Until After the Election
At a town hall event in Cincinnati, Ohio on July 21, 2021, Biden said "I don't care if you think I'm Satan reincarnated."
By Mike Holly
January 16, 2024 Final Update January 31, 2024
In the article “The Fed has Rigged the Stock Markets to Crash,” my analysis concludes “the major stock market crashes have always resulted when, and only when, the Fed has responded to inflation by raising interest rates by three percentage points or more, while the government reduces, or at least doesn’t significantly increase, deficit spending.” It is now clear that Biden has greatly increased deficit spending, and that has delayed a stock market crash and recession. Housing inflation remains high. Biden’s lower inflation numbers for goods and commodities have benefited from lower consumption in other countries. He has also reduced inflation by encouraging increased oil and natural gas production and usage, even to the point of threatening future supply, while delaying his costly environmental regulations promoting “clean” energy and automobiles. Biden has no doubt carried out U.S. policy manipulations for political gain at least until after the next election. A delay likely means consumers will suffer from even higher future prices and higher for longer interest rates, the growth of the national debt accelerates toward bankruptcy, and the stock markets flatline until the crash, or the politicians cause something even worse.
Biden is threatening to complete the monopolization, cost increases, and socialization of the major consumer necessities. The following figure shows that from 1965 through 2023 prices have increased by an incredible 30 times as much for education, 22 for health care, and 17 for homes, compared to nine for food, and under four for cars and apparel (which benefit from global competition). Oil prices have increased by 23 times as much, due to manipulations by OPEC countries. The U.S. government has already allowed monopolies to limit supply and inflate the prices of health care, education and homes, and has socialized the costs through government tax, low interest rate and debt financing. Clearly, Biden plans to do much the same with energy and automobiles, and thus also inflate food prices. Biden favors monopolies and unions offering large-scale and much more costly wind and solar energy, a national electricity transmission grid with battery storage, and electric vehicles made with large amounts of American-made microchips. Banking and technology are also monopolized, expensive, and socialized, and involved with the government in controlling the major consumer markets.
The monopolized U.S. economy is not anywhere near as strong as Biden claims, since it requires trillions of dollars of debt stimulus each year. History has shown that continued growth of the economy has required stimulation with low interest rates from the Federal Reserve Bank (Fed) and/or deficit spending from the government, especially during economic booms, war and pandemic. But such economic booms, like that since 2009, have risked inflation, the monetization of debt and lower long-term growth. According to Austrian Business Cycle theory, credit-sourced booms also result in widespread malinvestment that requires a curative recession to reallocate resources back towards their former uses at the higher interest rates. A deflationary crash is needed to reduce inflated prices.
Biden has prolonged and magnified the nation’s cost and debt problems with the unprecedented timing of his increased and massive deficit spending. Biden is the first President to “fight the Fed” by increasing deficit spending to stimulate the economy while fueling inflation, at the same time the Fed has raised interest rates significantly and kept them high to slow the economy to reduce inflation. Biden’s deficit spending has forced the Fed to raise interest rates higher and for longer than would otherwise have been necessary to reach the Fed’s goal of two percent inflation. The Fed Funds Effective Rate has been increased from 0.2% in March 2022 to 5.12% in July 2023, and yet inflation is still well over three percent, as measured by the Consumer Price Index (CPI), even though Biden has temporarily driven down energy prices.
Inflation and High Prices
High prices are especially hard on Americans lacking sufficient incomes to buy essential goods, and the elderly who are losing their savings. Biden, the Fed and Congress have blamed inflation mostly on temporary supply chain shocks resulting from Covid that increased prices for new homes and cars in 2021, and the Russian invasion of Ukraine that increased food and energy in 2022.
