Inflation Fear vs. Real Economics: Edge of the Cliff Dead Ahead

By Rinaldo Brutoco   |   November 8, 2022

Here at the Montecito Journal, we have long believed in offering a variety of views, letting each side have its space to speak. In light of the upcoming election, two of our longtime contributors have written in on what they think you should consider when heading to the ballot box this November 8.

With Rinaldo S. Brutoco on the Left and Bob Hazard on the Right… Read on to find what each side would like to say. – MJ Staff

The word on most voters’ lips these days is “Inflation.” In some ways that is understandable. People are still reeling from the inflationary shocks that began to hit the U.S. economy in April 2021. We need to understand what caused current inflation to be able to engineer our way out of it with minimal damage.

We can’t afford to be the proverbial ostrich with our head in the sand. We have to understand how we arrived here if we want to get past this place of lingering inflation. There is a trade-off that the Biden administration has resisted implementing that could augment FED policy to bring inflation down much more quickly. However, this approach would cause rapid increases in unemployment.

Economic historians know that the rapid rise of inflation starting 20 months ago came from the pent-up demand that arose during the pandemic. This catchup demand completely overwhelmed international trade capabilities. Supply chains for almost all goods became hopelessly backed up, triggering an immediate, and persistent run up in prices.

For instance: California watched as 83 ships lined up outside the Port of Long Beach/Los Angeles with no ability to quickly unload. That drove prices up further to account for the dramatic and massive increases in all sea freight, which in turn drove the price of other types of cargo.

At that point, President Biden could have elected to withhold the massive amount of direct stimulus checks that he unleashed from around June 2021. These stimulus checks were not the cause of inflation; the global supply chain mess was. The checks were designed to put money in every consumer’s pocket so they could afford to keep buying in the face of the rising prices. President Biden believed that putting that money into the pockets of average consumers would prevent the inflation spiral from locking middle class families out of the buying cycle needed to emerge from the pandemic.

It worked brilliantly. Household incomes went up, job creation accelerated, unemployment went down, and the economy started to “hum” even as it continued to be hobbled by a wide swath of pandemic-caused death and economic retraction.

All that extra money shooting into the economy would have temporarily increased inflation but the benefits achieved by the amount it raised average household savings – even while purchasing picked up dramatically – stabilized the middle class in a way that was essential to restoring economic balance. 

Unfortunately, unforeseen geopolitical events sent the world economy in a different direction. In January 2022, Russia massed the largest land army since World War II on the borders of Ukraine. This sent the oil and gas markets shooting up. Then, in February, Russia actually invaded Ukraine, causing a further spike in fossil fuel prices. Those dramatic price increases (a gallon of gas in Montecito went over $7/gallon) in turn spiked increases in prices first at the grocery store and then in every sector of the economy as fuel costs to transport all goods became the primary driver of inflation.

One could legitimately fault Biden for taking too long to tap the Strategic Petroleum Reserve, and for tapping it too lightly initially, because the signal he wanted to send was far too meek to be heard in the oil capitals of the world. And, one could fault Biden for sending too little weaponry to Ukraine (particularly for air defense) as had he been more forceful the war in Ukraine might not have been as harsh as it got nor as deadly for civilians. Even with those criticisms, however, it is clear that U.S. support and that of virtually the entire world is going to produce a victory for Ukraine sometime in 2023.

The price increases in groceries and virtually everything that travels by truck across America, together with the stimulus spending, led to more inflation and an overdue increase in the average wage. Is this a full “wage-price” spiral in the classical sense? No, it isn’t.

The current situation has several economic factors working in tandem: the increase in prices – or inflation; a real increase in wages and average household disposable income; and now interest rates that have been increasing which drives everything – particularly housing – to increase costs, which will be corrected by downward adjustments in the “hot” housing market.

So, was the trade-off to higher inflation in order to restore economic activity and restore the purchasing power of the middle class? You bet it was! Look at the U.S. compared to any other developed economy, and it is clear how much better the Biden policies were than those of other nations.

China’s growth rate continues to be less than a third of its historical rates for the last several decades and appears likely to fall further. Europe is in recession, due to the dramatic increase in energy costs brought about solely as a result of Putin’s actions to weaponize fossil fuel in his losing invasion of Ukraine. Meanwhile, the U.S. is continuing to add jobs while the economy keeps growing.

Here’s something you can safely bet on: if the U.S.A. maintains its support of weapons for Ukraine, Russia will clearly have lost the war by March, 2023. Why? Because the almost total cut off from Russian gas and oil to Europe together with the cessation of any shipping of grain from Ukraine ports (which are now blocked once again), will produce a freezing cold, very hungry, European continent. It will be like what George Washington had to survive at Valley Forge – but Europe will survive.

