President Biden Doesn’t Understand the Nature of Inflation

President Biden recognized that inflation is a big problem for Americans in February 2022, but claimed "there are also signs that we will make it through this challenge."

Mr. Biden hoped at that time that inflation would ease substantially by the end of 2022, referring to the opinions of 14 unnamed Nobel laureates (probably, in economics) who advised him.

Yet in February 2022, Mr. Biden has formulated the cause of inflation as follows: “The reason for the inflation is the supply chains were cut off."


In April 2022, the US inflation was 8.3% lower than in March 2022 (8.5%), but higher than April 2022 estimated one (8.1%).

70% of Americans believe that inflation is «a very big problem” according to Pew Research Center survey done in the end of April - beginning of May 2022. This is understandable - inflation (rising prices and devaluation of money) makes Americans poorer.

President Biden has diversified his vision of the causes of inflation on May 10, 2022: “There are two leading causes of inflation we’re seeing today. The first cause of inflation is a once-in-a-century pandemic. … And this year we have a second cause — a second cause: Mr. Putin’s war in Ukraine.”
Mr. Biden explained that Russia's war against Ukraine has increased the price of fuel (Russia is one of the major suppliers of oil and petroleum products to the world market) and food (Russia and Ukraine are global largest suppliers of wheat and corn).

He even touched macroeconomics: “And those two major contributors to inflation are both global in nature. That’s why we’re seeing historic inflation in countries all over the world.”


The president is advised by many different specialists and organizations before making the decision. For example, economists from Peterson Institute of International Economics (PIIE) estimated that a trade liberalization policy equivalent to a 2-percentage-point reduction in tariffs could knock the US inflation down 1.3 percentage points from its current rate. The presidential administration is starting to think that over. Everything seems to be done correctly and the level of consultants corresponds to the complexity of the task.

But…

Some critics say that Biden's $1.9T American Rescue Plan has caused the inflation. The others argue it saved the economy. It is not clear who is right. While experts argue, inflation and the cost of living are rising despite the hopes of the president, consultants and the Fed. We may find out soon that yearly inflation of 8.3% is a good thing.

Mr. Biden suggests many things to curb the inflation: to lower tariffs on trade with China and prescription drug prices, to cut the federal deficit, to make big corporations and the wealthiest Americans pay their fair share in taxes… However, inflation is high and nothing has changed since January 2022. And nothing will change in the future because President Biden, his advisers and the Fed do not understand the nature of inflation. Or they deliberately hide it which is even worse.


All president’s statements about the nature of inflation are wrong and his (his advisers) causes of inflation are misleading. For example, the breakdown of supply chains in the world is a direct consequence of lockdown around the world because of the coronavirus pandemic and nothing else. Reducing drug prices and tariffs on trade with China will have no effect on inflation. Reducing the federal deficit is good and right thing to do in and of itself, taxing the rich and corporations is not feasible (because they are the ones who sponsor legislation in the country), but anyway both also have nothing to do with the inflation.

It seems nobody knows anything about inflation now or, rather, everyone knows everything. It is completely impossible to answer the question "how to fight inflation" and even the simpler one "where the inflation comes from" having all the necessary institutions and consultants - Nobel laureates. What do they exist for?

This is the main problem of our civilization, modern science and economics, as a science, in particular - it does not see the forest behind the trees.


High inflation is a big problem for Mr. Biden himself in the next presidential election in 2024 and for the Democratic Party, too, taking into consideration the approaching midterm Congress election in November 2022. Mr. Biden and the Democratic Party could lose their already weak control of the Congress.

Republicans don't know what to do about inflation either, just like they have failed to come up with anything reasonable instead of Obamacare all four years of Trump's presidency. So they are now just pointing their fingers at high inflation and will blame Democratic Party and Mr. Biden for spurring it. However, when the RP comes to power again, it will be unable to do anything about inflation also and will speak only about the "heavy legacy of the Democrats," like the Democrats do now.

Unfortunately, the current two-party political system in the US does not guarantee effective managing of the country.


People of the US also do not understand inflation also, but at least they have noticed it due to coronavirus. Americans listen to president’s explanations and actively participate in discussion, putting their likes and comments at Twitter. In November 2022 they will vote for one party or another, but in any case to their own detriment, because both parties do not clearly understand the essence of the processes taking place in the country and therefore cannot offer a comprehensive solution to the progressing problems.

As you can see, it is very easy, profitable and prestigious to govern a country with an ignorant population, and most importantly, there is no responsibility for poor governance. After the president’s administration or Congressmen leave, the main problems of the country (corruption or inflation, for example) remain, and no one is even able to assess the results of the governance. Just recollect what good or at least memorable things Clinton, Bush and Obama did for you personally. They left only a feeling of constant political struggle for nothing without tangible results. Only Mr. Trump is remembered so far by Americans (and the rest of the world) for his unpredictability and the US Capitol attack on January 6, 2021.


