Red Hot Economy?

Timothy Birdnow

I caught the beginning of Fox News Sunday. Bah!  That dimwitted host talked about the "red hot economy" while teasing her segment with a Biden Secretary of Silly Walks or whatever he was.

"Red hot economy"?

This is purest Keynsianism; the high inflation must be caused, the Keynsians say, by high demand for consumer goods. They believe the economy is driven entirely by demand. This is spectacularly wrong.

Inflation is driven by the money supply. That's why it's  called inflation int he first place; the money supply inflates. More money without an increase in productivity and the price of goods and services go up. Inflation is not rising prices but rising currency.

The Federal Reserve has massively expanded the nation's money supply in the last two years. They have increased the supply by trillions of dollars.

This article states:

And in fact the Federal Reserve has increased the M2 supply by 33%  between January of 2020  and May of 2021 alone. 

This kind of increase has happened every few months since.

In fact, as of February of this year the M2 supply was up over $21.6 TRILLION ! That is a sea of bad paper.
Every new dollar waters down the old. It's a way of stealing wealth.

Government loves this; it allows them to spend money that they do not have without obviously raising taxes. They can pay with pretend money.

Now the Fed wants to rein in the money, and that means "qualitative tightening" or destroying money as it is paid back. This sounds reasonable and it would be if done slowly and deliberately during a good economic period, but we have none of that.

The Federal Reserve did this very thing in 1929, and it precipitated the Stock Market Crash that led to the Great Depression. for a decade they had expanded the money supply then pulled out the rug from under the economy. See here, and here. Milton Freeman proved inarguably that it was a case of bad monetary policy that triggered the Depression in his book A Monetary History of the United States.

You cannot increase the money supply by one third and not expect high inflation.

I would like to know how staggering inflation is a sign of an "overheated economy"?

What is happening in the economy? Investments have been struggling, for instance; the stock market isn't making a whole lot of money. How is that overheating?

As of May consumer spending had FALLEN when adjusted for inflation - by 0.4%. This in the post-lockdown period, I might add. Now that consumers are free to move about spending should be up. See also this.

Used car sales are down. But that's o.k. because new car sales are down too; nobody can afford them, or the gas to drive them.

U.S. manufacturing was unexpectedly weak in May.

Sales of new homes has been steadily declining.

And according to Trading Economics:


But not to worry! Sales of existing homes fell by even more.

And the commercial market, after rising once the pandemic restrictions were removed, is back in decline. In fact, the Green Street Price Index showed a decline of 1%since the start of the year, in a "red hot economy".

How does any of this translate to a "red hot economy"? If it gets any hotter it will freeze up completely.

The only thing anyone can point to is the employment numbers. But does that surprise anyone? With the economy reopening  and peopole going back to their jobs the unemployment numbers will by necessity drop.

But it does not mean we have actually added new jobs, just restored jobs that used to be there.

In other words it's a mirage.

The unemployment also suggests something more sinister; many people did not return to their jobs after the pandemic ended and are living on government assistance or on their savings. Those chickens will come home to roost.

Oh, and unemployment rates rose to a rate not seen in a year, according to Bloomberg News.  It had already risen by 5.5% in March, according to Investapedia.

So it is appearing that the "red hot" unemployment is not even a real thing.

No, there are signs of serious illness with this economy. Inflation is but one problem; the type of inflation is another. Energy is sky high right now thanks to the Biden Administration's environmentalist policies and adherence to the Paris Accord and his bumbling of the world energy market. That affects EVERYTHING, because everything moves by some conveyance. Electricity is going through the roof too. There is talk of both gas rationing and blackoouts this summer, and we are out of fertilizer for our farms because of the insistence on limiting fuel - particularly diesel - and the feckless response to Russia in Ukraine which has done nothing but dry up Russian diesel (needed to make urea, a critical component in fertilizer.)

And now, with the Fed spiking interest rates and promising more of the same and at the same time contracting the money supply, we are in peril of total economic disaster.

Look, we NEED to tighten the money supply, but the economy is wobbling like a drunken fool right now and this is no time for it. But the Keynsian dimbulbs there think this is the way to go to stabilize things. It's not.

We are going to want to maintain the money supply and deal with the  inflation (which will stop if we just stop spending huge amounts and printing money to cover it.) It will plateau. What the Fed is doing is ushering in Deflation, which can be horribly destructive; it freezes up credity, for example, because nobody wants to lend money out that will be worth less when they are paid back. Freeze up credit and the economy grinds to a halt.

Or we can have stagflation - something the Keynsians said was impossible until Jimmy Carter made it so.

Stagflation occurs when the Fed prints money to avoid deflation and at the same time heavy regulatioins lead people away from investments and towards wealth protection.  The wage and price controls of the '70's led directly to stagflation as the Fed kept printing money to stimulate an economy that couldn't be stimulated by more dollars. It was overregulated and people were sheltering money overseas or burying it in the back yard. Keynsians believed it was impossible, since they believe the economy is driven by consumption and that investment has nothing to do with it. Mo money mo spending! Carter proved that the investors are a critical component of the economic health of a country. Ronald Reagan's whole economic policy was "supply side" meaning he looked to the manufacturers and investors to ramp up the economy. Mocked by George H.W. Bush and others as "voodoo economics" supply side worked spectacularly and has worked every time it has been tried.

But it is not popular with the ruling class because there are no strings attached as in other economic theories, particularly Keynsianism, which says the way to jumpstart the economy is to "prime the pump" by government spending - a true politicians dream.

Supply siders say cut taxes, cut regulations, and encourage investors. Sound monetary policy is critical to all this too; money has to have real value or investors go to things that wont depreciate.

I would add the Housing Bubble which burst in 2008 was an attempt by investors to put their money into something real, substantial. The tech bubble scared them (people were investing in all sorts of internet stupidity that had no real value). BUT the government used Fannie Mae and Freddie Mac as their private piggy banks, and they imposed draconian regulations regarding things like redlining, and they pushed for "affordable housing". Banks couldn't say no to most borrowers, no matter how credit-unworthy. They wound up finding a solution; bundling bad loans with good as part of an package deal. It was a game of Old Maid; someone was going to get stuck with the bad debt eventually. This created the "subprime market". But it was a game of Old Maid, and by 2008 the market was horribly overspeculated, with janitors and fruit pickers buying property to flip or for investment. They had no business getting loans, but the government was pushing, pushing, pushing! Eventually we saw such venerable old institutions as Bear Stearns go belly up and the bailouts bailed in a peculiar way; they bailed out some companies but let others collapse. In fact, sometimes they stopped buyouts which would have saved a company.

They let Countrywide collapse, for instance. And J.P. Morgan bought out Bear Stearns for bargain basement rates.

The result was the Great Recession which gave us Barack Hussein Obama, "Government motors", and a host of other catastrophic events.

One wonders if the current economic policy of the Fed and the Biden Junta are not aimed at another such "Great Recession".

At any rate, our "red hot economy" is anything but and we are in great peril right now.

How a host on Fox can be such a dullard as to not understand that is beyond me!

Posted by: Timothy Birdnow at 11:09 AM | Comments (6) | Add Comment
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