There was no “Bidenflation” from 2021 to 2022. History books will make clear that there were rising prices, not inflation. There’s a difference. Just the same, the dollar has declined fairly substantially from March of 2022 until the present, thus the actual inflation that has some worried in the present.
Bidenflation from 2021-2022 was the headfake, while what we’re seeing now is the real thing. That the Fed’s rate hikes did nothing to arrest both the headfake and the real thing was and is a statement of the obvious. But first, let’s backtrack to go over what pundits, politicians and economists on the left and right imagined to be inflation in 2021-22, even though it wasn’t.
Republicans near monolithically joined prominent Democrats including Larry Summers and Jason Furman in saying government spending signed into law by President Biden ignited the 2021-22 spike in prices that they described as inflation. The explanation from the right was that the spending created “excess demand,” while those on the left actually believe against all rationality that government spending boosts economic growth.
For the right, the problem was and is that all demand begins with supply, and governments supply nothing. They can only spend insofar as those producing have less to spend. Republicans seemingly knew this but chose to politicize inflation, while Democrats still broadly believe once again that government is an “other” capable of creating demand.
It should be added that even if it were true that government spending had increased demand (in reality, it’s impossible), this wouldn’t be evidence of inflation as is. Economics is about tradeoffs. If demand is pushing up prices of certain market goods, the latter presumes commensurate price declines for other goods.
None of this is to say that prices weren’t elevated in 2021-22, but it is to say that the elevation had an obvious origin: think the lockdowns related to the coronavirus that revealed their ugly self in March of 2020. The lockdowns were global in nature, and subsequent price surges revealed just how interconnected the global economy was and is.
That’s because the biggest factor (by far) when it comes to market prices is the number of hands and machines at work in the creation of market goods. Lockdowns of varying duration eviscerated this incredibly sophisticated global cooperation to varying degrees, and with predictable results: prices didn’t surge during and after the lockdowns because of demand outstripping supply (an impossibility as is since the former is a direct effect of the latter), but because fewer hands and machines were working together in 2021-22 relative to 2020.
Global production symmetry that took decades to build will surely take years to rebuild, thus prices that remain elevated to this day. Still, command-and-control in the form of globalized shutdowns is decidedly not inflation. Inflation is one thing: a decline in the unit of measure. And as written last week, the dollar didn’t decline in any notable way from 2021-22. The gold signal was clear that “Bidenflation” was a myth.
Rather than acknowledge the dollar’s relative stability as a signal of a lack of inflation, Democrats and Republicans joined hands again in saying the Fed must fiddle with interest rates to arrest the higher prices that they mistook for inflation. Economic historians will marvel at the monolithically wrongheaded approach. See above. Falling prices are yet again an effect of a growing number of hands and machines at work in the production of market goods, thus the obvious prescription for what ails us: free trade and never again using economic contraction as a virus mitigation strategy. If so, prices will take care of themselves.
Instead, the left/right consensus was market intervention. Notable there is that when the Fed began hiking in March of 2022, the price of gold was roughly $1950/ounce. To be clear about the Fed’s actions, to suggest that higher rates would strengthen the dollar is like saying a facelift will fix a broken leg. It’s a total non sequitur. And markets agreed.
After 525 basis points of rate hikes the dollar price of gold had risen all the way to $2559. And the dollar has continued to weaken. Gold today sits at nearly $3,000 an ounce as both sides reveal how little they understand inflation. And markets have responded wisely. Without guidance from the Biden Treasury, or Trump’s, the dollar continues to reveal the bitter fruits of the absence of concept that is “benign neglect.”
You fix inflation with a definition of what the dollar should be, not fiddling with market signals like money in circulation and rates of interest. To fiddle with the former is to say that production is inflationary, while messing with the latter is like (rather vainly) limiting the supply of rulers as a way of strengthening the foot. No, the foot has a definition while the dollar needs one.
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