Dear Friends,
It seems to me, when Trump takes command, even if the Fed were to cut interest rates, there will be deflation, not inflation… as long as he cuts government spending, taxes and regulation at the same time. Think of it like a car. Taxes and regulation are the brakes, while spending lowers the efficiency of the engine. So if you push down hard on the brakes, with taxes and regulation, while at the same time lower the efficiency of the engine, the car will slow and eventually stop. A Keynesian would claim spending is the accelerator, but empirical history proves it lowers efficiency, it doesn’t increase fuel intake. It’s “pushing on a string.” R&D, investment in plant, and innovation are the accelerators. So, to cut inflation, government only needs to cut spending and lift its foot off the brakes.
Because government spending is like cocaine, it only feels good, it doesn’t make anything better. In fact it’s destructive. Why? Because government spending competes with private sector spending, creates inefficiencies, and fosters cronyism. All of which corrodes a nation’s wealth. Though it vastly increases the wealth of those directing the spending. By competing with private sector spending, government largess drives up costs. Monetizing the debt increase inflation. Government needs directs research, instead of consumer needs, making the economy less efficient. Meanwhile, Many firms become established they only rent seek. Becoming specialists in filling out the forms necessary to get free government money. Like coke, it feels good… until it runs out.
Deflation is the normal state of affairs in a free enterprise economy. Wages and costs are directly derived from the efficiency of the operation. If a manufacturer buys a new tool that increases the efficiency of his workers by 20%. He can give them a raise, lower his costs to under cut his competition, and take extra profits for himself. All because of that increase in efficiency. To make it more clear. If a contractor had a carpenter, who can frame a 20 foot wall in 20 minutes with a hammer and nails. Then the contractor buys a nail gun that increases efficiency, so the same carpenter can frame the same wall in 5 minutes, that increase in efficiency translates in to profit, higher wages and a savings to the customer. Making deflation and rising wages the normal state of affairs in a capitalist economy.
The way the government keeps inflation as close to 2% as possible is by printing 2% more money than the economy grows in a single year. Which is tricky because the actual growth is hard to measure,. Especially with flawed metrics. What the elite never want to happen, is to allow natural deflation. Because that leads to rapid increase in wages, the standard of living, and the station of us peons. The argument for keeping inflation above zero is based on flawed logic as well. They claim people will stop spending if they can expect lower prices next year. But if you need a refrigerator, you need it now, not next year. Few who are making gobs of money, are willing to store meat in a cooler for a year, to save a fiver. Making the argument against deflation spurious as it can be.
So if the government can cut spending, regulation and taxes, The federal reserve will be reigned in. Because there will be no need to print money to keep up with the deficit. The debt would be whittled away while our standard of living would increase. Even as the Federal Reserve will raise interest rates to try to cut into the growth. To save the cronies. A wise government that serves the interests of the whole nation, would then cut spending, taxes and regulation to allow the free market the breath, to grow us out of the debt the elite have saddled us with. I suspect the Fed’s plan though is to collapse the currency the debt is denoted in and voila… the debt is inflated away and the elite don’t suffer. Just the economy, citizens and debt mules. Us for the most part.
Sincerely,
John Pepin
