In late August, Fed chairman Jerome Powell suggested that the Federal Reserve would begin tapering before the end of the year, an admission that price inflation was rising above the 2 percent target. Nonetheless, the Fed took no immediate action in the following month. This week, Powell again suggested a taper would begin soon, stating it would begin soon enough that the process could “conclud[e] around the middle of next year,” and maybe could begin in November. This, of course, was highly conditional, with Powell noting this taper would only happen if “the economic recovery remains on track.”

Some interpreted this as a hawkish turn for Powell, but again, we should expect no immediate action on this. Lackluster economic growth remains a concern and Powell’s qualifier on the “recovery” remaining on track will be key. Last week, Goldman downgraded the US economic growth forecast, and the Beige Book—which always casts economic growth in a rosy glow—also reduced its description of the economy during July and August to “moderate.” Meanwhile, the Bank of England today signaled a worsening global situation with its own downgrade of growth expectations. In other words, if the economy isn’t improving enough—according to the Fed—then it can simply abandon plans to taper.

The Fed may be talking taper, but fears of low growth among doves will fuel ongoing calls for continued stimulus. In fact, we’re already seeing some calls for abandoning the 2 percent inflation target in favor of even higher targets. This, it is believed, will allow for longer and more aggressive periods of stimulus.

A Weak Recovery

The root of this drive for more inflation lies partly in the fact that many inflation doves believe that the Fed was too timid with stimulus after the Great Recession. Indeed, growth was remarkably slow in those days, producing “the slowest economic expansion” in many decades.¹Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard, (Cham, Switzerland: Palgrave Macmillan, 2018), p. 8. This was in spite immense amounts of monetary stimulus. Nonetheless, the Fed repeatedly spoke of an “improving economy,” and repeatedly hinted at tapering. But it was only in 2016 that the Fed finally dared to allow the target interest rate to inch upward. This was largely done out of fear the Fed would have no room to maneuver in case of another crisis. Price inflation, after all, remained low in the official measures.

But in 2017 and 2018, when CPI inflation began to push above 2 percent, the expectation arose that the Fed would begin to meaningfully taper to keep inflation near the stated 2 percent target. This alarmed some inflation doves who were concerned—with good reason—that any reining in of the Fed’s easy money policies would end the very fragile and lackluster recovery then underway. They wanted to keep the asset-price inflation going—to reap the benefits of the so-called “wealth effect.” These fears were partially borne out when, in spite of the timidity of the Fed’s tapering efforts after 2018, the repo crisis of 2019 suggested trouble was indeed brewing. And it’s not surprising. Economic “growth” rested largely on a mountain of zombie companies and a financialized economy addicted to artificially cheap credit.

How that would have played out in the absence of the covid panic is unknown. In any case, efforts at reining in monetary inflation evaporated with the covid crisis and the target interest rate was quickly returned to 0.25 percent. Additional asset purchases resumed at breakneck speed, with the Fed’s portfolio soon topping $8 trillion.

Pushing Inflation Targets Upward

The covid crisis gave doves an opportunity to press for a more “flexible” inflation target. In August of 2020—with central bankers looking for new ways to justify continued stimulus—the Fed adopted a new policy in which it would pursue an average 2 percent inflation goal. In other words, the Fed could now pursue a price inflation goal above 2 percent for some periods so long as it all averaged out to 2 percent over time.

But even that hasn’t been enough for the advocates of ever more price inflation. We’re now seeing calls for ending the 2 percent target altogether—and raising it.

For example, writing at the Wall Street Journal earlier this month, Greg Ip noted that Powell appears to be banking on the inflation rate soon returning to 2 percent. But what if it doesn’t? Ip says if inflation remains above targets, the Fed should just raise the targets. He writes:

One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.

And why pursue higher inflation? Ip takes the popular view of the “mythical trade-off between higher employment and inflation,” as Brendan Brown describes it. For Ip, higher inflation is the way to ensure an employment-fueled expansion, and he writes:

Why would higher inflation ever be a good thing? Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions, and less need for exotic tools such as central-bank bond buying, which may inflate asset bubbles. More practically, if inflation ends up closer to 3% than 2% next year, raising the target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.