But core inflation, that excludes food and energy, is stuck around four percent, including housing, services and wages at about seven, five and four percent, respectively. Clearly, these prices increased due to low interest rates and deficit spending since 2009 and especially since Biden took office in 2021. Unemployment was declining and wage inflation was increasing even before Covid, and so were home prices. Biden is trying to reduce housing prices by promoting less popular apartments made from largely abandoned office buildings. Prices for core goods, including cars and apparel, and also commodities, like grains, oil and metals, are no longer rising largely due to declining economic growth rates in the EU and China, which appear to have more limited deficit spending. Because newer automobiles are still more expensive and less affordable at higher interest rates, consumers are requiring more car repairs, which has increased those prices by over 15%. Food is about three percent. Energy is negative, but those prices are volatile.
Inflation would be worse if the Biden administration were not temporarily manipulating the health care and especially oil and natural gas markets. Medicare is cutting payments for persistently high and inflating health care services and drugs, while providers are responding with limited service and reduced development. The Biden administration has been increasing oil and natural gas supply by depleting the strategic petroleum reserve, easing sanctions against Venezuela and Iran, pressuring domestic companies to boost production, and encouraging “immediate investment” by promising to buy oil from private producers if the price were to fall below a certain level. Biden is forcing U.S. shale drillers to deplete prime drilling locations within the next three to six years and set up the nation for oil and energy crises.
The Biden administration is delaying even higher energy and automobile costs until after the election. Biden has only started to ramp up costly environmental regulations favoring wind and solar energy, a national transmission grid, and electric vehicles that will at least double the costs of adding energy and automobiles. Higher energy and transportation costs will increase the costs of other products whose production and distribution is dependent on them, especially food. The manufacturing and construction required to move rapidly to these technologies will further decrease the supply and increase the already high prices of labor, materials and other resources needed to build new homes and economic cars, as well as produce food and economic forms of energy. Biden’s plans for deglobalization, including microchips needed for cars and especially electric vehicles, will add yet more costs.
The higher for longer interest rates are also prolonging high borrowing costs for consumers seeking loans for homes and cars. For example, Biden has exacerbated home affordability problems caused by the Fed’s cycling of interest rates. The Fed has alternatively made home mortgages less affordable by raising interest rates, and then home prices less affordable by decreasing interest rates. Home builders couldn’t increase new supply rapidly at lower interest rates, because they knew the Fed would raise interest rates again. By stimulating the economy while the Fed has raised interest rates, Biden has prevented the lowering of both home mortgage rates and home prices at the same time! Prices for homes and cars will likely increase further if interest rates are reduced.
In addition, Biden’s increased deficit spending is reducing the supply of capital available to small and other non-subsidized private businesses, while prolonging the Fed’s high borrowing costs and tight credit policies, that are crushing those seeking to finance their operations. The higher interest rates compared to China and the EU are discouraging loans to foreign firms, and contributing to the de-dollarization movement.
Throughout 2023, Biden boasted about reducing the budget deficit by $1.7 trillion in 2022, even though the 2021 deficit of $2.7 trillion was higher due to Covid-19 spending. Then, the budget deficit shockingly doubled from $1 Trillion in 2022 to $2 Trillion in 2023, after the Congressional Budget Office had projected only a small increase. It doubled even though the 2023 budget benefited from further reductions in Covid spending. The New York Times even caught the Biden administration trying to coverup the magnitude of the increase with an accounting trick that increased the deficit in 2022 and decreased it in 2023. The administration has also claimed that the increase was mostly due to lower tax revenues, but revenues were historically high in 2022 and still high in 2023. Although deficit spending in 2022 was about the same as 2019, both revenues and spending were much higher.
The Biden Administration has used legislative and executive actions to add over $5 trillion to deficits over the 2021-2031 period. The misnamed Inflation Reduction Act (IRA) contained climate and “clean energy” provisions that will cost over one trillion dollars. The Bipartisan Infrastructure Law added another $370 billion, including $70 billion for transmission lines for wind and solar energy. The SNAP (food stamps) program is being expanded by $185 billion, and health care-related executive orders will add another $175 billion. The CHIPS and Science Act added $80 billion for the development of the domestic microchip industry.
