We Need to Talk...About Inflation and a Possible Recession

We're going about it all wrong

It seems everywhere you go these days, the talk is all about inflation, and also a possible recession.

And so, I figured we need to talk about it.

If you’re like most people, economics is a topic you never think of spending much, if any, time talking about. You can find a million other things to talk about than a subject that appears to be drier that the driest of martinis.

Economics is known as the “dismal science,” because it seems so, well…dismal.

Where did the phrase “the dismal science” come from? It was the British historian Thomas Carlyle who coined it in his 1849 work Occasional Discourse on the Negro Question.

In this piece, Carlyle argued that reintroducing (or continuing) slavery would be morally superior to relying on standard market forces, and he labeled the profession of economists who disagreed with him as the “dismal science,” since Carlyle believed that the emancipation of slaves would leave them worse off.

Just the idea, furthered by Carlyle, that economics could be used as a rationale for slavery, and racism, is pretty dismal.

Further making it dismal is the obtuse language, with words such as valorization, valuation, dumping, backwardation, monetary neutrality, monopsony, disintermediation, hysteresis, frictional unemployment, peak pricing, Ricardian equivalence, sterilized intervention, and a whole lot more filling up the lexicon, all designed to keep it an insiders game, privy to the experts and too dense for regular folk like you and me.

But it shouldn’t have to be this way. The origin of the word economics is a Greek term, “Oikonomia,” which comprises two words: “oikos,” or household; and “nomoi,” which means laws, rules, constraints. Thus, the original meaning of economics literally means the “Laws of running, or managing, a household.”

In other words, we’re all economists. Once you are running your own household finances, you are a Ph.D. in economics.

And these days, every time you fill your car up with gas, you are fully immersed in the realm of economics.

So let’s examine this animal that’s called inflation.

The annual inflation rate right now in the U.S. for the 12 months ending May 2022 is 8.6%, the highest in 40 years. It’s not just the U.S. though: inflation in Europe is 8.1%, with France the lowest at 5.8% and the Netherlands the highest at 10.7%.

What’s driving this? Mostly two things: the supply chain issues and supply shortages resulting from the pandemic; and the Russian invasion of Ukraine.

Global supply chain issues limited the availability of parts needed to make consumer goods, while at the same time, demand increased exponentially for these very same consumer goods during the pandemic.

And on top of that, the companies that ship the parts or goods from the factories in Asia that pay their workers pennies a day to make them have jacked up their shipping charges 1000%.

This has led to a domino effect on the price of everything.

And then there’s the war Russia is waging in Ukraine. Gas prices were already rising before the war began—in December 2021, the U.S. national average was $3.41 a gallon. Since the war, prices have been jacked up and the national average now is $4.98 a gallon, while in California it’s $6.40 a gallon; meanwhile, diesel fuel is averaging at least $1.50 a gallon more than regular gas.

Inflation is mostly being driven now by the high cost of fuel, which then leads to higher costs for food, since it’s trucks running on diesel that ship food all over the country.

The cost of a barrel of oil isn’t the sole driver of gas prices. In July 2008, oil cost $145 a barrel, and the cost of gas peaked that month at $4.11 a gallon. Now the price of a barrel of oil is $109, yet gas prices are through the roof. On top of that, the cost of crude oil only makes up 61% of the cost of a gallon of gas.

Which means there is a certain amount of price gouging going on among the oil companies. This shows up in their bottom line, where profits are at their highest in seven years.

It’s not just oil companies that are making record breaking profits. Corporate profits are their highest in 70 years.

And who is paying for these profits? You and me—it’s extracted from our pockets into the coffers of the corporations.

Now, the rough definition of inflation is this: too much money chasing too few goods. To some, this definition gives them license to blame inflation on all the people who received pandemic relief funds from the government, along with the increased unemployment payments and the expanded child tax credit the government paid in 2021, because all of that put more money into the economy.

That’s a tired old trope though, blaming the poor and working class for society’s problems, while giving the wealth class a pass.

And besides, as I pointed out, inflation is occurring in Europe at the same time, even though there wasn’t the same scale of pandemic relief monies paid out.

No one said a word when the Federal Reserve was pumping at least $50 trillion into the financial economy—Wall Street banks, hedge funds, private equity, large corporations, and billionaires—over the last 14 years. No one blamed the wealth class for the inflation which ensued, which primarily showed up as inflation in overall housing prices, along with assets held by the wealthy—especially the stock market, which has boomed for these last 14 years (up until the last few months).

The Federal Reserve has been giving out money as if it was candy, but only the privileged class was lucky enough to receive it. It was the age of easy money, with interest rates at zero or near zero for the longest time.

All that easy money has widened the gap between the very rich and everybody else, leading to levels of wealth inequality not seen in the U.S. since the Gilded Age of the late 19th century.

Yet now, when the poor, working class, and even middle class receive some help, fingers get pointed at them, as if they are the cause of all the world’s problems.

Most people are struggling to make ends meet. When they receive some financial help from the government, it helps them stretch their budget a little further—after all, the expanded child tax credit of 2021 led to sharp drops in childhood poverty and hunger.

