Inflation and Recession

Economically speaking, the aggregate demand for the U.S. economy represents the quantity of domestic products in general that are demanded at each possible value of the price level. If there is too much money being printed and in circulation, an increase in the aggregate demand pushes the price level up. If the aggregate demand continues to increase month after month, the economy will suffer from inflation – a sustained increase in the general price level.

When production falls and people lose jobs, two consecutive quarters to be exact, the economy experiences a recession.

The mainstream media pundits, who are not economists, but communication or English majors, are twisting themselves into pretzels, trying to redefine the term recession to spare embarrassment to their favorite Democrat president, Joe Biden, and his disastrous economic policies. They are counting on most Americans, with or without a college degree, not knowing basics of Macroeconomics.

If recessions are deep and sustained, they turn into depressions. Here are events in economic history that had affected American families deeply:

-          the depression of the 1890s after the rapid industrialization and railroad prosperity

-          the panic of 1907

-          the postwar depression following WWI

-          the Great Depression of the 1930s

-          the postwar recession following WWII

-          the 1974-75 recession with serious stagflation in the U.S.

-          the 1982-83 recession

-          the 1990-91 recession 

-          current inflation and recession under President Joe Biden

The economy also experienced dramatic deflations, sustained decreases in the general price level, such as the post-Civil War deflation, in the 1870s, the 1880s, 1921-1922, and 1929-1933.

The decline in economic activity during the Great Depression was the most severe in our economic history until the lockdowns of Covid-19 in 2020 from which world economies are still struggling to recover from due to the disastrous government interference in the free markets.

The Great Depression taught us that recessions and inflations take a long time to self-correct, and the right combination of economic policies, fiscal and monetary, must be adopted by governments. Are these economic policies successful? Not all the time.

To power large economies, crude oil and coal are necessary for energy and economic growth, not the unreliable green energy, solar and wind. Governments are expected to manage their economies so that “recessions do not turn into depressions and depressions will not last as long as the Great Depression.”

When rapid inflation occurs while the economy is growing slowly (“stagnating”), or in a recession, then we experience stagflation such as that experienced in the 1970s in the U.S.

The Federal Reserve, which is neither federal nor a reserve, but a private corporation since 1913, controls monetary policy, money stock and interest rates. When a competent person is at the helm of the twelve regions’ federal reserve banks, the Federal Reserve (Fed) can take actions to influence aggregate demand by changing interest rates up or down, making borrowing more expensive or cheaper, or by altering the money stock (supply). The Fed engages in buying and selling of securities and the printing of new fiat (Latin for “let it be”) money not backed by any goods or services, to control interest rates and the money supply.

Can the government stabilize the economy with its fiscal policies (federal taxation) or even manage it correctly? As history shows, the answer is no. One of the reasons is the out of control spending that Congress engages in which requires more money that we do not have enough of from taxation, money which then must be printed by the Federal Reserve’s printing presses or borrowed from countries like China.

Printing so much money without the backing of goods and services devalues the currency, i.e., the dollar. During the American Revolution, one dollar was worth 2 ½ cents. The Bureau of Engraving and Printing runs the printing presses since 1862 and produces dollars (“greenbacks”), using the same magnetic ink and special cotton (75%) and linen (25%) paper made by Crane and Company since 1879.

So, is inflation bad for everyone? It is if you look at it as unlawful taxation forced upon all Americans because they must pay so much more for their food, gasoline, medical care, travel, entertainment, housing, energy, etc. It is worse for the elderly and people living on fixed incomes who do not qualify for or are too proud to ask for welfare.

Debtors can come ahead in an inflationary environment. Earning $100 you borrowed two years ago becomes easier. What you repay in real terms is much less than the $100 because the money you use to repay the lender will not buy now what it would have bought two years ago.