June 16, 2022 - 4:01pm
After inflation rose to 8.6% last week, the US Federal Reserve had no choice but to act aggressively, which they did this week by raising the federal funds rate by three-quarters of a percentage point, the biggest one-off increase in nearly thirty years.
In addition to the rate hike, the Fed Chairman, Jerome Powell, indicated that another three-quarter point hike is possible at the Fed’s next meeting in July, which implicitly concedes that the US central bank is way behind the curve on containing inflation. The elusive soft landing for the US economy also looks imperilled, and a nasty recession therefore almost certainly looms ahead.
Worst of all, the ‘cure’ of higher rates is unlikely to solve today’s economic problems; in fact, they could well make things worse. Thanks to the Ukrainian war (and the corresponding sanctions imposed in response to the conflict), Americans are suffering on a daily basis, whether it be at the local grocery store, or the gas pump, where gas prices have hit an all-time national high of more than $5.00 a gallon.
Rapid increases in the cost of living have eroded consumer confidence and demand. We can see this in the latest May US retail sales figures: total monthly retail sales growth came in 0.5 percentage points below the consensus expectation. The prior two months were revised down by 0.4 percentage points overall.
Consumer sentiment is also rapidly deteriorating: it fell sharply to record lows earlier this month, well below market forecasts. In full context, this reading is below the level reached during the worst of period in 1980 when inflation was in double digits and the economy was crashing at more than a 10% annual rate. It is also lower than the level reached in the depths of the 2007–09 recession — the worst in three generations.
Even if China were to end its lockdowns and rapidly come back onstream to fill some gaps in the supply chains, it won’t alleviate much of today’s inflation because China is also a major consumer of food and energy (where the price pressures are most acute throughout the world). Hence, we’ll have the worst of all possible worlds: US productive capacity will remain constrained by higher interest rates, while China fills in some supply gaps (but at a cost of further eviscerating what’s left of American manufacturing), all against a backdrop of soaring food and energy price increases.
Even more ominous than the prospect of yet further interest rate hikes are the looming cutbacks in government spending. The US Federal Government budget deficit is forecast to plunge from $2.8 trillion in 2021 to around $1 trillion this year, as most Covid relief programmes expire.
On the surface that might sound good, but the reality is that it constitutes a major economic contraction: the expanded child tax credit ($110 billion) lapsed in December, student loan repayments are likely to restart for tens of millions of Americans, shut-off moratoriums just expired, rents are still rising rapidly, and housing is increasingly unaffordable at a time when many American families are drowning in consumer debt.
All of which means a self-inflicted 1970s-style stagflation cycle lies ahead — a legacy of decades of mistakes made by fiscal and monetary policymakers, now exacerbated by an interventionist foreign policy agenda that risks (literally) blowing everything up.
Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.
Mauerback
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeEverything Starmer does is calculated to make Labour more attractive to the wealthy middle class rentier voters he needs in order to win. Like his mentor Blair, Starmer thinks only about getting power. It’s clear he has no real idea what to do once he’s got it. The next government will be even more paralysed than this one.
Thing is by time he gets there Tories will have implemented most of his policies!
Thing is by time he gets there Tories will have implemented most of his policies!
Everything Starmer does is calculated to make Labour more attractive to the wealthy middle class rentier voters he needs in order to win. Like his mentor Blair, Starmer thinks only about getting power. It’s clear he has no real idea what to do once he’s got it. The next government will be even more paralysed than this one.
We can agree the Tories are a poor govt. But this doesnt make Labour a good Govt.
We can agree the Tories are a poor govt. But this doesnt make Labour a good Govt.
Blair did not take the pluralist approach the author suggests and Labour won three consecutive elections and made enormous changes to Britain, including Scottish and Welsh devolution, the creation of the GLA, the creation a permanent leftist administrative state, mass immigration.
Under the Tories we have had continuity New Labour with added Corbynism for over 26 years. The result has been catastrophic socially and economically, but one cannot argue that Blair’s expulsion of the hard-Left didn’t yield substantial results.
From a right-wing perspective I would have preferred Blair and Brown to have been bogged down with fighting a substantial fractious hard-left element within his own party. But if Starmer is looking to Blair as an example, he is hardly going to take the author’s advice and make a rod for his own back.
In fairness New Labour was simply Thatcherism with a bit more spending on the health service. The UK has been following the same ideology for 4 decades
New Labour attacked the fundamental structures of British society . Regional devolution of Britain, the creation of the GLA and office of London Mayor, the advent of the age of mass immigration, the doubling of house prices, involving Britain in disastrous regime changes, the entrenchment of a permanent leftist quangocracy – this is New Labour’s disastrous legacy, left in place by the Tories, not the few years they followed Conservative economic policy.
New Labour attacked the fundamental structures of British society . Regional devolution of Britain, the creation of the GLA and office of London Mayor, the advent of the age of mass immigration, the doubling of house prices, involving Britain in disastrous regime changes, the entrenchment of a permanent leftist quangocracy – this is New Labour’s disastrous legacy, left in place by the Tories, not the few years they followed Conservative economic policy.
In fairness New Labour was simply Thatcherism with a bit more spending on the health service. The UK has been following the same ideology for 4 decades
Blair did not take the pluralist approach the author suggests and Labour won three consecutive elections and made enormous changes to Britain, including Scottish and Welsh devolution, the creation of the GLA, the creation a permanent leftist administrative state, mass immigration.
Under the Tories we have had continuity New Labour with added Corbynism for over 26 years. The result has been catastrophic socially and economically, but one cannot argue that Blair’s expulsion of the hard-Left didn’t yield substantial results.
From a right-wing perspective I would have preferred Blair and Brown to have been bogged down with fighting a substantial fractious hard-left element within his own party. But if Starmer is looking to Blair as an example, he is hardly going to take the author’s advice and make a rod for his own back.
If Labour formalises an agreement with the SNP, LibDems or Greens before the next General Election they may lose some of their existing support or even discourage discouraged Conservatives from ‘lending’ their vote as a protest.
So I imagine that Starmer will avoid such a commitment before the GE even if he comes to some arrangement after the GE to secure a clear majority.
If Labour formalises an agreement with the SNP, LibDems or Greens before the next General Election they may lose some of their existing support or even discourage discouraged Conservatives from ‘lending’ their vote as a protest.
So I imagine that Starmer will avoid such a commitment before the GE even if he comes to some arrangement after the GE to secure a clear majority.
They are not a million miles apart on the issues of immigration and Brexit and the value of our culture, though, are they? Anyone wanting to destroy the UK and then make a bid to commandeer the wreckage might find this sort of alliance to be very useful.
They are not a million miles apart on the issues of immigration and Brexit and the value of our culture, though, are they? Anyone wanting to destroy the UK and then make a bid to commandeer the wreckage might find this sort of alliance to be very useful.
What is this pro-development, pro-growth, pro-trade union, and pro-UK party to which Richard Johnson refers? If I knew of such a party, I might be tempted to vote for it.
What is this pro-development, pro-growth, pro-trade union, and pro-UK party to which Richard Johnson refers? If I knew of such a party, I might be tempted to vote for it.
We won’t be getting pluralism with Starmer, either inside the Labour Party or outside it. This is not about the history of the party, it’s about the current leader not being the slightest bit interested in political debate, reaching out, joint working, decentralisation or making people feel represented. If he wasn’t so bloodless, people would maybe worry a bit more about him. He’s not just fixated on getting power, he’s fixated on keeping it all for himself.