October’s employment report helps explain Donald Trump’s landslide electoral victory. Private payrolls shrank for the first time since the post-Covid recovery.
American households, especially lower-income families, were crushed by inflation rates double the officially reported level. Now, jobs are drying up. The economy is much worse than reported by official readouts.
Biden set in motion the worst inflation since the 1970s, and perhaps since the US Civil War, by handing out trillions in so-called stimulus checks after the US economy had already begun to cover from the 2020 Covid recession.
The Federal Reserve spent a year pretending that inflation was a problem and then jacked up interest rates, pouring gasoline on the fire. It should cut the federal funds rate by 2 percentage points immediately, taking pressure off households as well as the federal budget.
The US economy is still expanding, according to government statisticians, entirely due to higher personal consumption – investment in businesses and homes remains in the dumps. The American public didn’t buy the official version, because it just isn’t so.
Somehow, Americans have managed to increase “real personal consumption expenditures” (the calculation of consumption in the gross national product series) without buying anything.
Real retail sales, as reported by the Census Bureau, have been falling since 2021, while personal consumption keeps rising. The gap that opened between the real retail sales report and the personal consumption estimate is the widest on record.
The likeliest explanation, and the one that corresponds to the experience of most American households, is that the US economy is much weaker than government statisticians claim. Inflation is much higher and inflation-adjusted personal consumption is much lower.
The Biden administration may thus have left Trump with a recession as a going-away present. And the Federal Reserve is the gift that keeps on taking.
Unlike the inflation of the 1970s, the present inflation is NOT caused by excess credit creation. Total credit outstanding to the US private sector has fallen during the past several years, according to the Bank for International Settlements, which reports quarterly data through March 2024.
This inflation stemmed from Biden’s attempt to bribe voters with enormous subsidies.
Barack Obama’s Treasury Secretary and former Harvard University president Lawrence Summers calculated earlier this year that inflation peaked at 18% in 2022 and remains above 8% when the cost of higher interest payments to American households is added in.
Credit card debt outstanding exploded after Covid, rising from about $800 billion to nearly $1.1 trillion. But the real kicker came from higher interest rates. The average interest rate banks charge on revolving credit jumped from 14% to 22% between 2021 and 2023.
Multiplying the interest rate on revolving credit by the outstanding balance shows that household interest payments on credit cards rose from slightly over $100 billion a year in 2020 to about $225 billion in 2023.
The New York Federal Reserve’s survey of consumer credit shows that past-due credit card balances now exceed 11% of the total, the highest level in 10 years, while delinquent auto loans are almost 5% of the total.
Inflation also raised taxes by pushing wage earners into higher tax brackets. Personal income tax receipts rose much faster than nominal gross domestic product.
At the peak of 2020 inflation, US taxpayers were paying $400 billion a year more in federal income taxes than the level of GDP would have predicted.
The Fed’s whipsaw is also the principal cause of budget constraints. Biden’s spending spree and the Fed’s overreaction doubled interest payments on the federal debt.
Federal Reserve Chairman Jerome Powell, the main culprit in the monetary policy bungle, has said that he won’t leave office before his term expires in 2026.
Whether President Trump will have the ability to persuade Powell to leave sooner is unclear. But it’s critical for the President-elect to explain to the American people why they are in this jam, and who put them there.
Follow David P Goldman on X at @davidpgoldman
