Driving On Ice

I learned to drive in my native Western New York which certainly entailed driving on ice. There is no foolproof way to drive on ice. It is much different from and much more difficult than driving in snow. That said there is a technique that will enhance your chances of avoiding a serious mishap. Basically, you pump, not slam, the brakes and certainly never accelerate when you start a skid. To a degree something similar can be said about economic policy. Unfortunately, the powers to be in both America and the UK didn’t seem to learn that lesson.

Last week the Fed announced its third straight .75% rate increase. Going back to my analogy, they slammed on the brakes. In the UK new Prime Minister Liz Truss announced that, in her Thatcher-Reagan way of governing, a pending corporate tax rate hike would be suspended and taxes would be lowered on the rich. It is falsely attributed to Einstein but there is an old saying that doing the same thing over again and expecting a different result is the definition of insanity.

There is no doubt that we are dealing with an inflation rate that is too high. The UK’s problem is worse and the reason it is proves my theory of why we are in the boat we presently are in. A large part of the current inflation is transitional, not structural. We are finally coming out of a global pandemic that radically changed demand overnight. That, coupled with pandemic related production issues caused a spike in demand for some goods and services and simultaneously the drying up of demand for others.

As if that weren’t enough Vladimir Putin decided to invade Ukraine which, especially when coupled with economic sanctions (which I largely support) caused another set of shortages and interruptions. Europe, of which the UK is a part whether they want to recognize it or not, suffered worse than America largely because of a greater spike in fuel prices.

The classic definition of inflation is too much money chasing too few goods and services thereby increasing prices. That is structural inflation and certainly doesn’t apply to the American or British kitchen table. However, it might well apply to the formal, servant attended dining room tables. (Yes, Liz I’m thinking of your moves.)

I lack the economic expertise, research staff and data to present a conclusive and concise argument but it seems to me that three huge interest rate raises in such close proximity is like slamming the brakes on in the midst of an on-ice skid. The outcome is almost always less than optimal!

The Fed justifies its actions based on annualized inflation – which I agree is too high. However, the annualized rate they are looking as fails to take the decreasing “rate of speed” into account. The most recent rates of increase (think speed) are actually small, especially when compared to a few months ago. If you continue to slam on the brakes, you will bring the economy to a crash (think recession). The first and perhaps second rate increases were needed; the third not so much.

How raising interest rates paid by the working class on borrowed money is going to help them balance the household budget is beyond me. A targeted tax increase (thereby lowing cash on hand for a selected few) might help but try getting that past Republicans in Congress.

Mortgage rates were one of the first consumer rates to go up. How is making it more difficult for first time home buyers to make that leap in the public interest? Most working and middle class Americans have the bulk of their wealth tied up in the equity of their only home. How does making it more difficult to sell help them?

Now I’ll turn back to the UK for a bit. Prime Minister Truss appears to be a believer in the trickle down theory of economics. I’ll spare you the crude jokes for the moment but let’s just say that history has proven that theory to be malarkey. However, it is popular with the wealthy and large corporations.

If you really want to help the economy the two most important things to do are stop the war in Ukraine and get the pandemic completely under control. If you want to solve a problem look for to the causes. If you are driving on ice and come into a skid pump the brakes, don’t slam them and certainly don’t accelerate.

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