Former Congressman and libertarian darling Ron Paul has spoken out in his weekly column to address the current activities of the Federal Reserve, arguing that the United States will face an era of stagflation as a result of the Fed’s monetary policies throughout the CCP (Chinese Communist Party) virus pandemic.
Paul’s written statement is a response to the latest rate hike of 0.75 percent from the Fed, the highest single hike since 1994, as the institution becomes more frantic in its fight against inflation. In his column, the octogenarian gadfly said that the Fed’s ambitions to stymie inflation without triggering a recession were unlikely, sniping at the Central Bank’s previous assertions that the current bout of inflation was “transitory.”
“This latest rate increase will only raise rates to where they were before the lockdowns led the Fed to embark on a historic money-creating spree,” Paul wrote. “The Federal Reserve cannot increase rates to anywhere near the level they would be in a free market because doing so would increase interest payments to unsustainable levels for debt-ridden consumers, businesses, and the federal government.”
Paul also dug into the relationship between interest rates and government spending, suggesting that government debts are one of the primary reasons the Fed has failed to move quickly on inflation.
“Increases of a couple percent or less in interest rates can cause big increases in federal debt payments. The resulting new spending puts pressure on the supposedly ‘independent’ Fed to maintain low rates, making it more likely the Fed will fail to tame inflation but succeed in resurrecting stagflation, combining price inflation with a recession. This new stagflation will make the 1970s look like a golden era.”
In comparing the economy of the near future to the 1970s, Paul joins a growing chorus of pundits drawing allusions to the “‘Me’ Decade,” during which inflation reached levels unseen since then while GDP growth stalled. In Paul’s estimation, the fiscal situation facing the United States is even worse than that, and the stalwart constitutionalist places the blame squarely on the Federal Reserve for failing to hike rates earlier.
“Nearly every time the Fed has raised interest rates this much and this quickly, it has caused a recession. A recession will hurt everybody, but it will be especially harmful to lower-wage workers, who are disproportionately women and people of color,” Reich argues.
“Besides, interest rate increases are not going to fix the main causes of inflation: pent-up demand from two years of the pandemic, shortages of goods and services, the war in Ukraine, and powerful corporations using inflation as a cover to raise prices... The Fed is making a big mistake.”
However, Reich is in the minority of economists on this point. While the consensus of economists maintains that rate hikes are likely to have a recessionary effect on the overall economy, they also note that inflation has uniquely deleterious effects on the lower and middle classes, who find their purchasing power diminished as wages are unable to keep up with the devaluation of the currency (Reich highlights this in his own analysis, but cites the phenomenon as proof of corporate greed, eliding the possible effects on purchasing power).
“Rents are rising at a rapid clip, due to the mix of rising demand and bottlenecked supply. The biggest losers there will be the poor,” writes economist Tyler Cowen. “And if poorer people are trying to live somewhere relatively prosperous, perhaps to enjoy future economic mobility for themselves and their children, rising rent will eat up an especially large share of their incomes.”
“The poor also save less, including as a share of their incomes, because they have to spend a relatively large percentage of their incomes on necessities,” Cowen continues. “That means they have smaller buffers against many kinds of changes and uncertainties, including those of inflation.”
On the other hand, the very wealthy and private financial institutions may benefit from some measure of inflation, as it allows them to pay off business debts at less expense to their own buying power.
“Monetary inflation boosts asset prices first and foremost yet boosts wages the least,” writes investment adviser and financial columnist Marc Cumberti. “The more assets one owns, the more the net worth of that individual rises, while the person subsisting on wages falls further and further behind.”
As a longtime budget hawk and deflationist, Ron Paul is somewhat unusual in the extent of his advocacy for a miserly monetary policy. However, as inflation continues to surpass decades-old records with new releases of the Consumer Price Index, economists and policymakers have increasingly adopted views similar to the former representative from Texas. More generally, Paul’s broad pessimism about the state of the U.S. economy is reflective of the attitudes of multitudes of analysts and financial institutions, whose assessments of the risk of inflation are rising steadily as inflation continues unabated and many equity markets suffer under the weight of financial uncertainty.
