Don’t blame the Fed for the “panflation” plaguing the economy due to the pandemic

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It is becoming increasingly clear that the current economic environment in which we find ourselves defies conventional description.

This is certainly not a normal recovery in the business cycle, and inflationary pressures pushing up consumer and producer prices are not the product of an overheated demand-driven economy leading to bottlenecks. strangulation of production and subsequent increases in wages and prices typical of end-of-cycle behavior.

We have solid growth and ‘panflation’, price hikes induced by a global pandemic that has disrupted supply chains around the world, dramatically distorted global labor markets amid uneven demand for goods and services. specific services.

It also appears that traditional tonics to cool the economy and lower prices are not the answer to this thorny problem.

In short, health care policy remains economic policy and until the pandemic and all its variants are fully under control, or completely eliminated, disruptions in supply, labor shortages and the rise in prices may, as Federal Reserve Chairman Jerome Powell suggested, turn out to be more than transient.

Many economists and many less informed elected officials blame these distortions on the levers of monetary and fiscal policy used to mitigate the economic blows dealt by the coronavirus and now its delta variant.

But these reviews don’t match the real world experience.

Record employment gap

There are no tankers off the California coast with tons of cargo on board because the Fed is buying too many bonds or the fiscal policy is too loose.

Millions of Americans did not retire early, and more than a million women did not leave the workforce because they received too much help from the government.

The record gap between the number of open jobs in the United States, at 10.9 million workers versus 8.5 million unemployed, is not a product of politics, but also of the pandemic.

There has been a massive change in the demands of workers, pay equity, flexible hours and locations, the desire to quit jobs that do not respect an employee’s efforts while not paying a living wage, what is most visible in leisure, hospitality, travel and catering worlds.

Some simply decided to get a better education, retrain for different and emerging economic opportunities, or go it alone.

In the industrial world, many workers see the robotic writing on the wall. Of course, they can go back to the warehouse, recognizing that in the short term they will be paid better than before, but eventually replaced by machines. So why bother?

A global computer chip shortage is not the result of the CARES Act or zero interest rate (ZIRP) policies around the world.

Ending the pandemic will normalize the economy

Nor was it the ‘stagflation’ of the 1970s or early 1980s that was brought about by the United States shocking the world economy by abruptly rejecting the gold standard; the Arab oil embargo which has quadrupled oil prices; flawed policies such as wage and price controls; union deals that included not only annual contractual wage increases but also additional inflation-linked wage increases, or the Iranian hostage crisis which again tripled oil prices in 1979.

It is “panflation”, a disruption of both supply and demand, labor markets and world trade.

We see it from Vietnam to Vancouver and from Texas to Taiwan.

Ending the pandemic, however long it takes, is the real cure for normalizing the economy.

No reduction or increase in interest rates, and frankly, no social engineering will bring these imbalances back to pre-pandemic levels.

We are not stuck with these problems forever, but we will need more enlightened solutions to normalize the economy, monetary and fiscal policies, and bring some rationalization back to domestic labor markets and international trade, or ” panflation ”may turn out to be more than an economic flash in the pan.

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