Hey, today we're going to talk about inflation again and look at its ugly source.
Hey, welcome back to the Barry Ferris Show Culture Shift.
Thanks for being with us today. Appreciate it.
Hey, today what we're going to do is just look at the source of inflation and a little bit of history.
You know, in the 19th century, the Ottoman Empire was deep in debt due to too much government spending.
In the past few years, we've seen Italy and Greece nearly go bankrupt.
They basically imploded due to too much government debt, which is due to too much government spending.
Even Puerto Rico, it's part of the U.S. technically.
They formally filed for bankruptcy in 2017.
Okay, you have basically what's almost a state, it's not technically, but almost a state of the United States that's bankrupt.
They did that in 2017.
What was the cause? Too much debt based on too much government spending.
Heck, you can pick a period.
You know, Louis XIV spent so much money on palaces and even built some public hospitals that the French treasury was spending,
now get this, more than 80% of tax revenues just to pay the interest on their enormous debt.
There's just this hard-coded reality that you cannot permanently get away with spending more than you make, even if you're a big government.
But you'd never know that if you looked at the behavior of the United States federal government and a lot of governments around the world.
And in the United States case, they have a sponsoring agent.
And that sponsoring agent is the Federal Reserve.
The Federal Reserve System is the central bank of the United States.
Now, according to the Fed's website, it performs five functions.
First, the nation's monetary policy to promote maximum employment and stable prices in the U.S. economy.
Second, it promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad.
Third, it promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole.
Fourth, it fosters payment and settlement system safety and efficiency through services to the banking industry and the United States government that facilitates the United States dollar transactions and those payments.
And then fifth, it promotes consumer protection and community development through consumer focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
Man, back in the 80s, I toured the Fed Reserve and got to sit down with, at that time, the chair and our team from the Washington campus.
And at that time, it was still a pretty big job, but they have a huge job now.
They have expanded what they do.
I just read from the website there because I didn't want to misrepresent them, but that's what they believe they're supposed to do.
It's huge. It's enormous.
Now, to its credit, the Fed, and even on its website right now, has a credible history of itself, like it identifies a period when most listeners' parents or grandparents were in their prime.
It's called the Great Inflation.
That's how they title it.
It's the nearly two decade period of 1965 to 1982.
I wonder if we could learn something from history.
The Federal Reserve looks back on this period, and to paraphrase, they admit that it was really bad that the Federal Reserve messed up.
We had four economic recessions, two severe energy shortages, and the unprecedented peacetime implementation of wage and price controls, and that was by Republican presidents.
It was, according to the historians, the greatest failure of American macroeconomic policy in the postwar period.
That's a pretty big statement.
The failure was so severe that it changed the rules that today guide the monetary policies of the Federal Reserve and other central banks around the world.
But it seems like we're starting to ignore our own advice and run headlong back into this dangerous economic disaster.
We'll address that next time.
This time, let's just take a brief look at that great inflation history.
Now up through the first half of the 1960s, the economy was strong and it was what they
called real.
And by real, I mean that every dollar was backed by something that you could touch,
which was gold.
And as a result, inflation was 1% in 1964.
But LBJ became president after John F. Kennedy was assassinated and he introduced huge government
programs to achieve his goal of the Great Society.
He described it as the War on Poverty.
They were a total failure on every level.
That's empirically just true, but we're not going to talk about that today.
Let's assume they were not failures.
The problem with the programs is they cost more money to implement than the United States
was taking in in tax revenues.
So when you're spending more than you're bringing in, what do you do?
The U.S. would have to find a way to cover the shortfall between what they were spending
and what they were bringing in.
Now the Fed was supposed to be independent.
That was the real goal.
And if it was totally independent, the notion is that it would be an anchor and it would
anchor the dollar and force the government to spend only what they reasonably can collect
in tax revenues.
They could use their power to not facilitate spending and not print more money.
If the Federal Reserve had remained independent, it could have forced the federal government
to remain limited, which was the idea of the American concept.
It would not have been able to add all those agencies and programs that were way beyond
the primary role of the federal government.
They could cry all they want.
They could try to talk about social programs in Europe.
But without the money, Congress and the White House would have no choice.
They would have to have been more restrained.
They would have had to have a more humble view of themselves.
If the Federal Reserve had done their job, the government would have remained limited
to the essential things like the military that would have made this country continue
to be great.
But that isn't what happened.
The Federal Reserve policy changed to one of coordination.
This is where the Fed believed it was now its responsibility to fund whatever Congress
concocted when the president signed into law.
The result was horrible.
We lost the war on poverty.
Society wasn't that great.
Inflation reached 14%.
Unemployment rose and you could pay, get this, as high as 18% interest for a mortgage.
Let's just compare that to last year's rates for a person that's got $1,750 to spend a
month on a normal down payment.
He could get a $400,000 house.
In 1980, you could only afford a $110,000 house even after adjusting for today's dollars.
So for your largest purchase, your buying power was about one-fourth in those late 70s,
early 80s of what it is when inflation is under control.
The Great Inflation kicked in after the Fed decided to fund the Great Society with excess
government spending.
And they did this with an excessive growth in the supply of money.
Now if the dollar was anchored, it wouldn't have been possible to go on such a spending spree.
You know, the dollar used to be heavily anchored.
In fact, in July 1944, in Bretton Woods, New Hampshire, we had this Bretton Woods Conference.
Thousands of nations got together to attempt to form what they called a global society.
One that was linked to the United States dollar and the U.S. dollar was linked to gold.
It had some flaws.
It's hard to keep fixed parity among nations.