Biden’s increased deficit spending and the Fed’s high interest rates are accelerating the buildup of the national debt, even though studies have warned that the U.S. government is heading for default. Interest payments on the debt are increasing due to Biden’s increased deficit spending but especially higher interest rates. Because Treasury bonds are largely short-term and constantly coming due, higher interest rates for longer have increased interest payments on the much larger national debt. Because the government has to finance the deficits and refinance the debt in the Treasury bond markets, while the Fed and key foreign countries aren’t buying, the government has been forced to increase the yields paid to lenders.
Biden’s increased deficit spending may even be creating a bond doom loop. This results when banks hold older government bonds that lose value with increasing yields on new bonds, and the resulting bank credit crunch increases the deficit even more by slowing the nation’s economic growth and reducing government tax revenues. A bond doom loop appears to be developing as the government must borrow excessive and increasing amounts of money to finance its debt, and the central bank must raise rates to attract sufficient buyers. It started when the central bank raised interest rates to control inflation and Biden forced even higher rates by increasing deficit spending. The government has already lost tax revenues and bailed some banks in March 2023, with yet more deficits and debt.
Stock Market Crashes
The Fed’s major interest rate increases made to control inflation, while crashing the stock markets, have been guided by classical/neoclassical economics and haven’t had to compete with increased deficit spending until now. In 1920 and 1929, the Fed raised interest rates to quickly lower the stock markets while creating deflation, and yet both times they continued raising rates to an increase of about three percentage points that crashed the markets even lower. The Fed raised interest rates by about four percentage points from 1994 to 2000, and inflation caused largely by health care and oil prices dropped from between three and four to about two percent as the stock markets crashed. The Fed raised interest rates by 4.25 percentage points from 2004 to 2006 to bring inflation caused largely by health care and oil prices down from about four to two percent, and yet they held rates there for a year, and the stock markets crashed in 2007. The Fed’s five percentage point increase of interest rates since 2022 should have fairly quickly lowered inflation to two percent and caused a crash, if not for Biden’s deficit spending.
There has never been a soft landing even though conventional wisdom has claimed there was one in 1994-5, and some are claiming as much today. After the Fed raised interest rates by three percentage points from 1994 to 1997, inflation fell from under four to below two percent from 1997 to 1998 while the Dow stock market continued to boom. But the Asian crisis also caused prices for goods and commodities, especially oil, to fall from 1997 to 1998, which helped both reduce inflation and support the U.S. economy, and after the crisis ended in 1998, oil prices and inflation shot up higher than before. The Fed raised interest rates by another percentage point in 2000, and inflation quickly fell back down to two percent as the stock markets crashed. Today, inflation would be higher if prices for goods and commodities, especially oil, hadn’t been reduced by Biden’s market manipulations and lower usage in the EU and China. That could change.
When guided by Keynesian economics, the Fed has raised interest rates too little and slowly to either stop inflation or crash the stock markets or economy. The result was the “dreaded” stagflation (i.e., persistent inflation and low growth) from 1965 to 1982. Inflation increased from about two percent in 1965 to about six percent in 1970 mostly due to skyrocketing health care costs, and over 10 percent during two OPEC-induced oil spikes in 1973-4 and 1979. The stock markets were flat nominally and declining after accounting for inflation. Eventually, the Fed was forced to apply classical economics by raising interest rates quickly and so high that it was sure to crash the economy in 1982.
Now, it is Biden who is applying the Keynesian economics but this time by increasing deficit spending. Biden has effectively taken control of the stock markets and economy from the Fed, even though it was supposedly founded as an independent agency to operate without political manipulation. The Fed has accommodated Biden by not raising interest rates further, and even fought their own policies when bailing out some banks. The Fed has avoided comment on Biden’s deficit spending, even though they staged a conference that found that it might be helpful to coordinate policies.
The prognosis for the stock markets and economy is difficult to determine because no President has ever used debt to delay a crash. Current signs of a possible crash are depletion of consumer savings, a frozen real estate market, and higher short-end interest rates. But stagflation is indicated by the relatively flat stock markets that are declining after accounting for inflation since late 2021. If the Fed follows through with its plans to lower interest rates in 2024, the stock market could rise but some form of hyperinflation could result. A debt default or even difficulty financing the debt would likely crash the stock markets, as well as create even more serious problems.