Treasury Secretary Janet Yellen recently talked about the progress that the Biden administration and the Federal Reserve have made toward reducing the inflation problem that has existed since Biden was sworn into office. She predicted what would happen economically in the near future.
It looks like this prediction will be as far wrong as many she has made since becoming Treasury Secretary.
In early 2021 when the inflation rate was beginning to escalate from the 1.4% rate recorded at the end of the Trump administration, she said that inflation was “not a problem” and was “manageable.”
That turned out to be very wrong as the Consumer Price Index reached 9.1% in June 2022. At that time, Yellen admitted she was wrong, blaming “large shocks to the economy that boosted energy and food prices.”
That’s not exactly genuine. The core rate, which excludes changes to food and energy prices exceeded 5% in June 2022, and, in fact, has remained in the 4% to 5% range even today.
Yellen was also not correct when she said that Congress should remove the debt ceiling. That would allow the public debt to rise to even higher levels than the $33.6 trillion where it is today. This huge debt — which removes capital from capital markets and results in annual interest expenses approaching $500 billion — will only worsen without the control that a debt ceiling places on government spending.
Then she said that the Federal Reserve can continue to vastly increase the money supply and keep interest rates near zero, without worrying about an increase in inflation. Although that position is contrary to Monetary Policy theory, she said there is Modern Monetary Theory, that refutes the existing theory. That was wrong.
Yellen’s latest comments came after the release of the November inflation data. While it is true that the consumer price index (CPI) is down to 3.1%, most of the decrease is due to falling energy prices. As Yellen has noted in the past, it is the core inflation rate that is important. The core rate is 4%, not down significantly from the 5% level recorded in 2021.
Yellen was asked whether the country was on a sustainable fiscal path. She responded by saying that she doesn’t see the huge deficits incurred during the Biden Administration as an “urgent issue.” Even though the Biden Administration will incur more debt during Biden’s first term in office than any other President in history.
She then said, “Our tax collections, as a consequence of the Tax Cuts and Jobs Act in 2017, have fallen to historically low levels.” That simply is not true. Except for a slight dip in 2020 when the economy completely shut down in March and April, total tax revenue has increased every year since the 2017 tax cuts were passed.
It is important that when the Biden administration sets spending for the fiscal year they are aware of the resulting deficit. It is also important that the president gets advice from members of his cabinet that is objective, and geared toward reaching the economic goals of price stability, full employment and economic growth.
Unfortunately, Biden has selected a politically correct cabinet who are simply not providing accurate information to him and who seems to follow the same agenda as the President.
Today economic conditions are not very stable. Growth, which has been strong so far this year, has been fueled by huge government spending deficits and by consumers who have been on a year’s long spending spree. It looks like growth will slow considerably in the current quarter.
The spending spree began when the economy re-opened from the shutdown and consumers were flushed with cash from the government handing out free money to all households. The average family of four received more than $11,000 from the government whether they were negatively impacted economically by COVID or not.
Then when the free money ran out, consumers used credit cards to continue spending. By July of this year, consumer credit card debt exceeded %1 trillion for the first time in history. Consumer spending will likely fall going into next year.
Today we need sound Monetary and Fiscal Policies to finally end this inflation problem. This is particularly true since wage increases are running in the 7% range this year.
And the president needs to get advice from experts who are more accurate in their forecasts than Janet Yellen.
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