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Powell’s Bag of Leeches
Hiking interest, the Medieval cure for inflation

Saw the leeches? When the Federal Reserve announced another interest rate hike today, did you see the little bloodsuckers crawling out of the pockets of Chairman Jerome Powell? Because his cure for inflation has much too much in common with Medieval bloodletting, and is just as effective.

From left to right: Putin, Exxon, MBS, Jerome Powell, Xi Jinping, Jamie Dimon

Inflation has fallen, and fairly fast. Powell is preening, taking credit for this miracle, care of his leeches—the ever-higher interest rates bleeding wage workers. In the Dark Ages, doctors who saw a patient improving, gave the credit to the leeches—and applied more. Powell, seeing wage workers bleed, is sure he’s curing the patient.

So, today the Fed’s Open Market Committee applied another leech, a quarter percent hike in the federal funds rate, bleeding the victims of inflation—wage workers—rather than the perpetrators.

Victims? Perpetrators? But aren’t we told that inflation harms everyone? Well, what else would you expect the perps to say?

The perps? According to the pundits, from The New York Times to NPR, the culprits driving inflation are the working stiffs demanding more pay—who are also selfishly clinging to their jobs. I was told, by a stern voice on NPR, that the “bad economic news” is that employment is rising. And therefore, if unemployment is too low and wages rising too fast, the cure is simple, according to our betters: throw a few million folks out of work and scare the crap out of the still-employed so they don’t dare ask for higher wages.

But, it’s not true; not according to the data. Keep in mind that, by “inflation” we mean a general rise in prices. According to the Bureau of Labor Statistics, keeper of the stats, what cost $100 in March 2021 cost $113.95 last month, a 14% rise. In March 2021, the average working person received $39.01 per hour in wages and benefits, rising last month by just $3.71 or 9.5% over the last two years.

That translates to a cut in real wages, of 5.5%, a loss in buying power for the average worker of over $4,000 per year ($4,155). Wages are not close to catching up to price hikes. In other words, Dr. Powell, wage workers are the victims of the price hike, not its cause.

The Phillips Curveball

So where did Powell get the whack idea that you can cure inflation by shooting the victims? So where did Powell and the pundits get the idea that rising wages and employment are the cause of inflation?
As John Maynard Keynes said, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”…”some defunct economist.” The scribbler in this case is a British economist, A.W. Phillips, father of the Phillips Curve. The Phillips Curve was once taught as an ironclad law of economics, stating that,
    • “Lower unemployment is associated with higher inflation.”
    • “Higher unemployment is associated with lower inflation.”

Simple, obvious; and dead wrong. This explanation of the Phillips Curve, which still infects the brains of the chattering classes, comes from academic papers, “What is the Phillips Curve and Why Has it Flattened?” and “Who Killed the Phillips Curve?”—both issued by… the Federal Reserve Board.

San Francisco Fed Chair May Daly speaks of the Curve as akin to Monty Python’s ex-parrot: “As for the Phillips curve… most arguments today center around whether it’s dead or just gravely ill.”

[N.B. In defense of the poor maligned Professor Phillips, he himself never claimed rising employment causes inflation, he only calculated the loss of worker bargaining power as unemployment rises.]

Dear reader, I’ve written about the structural cruelty embedded in our political economy in my book, Armed Madhouse. While some years have passed since the book topped the New York Times bestseller list, the facts don’t age.
    Therefore, I’ve made Armed Madhouse the Audiobook available without charge—though a voluntary donation would be most appreciated.

Nevertheless, Powell is panicked that there are simply too many people working to reduce inflation, and he intends to put an end to the employment spree. As Chairman Powell scolded,

“If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in.”

“We can help the economy by hurting the economy.”

So why is Powell taking us for a ride on a Phillips Curve that his own economists have thoroughly discredited?

For answers, I turned to Nomi Prins, the nation’s leading expert on what goes on inside a central banker’s brain. Dr. Prins, author of All the President’s Bankers and recently, Permanent Distortion, was a Managing Director of Goldman Sachs. She knows Fed-men and Fed-think intimately. That she bailed out of Goldman, walking away from gobzillions in unvested stock options, tells us she has a true insider’s view and the integrity to let you in on it.

Prins told me, “This narrative that the Fed can control inflation is absurd.” What?!? Papa Powell can’t save us?

Apparently, Powell hasn’t heard of Putin invading Ukraine leading to crude prices hitting $117 a barrel in June 2022, the peak month of inflation. Unless Powell hits the trenches with an RPG, there’s nothing he can do about that. Stratospheric energy prices affect every product, from creating chemical fertilizers to your Door Dash guy bringing you that greasy bag of Chik-Fil-A.

Ukraine is also one of the world’s leading exporters of grain and edible oils causing a massive blow-up in food prices worldwide

Even the knuckleheads at the IMF know this. Their economists have created a colorful graph to understand that energy and food are the “inflation drivers.”

And China. Mr. Powell, there was this epidemic, a Covid virus. Among other supply chain knots it created, was the closing of America’s largest port: Shanghai.

Consider car prices, a notable chunk (8%) of the consumer price index. With parts, especially computer chips, in shortage, tens of thousands of new cars sat unfinished at US assembly plants. As a result, used car prices hit the moon.

This is a classic “supply squeeze” inflation, as opposed to a “demand pull” inflation when higher wages are bidding up prices. Prins notes, “People making $3 more an hour are not bidding up the price of houses.” She does see some demand pull—from the fabulous new riches of the already too rich bidding up housing prices. (The average Goldman VP earned more than $500,000 in bonuses last year. No regrets, Nomi?)

