A couple of weeks ago, Secretary of the Treasury Janet Yellen admitted she was wrong last year when she said the inflation experienced back then was temporary or transitory. Recently she said that a recession was not inevitable. She is wrong again.
Yellen has made several incorrect forecasts about the economy. She admitted she was wrong when, early in 2021, she said inflation was “not a problem,” a “small risk,” and “manageable.”
She was also wrong when she said that large increases in the money supply will not lead to inflation. She said that classic monetary theory says that vast increases in the money supply are indeed inflationary. But she said we now have Modern Monetary Theory, which disagrees with the classic theory. She was proven wrong as inflation skyrocketed.
Then she tried to justify the large increases in government deficit spending that the Biden Administration wanted. Biden convinced Congress to pass his now obviously inflationary American Rescue Plan and the Infrastructure bill. That spending totaled nearly $3 trillion.
Since the economy was growing at a 6% rate, that huge increase in excess demand was obviously inflationary. Yellen tried to justify it by saying we have Modern Supply-side Economics. She reasoned, somehow, that the increase in spending would increase supply and therefore not be inflationary.
She knows that increases in government spending add to aggregate demand not supply. When inflation skyrocketed that position was proven wrong.
Now she says that a recession is not inevitable. There are some less than objective economists that agree with her. Unbiased economists know that position is wrong and that a recession will be here shortly. We may, in fact, be in a recession right now.
As inflation continues at a forty-year high and interest rates rise, consumers are spending more on necessities like food, gasoline, and rent or mortgage payments. That leaves less to spend on non-necessities, which reduces demand. Eventually business produces less and the economy declines.
The other factor is that productivity has turned negative. That resulted in the first quarter of 2022 showing a growth rate of -1.5%. Most economists are forecasting a growth rate of 2% to 3% for the second quarter. However, if productivity remains negative, the second quarter will show negative growth.
Although government officials will not declare a recession, because they say they look at other factors, like unemployment, that will be a recession. The classic definition of a recession is two successive quarters of negative growth in GDP.
Even if the second quarter shows slightly positive growth, as the Federal Reserve continues to aggressively raise interest rates, demand will decline, and a recession will follow by the end of the year.
The unemployment rate will not rise as is typical during recessions. That’s because we have a severe labor shortage, meaning the recession will eliminate the shortage but will have only minimal effects on the unemployment rate.
Yellen continues to be wrong on other matters. She was asked if she supported a federal gas tax holiday to reduce gasoline prices and help the consumer. The tax is 18.4 cents per gallon. Eliminating the tax for a brief time period will do little if anything, to reduce the price of a gallon of gasoline.
Most of the gas price inflation is due to excess demand, which resulted from the government giving free money to all Americans whether they were negatively impacted financially by COVID or not. Once the economy fully reopened Americans were eager to start driving again regardless of gas prices.
There was a reduction in the supply of gas mostly because Biden discouraged domestic production. But most of the inflation had to due with excess demand. Since Russia is exporting more oil and gas today than before the boycott from Western countries, the reality is that Putin has little to do with the current inflation. China and India are buying all the oil that the West won’t buy.
Eventually, the gas tax would have to be reinstated, leading to higher prices. Also, this tax is used to fund infrastructure projects which have increased because of Biden’s infrastructure bill. The tax revenue is needed.
Secretary Yellen is continuing her streak of being wrong on just about everything she forecasts.
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