For two decades the Federal Reserve worked magic, keeping the U.S. economy at a steady simmer — neither too hot nor too cold. The Fed worked its magic by tinkering with the money supply through techniques advanced by Paul Volcker and perfected by Alan Greenspan, both former Fed chairmen.
If the economy was growing too slowly or threatening to slip into recession, the Fed lowered interest rates. This made borrowing less expensive, encouraging business expansion and personal spending. Result: more growth.
If that growth grew too strong, threatening an inflationary rise in prices that eats away at the value of our money, the Fed would tweak interest rates higher, dampening growth and keeping inflation at bay.
The Fed’s balancing of growth and inflation worked because the United States was the world’s largest consumer of just about everything. Slowing growth shut down inflation because, if U.S. consumers weren’t buying a product, no one was.
No more.
Growth in places like China and India is putting huge demands on commodities like oil, food and building materials. Weak demand in the United States is no longer enough to drive down the prices of these goods.
So now we have the United States teetering into recession at the same time inflation — including food and energy costs — is running around 4.3 percent.
The Fed is trying its usual response to a recession threat — lowering interest rates. But that’s just pushing inflation higher as the central bank floods the market with money. The dollar’s value is plummeting. Foreign investors, on whom we depend to finance our budget deficits, are being driven away. No wonder. Would you invest in a country that offers lower interest rates and money that’s losing value compared to your home currency? Not likely.
No growth, rising inflation. Someone invented a term for that in the 1970s — “stagflation.” And it’s a tough nut to crack. President Gerald Ford tried by handing out buttons with his “Whip Inflation Now” slogan. Didn’t work. Jimmy Carter suggested Americans would just have to get used to living with less. “Malaise forever.” That got him a one-way ticket back to Palookaville.
I graduated from high school in 1979 so I remember the ’70s. They weren’t pretty. Dad worked two jobs for a while to help make ends meet. I remember gas lines and horsemeat in the grocery store because people couldn’t afford beef. I remember hopelessness and hostages.
In his second inaugural address in 1997, Bill Clinton talked about “building a bridge to the 21st century.” Right now, I’ll settle for a presidential candidate who can keep us off a bridge back to the 1970s.
