Are Democrats missing an opportunity to strengthen their inflation argument?

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (FRS), today testified before the U.S. Senate banking and finance committee on the state of the FRS’ monetary policy.  One of the main points of questioning by the senators was the issue of inflation. 

Republicans have been asserting that loose monetary policy, specifically the FRS’s delay in raising the federal funds rate, and expansion of its balance sheet of agency and mortgage-backed securities, combined with the Biden Administration’s spending are at the heart of U.S. inflation.

Democrats’ main assertion is that companies have been taking advantage of the American consumer by increasing prices and taking profits.

We understand that in a political environment each side of the aisle aims to tug at enough electorate heart strings in order to secure votes in the fall.  I don’t pretend to be a statistician, but a back of the napkin analysis of growth in the money supply and changes in the consumer price index tells me that Republicans should include other factors in their cause of inflation analysis, and that Democrats need to trust Americans more by sharing and explaining the numbers.

According to data from the FRS, between January 2021 and April 2021 M2 money supply increased an average of 1.3%, month-over-month while inflation increased an average of 0.5% month-over-month during that same time period.

But between January 2022 and April 2022, while M2 money supply increased an average of .003% month over month, inflation increased 0.7% month over month.  The money supply was at a dead crawl while consumers continued to see price increases at a faster rate versus the same period last year.

I admit the sample is small.  I am trying to be fair to the Biden administration by reconciling his time in office with available 2022 FRS data on money supply.  Hopefully my small exercise demonstrates that there is some room for the Democrats to strengthen their arguments on the cause of inflation and that pricing behavior on the part of firms needs to be taken into consideration.

Alton Drew

22 June 2022

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Elizabeth Warren’s bill almost gives Joe Biden some cover … almost.


Inflation, not climate change, will be at the top of the taxpayer’s electoral cheat sheet come the mid-term elections in November.  I expect Democrats like U.S. Senator Elizabeth Warren of Massachusetts will lead the way with an argument that price gouging is at the heart of the high rate of inflation Americans are seeing.

Last month, Mrs Warren, along with other Senate colleagues, introduced the Price Gouging Prevention Act of 2022 which is intended to prohibit price gouging during all periods of market disruptions.  The Federal Trade Commission will be the lead agency on its enforcement.  

Co-sponsor Senator Tammy Baldwin, Democrat of Wisconsin, tied inflation to the bill by saying, “This legislation will shine a light on price hikes and help prevent big corporations from exploiting a period of inflation to gouge consumers with higher costs.” 

The bill appears to be an attempt at making Congress appear as a significant player in fighting inflation by using red herring buzz words like “price gouging” and “inflation.”  The bill at the same time distances itself from the narrative spin by not even defining the word “inflation.

Instead, the bill throws out into the universe a concept it labels, “exceptional market shock” which it defines as, “any change or imminently threatened (as determined under guidance issued by the Commission) change in the market for a good or service resulting from a natural disaster, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, public health emergency, or any other cause of an atypical disruption in such market.”

The text book definition of inflation is an increase in the average level of prices of goods and services.  But what is driving this increase in average price levels?  In this case it is an expectation of disruption in the money markets.

I believe that goods, services, and money markets are responding to the narrative of inflation and particularly in the money markets the expectation of rate increases is being passed from short term lenders to wholesalers to retailers and finally to end-user customers.

As the narrative of short-term rate increases pervades the markets, businesses still have short term consumer demand to meet so they borrow at the higher rates.  In the immediate term these borrowing costs get passed down to the end-user consumer in the form of higher prices.

To Mrs Warren’s credit, she is two-thirds of the way in meeting her thinly-veiled objective which is to provide Joe Biden and the Democrats with as much cover as possible going into the mid-terms.  The objective here is to separate the Democrats from the inflation problem by providing a legislative initiative while reminding the electorate that the management of the money supply, the real cause of inflation, is in the Federal Reserve’s lane.

The public will push back and say that Mr Biden re-appointed Jerome Powell as chairman of the Federal Reserve System’s Board of Governors so why should Biden be pulled off the hook unscathed?  Mrs Warren could argue that she tried to warn Biden and the rest of the Senate that Mr Powell was a “dangerous man” and now we are reaping what we sow.

Like I said, Mrs Warren is two-thirds of the way there.  Had she expressly defined inflation; included money markets in the definition; and firmly expressed that this bill is about monitoring price levels, the bill, at least narrative wise, would have offered more punch. 

Alton Drew

12 June 2022

A quickie. The buck stops and breaks with the President …

Yesterday, the President told #Caribbean leaders he is ready to help them. He may want to start with making his dollar a little less expensive. He can only hide behind the “price gouging” argument for so long.