According to Ip, the too-low 2 percent target places the Fed in an intolerable bind. The Fed needs more room to breathe. Rather than feel the pressure to taper just because price inflation has risen above the 2 percent target, Ip wants to make sure the Fed can just keep on with the stimulus until price inflation exceeds 3 percent, or maybe even 4 percent. And who knows? After that, maybe “economic theory” will tell us that 5 percent inflation is an even better target. Certainly, that would be no less arbitrary a number than 4 percent or 2 percent.

How Inflation Fears Put Political Limits on Easy-Money Policies

The need to raise the target rate is essentially political. Presumably, the longer inflation persists above the target rate, the more the Fed will feel pressure to bring inflation back down through some sort of tapering. After all, the adoption of a 2 percent target implies 2 percent is the “correct” inflation rate. Anything higher than that is presumably “too much.” With the Fed moving toward the 2 percent target since the 1996—and having formally adopted it in 2012—the Fed’s credibility is on the line if the Fed simply ignores the target.

But it’s a safe bet that if the accepted inflation target were increased to 4 percent, we’d be hearing little to nothing right now about tapering, normalization, or any other effort to cut price inflation. The Fed would then be more free to keep the easy money spigot open longer without having to hear complaints that the Fed has “lost control” of price inflation. That would be great for stock prices and real estate prices. Ordinary people, on the other hand, might fare less well.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.

In 2022, the Republican Party has an opportunity to not just win back the House of Representatives but for the first time in a hundred years repudiate the constant creep of statism and Marxism eroding our liberties. But the GOP needs to drop its 40-year plus “game plan.” To be blunt, it is time to drop “cutting taxes,” “increasing defense” budgets, and giving lip service to federalism and limited government. The greatest threat to liberty, living standards, and our natural rights has been driven by deficit spending. We expect Democrats to continue with socialism and authoritarianism but Republicans, by essentially feeding the “beast,” have contributed as much to our current mess.

Recently, Paul Ryan, the epitome of the simplistic 1980s playbook, is back in the news. Media pundits are asking what path the GOP should take, a return to Paul Ryan or Kevin McCarthy? The former pushes pseudo “wonkism” and the latter just follows the fickle winds without any true course. Neither have a path that ensures our liberty or prosperity.

What needs to be done isn’t a return to the compassionate conservatism of Jack Kemp, because “supply side” economics had the same impact as “demand side” Keynesianism; large deficits, enrichment of the well-connected, constant growth of “complexes” (military, education, healthcare, financial, and now security), deindustrialization of America, and a profound loss of honesty, integrity, and finally, our liberty.

The objective for true change and a return to freedom must start with cutting, and eliminating deficit spending. Federal tax cuts cannot even be considered until surpluses are obtained.

Why is eliminating deficit spending the key objective?

1. It destroys our industrial base. Federal deficits are primarily funded by the Federal Reserve printing money out of thin air. This would normally create inflation which impacts the average American’s standard of living. But with China as the off loader of our printed money, the federal government was able to launder the debt to a country which is fine “eating” our inflation as it continues to export trillions of dollars in goods. Flooding our markets with cheap goods devastated much of small-town America as factories closed by the tens of thousands. It was mutually beneficial; the Chinese communist government could round up those pesky rural peasants to factory towns to be well controlled and through currency manipulation provide American with cheap goods that Americans could buy with lots of credit (see Federal Reserve below).  Dollar stores replaced factories in small town America but the federal government enjoyed the Chinese buying just enough federal debt with their dollars to keep things from getting out of control. COVID-19 and the insane amount of money printing and spending has ended this short term pause on inflation. Real free trade is good for America but than means no subsidizes, no tariffs, and no pegging to the dollar.
2. It allows for perpetual war. If the federal government had to raise taxes to pay for the idiotic wars since 2001, the tax “pain” would have forced their end before trillions were printed and spent and $80 billion in weapons were left for the Taliban.
3. It subsidizes unprofitable industries and creates higher prices. The military-industrial complex, the educational complex, the healthcare complex, and security state are enriched through government privilege and protection from competition. The results are constantly rising prices and an opportunity cost of real growth benefiting real Americans.
4. It drives wealth inequality. In a free-market, inequity is a sign of freedom but since 1971 (the year Nixon closed the gold window) the printing of money to fund big government and buy votes has primarily benefited the financial sector along with the other “regulated industries.”
5. It feeds the growth of “wokism” which turns America into warring tribes.