And as inflation went higher, people invested in gold.
What about that?
They didn't think about those speculators.
So it made it really hard for then-President Nixon to navigate.
So in addition to his price and wage controls, he stopped the gold standard.
And the post-war global monetary system was gone forever.
So Bretton Woods failed.
So with the last link to gold gone, most of the world's currencies, including the United
States dollar, were now completely unanchored.
That's like going hunting and not aiming while you're shooting.
It's not a good idea.
But the industrialized world would be on this irredeemable paper money standard.
The late 1960s and the early 1970s were a turbulent time for the United States economy.
What is it with Democrats?
I mean, rather than encourage entrepreneurship at this time, while we were in this fragile
place, President Johnson's Great Society legislation brought about major spending programs
across a broad array of social initiatives that, at the very same time, the United States
fiscal situation was also...
already being very strained heavily by that Vietnam War.
And the United States at the time used a whole lot more oil than it produced.
So it was vulnerable to the Arab oil embargo where oil quadrupled from the 1960s to 1975.
Think about that.
Then there was this Iranian revolution which brought about another oil crisis in 1979 and
oil tripled again.
Everything got so bad that in the 1970s economists and policymakers began to categorize the rise
in aggregate prices in two different categories of inflation.
They had two types of inflation instead of just saying inflation.
The first is demand-pull inflation and this is directly connected to macroeconomic policy
and monetary policy.
It comes from the policies that generate more spending than what the economy can produce
without pushing the economy beyond its ordinary capacity.
And this pulls more expensive resources into play.
That's bad.
The second is called cost-push inflation and this is when costs are pushed higher as a
result of supply disruptions.
In the 1970s this was food and energy markets.
Now it's kind of everything.
The cost-push inflation in the 70s got passed through the supply chain into higher retail
prices.
So they had no anchor of gold and they didn't have a target for the dollar so the Federal
Reserve made it worse.
They paid for spending that was reckless that increased the debt and we didn't actually
have the money to pay for those programs.
That accelerated the expansion of the money supply and that threw more money at the same
amount of goods which raised the overall prices without reducing unemployment.
So their goal didn't get accomplished which was to keep unemployment low and let inflation
fluctuate.
Bottom line according to the Fed's own history of itself they were overestimating their impact
on unemployment and underestimating the inflationary effects of their policies.
Their approach actually accelerated both.
So we now have a mountain of explainable data to prove that what they did does not work.
In fact, it creates an artificial cycle that trends in the opposite direction of their goal.
Bad government and Fed policy created the demand pole type of inflation and exacerbated
the cost-push inflation.
Those lessons learned have been completely ignored right now and they're being repeated
but it's worse.
Why is it worse?
Well, we know.
I mean they didn't.
I mean though they had some famous economists like Milton Friedman and Edmund Phelps that
said look man this relaxed view on inflation is not going to work.
It's wrong-headed.
And they explained why they turned out to be accurate and correct.
But at the time that they were complaining in the 60s they didn't know empirically.
But now after 1965-1982 is past us, I mean that history is known.
It even has a title, The Great Inflation.
Why are we ignoring it right now?
What is going on?
Now let's just zoom in on Janet Yellen.
She's the U.S. Secretary of the Treasury right now.
She knows better.
You know she used to be the head of the Federal Reserve.
She helped write the history that talks about the Great Inflation.
She knows that there's empirical evidence showing how flawed the Fed policy was from
1965-1982.
She also knows that a massive social spending spree will only make matters worse.
Ignoring inflation failed back then and everyone can read the history.
Why are they ignoring it now?
Next time we're going to look at what happened next, which was this mechanism to create a
simile of honest money and it kind of sort of worked, pretty brilliant, and it had a
built-in inflation tax, which isn't always so good.
It didn't help us reduce spending, but with excess spending it did help control inflation.
We'll explain that a little bit next time.
Yet right now there's a decay of this honest money and it seems deliberate.
If the Fed raised rates to 6%, real estate prices would plummet.
If they went to 7%, the U.S. government could even default on its own debt.
So you would think that the logical thing for Congress would be to take a chill pill
and put brakes on spending since we know spending is the source of the problem.
Instead, the POTUS and the Democratic Congress have asked for more spending.
It's kind of hard to keep up.
All the stuff that's happening recently I'm not talking about.
I'm going back to last spring.
Just last spring they added $2 trillion.
$2 trillion. And what was the result of that? 40% of the people that received monies that
were on unemployment benefits earned more than they did at their previous jobs. No wonder
it was hard for them to go back to work. Eviction protection kept more people on the sidelines.
You know, when the government gets involved, it just usually costs more, takes longer and
accomplishes less. If Congress had not rammed through that stimulus bill, which had zero
bipartisan support by the way, we might have dodged a bullet from all the 2020 stimulus
package stuff and it looked like we were about to. But the latest round, that round, back
in the spring, seemed wholly political. It allocated billions to reward irresponsible
state governments. It didn't really do that much to target actual needs. In big picture
terms, what the government should do is quit spending money that's way outside their jurisdiction,
adopt a balanced budget requirement. Wouldn't that be fantastic? Quit manipulating the market,
reduce the scope of the Fed to maybe three things, stabilize those prices and have a
more humble view of itself. But that's not happening anytime soon. So what can you do?
Well, you'll have to invest in making yourself a scarce resource and invest in scarce resources.
That's pretty much your only hope, to have a hedge against inflation. We'll give you
a little more on that next time. Until then, to your success. And that depends on your
grasp of your freedom. God bless you.
Hi, I'm David Farah. Thank you for listening to my dad's podcast, The Barry Farah Show.
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