Lies, Lies, and Videotape

Well well well, how is that Inflation Reduction Act working out? In the last two days, the CPI (Consumer Price Index) and PPI (Producer Price Index) numbers have become hotter than expected.

This is no surprise to regular American citizens who work for a living but it might be a surprise to the people who believe the bullshit that the Inflation Reduction Act is working.

Most people do not understand what economics is about. At its core, it is the study of scarcity. How do people make trade-offs? How do they value things and what opportunity costs are they willing to assume to make a decision? The other important thing to look at in economics is not the gross numbers but the numbers at the margin. How much does it cost to do one more? What’s the rate of change?

Inflation is a really hard concept to quantify in economics because there are so many things going on in the background.

Inflation is a government spending phenomena at its core. However, if the economy grows quickly at greater than the rate of inflation, people don’t notice. It is not that there isn’t inflation, there is. If you want to read a long and good explanation about inflation in modern times, read this by John Cochrane.

There are many fine points in the piece. At times it can be a difficult read due to the math and concepts presented. This stuck out to me in my first reading of it. Raising interest rates doesn’t stop inflation. I don’t think that is a mainstream thought and my guess is that it is quite the opposite.

But the bigger problem is that this theory just doesn’t apply to today’s world. The Fed does not control money supply. The Fed sets interest rates. There are no reserve requirements, so “inside money” like checking accounts can expand arbitrarily for a given supply of bank reserves and cash. Banks can create money at will. The Fed still controls the (immense) monetary base (reserves+ cash). The ECB goes further and allows banks to borrow whatever they want against collateral at the fixed rate. The Fed lets banks arbitrarily exchange cash for interest-paying reserves. Most “money” now pays interest, so raising interest rates doesn’t make money more expensive to hold.

Monetarist theory is perfectly clear: The Fed must control the money supply. If it does not do so, and either targets interest rates or provides “an elastic currency” meeting demand, the theory does not work. “Money” and “bonds” must be distinct assets. If money pays the same interest as bonds, or if bonds can be used as money, the theory does not work.

It’s a nice theory. It might be a theory of how the Fed could control inflation, or perhaps how money supply (by the Fed, gold discoveries, etc.) did control inflation in the past, even as recently as the 1980s. It might even be a theory of how the Fed should control inflation. (I’m throwing bones to my many monetarist friends.) But it is not a theory of how the Fed (and the ECB, BOJ, EOE, etc.) does control inflation by raising interest rates without any money supply control.

Here is where the government spends your money. I think this is important to know because of all the demagoguery around government spending by both parties. 90% of the Federal budget is spent before anyone takes an oath of office.

Looking at this chart, if a President decided to shutter the Department of Education and send the money spent on education directly to the fifty states, it means little in the gigantic budget.

Spending under Biden has increased dramatically. This is on top of a dramatic increase in spending due to mandated government shutdowns under Trump. I pulled this data from ycharts.com. It’s the yearly expenditures, not deficit, not as a percent of GDP, just gross expenditures of the federal government during the year. T means “trillion”.

December 31, 2023 $6.135T (Biden/Harris) (House Republican/Senate Democrat)

December 31, 2022 $6.273T (Biden/Harris) (House Democrat/Senate Democrat)

December 31, 2021 $6.822T (Biden/Harris) (House Democrat/Senate Democrat)

December 31, 2020 $6.554T (Covid) (House Democrat/Senate Democrat)

December 31, 2019 $4.447T (Trump/Pence) (House Democrat/Senate Democrat)

December 31, 2018 $4.109T (Trump/Pence) (House Republican/Senate Republican)

December 31, 2017 $3.982T (Trump/Pence) (House Republican/Senate Republican)

Covid caused bullwhip effects in supply chains. That caused some inflation. The government's response of free money and suspension of all adherence to legal and economic principles also caused inflation.

Not to put too fine a point on it but in the money blizzard, there was a lot of fraud. Surprise surprise. Yawn. I still get daily junk calls from people wanting to lend me Covid money for my business.

