Inflation is much worse this time
mark94
Arizona
The last time we had inflation at these levels was the late 1970s. But, for the government ( meaning all of us ), it is much worse now.
Back then, Paul Volker hiked the lending rate to reduce demand Which lowered inflation. After a couple years of recession caused by higher rates, inflation was under control and the economy rebounded.
When Volcker hiked interest rates in 1980, the total amount of U.S. government debt was only $907 billion, or about 30 percent the size of the total U.S. economy. Today, the U.S. debt stands at $28 trillion, or about 125 percent of the total U.S. economy, meaning that our debt is worth about 25 percent more than our economic output each year.
The government has to pay interest on all this debt it has accumulated. As interest rates rise, the cost of paying that debt also rises. Which increases the size of the annual deficit. Which increases our debt. And so on. It’s a death spiral and we may be beyond a point where it can be stopped.
The total gross interest costs to the U.S. government were basically flat in recent years as the Fed held rates near zero, hovering at about $550 billion. That figure will hit $1.2 trillion within the next 18 months, which will amount to more than the government spends on either the Department of Defense or Medicare.
This means that the Fed’s tightening will push the United States closer to a dilemma that cheap debt has allowed it to avoid for years. The government will have to either raise taxes or cut spending to avoid more and more of its budget to simply paying interest costs.
Raising taxes would put a drag on the economy at a time when we are already entering a recession.
Cutting government spending is unlikely with the current politicians ( Republican and Democrat ) in office. They are in bed with all the groups that benefit from government largesse.
Back then, Paul Volker hiked the lending rate to reduce demand Which lowered inflation. After a couple years of recession caused by higher rates, inflation was under control and the economy rebounded.
When Volcker hiked interest rates in 1980, the total amount of U.S. government debt was only $907 billion, or about 30 percent the size of the total U.S. economy. Today, the U.S. debt stands at $28 trillion, or about 125 percent of the total U.S. economy, meaning that our debt is worth about 25 percent more than our economic output each year.
The government has to pay interest on all this debt it has accumulated. As interest rates rise, the cost of paying that debt also rises. Which increases the size of the annual deficit. Which increases our debt. And so on. It’s a death spiral and we may be beyond a point where it can be stopped.
The total gross interest costs to the U.S. government were basically flat in recent years as the Fed held rates near zero, hovering at about $550 billion. That figure will hit $1.2 trillion within the next 18 months, which will amount to more than the government spends on either the Department of Defense or Medicare.
This means that the Fed’s tightening will push the United States closer to a dilemma that cheap debt has allowed it to avoid for years. The government will have to either raise taxes or cut spending to avoid more and more of its budget to simply paying interest costs.
Raising taxes would put a drag on the economy at a time when we are already entering a recession.
Cutting government spending is unlikely with the current politicians ( Republican and Democrat ) in office. They are in bed with all the groups that benefit from government largesse.
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26 comments
We can make some cuts in programs like Social Security but with the large Boomer generation all retired these cuts will have a limit. We will have to cut all nonessential programs. An argument is often made that a specific program doesn't cost much but if you add up all these programs it comes up to a lot of money. We won't have that money. Also, we definitely won't continue to spend $800 billion dollars a year on the military and will adopt a much less interventionist foreign policy.
When Social Security was established, life expectancy was 65. It was not intended as a 20 or 30 year pension.
Similarly, when Medicare was established, average medical expenses were a fraction of what they are now. That’s in part because there was an expectation that it was natural for people to die of old age. Now, half of all medical expense are related to squeezing an additional year or two of life at the very end using extraordinary measures.
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We need to stop this short-term thinking and kicking the can down the road. We also need to stop playing games. Calling a government spending bill an "Inflation Reduction Act" won't mean it will reduce inflation. We have to reduce spending since we have been printing up money to pay for it. We printed up five trillion dollars between 2020 and 2022, a 40% increase in the money supply, to help pay for three giant stimulus bills totaling six trillion dollars. Powell said that wouldn't cause inflation. Then he said the inflation it was causing was "transitory". Now he finally admits he was wrong.
https://twitter.com/lynaldencontact/stat…
If the Fed didn’t exist, then the money supply would be stable and interest rates would be set by market forces. That would provide an automatic limitation on inflation and allow money to be invested in the enterprises that had the best returns.
^ what a loser. Skibum says how it was so great in the 70s and he was too weak to deal with life then. Oh and he makes fun of us young ones for having more difficulty than him and calls us soft. Wow! Just Wow! So pathetic
Oh wow scrub! The seething hate is real... Lol. You should go get counseling for that. It my help you with your daddy issues too
The reason we use a rolling 12 month measurement is that there will inevitably be month over month fluctuations. But the simple reality is that until we get demand for labor and fossil fuels under control, inflationary pressures are not going to abate to any significant degree. That's not going to happen while we timidly continue to support negative real interest rates (Fed funds rate minus inflation). As history has amply taught us, both here and in foreign countries, the way to tame inflation is to bring the benchmark interest rate above the inflation line.
Russia can't take a country a quarter its size. Sad.