Trump: A Five Alarm Fire on Inflation

I see many of my "conservative" friends and acquaintances who live in the Fox News bubble (despite their denials of that reality) who are constantly whining about he inflation we are currently experiencing on Joe Biden and/or Democrats while utterly ignoring the soaring corporate profits fueled by greed that are actually a primary driver of increasing prices. Similarly, they ignore the reality that inflation is a global phenomenon with multiple causes besides the greed of corporate America and also ignore Biden accomplishments such as the coming provisions to lower drug costs for older Americans as described here.  Meanwhile, they also ignore the potentially catastrophic proposals that Donald Trump, a/k/a Der Trumpenfuhrer and his extremist advisors are proposing should Trump regain the White House.  These proposals include wide ranging tariffs that would significantly increase prices for American consumers who ultimately pay the tariffs (not foreign nations as Trump stupidly and dishonestly claims). How these individuals and MAGA live in such a fact free world is mind numbing.  A column in the Washington Post looks at Trump's dangerous proposals.  Here are highlights:

Donald Trump, the presumed Republican presidential nominee, wants to kneecap the Federal Reserve. This should be a five-alarm fire for anyone who claims to care about inflation.

The former president and his advisers keep finding new ways to outdo themselves on bad economic ideas. Should Trump be granted a second term, he plans to slash the labor supply by ratcheting down immigration (including legal, work-authorized immigration). He wants to devalue the dollar. He’d levy worldwide tariffs of 10 percent or higher, plus perhaps a 100 percent tariff on some Chinese goods, apparently failing to notice that the costs of his previous tariffs fell almost entirely on American consumers.

Now, according to a Wall Street Journal scoop, Trump also wants to strip the Fed of its political independence. Proposed changes include enabling the president to fire the Fed chair at will, or even play a role in setting interest rates himself.

So why is it important for the Fed to be, and remain, independent?

Politicians always have an incentive to manipulate the money supply in ways they think will improve short-term economic outcomes, to help them win reelection. That might mean, for example, slashing interest rates to make it cheaper to borrow, helping people feel richer and more likely to spend money. In other words, politicians might be tempted to give the economy a sugar rush, whether it actually needs a boost or not.

But what seems politically smart in the short run is not always good in the long run. Juicing the economy when it’s already going strong can stoke inflation. On the flip side, if an economy is overheating, the central bank might need to make choices that are deeply unpopular in the short term (a.k.a. “taking the punch bowl away”). Raising interest rates, for example, may be necessary to cool price growth and prevent a more painful crash.

None of this is to say that central bankers always make the right decisions, nor that they should operate free of any oversight. Fed governors, for example, are president-nominated and Senate-confirmed, and by law, the Fed chair must testify regularly before Congress.

But there’s a difference between making Fed officials answer hard questions and directly enlisting them in politicians’ short-term electoral calculations. Central bankers must be able to make unpopular decisions without fear of losing their jobs. That’s the only way they have any hope of achieving their dual mandate, which is stable prices and maximum employment.

[C]entral banks with greater independence have better inflation outcomes. There are also lots of counterexamples, illustrating what happens when the money supply is left to politicians whose punch bowls overfloweth. Inflation-plagued Argentina and pre-euro Italy are notorious poster children of this problem. For other examples, look to Turkey (current annual inflation rate: 68.5 percent) or Venezuela (last year, nearly 200 percent).

Businesses that fear the central bank won’t act might start preemptively raising prices just in case their suppliers do, too. So if a central bank lacks the credibility to keep expectations about inflation “anchored,” a short-term price shock can easily turn into something more entrenched.

Trump’s disrespect for Fed independence is not new. When he was president, he tried to appoint obsequious political operatives to the central bank’s board. At the time, fortunately, Republican senators effectively stopped him. Trump also tried to bully the Fed into cutting interest rates — presumably to help not only his polling, but also his own finances. (Lower rates are attractive if you happen to hold a lot of debt.)

Why, then, didn’t the U.S. economy experience much inflation when Trump was in office?

Well, by that point, the Fed had already spent decades building up its reputation for independence, and even (competent) the Fed members whom Trump did appoint were able to publicly resist his jawboning. It also helps that when Trump was in power, the United States wasn’t hit with a huge inflationary shock — such as, say, the reopening of an economy after a once-in-a-century pandemic.

The economic context is different now. For a variety of reasons — some likely inevitable, some due to poor policy choices — the country recently experienced the highest levels of inflation in a generation. It’s been painful.

The Fed’s credible, long-term commitment to stable prices — and not merely its recent rate hikes — is a key reason inflation has since cooled as much as it has, and hasn’t (so far) reignited.

But if the next president compromises that pristine reputation, we may not be so lucky.

None of this will likely sway MAGA cultists who worship their orange god , largely because he plays to their racism and religious extremism.