By Eugene Puryear, Breakthrough News
The following is a lightly edited transcription from The Punch Out with Eugene Puryear, a daily news podcast that comes out Monday through Friday, 5pm ET. Subscribe here.
Almost every major economic commentator is now predicting a recession in the United States in the second half of the year — as we have been predicting here on The Punch Out since last year. But what most are obscuring is the underlying fragility of the U.S. economy.
The immediate reason for the recession fears is the Federal Reserve’s approach to inflation: raising interest rates.
It’s no secret that inflation is plaguing the US and making it more difficult for millions to make ends meet. In the last 12 months inflation has increased 8.3%, while wages have only increased 5.5%. This is, in essence, a pay cut and inflation is straining budgets at every level in a major way.
Raising interest rates is the Federal Reserve’s main method against inflation — and something of a blunt force instrument. This is sometimes referred to as “draining liquidity” from the economy and it works like this: Raising interest rates means making it more expensive to borrow money. Since the economy essentially runs on credit, by making it more expensive to borrow money, the overall economy is going to shrink, as people become less likely to lend or borrow money for new investments or expanded ventures.
How does this affect prices? With a weaker economy and a smaller overall market, both capitalists and consumers are more selective with their money, and so to remain competitive in a smaller market, the price has to be right. For instance a company might have to internalize a slightly increased cost rather than pass it on to you, the consumer.
The bottom line is that raising interest rates to defeat inflation essentially means forcibly making the economy smaller to reduce inflation — otherwise known as inducing a recession.
Fed Chairman Jerome Powell has been doing the media rounds noting that there will be increased interest rates hikes and warning, in his words, that this will involve some “pain.”
There are three questions that flow from this: 1) How much pain, 2) For who? and 3) Is this blunt force approach really the best and only way to contain inflation?
Categories: Economics/Class Relations