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Back Down to Earth, Swiftly

July 11, 2022

It’s ironic, but it seems economists are the last to the party when it comes to the economy.

For instance, Treasury Secretary Janet Yellen recently acknowledged again her misdiagnosis of inflation as transitory last year. She also said expectations of a rapid fall in inflation are unrealistic.

That’s quite a turnaround.

One of her predecessors, Larry Summers, made a rare call correct call last year when he said government pandemic spending would trigger higher inflation. He’s now going a step further, publishing a paper identifying how governmental inflation calculations don’t align with economic reality. The study confirms economic policy is set by people using flawed models.

There are real implications of these policy failures. They’ve created market bubbles, wealth inequality, and runaway speculative debt. Meanwhile, business and political leaders are mostly silent as the wealthiest get even wealthier, to the detriment of our collective economic future.

As Summers suggested, a recession is both necessary and almost certain because of the Federal Reserve’s inability to fight rampant inflation. Many firms’ earnings are declining and consumers, despite what we hear about their great strength, are taking on more debt and struggling with skyrocketing energy, food, and housing costs.

Everybody hoped the Fed could keep printing money without consequence and asset prices would keep rising towards other planets. But other planets cannot sustain life like Earth does. Thus, those who subscribed to the fantasies of the last decade are being brought back down to Earth, swiftly.

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