And while he is right that monetary policy is the lane of the Federal Reserve, it does not prevent him from using his bully pulpit of persuasion on the Fed chair during their breakfasts and phone calls about the economy.

The President has signaled that he is ready to throw his Treasury secretary under the bus, and his National Economic Council chair does not engender the highest confidence.

The US currency is issued by his government, notwithstanding central bank mechanics. The buck ( pun intended) stops with him. Just ask Jimmy Carter.

Alton Drew

10 June 2022

Georgia’s congressional Democratic representatives tout the political not economic narrative on inflation.

Congress has been passing the buck on the value of money since it created the Federal Reserve System in 1913.  Article I, Section 8 of the U.S. Constitution not only provides the Congress the authority to borrow money on the credit of the United States, but to coin money and regulate both its domestic and foreign value.  Today, the two agencies to whom primary responsibility for regulating the value of money has been passed down to are the U.S. Treasury and the Board of Governors of the Federal Reserve.  President Joe Biden appeared to emphasize the “buck passing” by meeting recently with Jerome Powell, chairman of the Board of Governors.  Reportedly, Mr Biden reiterated the Federal Reserve’s political independence and that the White House would not only do its part in combating inflation, but “get the Fed to do whatever it takes.”

Between U.S. Treasury Secretary Janet Yellen taking the hit for making the wrong call last year on the transitory nature of inflation, thinking that inflation would abate a lot sooner, and what some analysts deem as poor decision making on the part of Chairman Powell for not raising rates faster, Americans are seeing the political nature of the inflation narrative. 

Mr Biden is distancing himself from the inflation narrative, a politically prudent move, since Congress long abdicated its role on the matter.  But it is a move that is both too late and tentative.  Forget that Mr Biden selected as Treasury secretary a former chairman of the Board of Governors and that Mr Biden nominated Chairman Powell to another four-year term.  Mr Biden decided to keep the inflation arrows in his quiver probably unaware of the restraints his Executive Branch is under in terms of policymaking.

By coming out swinging on the one hand that he will be laser focused on inflation, but on the other hand is ready to throw his Treasury secretary under the bus for a bad inflation call while telling the world that inflation management is really all on the Fed makes Mr Biden look weak. 

Closer to home, the Georgia representatives to Congress seemingly prefer tout Mr Biden’s increasingly waning line on supply chain constraints.  For example, U.S. Representative Nikema Williams, a Democrat representing Georgia’s 5th district, and U.S. Representative David Scott, another Democrat representing Georgia’s 13th district, have emphasized Mr Biden’s infrastructure and Build Back Better plan as a way to expand economic capacity, relieve congestion, increase jobs, and stimulate the economy.

Sitting on the other side of the inflation argument is U.S. Representative Barry Loudermilk, Republican of Georgia’s 11th district.  Inflation, according to Mr Loudermilk, is a monetary phenomenon.  One need only look at increasing asset prices, according to Mr Loudermilk, to see that inflation is a monetary issue.

Sitting somewhat in the middle is U.S. Senator Jon Ossoff. While he agrees with the President that unraveling the supply chain is one way to combat inflation, he took issue with the Federal Reserve’s pursuit of massive quantitative easing when it was clear that inflation was not transitory.

The narrative has been disingenuous on the part of Mr Biden and on the part of Georgia Democrats.  Their lane is a political lane and over 100 years ago, Congress decided that the money vehicle would not be driven in the political lane. Saying that they can do something about inflation while acknowledging the money supply is the responsibility of the Federal Reserve only confuses voters.      

Alton Drew

6 June 2022

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The Federal Reserve is signaling to Biden that 2024 could be rough …

Political odds makers don’t see the Democrats faring too well in this November’s midterm elections.  With 21 weeks to the elections, Democrats have work to do in convincing the American electorate that their party will be best at governing in a post-pandemic economy.

The doomsayers are out in full force expecting interest rates to climb as the Board of Governors of the Federal Reserve today begins selling off Treasurys and mortgage-backed securities from the portfolio it built up during the pandemic.  As securities hit the street, the issue of who wants these securities and at what price, I believe, will be the question in New York and Washington as interest rates are expected to inch up while the prices on these securities due to increased supply goes down. 

However, rising rates is what the Board of Governors wants.  Higher interest rates are expected to discourage the rise in inflated consumer prices which at the last Bureau of Labor Statistics print is 8.3%, year-over-year. The Board hopes to get this rate closer to two percent per year. 

