America’s inflation woes were caused by the moral hazard of cheap money

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  • USA TODAY Network Tennessee Columnist Cameron Smith is a Memphis-born, Brentwood-raised recovering political lawyer raising three boys in Nolensville, Tennessee.
  • We should be reacting to what Congress is doing in the real world rather than what it plans to do.
  • If we are to fight inflation and avoid economic collapse, we must inflict the pain of significantly higher interest rates.

America has sown the economic wind, and now we will reap the storm. Most of us can’t be bothered by the nuances of monetary policy, but our leaders, both business and political, have all but assured that the realities of monetary policy will impose real pain in the months and perhaps the years to come.

Whether conservative or liberal, much of America’s economy is built on a fiction about to catch up with us.

Inflation is the most painful indicator something is wrong with our economy. Too many dollars continue to chase too few goods. This is why prices have increased exponentially. Nobody likes it, but where are those extra dollars coming from?

Before the COVID-19 pandemic hit, we already had cheap money in our economy. For most of the past decade, interest rates have been at or near historic lows. When money is cheap, companies borrow more. They take economic risks that they would not otherwise accept. These bets only need to be a marginal success to avoid an economic calamity.

In the process, the money lent increases the supply of available dollars without necessarily increasing the quantity of goods and services.

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Bailouts and COVID stimulus measures reflect poor leadership

Economic shocks like a housing crisis or a pandemic disrupt repayment plans. Some riskier loans and investments are not able to withstand changing markets. Normally, that would mean the company folds, investors take a dip, and employees lose their jobs.

Unfortunately, we live in a society that has too often eliminated failure as a measure of accountability. Over the past 15 years, Democrats and Republicans have taken action to bail out defaulting businesses, lenders and borrowers.

To make matters worse, Congress handed out checks during the COVID-19 pandemic to just about everyone. As a result, trillions of additional dollars made their way into the economy.

Congress has mishandled this issue in every way. Low interest rates and high levels of government spending create a permanent economic underclass. Wealthy Americans have assets to get into debt. They use relatively low interest rates to generate income during a period of high inflation.

The average American worker, on the other hand, receives a wage that inflation suppresses through the high cost of goods. The rich get richer while irresponsible government and tax policies hammer everyone.

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Consider Paul Volcker’s “shock” on the economy

To protect the average American, Congress should tie interest rates to inflation through legislation.

Chick Harrity |  Associated Press In this 1980 photo, Federal Reserve Board Chairman Paul Volcker appears before the Senate Banking Committee in Washington, D.C.

For example, if the Federal Reserve is targeting 2% inflation and America is experiencing 8% inflation, then the 6% delta should directly drive up interest rates. No economist wants to bring the economy to a screeching halt, but the track record of history is instructive.

To deal with the high inflation of the 1970s, Fed Chairman Paul Volcker pushed the federal funds rate to around 20%. He shocked the economy with short but sharp interest rate hikes ranging from 6 to 10 percentage points from 1979 to 1981.

The short-term economic pain in terms of jobs and economic growth was real, but inflation receded. The result was an incredible period of economic prosperity.

Why should we wait for the Fed to do what we should demand in fiscal sobriety? Linking Inflation to Interest Rates Also Fights the Lies Coming Out of Washington, D.C.

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How can Congress avoid spikes in inflation?

The congressional deficit spends like it’s drunk, and no real accountability ever materializes. It is difficult because the House and the Senate base their decisions on financial projections.

As a young lawyer working in Congress, I discovered that the biggest lie in Washington, DC is the 10-year budget window.

Cameron Smith, columnist for The Tennessean and USA TODAY Network Tennessee

When most Americans hear about the cost of legislation, thinkers usually refer to the balance between sources of revenue (tax increases, eliminating waste, or cutting programs) and expenditures (new spending, benefits or programs) over a 10-year period. period. Predictably, expenses occur while taxes and other sources of revenue are much harder to maintain.

Linking interest rates to inflation is a key accountability mechanism. We should be reacting to what Congress is doing in the real world rather than what it plans to do. Inflation captures this activity. If Congress prints money to satisfy its spending appetite, inflation rises. We are living this now. If Congress really balances taxes and spending, inflation shouldn’t skyrocket.

When consumers can’t buy homes, cars, or education because of congressional overspending, they will voice their displeasure at the polls. It is a real tool to restore great fiscal responsibility and prevent a permanent inflation-punished underclass without access to cheap capital.

If we are to fight inflation and avoid economic collapse, we must inflict the pain of significantly higher interest rates. Between the Federal Reserve’s cheap money and Congress’ reliance on deficit spending, we know exactly who to blame. Vote accordingly.

USA TODAY Network Tennessee Columnist Cameron Smith is a recovering political lawyer born in Memphis, raised in Brentwood, raising three boys in Nolensville, Tennessee, with his especially patient wife, Justine. The direct indignation or agreement of [email protected] Where @DCameronSmith on Twitter. Agree or disagree? Send a letter to the editor to [email protected]

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