WORD of the DAY – Runaway Inflation

Economics Has “Long Been Called “The Dismal Science”.

However, In My Opinion It Should Be Called “The “Magical Thinking Science”

So many calculus formulas and jargon words are mis-used to promote economic policies that seem nuts.

This week I’m using an example of “Wolf Street’s Stories behind Business, Finance & Money” post  about Runaway Inflation for their chock-full-of-data about how Economics really works.

Wolf defines this phrase. Runaway Inflation is when “‘Temporary’ inflation” (or a “spike in inflation” is suddenly called “Runaway Inflation”).

Wolf shows in an easy-to-see Eurostat chart that “Runaway Inflation” in the Eurozone jumped to 9.1% in August 2022, a percentage that in Europe hadn’t been seen since 1997.

Ignoring reality, back in mid-2021 our Fed announced that inflation was just temporary, and the ECB followed suit.

For decades while printing money, both our Central Banks and the Eurozone Countries Central Banks had been getting away with using a policy called “Negative-Interest-Rates”

The Central Banks in Europe and U.S. told their big money-market customers that even though their clients’ accounts were losing money, their customers were safer with them than with other kinds of assets.

Those Central Banks were accually claiming that going and staying below zero was gaining their customers some kind value – the value of peace of mind.

Here’s What I Mean by Central Banks’ Magical Thinking

Our US Federal Reserve Banks were calling Runaway Inflation” the same thing by a different name (QE) “Quantitative Easing”.

QE was used when the Fed took out any assets from its books when those assets expired, and did not buy new assets to cover the expired Federal Reserve account debits.

In other words, the Fed carried the negative interest rates of big money debtors on the its own shoulders. Now the Fed is doing the opposite thing.

That is called “Quantitive Tightening.” QT is when a Central bank is selling its accumulated assets (mainly bonds) in order to reduce the supply of money in order to slow down “inflation” (too much money chasing too few goods). The Central Bank then raises interest rates on bank loans thus creating a slowdown (they hope) of inflation.

Professor Mehrling at Columbia University calls QE and QT  the “shrinking of the money triangle. The bottom line of the triangle expands bigger (QE) as credit/debit card interest rates fall lower (credit and loans become cheaper), and then shrinks (QT) when credit/debit interest rates rise  higher (credit is more costly).

This past week Janet Yellen, 78th Secretary of the U.S. Treasury spoke on TV about the fears of “recession” and “inflation” in the present markets.

Secretary Yellen mentioned the strong jobs reports and noted that the Fed is legally limited its goals to the control two variables:  Employment and Inflation that I previously mentioned in my post, “Word of the Day – The Federal Reserve – PART ONE

And! Then Yellen spoke about supply-chain problems causing inflation! Supply chains are something that is not in the Keynes formula in the early 20th century for balancing a nation’s Economy because supply chains didn’t exist in Economics until later in the 20th century.

It seemed to me that Yellen wished that the Fed could control British Lord, John Maynard Keynes’ variable “Prices” in his formula for balancing a country’s Economy, but she backed away from the Fed having that power.

If government control of “Prices” ever comes to be used to fix an Economy in this century, the variable I suggested the Fed use in my previous post, “Wages” could be included as well. That is highly unlikely to happen, but we desperately to find more effective fairness when it comes to distributing wealth in nations.

Why We Need a New Kind of Economics – One For This Century

Fortunately, like Negative-Interest-Rate polices, Quantitative Easing is another story that is finally over. Whether Quantative Tightening on money  works to tame inflation remains to be seen.

We have to find better ways to distribute money in economies all over the world. As well as find ways to solve supply-chain problems, Wars that are crippling Economies all over the world, and face the challenges of climate change!

Wolf’s article on “Runaway Inflation” continues with Eurozone statistics about energy prices, supply chain problems and inflation percentages before and after Putin’s Russians invaded Zelensky’s Ukraine.

These Eurozone data statistics are going to severely affect those of us on the other side of the pond in this century. Please check out Wolf’s link above!

These global challenges are why we badly need to get past the 19th-and 20th-century economist’s “Magical Thinking” Economics,” and get a meaningful global perspective on our real-world Economics today with views that could be broadcast everywhere on Earth and used by all.