Given the necessity Russia forced on the western world to more rapidly move away from fossil fuels, the total reliance on historical Russian imports will plummet. Russia will find fewer customers for its oil, and the international price of oil will come down as soon as it is apparent that Putin’s fossil fuel blackmail failed to win him the war.

This winter in Europe is Putin’s “last hurrah.” All the barrels he does sell after March will be at a much lower price as Europe emerges with more energy independence, and global oil prices continue to fall. Gas prices at the pump have been falling for the past seven months. The current price for gas in our area is $5.57/gallon. That price is almost certain to drop further after Russia loses its “game of chicken” with Europe this winter.

Getting Inflation Under Control

So, what do we need to do to bring inflation under control? The FED clearly has a role to play. However, monetary policy by the FED is only a part of the necessary policies. What are those policies? 

1) First and foremost, we must ensure that Putin fails with his attempt to weaponize fossil fuel and that Europe survives a very harsh winter but emerges – from an energy perspective – stronger than ever. That will put further downward pressure on international oil prices for many years into the future. 

2) We must preserve the Biden’s administration’s policies to cap insulin prices for all Medicare recipients. Furthermore, we need to preserve the newly won right for Medicare to negotiate drug prices with Big Pharma. This in itself will bring drug prices down by 20-40 percent as those prices become the established range for all non-Medicare purchases as well. It is a scandal that drugs made in the U.S. sell for up to 40 percent more here than they cost in Europe, where they are imported and sold for far less. 

3) We need to preserve the massive incentives in the Inflation Reduction Act (IRA) for stimulating climate change solutions by accelerating the growth of renewable energy sources like wind, solar, geothermal, and hydro, which will put further downward pressure on fossil fuel prices.

4) We have to build upon Biden’s “reindustrializing America” initiatives, which preference goods, particularly advanced silicon chips and electric cars, being manufactured here in the U.S.A. Many free trade advocates are against this modified form of protectionism that will occur because of the preference of subsidies to domestic industries contained in the recent “Build Back Better” and IRA initiatives. However, these policies will create jobs in the country’s manufacturing sectors. This will make the U.S. more competitive on world markets. These policies will hobble China’s efforts to overtake the U.S.A. as the world’s biggest economy and may force China’s President Xi to re-open the Chinese economy once again. Until Xi does such, however, we need to maintain pressure on his economy so he will have less maneuvering room to harass Taiwan and his other Southeast Asia neighbors.

5) We must continue to create jobs so that the unemployment rate remains at its current very low level of 3.2 percent. The best way to permanently rein in inflation is to increase productivity. The funds for massive infrastructure spending have already been approved and those funds – together with the growing innovation in the alternative energy sectors – will provide a meaningful boost to well-paying jobs in 2023.

6) We need to continue efforts to make the tax code fairer and more balanced. Biden has done so by putting minimum tax collections on the largest U.S. corporations that previously had paid none. We also have to keep the new IRS budget intact so that it can have the personnel it needs to properly audit the tax cheats in our society.

7) Finally, and most importantly,we must avoid the political stalemate that could halt the very meaningful progress we have made for the last two years. We have left the pandemic crisis, skated over an internationally created inflation spiking gasoline price acceleration, and successfully maneuvered ourselves into a situation where the economy is growing robustly. In the meantime, FED interest policies are creating downward pressure on inflation. Any form of political stalemate brought on by the mid-term elections will likely yield “stagflation” – that horrible condition of rising prices and falling economic outputs, which we haven’t seen since the 1970s.

I think inflation has already peaked and stagflation must be avoided. Make no mistake about it. The U.S. is still a consumer economy where 75 percent of our GDP growth occurs due to consumer purchases. We need those purchases to stay strong so we can continue to put more money into blue-collar middle-income pockets, which in turn will create more money at the top of the economic pecking order from higher long-term corporate profits. Everyone wins when the middle class “wins.”

The “edge of the cliff” we are standing on is not one labeled “inflation.” That problem is being handled, and absent mid-term political upheaval will continue to fall over time. The “soft landing” we all want is not only achievable, it is unfolding as you read this. Now what we voters must do is to “stay the course” and avoid the temptation to elect “election deniers” who would throw our democratic form of government out the window in favor of a “Maga fascist” state – and with it would crash our economy just assuredly as Britain crashed its with Brexit. 

Everyone, not just the middle class, has a major stake in this election. The policies of a democracy will see us through to increasingly strong economic times, which will continue to be the envy of our trading partners. We just have to rationally evaluate the issues and decide to vote for a capital markets system that will continue to be incubated in a
democratic republic.


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