Economics is a relatively complicated subject. Some definitions and explanations are required for those not familiar with the subject. The basic principles of economics are the laws of supply and demand. The price we pay for a product or service will rise or fall based on availability. Abundance of a product will generally hold down or reduce prices. Shortages will result in higher prices. Interest rates are the cost of capital. The last time we had very high interest rates was during the very bad inflation of the 1970s. The availability of capital has gradually increased continuously since that time which has resulted in gradually lower interest rates until this past year. It is important to note that interest rates affect both the supply and demand sides of the economy. Increasing consumer interest rates for credit cards, consumer loans or home mortgages will affect demand for products. Increasing interest rates for commercial mortgages, corporate bonds and other commercial credit will reduce the capability of companies to provide availability of products and services for consumers and affects the supply side of the economy. Inflation results when demand exceeds the capability of companies to provide needed goods and services. Prices will rise as a result. Similarly, prices will stagnate or decline if an excess of goods and services exist. Gross Domestic Product is the total of all goods and services produced in our domestic economy. When Gross Domestic Product (GDP) declines for two quarters in a row, the country is deemed to be in recession. In fact, GDP did decline in the first quarter of 2022 for the first time in many years. If we have a similar decline in the second quarter, the United States will be in recession.
What is the present status of our economy and how did it get that way? We have very substantial inflation or rapidly rising prices which means that demand for goods and services substantially exceeds available supply. How did it get that way? In the 1950s, when supply and demand were in balance in this country and every country on earth wanted to buy American made products, everything we invented, used, ate and shipped overseas was produced in this country. On the supply side, US corporations have been sending manufacturing jobs from the United States to overseas countries since the 1970s. Jobs first went to Japan and other oriental countries primarily due to rising production costs at home. Later, during the Clinton Administration, trade agreements were reached to open free trade with China, India, Mexico and Canada. Many, many more jobs were transferred overseas from the United States as a result of these agreements. We have lost control over our supply chain as a result of these very substantial changes. I think everyone knows that nothing we wear or use is produced here any more and very little of what we eat. Reliability of supplies from overseas has proven futile. Ports have not been expanded overseas or in the United States and supplies can not get out or in. These shortages of supplies contribute to inflation
It is also important to note that the United States government has borrowed almost $30 trillion since the year 2000. Most of that money is used for social programs, increase in government employment or other spending which increases the need for products and services to satisfy consumer demand. Such increases in demand which can not be met by the supply chain are inflationary. Most economists, reporters and analysts today blame the increase in inflation on government spending. It should also be noted that, when Lyndon Johnson was President, he borrowed extensively from the social security program to begin his social welfare programs showering vast sums of money upon the public which increased spending for goods and services which could not be provided by the supply chain that existed at the time. This was also largely responsible for the inflation of the 1970s. The inflation we are currently experiencing, as well as the inflation we had in the 1970s, are considered very serious problems that threaten future economic health and must be resolved.
Most economists agree and college economics for the last three generations teaches that the solution to inflation is for the Federal Reserve Bank to increase interest rates as substantially as necessary to reduce the demand side of the economy and bring supply and demand back in balance which would correct the price inflation we are experiencing. I disagree. Raising consumer interest rates would dampen consumer demand, but raising interest rates in general also dampens supply and tends to cause recession.
The present conundrum, then, is how to reduce inflation without inflicting harm on our economy which, in my opinion, is already fragile. Don’t forget that our government has injected almost $30 trillion into our economy of borrowed money which, if we had not done, might have resulted in lower Gross Domestic Products for the last 20 years. In other words, we may already have been in recession or depression for a long time. Interest rates alone may have no effect at all on inflation without affecting the economy in general. What we have to do is bring supply and demand back in balance by bringing production back to the United States thereby making our supply more reliable and available. Because of noticed shortages of chips, some chip manufacturers have committed to build new chip manufacturing plants in the US. Car manufacturers are planning to build electric vehicles to be used in America here in this country while reducing the overseas production of gasoline vehicles. Changes of this type in coming years will have a dramatic effect on reducing inflation. At the same time, such increased production at home will increase the level of employment in what has always been considered career jobs. This will have a very substantial effect on avoiding recession as well. It is important to note here that a substantial part of the increase in inflation we are currently experiencing has to do with a doubling of the price of oil and gasoline in the past year or so. These price increases, of course, are due to the current Administration’s efforts to curb the use of fossil fuels by prohibiting the production of petroleum and natural gas and shutting down pipelines. Petroleum is used in so many American products and gasoline and these increases added substantially to inflation. At the same time, we have eliminated many career oriented jobs from our economy contributing to slowdown at a time when we must defeat inflation without destroying our economy.
We must realize that the basic problem we have to solve has nothing to do with damaging higher interest rates which would only tend to help further destroy the economy we are doing so much to slow down by sending jobs overseas for so many years and reducing production of petroleum in this country where we have abundance. Raising interest rates reduces both supply and demand. It has also been suggested that raising taxes could reduce demand. Nothing could be further from the truth. Increasing taxes dampens both supply and demand and contributes to recession. The problem we must solve is to increase supply to meet demand. We can make our supply of goods and services to meet consumer demand more reliable by bringing production back to this country. There is an immediate need to place restrictions on the importation of certain types of products from China and other countries, not only for purposes of improving our economy, but also for purposes of security. It is likely that much of our new technology as well as military capability is being given away by having everything produced by foreign countries, many of which are not even friendly or allied with US interests. Lower taxes and lower interest rates are both beneficial to an expanding economy. Imbalance in supply and demand is not beneficially corrected by attempting to reduce demand. The correct solution to an inflation problem is to encourage our corporations to increase production here and bring jobs back to America. Interest rates need not be involved and should be affected only by the capital requirements of consumers and businesses. Recession will automatically be avoided if we go about correcting our inflation problem in the correct way and avoiding taking any action which will contribute to recession.