STEVE FORBES: Misguided Federal Reserve thinks crippling the economy will rescue America

Steve Forbes is chairman and editor-in-chief of Forbes Media and author of ‘Inflation: What It Is, Why It’s Bad, and How to Fix It’

The Federal Reserve has hiked its benchmark interest rate by three-quarters of a percentage point for the second straight time in an historic effort to rein in the worst inflation in 40 years.

It’s like a dentist doing a root canal on a patient with a heart problem.

It’s not going to help, but it sure will hurt.

Worse still – the Feds action on Wednesday will do nothing to stop America from slipping back into the dark stagflationary days of the 1970s and early 1980s.

The Federal Reserve believes its role in fighting inflation is to raise interest rates, depressing the economy and stopping people from buying the goods and services they need, at a time when the nation is already teetering on the brink of recession.

But putting people out of work and deliberately crippling America’s economic growth is not the way to get back to a vibrant economy.

It’s a cure to the wrong disease.

The biggest factor driving the current inflationary situation is ‘non-monetary,’ meaning that it has nothing to do with how many dollars are circulating in the economy.

‘Non-monetary’ causes of inflation are factors like supply chain disruptions, which are often the result of events like war, hurricanes, or — as we see today — pandemics.

The Feds action on Wednesday will do nothing to stop America from slipping back into the dark stagflationary days of the 1970s and early 1980s. (Above) Federal Reserve Chairman Jerome Powell at the Federal Reserve Board building in Washington on Wednesday, July 27, 2022

The Feds action on Wednesday will do nothing to stop America from slipping back into the dark stagflationary days of the 1970s and early 1980s. (Above) Federal Reserve Chairman Jerome Powell at the Federal Reserve Board building in Washington on Wednesday, July 27, 2022

Putting people out of work and deliberately crippling America's economic growth is not the way to get back to a vibrant economy. (Above) At the State Employment Securities Department in Seattle, Wash., people wait to pick up their unemployment checks on July 30, 1970

Putting people out of work and deliberately crippling America’s economic growth is not the way to get back to a vibrant economy. (Above) At the State Employment Securities Department in Seattle, Wash., people wait to pick up their unemployment checks on July 30, 1970

The virus-related shutdowns disrupted supply chains that the ‘experts’ barely knew existed.

These vast, complex global delivery systems do not behave like a light switch that can be flipped on and off.

Hiking interest rates do nothing to address this problem.

The overwhelming problem today is too little supply.

But apparently, the Fed believes inflation is the result of too much demand.

For the average American family the price of all these blunders will be high.

As in — higher prices, higher rents and higher mortgage payments.

Borrowing costs will go up, businesses will have trouble growing and people will lose their jobs or not be hired at all.

It means less money saved for education and retirement and a dimmer economic future.

Making people poorer is not the way to fight inflation.

It is also undoubtedly true that federal government reactions to the pandemic, such as giving away an extra $600 a week in unemployment benefits and lavish stimulus checks, helped fuel today’s inflation.

But even worse, the Biden administration is now piling on with even more erroneous economic policies through regulatory war on commerce, domestic energy production and vital industries.

They continue to restrict U.S. oil production with onerous regulations and bans, as they beg Saudi Arabia to produce more.

America is already in a version of the stagflation – defined by rising prices and unemployment — that ravaged the nation five decades ago.

Back then the Consumer Price Index (CPI), a measure of the prices paid by typical consumers for retail goods, went from 37.8% in 1970 to 76.7% in 1979.

The CPI in June 2022 was 9.1%

For the average American family the end result of all these blunders will be high. As in -- higher prices, higher rents and higher mortgage payments. It means less money saved for education and retirement and a dimmer economic future.

 For the average American family the end result of all these blunders will be high. As in — higher prices, higher rents and higher mortgage payments. It means less money saved for education and retirement and a dimmer economic future.

The Consumer Price Index (CPI), a measure of the prices paid by typical consumers for retail goods, went from 37.8% in 1970 to 76.7% in 1979. (Above) A group of demonstrators march up Boylston Street in Boston to protest unemployment in the state of Massachusetts in March 1975

The Consumer Price Index (CPI), a measure of the prices paid by typical consumers for retail goods, went from 37.8% in 1970 to 76.7% in 1979. (Above) A group of demonstrators march up Boylston Street in Boston to protest unemployment in the state of Massachusetts in March 1975

In 1979, the average 30-year fixed home mortgage had risen to more than 11%. And it climbed further still in the 80s topping out over 16%.

Stagflation puts people on a treadmill, but the treadmill is winning.

They run harder and harder to just stand still, but the steadily increasing cost of living wears them down in the end.

People get tired of not moving forward. They feel as if they are in a permanent rut.

But it doesn’t have to be this way.

Author Steve Forbes is co-author of 'Inflation: What It Is, Why It's Bad, and How to Fix It'

Author Steve Forbes is co-author of ‘Inflation: What It Is, Why It’s Bad, and How to Fix It’

We need for the Federal Reserve to focus on stabilizing the dollar, instead of intentionally inflicting pain on people with little positive economic gain to show for it.

The Federal Reserve can return to the old Bretton Woods gold standard or announce that they will follow closely gold and commodity prices as Chairman Alan Greenspan did from the late 1980s to the late 1990s. 

We also need the federal government to cut taxes and regulations and stop their politically motivated spending binges.

Some of that happened in the 1970s, with good results.

President Jimmy Carter deregulated much of the transportation sector. Consequently, the trucking industry boomed and the U.S. rail industry, which was on the verge of insolvency, became the best in the world. Before deregulation, airlines couldn’t even make route changes without unneeded government approval.

We can do the same thing today, if we put down the drill and pick up the stethoscope.

Don’t condemn Americans to malaise of 1970s and 80s stagflation.

Fuel the engine of American business and America’s heart will start pumping strong again.

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