The Board has its work cut out for it in its pursuit of a two percent inflation target. One of the monetary policy tools in its arsenal is the closely watched federal funds rate, the overnight rate that banks charge each other when lending and borrowing excess reserves overnight.  Raising the fed funds target rate signals an increase in lending rates which in turn makes doing business more expensive leading to a slow-down in national economic activity.

The current range for this rate is 0.75% to 1.00% with a reported effective fed funds rate of 0.83. On 30 May 2022, Federal Reserve System governor Christopher J. Waller shared in remarks that the he expects the federal funds rate to be around 2.65% by the end of the year.

If the Board of Governor’s monetary policy leads to a contraction in the economy, there is a chance that labor will suffer with the potential loss of jobs.  Job losses, while not boding well for most Americans, is particularly harrowing for low-income workers.  Inflation and job loss are a double tax on the poor. 

As Board of Governors vice-chairman Lael Brainard shared in remarks last April, lower income households spend 77% of their income on necessities, i.e., food, shelter, energy, versus 31% of income spent on necessities by high-income households. Vice-chairman Brainard also noted that the inflation index for low-income households increased faster than the overall consumer price index while the inflation index for higher income households increased at a rate lower than the CPI.

The economic tea leaves should tell President Biden that he will have to come up fast with a sales pitch to low-income voters.  His sinking poll numbers mean that he cannot afford to leave any votes on the table.  His sales pitch will have to contain a narrative that recognizes the pain in low-income households suffering the double-whammy of higher interest rates and contracting economic growth.

Mr Biden’s package will also have to tackle the apathy, particularly amongst the poor, that their votes don’t matter.  The poor are less likely to vote than the affluent.  Approximately 48% of households in lowest income category go to the polls versus 86% of families in the highest income categories.

The irony Mr Biden faces in putting together political packages for the poor is that the financing of his proposals will be hamstrung by rising interest rates going into the remainder of 2022.  A politically ineffective 2022 will in my opinion seep into 2024.

Alton Drew

1 June 2022

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Joe Biden and the Federal Reserve: The competing inflation fighting narratives …

John Williams, president of the Federal Reserve Bank of New York, today remarked on the state of inflation in the United States and the Board of Governors of the Federal Reserve System’s (“Board” or “Federal Reserve”) efforts to address rising prices throughout American markets for food, energy, other goods and services. 

Mr Williams reminded listeners of the Board’s dual mandate of maintaining stable prices and attaining maximum employment and reiterated that the Board has the monetary tools to address inflation stemming from congestion in the supply chain, China’s recent attempts to combat the surge in new Covid cases, Russia’s invasion of its Eastern European neighbor, Ukraine.

With demand exceeding supply and a tightening labor market, Mr Williams expects monetary actions to cool the demand side of the equation.  The Board has already embarked on cooling down the demand side, first by announcing during its last Federal Open Market Committee meeting (a committee that Mr Williams is a member of) an interbank overnight lending rate range of .75% to 1.00%. 

In order to influence its member banks to borrow excess reserves from each other within this range, the Board will begin unwinding its holdings of US Treasury notes and agency-backed securities on 1 June.  In theory, as more securities hit the market for sale, the price of these securities fall while the interest rates paid on these securities increase.  As interest rates increase, the Board believes the increase will be accompanied by a slow-down in lending by commercial banks and borrowing by businesses and consumers which is expected to result in a less heated economy. 

But as the campaign season heats up in the United States, how well will the Biden-Harris administration manage the political economy during a downturn?  Today, Mr Biden, in remarks addressing inflation, spun a narrative that inflation is the result of Vladimir Putin’s antics in Ukraine and by a federal budget deficit caused by wealthy individual and large corporations’ unwillingness to pay their fair share of taxes. 

Admitting that monetary policy is the purview of the Board of Governors, Mr Biden offered up a fiscal solution contained in his Build Back Better agenda.  Components of the Build Back Better agenda offered in his remarks included investment in renewable energy infrastructure; passing clean energy and electric vehicle tax credits; promulgating fuel regulations that would increase miles per gallon for fossil fuel vehicles; and releasing one million barrels a day from America’s strategic petroleum reserves.

Throughout Mr Biden’s speech, Vladimir Putin’s name was cited repeatedly giving me the impression that remarks were intended to drum up electorate support for continued U.S. and NATO involvement in the Ukraine-Russia conflict versus resolving the inflation issue.  I also get the sense that by early summer, Mr Biden will tie Mr Putin to former president Donald Trump, thereby turning the inflation messaging into a strategic communication that garners more electoral support for the Democratic Party.