But, Biden/Harris spending has sustained inflation. In 2021, if the Democrats would have reduced the budget to the $4.447 trillion in spending under Trump, we wouldn’t have inflation like we do today.

The Inflation Reduction Act was merely a backdoor way to get New Green Deal stuff passed and to give people 1.2 trillion in subsidies. Those subsidies are a transfer of wealth from the middle class to the wealthy.

Here is but one example: Mr/Mrs/Ms. Rich Person can afford to put solar on their house and take advantage of the tax credit. Joe the Plumber cannot. Joe is essentially giving me a subsidy because he pays the same in tax while my taxes go down by the tax credit amount.

Harris's economic plans will destroy American family net worth and target capitalism and that’s not an understatement.

• A backdoor tax increase by raising the income cap on Social Security taxes so you pay more instead of looking at government entitlement reforms.

• Taxing unrealized gains which is so toxic, it will shutter investment. (The venture capital industry will cease to exist. The stock/bond market will crash. Asset values like homes/farms/companies will plummet)

• Raising capital gains taxes will curb investment, limiting employment opportunities.

• Raising corporate taxes will stop companies from hiring and building.

• Raising personal income tax rates on the rich will cause them to shift the recognition of income to avoid taxes, making it necessary to raise taxes on the middle class.

• Taxing unrealized gains after death is a radical departure from the step-up procedure we have today, and the wealthy will be able to game it.

• Quadruple the tax on stock buybacks (This is a particularly dumb proposal. We shouldn’t tax stock buybacks, nor should we tax dividends.)

• Getting rid of deductions. (This will curb investment. Remember, FairTax is better. No deductions, no loopholes, just pay when you spend, and she is against it)

• A 4% tax on individuals making more than $100k for “Medicare for All” (Socialized medicine. She wants to get rid of the private insurance industry)

• Expansion of estate taxes (Remember, you already paid tax on that. They tax you again. The wealthy avoid these with expensive accountants and lawyers)

• Imposing a financial transaction tax on stock/bond/derivative transactions of .2% on stocks, .1% on bonds, and .002% on derivatives

I don’t care about what a heavily managed debate looked like. Clearly, ABC was in the tank for Harris and it was a 3 on 1 debate. I suspect that what Trump had to say played well in Pennsylvania. The real things to look at are actual policies when you can find them. I don’t need to have a beer with the President, and I don’t need to like them.

I think that a lot of people get their news from podcasts and Twitter these days. They don’t watch their parent’s lame legacy media. They know it is biased and it has its own agenda which is not their own. Notice which campaign has sent both candidates to podcasts like All-In versus who didn’t.

Trump is far less radical than Harris on social issues. He returned abortion to the states and as a matter of fact, there are more abortions now than before he did. There are 8 states that allow for the killing of an infant immediately after birth.

Trump is better on foreign policy than the Democrats. Here is one example. There are countless others. The Democrats have enabled Iran in the Middle East and put Israel in peril. The Democrats are why Putin invaded Ukraine. (If Ukraine not in NATO, no invasion). The Democrats soft on China policy has emboldened China. Go to 43:17 in this video to hear a great story.

People like Liz and Dick Cheney are supporting Harris because they hate the idea of a centralized government ceding power to individuals. They want to be in a private interior club that makes all the decisions for you yet not have to live up to those decisions. They want control of the money and budget, not you.

Trump is unpredictable. He can’t be managed and sometimes that is a weakness but sometimes it is a strength. He can be petty and thin skinned. He can be absolutely charming and can be just as unlikable. He takes bait easily and runs with it. He is undisciplined and thinks out loud quite a bit of the time. He isn’t pressed, though he looks pressed.

He understands who he is fighting since he was one of them. I think it was funny when Dave Chappelle talked about Trump but at its core, it’s true. Especially true when you layer on the bevy of insiders who are lining up against him, like Liz Cheney and Mitt Romney.

Trump has far less downside risk than an 8-year and possibly 16-year presidency of Harris/Walz and then Walz/xxxx. Harris has no upside whereas Trump has upside potential. Trump serves four years and then we battle it out in 2028.

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