The second target should be the enabler of all of this. Yes, the one who can’t be named: the Federal Reserve System. It is time to “End the Fed.” No more interest rate manipulation. No more money printing to directly buy federal debt. Credit can only come from savings, not thin air. There is no reason for the Federal Reserve to exist in 2021 (at least based on it’s supposed roles). Blockchain and changes to time and demand deposit rules would replace the need for the Fed.

Do these two things—end deficit spending by cutting government and shut down the central bank—and the Republican Party can turn back the tide of government growth. This is what the GOP stood for under Warren G. Harding, Calvin Coolidge, and even Dwight D. Eisenhower.

It’s time to move on from the 1980s playbook. And that time is now.

Mike Fedele is a college graduate with a BS in Chemistry and a Master of Business Administration, and works as a product manager for a medical device company. His personal claim to fame is developing FedEx’s “Hold at Location” service.

This month marks fifty years since President Richard Nixon closed the “gold window” that had allowed foreign governments to exchange U.S. dollars for gold. Nixon’s action severed the last link between the dollar and gold, transforming the dollar into pure fiat currency.

Since the “Nixon shock” of 1971, the dollar’s value—and the average American’s living standard—has continuously declined, while income inequality and the size, scope, and cost of government have risen.

Since the beginning of this year, price inflation has increased much, and it could continue onward to exceed the 1970s-era price spikes. Understandably, Republicans are trying to blame President Joe Biden for the price increases. However, a major cause of the current price inflation is the unprecedented money creation the Federal Reserve has engaged in since the 2008 market meltdown. This, though, does not mean Biden and most U.S. politicians of both parties do not bear some responsibility for rising prices. Their support for the Fed and massive government spending contributes to the problem.

The main way the Fed pumps money into the economy is by monthly purchases of 120 billion dollars of Treasury and mortgage-backed securities. Even many Keynesian economists agree that rising price inflation means the Fed should stop pumping money into the economy. Yet, this year the Fed is likely, at most, to only slightly reduce its purchases of Treasury securities. It will almost certainly keep interest rates at near-zero levels.

A reason the Fed will not stop or significantly reduce its purchases of Treasuries and allow interest rates to increase is that doing so would increase federal debt payments to unsustainable levels. Even with interest rates at historic lows, interest payments remain a significant portion of federal spending, and recent indications are that the U.S. government is not about to start being frugal. Consider, for example, Congress’ six trillion dollars “Covid relief and economic stimulus” spending spree and the Senate passage of the trillion dollars “traditional infrastructure” bill and a budget “outline” of a 3.5 trillion dollars “human infrastructure” bill.

The “human infrastructure” bill represents an expansion of government along the lines of the Great Society. Among its initiatives are universal pre-kindergarten; two “free” years of community college; increased government control of health care via expansions of Obamacare, Medicare, and Medicaid; and a raft of new government mandates and spending aimed at reshaping the U.S. economy to fight “climate change.”

The need to gain support of “moderate” Democrats will likely mean the final “human infrastructure” bill will costs less than 3.5 trillion dollars. However, no Democrat is objecting to the bill’s programs; the objectors just want cheaper tolls on the road to serfdom. While progressives will likely accept reduced spending levels in order to get their wish list into law, they will then work to increase funding and expand the programs. As the programs become more entrenched, even many “conservatives” will support increasing their funding.

The expansion of government will increase pressure on the Fed to keep the money spigots open. This will lead to a major economic crisis. The good news is the crisis may mark the beginning of the end of the fiat monetary system and the welfare-warfare state, along with the dawn of a new era of free markets, sound money, and limited government.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.