Prins  says, “The Fed over-considers the little amount of wage inflation,” never inflation caused by the huge windfalls in the bonus and dividend class. Powell blames production workers for making a little more money, “and therefore the solution is to throw them out of work.” His theory is that, “We can help the economy by hurting the economy.”

She summarized her analysis in technical terms: “Powell’s an idiot.”

Bank Tellers vs Bank Takers

The Fed’s key mechanism for this “helpful hurt” is to raise interest rates. Think about that: Powell and the punditocracy insist that raising a bank teller’s wage by 5% is inflationary, but raising interest rates charged by the bank is anti-inflationary.

And let’s look at those interest rates. Take someone who obtained an Adjustable Rate Mortgage (ARM) last year at 3.75%. The Federal Funds rate has gone from about zero to 5%. On a mortgage of $431,000 (the US average), monthly payments will rise from $1,991 to $3,391—yow! Expect a wave of foreclosures.

Those workers getting that big $3.71 per hour extra over the past two years will have to use it to cover higher credit card charges and auto loan charges. And, God forbid they have a small business paying a variable rate on a line of credit. The rate hikes are getting close to adding a quarter-trillion dollar burden on our economy, one heck of an anti-stimulus program.

The Perps

Despite what you hear from the TV guys in bowties, inflation is not some victimless crime. There are victims—and there most definitely are perps, the perpetrators, the guys who actually raise the prices. I’m not talking about the guy in the ice-cream shop trying to keep the vanilla from melting, paying 14.3% more for electricity, the average rise last year.

Let’s do some math. In Japan, where corporations dare not hose their customers, producer prices, the prices industry pays for its supplies, rose last year by 10%—but Japanese industry only raised prices by 3%. In the USA, producer prices rose just 2.7% in the 12 months ending March, whereas industry raised prices by nearly twice that, by 5%. The difference? Champagne corks popping in America’s C-suites.

From CBS News:
“Chevron, ConocoPhillips, Exxon and Shell all reported record profits in 2022….Shell on Thursday reported a nearly $40 billion profit for last year. That’s more than double the prior year’s results and the most money Shell has ever made in its 115 years of existence. … “Exxon, the largest U.S. oil producer, this week reported an epic $55 billion in profits for 2022. The oil giant’s bottom line “clearly benefited from a favorable market,” CEO Darren Woods told investors.”

Woods should have said, “Exxon benefited from a favorable war.”

Let’s call it what it is: war profiteering. Which also suggests some ways to bring down inflation or salve its hurt. Britain’s recently removed prime minister, Boris Johnson, imposed a windfall profits tax of 25% on oil and energy companies, cycled back to consumers in the form of price caps. Yes, there were loopholes, but at least Boris understood that in effect energy corporations are war profiteers.

And the banks? JP Morgan sucked in $12.6 billion in profits in just the first three months of the year, a 56% leap. How about a windfall profits tax on Jamie Dimon’s bonuses—fattening on the pain imposed by Dr. Powell’s usurious rate hikes. Whether you attribute the bankers’ bonus bacchanal to the war in Ukraine or just the on-going class war, this is cruel war profiteering.

Inflation: Wave Goodbye

The cruel irony is that excessive inflation is coming to an end. The BLS reports that producer prices actually declined last month (March) by 0.5% following a zero inflation rate in February.

What’s keeping producer cost declines from reaching America’s consumers? You can call it “market power” or just plain greed. Take your pick: I’m an economist, not a philosopher.

But notice how, in the story from CBS quoted above, there is no connection made between the massive windfall profits by the energy giants, the banksters nor the other privileged industries rolling in it. When “inflation” is the topic, they return to form: you, dear wage slave, are the problem—and you must be punished for the public good.

Where’d they get this notion? From “economists.”

Turn on CBS or CNN or read the Times and you’ll get pundits telling us, “Economists say,” and “according to economists.” Now, I’ve lectured at the London School of Economics, Cambridge University Department of Applied Economics and other bigshot academic venues. Yet, I’ve never been called by these pundits. Rarely do they ask Dr. Prins. So, who are these mysterious “economists”? They clearly would not have called on my late professor, Milton Friedman, the Mother of All Monetarists, nor his opposites, the Marxists: they would all agree that the Fed’s idee fixe that high employment causes inflation is baloney.

How did we end up enthralled and victimized by a theory of price hikes that is as wrong as it is brutal. While I’ve shifted from economist to investigative journalist, the rule remains the same: follow the money.

The landlords of our planet don’t want you to understand that rising prices today can be traced back to two gangs of perps. The first gang, the Crips, is headed by Putin, Xi Jinping, and MBS (Saudi Crown Prince Mohammed bin Salman) – that is, the capos behind the invasion of Ukraine, China’s self-destructive production tangles and the OPEC cartel’s price gouging.

The Bloods, the other gang, are those taking advantage of the market power created by Putin, Xi and MBS: the bankers, energy magnates and other class war profiteers who mark up the numbers on their price tags.

Instead of an increase in interest rates, instead bleeding working people, maybe Powell should help remove the bloodsuckers from the wounded body of our economy.

*  *  *

Dear reader, I’ve written about the structural cruelty embedded in our political economy in my book, Armed Madhouse. While some years have passed since the book topped the New York Times bestseller list, the facts don’t age. Therefore, I’ve made Armed Madhouse the Audiobook available without charge—though a voluntary donation would be most appreciated.

Greg Palast (Rolling Stone, Guardian, BBC) is the author of The New York Times bestsellers, Armed Madhouse, Billionaires & Ballot Bandits and the book and documentary, The Best Democracy Money Can Buy.
His latest film is Vigilante: Georgia's Vote Suppression Hitman

Palast is currently working on a new documentary Long Knife, exposing the Koch Brothers' theft of Osage oil, to be released in 2024.

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