As an economic narrative, Mr Biden’s fiscal and legislative policy will depend on a defacto gridlocked Congress.  By keeping attention on Mr Putin and to a lesser extent Mr Trump, Mr Biden hopes Americans do not notice his inability to manage the political economy out of an inflationary mess.

All ears should stay open to what the Federal Reserve says and eyes open to what the consumer does.  While the Board lost credibility by continually repeating that inflation was transitory, it is in a position to take faster and more measurable action via monetary policy as opposed to Mr Biden’s fiscal and legislative agenda.

Alton Drew

10 May 2022

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Taking a look at the US money supply numbers: Has the political right missed the mark?

Between February 2021 and February 2022, Board of Governors of the Federal Reserve System (BOG-Fed) data shows that M1 money supply increased 12.7% or 1.05% per month. When you put this data along side unemployment data from the U.S. Bureau of Labor Statistics (BLS), the 1.05% monthly increase in money supply accompanies a monthly 3.2% decrease in the unemployment rate.

Inflation is running at a rate of 7.9% between February 2021 and February 2022, according to BLS data. This translates to a roughly 0.65% monthly increase in household expenditures.

And the dollar index which measures the strength of the US dollar against a basket of other currencies has risen 7.3% over the February 2021 to February 2022 period, which translates to 0.60% per month.

I’m not going to attempt a causal analysis here. A cursory view of the money supply and dollar index could lead one to conclude that the relationship between the money supply and the dollar index is less than unitary which could be interpreted as the existence of price elasticity; that buyers of dollars could find other competitive currencies to carry out a trade. I won’t say “carry trade” since I am not looking at bond yields.

The political right has been consistent in pointing out that inflation is reflective of increased money supply, but I cannot say whether the less than unitary response in the inflation rate when compared to the change in money supply indicates that the political right has missed the mark.

Alton Drew


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Inflation is the result of money backed by no current individual data value

Money is not only the physical acknowledgment of what is owed, it is also a claim on an asset.  Money is a receipt documenting the assets a bank holds for an individual and this receipt can be traded for some commodity, good, or service.  The counterparty on the other side of the trade should feel comfortable that the receipt can be redeemed for the assets held at a bank or traded with another counterparty for commodities, goods, or services.

Most of the electorate have no receipts to trade because they have no assets upon which they can issue receipts.

The ideal money is not money issued by the Federal Reserve or U.S. Treasury.  An ideal money is one issued directly by the individual, is backed by commodities or intellectual property, and contains up-to-the-minute data on the value of the individual’s assets.

Ideal, individually issued money should contain the individual’s identifying information, verifiable address, documented assets, and their real-time value.  In an ideal, individually issued money environment, most of us, now, would be walking around with worthless currency.  Our receipts today are backed by nothing that we own or produce.

You could argue that the money in your pocket or on your debit card that you use to buy a hamburger is the result of the hard work that you put in at AT&T.  But is it?  Yes, you have an employment contract with AT&T, and yes, they promise you some payment, x, in exchange for some service, y.  The service you provide, however, is not a commodity that the traded receipts can be used to make a claim on.  The receipts the wage earner receives from AT&T are either issued on the assets AT&T used to borrow money from a bank or from the services it sold with your help.

When you trade the receipts (money) you get from your AT&T wages in return for personal goods and services from a vendor, you are simply reselling someone else’s receipts.

In a value-driven, individual micro-bank environment, the portion of your value that you exchange with me in the form of individualized money should contain the data reflecting your real underlying wealth; the currency; the inputs for your value.

If you picked up a ten-dollar bill off the ground and bought a burger, fries, and a drink, what can I ascertain about your economic value? Nothing.  Even if you believed that the very act of picking up the dollar generated some type of economic value, the act itself is no longer current. The act is not an existing commodity on which an current economic value can be assessed.  Time passed and the duration of the act has reduced to zero any value it may have contained.

The wage earner/non-asset holder is left with no choice in an ideal, individual micro-bank scenario but to create a current asset that contains their data, skills, knowledge, and abilities.  The demand for this individual micro-economy will determine the value of the money the asset generates.

Banks, institutions with 500 years of experience pricing assets, along with the assistance of fintechs, can help the trader design and issue the money issued against assets.

And what would be the role of government in this scenario?  Other than offering a dispute settlement service, nothing.  The data contained in an individually issued token should be sufficient for a trader to determine the token’s underlying value.

The real reason we have inflation is not because of increasing money supply or price gouging on the part of greedy corporations.  This current round of inflation is an acknowledgment that the consumer is exchanging money backed by either nothing or by individual assets quickly depreciating to zero.  

Alton Drew