The Fed is Trying to Fix Inflation – Biden is Breaking it again
I know you have heard this a lot, but inflation means that people are trying to buy goods and services, when the production of goods and services can’t quite meet demand. Therefore some people pay more, and others do without.
The reason the Federal Reserve raises interest rates is to slow down businesses who want to borrow money to spend on expansion, and to discourage people from buying on credit. Moving the interest rates what seems to be a tiny bit slows down spending a tiny bit. We don’t want to do this fast, because we don’t want to slow people down beyond what is necessary, nor do we want an over-correction that might cause damage. In fact, the 0.75% increase is a rather shocking amount.
But now we have a $1.2 Trillion infrastructure bill that is going into effect. If you look at the chart below you will see that infrastructure spending because of this bill would consume an extra 1% of our GDP. Let’s assume that this is accurate.
Where the Federal Reserve is attempting to reduce demand by raising rates so that people spend less, the Biden Administration has printed an extra $200 billion this year that will absorb production, making prices higher for its competition. The government will compete for workers, raw materials, services and productive management. The competition, in this case, is private industry which wants those workers and materials to build profitable enterprises.
This is massively inflationary. Even if we were not already experiencing inflation due to a massive upheaval from Covid and stupid policies by the Biden Administration, this spending alone would cause enough inflation to be concerned about.
And would it not be better for private industry to use the available resources, since the whole world knows that they utilize them more efficiently? I’m a big fan of Keynes, but his “multiplier effect” has long been overshadowed by the idea that while, yes, the government can stimulate the economy by spending more, private industry does it way more efficiently and profitably (where the profit percentage “multiplies” as well).
Do we need this infrastructure? Both sides of the political fence seem to agree that infrastructure upgrades are necessary. I have no issues with that, we are the greatest country in the world, in part because of our infrastructure.
But common sense should prevail. The excess government spending should be halted until inflation is under control. Every second that interest rates are high means an ever accelerating national debt that we have to service.
Assuming the Fed’s measures start to work, a six month delay in excess infrastructure expenditures should not hurt us in the long run.
Change my mind.