It turns out that Americans have to sort everything about inflation out by themselves if they need to change something, otherwise they will be getting poorer and poorer, paying with their taxes for all government institutions (the president, his advisers, and the Fed) until the country collapses.

In this article I'm sharing my point of view at what inflation is and where it comes from, since that bothers Americans so much. You don't have to be a Nobel laureate to understand the nature of inflation, you just have to see the bigger picture.

Imagine that Mr. Biden lowers tariffs on goods from China, gives Americans cheaper medications, the coronavirus disappears, world’s logistics are restored, and the war in Ukraine stops, but the Fed issues $20T more money (or gives out $20T in loans) in addition to around $20T of current money supply. Bread, gasoline, and everything else in the Consumer Price Index, which the inflation is calculated from, will cost about two times more after a while. Why? Because there is twice more money in the circulation, but no more goods and services were added, so everything will cost more.

Isn't that obvious?


I think the Fed and 14 Nobel laureates are wrong on principle, and all US presidents share or just follow their delusion. They are starting from a false premise, namely the flawed inflationary model of economic development by J. Keynes.

In short, Mr. Keynes has allowed to all governments to live on borrowed money and substantiated that theoretically. The elites of various countries very much liked the idea and Keynesian inflation targeting policy has been caught on almost all over the world since the 1970s. Central banks in many countries have consciously started to put more and more money into circulation. In the US the Fed has been steadily increasing money supply measured by M2 by about 2% a year. This is the inflation policy, which targets 2% a year. In the past, that has been done mostly by printing extra money (in the US – by division of The Department of the Treasury), but now it was mostly the creation of electronic fiat money out of a thin air.

Why have the elites liked so much the idea of “living on borrowed money”?
1. They could borrow constantly now and pay back less later because of depreciation of money. This is why ancient rulers, for example, added lead or copper to their gold coins. By reducing the silver or gold content of a coin, a ruler could make more coins out of a given amount of specie. Inflation followed, allowing the sovereign to pay off less.
The US, in particular, has implemented this idea in the Social Security system. $100 in April 1972 had the same buying power as $696 in April 2022 according to CPI inflation calculator. This means that the government gets from a 20-year-old future retiree $100 and pays off back $100: 6.96=$14.37 fifty years later.

2. A great American economist and Nobel Prize laureate of 1976 Milton Friedman has clearly explained that: "Inflation is the one form of taxation that can be imposed without legislation."

Thus people all over the world are burdened with one more tax they are not aware of. The Americans began to notice it just because of the pandemic of coronavirus. Inflation made by constantly increasing money supply and accompanying depreciation of money are the causes of people’s impoverishment.


John Keynes advocated for increased government expenditures and lower taxes to stimulate demand.

Keynesian economists were very much afraid of deflation and contraction of the economy during Great Depression in the US in 1930s. That’s why they decided that targeted inflation (a planned rise in the price level) is better than deflation (a decrease in the price level). In other words, they think that inflationary spiral (a situation when prices increase, so people are paid more and purchase more which causes the price of goods and services to increase again, and so on) is better than deflationary spiral (a situation when decrease in price level leads to lower production, lower wages and demand, which leads to further decrease in the price level, and so on).

That’s why central banks in many countries are trying to artificially keep demand of goods and services above supply by issuing additional money into circulation (in the US by 2% a year). This extra money will be spent on something and thus the aggregated demand in the country will exceed the aggregated supply by targeted 2%.


Thus the Fed has created an inflationary spiral instead of deflationary one, which was an obvious disbalance. Demand and supply together make a single transaction happen and neither of them should be stimulated or both. They are the opposite sides of the same coin like accelerator and brake in a car. You either have to use both one after another while driving, or neither of them. Transactions are the building blocks of the economic machine. I think that balanced demand and supply make the economy work smoothly either with a state interference (socialism in theory and practice) or without any interference at all (capitalism in theory).

Mr. Biden often says that he is a capitalist and “capitalism without competition isn’t capitalism, it’s exploitation.” It is said correctly. Then real capitalism has to be restored from its current “crony capitalism” version. Only then R. Reagan’s slogan “Let’s Make America Great Again» (which means “Let’s Make All Americans Great Again”, not just elites) could come true.

First the country's monetary policy (and money in general) should be put in order. For that, the Americans have to see the real cause of inflation and understand what is wrong with the US and world financial systems.

(to be continued)


P.S. Dear Reader! I am very much interested in your opinion on the subject of this article. Please, write a comment or ask a question if you want to clarify something.
Yours,
Igor Chykalov