Stopping Inflation II

In my last post, I pointed out we weren’t making enough effort to expand supply to curb inflation. Similar to oil, the prospective future product increase will work to lower prices today and into the future. Energy, so essential to the World’s economy, is the starting point, but other building blocks, commonly called commodities, face the same hurdles for expansion.

Blessed with a wealth of minerals and highly productive farms, the U.S. is a commodity powerhouse, or at least it was in the past. Look around and almost everything you see originated in the ground. To expand oil production, you need steel and lots of other stuff. Want clean energy? You have to have everything from rare earths to a mountain of copper. 

The same attitude stifling increased oil production is evident in our ability to increase the supply of other commodities. Instead of maximizing our resources, we depend on others, some unfriendly, for basics. We have set up a world-class obstacle course to open a mine in the U.S.

In the past, I’ve pointed to Arizona’s Resolution deposit’s decades-long, unresolved journey to yielding copper. It’s not as if Arizona is new to copper mining. The state is the nation’s leading producer. The Resolution mine is potentially the largest ever in the state. A combination of environmentalists and Indian tribes have litigated the project to a standstill.

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Yes, Pres. Biden, You Can Stop Inflation

The Biden administration claims it can do little about inflation and leaves it up to the Federal Reserve (Fed) to tame prices. The Fed can bring inflation to heel if it will raise interest above the expected inflation rate. Anything less adds to costs while still encouraging borrowing. For instance, you’re buying a house with a 5% mortgage. It sounds high by recent standards, but if inflation is over 8%, the actual rate is -3 plus the interest tax deduction. This interest rate won’t deter people from buying houses or other capital goods. It just adds to demand and costs. Aso, don’t forget rising interest rates add 100s of billions to what we pay on our national debt, adding to rather than solving the problem.

However, if you drive up the interest rate above today’s 8-9% inflation, the economy probably will fall out of bed as it did in the early 1980s. People forget at the same time Fed. Chair Paul Volker was driving interest rates to 18%; we laid the groundwork for a rapid recovery. 

The Carter Administration deregulated industries such as Airlines, Railroads, and Telecommunications. Pres. Reagan extended this trend by dumping gasoline price controls, among others. He also cut taxes where inflation had pushed people into ever higher brackets. These were all supply-side incentives and turned the early ’80s recession into the excellent expansion that continued through the ’90s. 

It may be too late to avoid a recession, but we can try. Biden needs to emulate Carter and Reagan by expanding goods and services rather than maintaining his current roadblocks. The quicker we increase supply, the less the Fed will need to raise interest rates. 

Energy is essential to everything we do; it’s the place to start. Once again, let me lay out the economics. I’ve said it before, the view our future production doesn’t affect world prices is bogus. Yet, the Washington Post economics writer Charlotte Rampell echoes others by saying our energy production doesn’t affect prices. 

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