The most important thing to remember about how to survive cliff jumping is to not jump. You’re unlikely to find any good options once the free fall begins.
The same goes for runaway inflation. Like a dragon from House Targaryen, it is a difficult beast to control once allowed to escape from the lair.
Remarkably enough, this reality has been understood by politicians and policy makers from both major political parties for almost 40 years. It’s probably because pain is a harsh but unforgettable teacher.
In 1980, Americans suffered an inflation rate of over 14%. And that was after Democrats and Republicans in the White House and Congress had spent years trying to smother the fire.
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Federal Reserve Chairman Paul Volcker came up with a plan: aggressively raise interest rates to encircle the inflation dragon.
In 1982, the average mortgage rate was 16%. High interest rates burned like whiskey in a wound, but they worked. By 1985, annual inflation had fallen to 3.6%.
Inflation was banned for 40 years
And the dragon, banished to the bottom of its cave, remained hidden for decades. In fact, some of us have come to believe that we will never see those bad days again.
But then came the pandemic, President Joe Biden, Russian dictator Vladimir Putin’s war, a Democrat-controlled Congress, supply chain disruptions, labor shortages, a swarm of locusts and an infestation of midges.
Now inflation is over 8%, mortgage rates are over 7% and the Federal Reserve has just hit us with another big rate hike. Today’s prediction: 100% chance of more pain in the future.
What shall we do now? The only realistic option is to let the Fed do its job of controlling inflation by raising rates, reducing the money supply and slowing the economy.
I hate to say this because I know millions of Americans are really hurting from both high inflation and rising interest rates. And they’re likely to suffer more as the economy slows and employers stop hiring (or worse, start laying off workers).
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I wish there was a way to trap the dragon without tasting the fire, but the other methods – price controls, shaming for-profit companies to make money, Whip Inflation Now buttons – have been tried before . Spoiler alert: they don’t work.
Larry Summers sounded the alarm
I have no desire to say “told you so” about the dangers of inflation. Too many Americans are really hurting. But I will say that the President and Congress should have listened to Larry.
Summers, that is, who served as Secretary of the Treasury to President Bill Clinton and Director of President Barack Obama’s National Economic Council. He wrote in The Washington Post in February last year that Biden’s economic stimulus legislation would “unleash inflationary pressures of the kind we haven’t seen in a generation.”
Summers was right, of course, but the White House dismissed his warning at the time. Inflation, we were told, was not a major concern. Later we were told it was only temporary.
Now Americans are living with the harsh consequences of that hubris.
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Summers is now sharing another hard truth with Americans: Inflation won’t be under control any time soon, so the Fed needs to stay on track with a rate hike.
“I look at economic history and I see that there are many times when the Fed has not done enough and so inflation has reaccelerated, but I can’t find any time in the last 60 years when the Fed overdid it,” he added. Summers told CNN on Tuesday. “Even if there is a slowdown or a recession, I don’t think there’s any reason to think the Fed has any real prospect of pushing inflation sustainably below (their stated inflation target of ) 2% without much more action”,
Not what we want to hear. But what we need to hear.
The dragons are still at large.
Tim Swarens is an associate opinion writer for USA TODAY.
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