The 1970s was the last time inflation was this high, and the cause of it then was the Federal Reserve’s monetary policy, of too much easy money given out at low interest rates—just like today.

And then, as now, the Fed is trusted with the job of taming inflation, using the only tool they have, that of raising interest rates.

As they raise interest rates, the next part of the equation takes consequential action: a recession, or what some economists refer to as stagflation. The economy takes a dip, the stock market tanks—all because the Fed raised interest rates.

The purpose of raising interest rates is to tighten the supply of money in the economy. With higher interest rates, businesses and individuals borrow less, less people take out mortgages, and consumers cut back on their spending. As this occurs, businesses then hire less and the unemployment rate rises.

When the Fed raised interest rates in the late 1970s-early 1980s, it was a shock to the system. There was widespread bank failures and a recession.

In fact, over the last half century, every time the Fed has raised interest rates as quickly as they are doing now, it has caused a recession.

It doesn’t have to be this way. Raising interest rates and causing much financial pain is not the only way, nor is it fair or equitable.

When there is asset price inflation—especially in the price of houses or the stock market—it’s called a boom. These booms are beneficial for the wealth class, and neither the government or Federal Reserve does anything about it.

But when there is a rise in consumer prices, as is the case now, then it’s considered inflation and the Fed steps in with their shock the system approach, which causes financial pain for the masses.

As I stated earlier, inflation is defined by too much money chasing too few goods. That is why the Fed is raising interest rates: to tighten the money supply, because when that occurs, less money circulates in the economy.

But there are other ways not to have too much money chasing too few goods.

First off, as I mentioned, the reason there are too few goods right now is because of the pandemic—the pandemic’s supply chain issues and supply shortages drastically reduced inventory.

Secondly, another way to have less money in circulation is to increase taxes, as taxation takes money out of circulation.

There are two places where taxes can be put into effect to fight inflation:

1. Increase the taxes paid by the wealthy—what’s called a wealth tax. From the 1930s to 1980, the U.S. was the exemplar of the world, by virtue of its stable and prosperous economy. The reason for this was the progressive income tax, in which the highest tax rate over those years averaged 80%.

Thanks to that tax rate, wealth inequality was nonexistent in the U.S. But when Ronald Reagan became president in 1980, everything changed. He slashed taxes on the wealthy; ever since then, the level of wealth inequality has become extreme.

In the ensuing decades since Reagan, the wealth class has entered their own financial stratosphere, while everyone else has been left behind to pick up the crumbs.

By increasing taxes on the wealthy, it would take money out of the economy, which would then kill two birds with one stone: it would decrease inflation and decrease the levels of wealth inequality.

2. A windfall profits tax. As I mentioned, not only oil companies but corporations in general are making record profits.

A windfall profits tax would siphon off the record profits corporations are making now. This windfall could either be redistributed to the American people, to help them pay for inflated prices, or could be another method of taking money out of the economy, as a means to reduce inflation.

Regarding the profits of the oil companies, in the first quarter of 2022, Chevron’s profits more than quadrupled from the first quarter of 2021, while ExxonMobil’s profits more than doubled, despite taking a $3.4 billion hit for exiting its business in Russia.

Yet, ExxonMobil won’t be using its sky-high profits to ease the burden on consumers at the gas pump; instead they will increase their stock buybacks. They will buy back $30 billion of their own stock, up from the $10 billion they announced earlier this year.

In case you weren’t aware, stock buybacks artificially inflates the price of a company’s stock. Ninety percent of public companies pour in 90% of their profits toward stock buybacks.

That’s what the easy money from the Fed has allowed them to do.

Corporations and oil companies continue to rake in mega-profits, because they are the beneficiaries of inflation. All the rest of us are the losers.

The Fed’s only tool for fighting inflation, the raising of rates, will only cause massive pain for the great majority of people.

Before we assign all the blame to the Federal Reserve for perpetrating this on the American people, you have to know that there are two different entities that manage the economy: the Fed, which is in charge of monetary policy, and Congress, which is in charge of fiscal policy.

It is Congress that could act to create a wealth tax, raise income tax rates, or create a windfall profits tax. But Congress refuses to act, because the privileged few—call them the oligarchs, if you will—lobby and bribe certain Congress members to make sure Congress doesn’t bite the hand that feeds them by passing laws that would harm the oligarchs.

In other words, the system is rigged. As I’ve said in prior essays, the American economic system functions on the following principle: abundance for the privileged few and scarcity for the rest.

That’s why we need to talk about inflation and a possible recession—because you need to understand it doesn’t have to be this way.

For instance, imagine if the Federal Reserve, over these last 14 years of shoveling at least $50 trillion in easy money to the wealth class, instead put the money towards public investment—meaning, investing in the public good?

The good it could do, the social cohesion it would cause, the prosperity for all it would induce—it would go a long ways toward fulfilling the dream of a more perfect union and a more positive future.

That’s a dream that could become a reality, if you’re willing to open your eyes and understand how the system works.

And then work to change it.