The “strong economy”, as Jay Powell, chairman of the Federal Reserve board, describes it, can “flourish in the face of a less accommodative monetary policy.” True, but only if that policy, already too late, is not also too little to rein in inflation. And if it is accompanied by an energy policy that does not dry up oil supplies in an ill-conceived, too-hasty transition to a greener economy less reliant on fossil fuels. On present reading, neither is available.
Biden Blames Putin For Pain At The Pump
The oil-supply requirement is not limited to finding more barrels to tame the current escalation in crude and gasoline prices, a shock President Biden is trying to hang on Vladimir Putin, even though prices headed up before Putin turned his artillery on Ukraine’s cities, partly in response to what The Economist calls “the large fiscal stimulus that … has wrecked his [Biden’s] standing as an economic steward.” Naming this inflation is the reverse of the bidding war to name ballparks and sports arena: Biden is bidding to have the price escalation named after anyone except Joseph Robinette Biden Jr.
Biden Takes His Cue From Oliver Twist
He is also attempting to relieve the current short-term supply tightness, and politically disturbing run-up in gasoline prices, by rattling his beggar’s bowl at Iran’s Ayatollahs, Venezuela’s Nicolás Maduro, and Saudi prince Mohammed bin Salman (MBS). “Please sir, I want some more.”
The prospect of helping to end human rights abuses by Vladimir Putin seems insufficient to evoke a positive response from these despots. Besides, the Ayatollahs’ price, which Biden might yet pay, is a free hand to develop a nuclear weapon; Venezuela’s investment-starved oil fields would need 18 months to increase production by a mere 120,000-200,000 barrels per day (bpd); and MBS is understandably upset by the administration’s policy lurches that would end U.S. support for Saudi offensive operations in Yemen, and ease sanctions on its blood-enemy, Iran. Oh yes, Biden’s promise to turn MBS into “a pariah” has not inclined him to take calls from the President. Words matter.
The Prince, accustomed to deference rather than denunciation, is discussing with Xi Jinping, his new friend, top customer (1.76 mbd), investor (in MBS’ futuristic city), and tutor (lessons in building ballistic missiles), accepting yuan rather than dollars in payment for that oil. If that comes to pass, Xi would have taken a giant step towards replacing the dollar with the yuan as an international reserve currency. That would reduce the ability of the U.S government to finance its deficits by printing and flogging its IOUs, aka Treasury bonds and notes.
On The One Hand We Want The Oil Industry to Produce More
The domestic industry can and will step up production, which energy secretary Jennifer Granholm is exhorting industry executives to do – “hire workers … get your rig count up. In this moment of crisis, we need more supply”. She promised to shorten the amount of time it takes to process permits, a process the administration denies lengthening.
On The Other Hand, Only Until We Want Them To Stop
Unfortunately for her efforts at detente, at the same time Biden is accusing the oil barons of “price gouging” and profiteering, and other administration spokesmen are announcing that after extinguishing this “fire in the kitchen” the rest of the house will be converted to “renewables and clean technologies … we are not developing a new dependency that is repeating the mistakes of the 20th century.” That hardly sounds a clarion call to oilmen being asked to sink billions into developing new reserves, or the “hugs” one oilman told reporters he is looking for from the administration. Pity. We will need reliable supplies of domestically produced oil to underpin an economy strong enough to weather the bumps on the road to one less dependent on fossil fuels.
Little wonder that capital spending by exploration and production companies fell from $529 billion in 2019 to $314 billion last year. Rational investors have little appetite for developing resources that Biden’s team want to see left in the ground, “stranded assets” in industry jargon. By his actions they have judged his plans for their future.
On taking office, Biden barred completion of the Keystone XL pipeline that would have brought more Canadian oil to America than we received from Russia. He became the first President not to have a sale of onshore oil leases during his first two years in office. He has done his best to stop the fracking that has made America a net exporter of oil. It is said that not a single oil industry executive has set foot in the White House since the Bidens took possession, a report I cannot independently confirm. Even supporters of those policies quail at the pace at which the administration is attempting to eliminate fossil fuels.
And voters are unhappy. The vast majority agree with his decision to tell Putin to take his oil and, er, shove it (actually, sell it at a lower profit to two of his supporters, India and China), but 63 per cent are unhappy with his handling of rising prices and by 45-to-37 per cent say they believe Republicans are better able to handle inflation than Democrats. Probably true at least since William Jennings Bryant promised not to “crucify mankind upon a cross of gold.”
Too Late, Powell Dips A Toe In the Anti-Inflation Waters
As for Powell, the tools he has pulled from the Fed tool kit to bring inflation down to 4.3 percent this year and 2.3 percent in 2024 – eleven (presumably) one-quarter percentage point rate increases spread over this year and next – would leave real, inflation adjusted rates in negative territory for a good long while. Interest rates lower than inflation rates make money free, which shouldn’t slow the demand side very much if at all, although it is worth noting that the WSJ reports signs of consumer resistance to price hikes, especially in the case of low-end apparel and furniture. Meanwhile, Powell is gambling that supply constraints will prove, er, transient, a gamble that will pay off only if Luck is a very kind lady, indeed.
Larry Summers, who served President Bill Clinton as treasury secretary, beat Powell’s announcement to the desks of Washington Post headline writers. “I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than seems likely.” Stagflation or recession to follow.
Powell Fears Uncertainty Among The Certainties
Powell often refers to the “uncertainty” he must face. True, for him and for all policymakers at all times. But there are also certainties.
- The 10 per cent rate at which wholesale prices are rising will push up the current 7.9 per cent rate at which retail prices are rising.
- Labour shortages are likely to accelerate the emerging wage-price spiral.
- The usual flow of nickel and other materials from Russia is interrupted, and has already forced Elon Musk to raise the price of his electric vehicles.
- Higher fuel prices are rippling through the economy, driving up transport and manufacturing costs.
- No wheat will be planted in Ukraine this planting season, meaning shortages and higher prices are baked in.
- Supply bottlenecks aren’t going away.
Too Little, Too Late From the Fed, Too Much, Too Soon From The Feds
The real pity is that too little, added to too late from the Fed, and a too-much, too-soon energy policy from the administration would be unforced errors. The economy is strong enough for the Fed to tighten faster and harder without taking an out-sized risk of causing a recession. And our energy resources are sufficient to allow Biden to organize a sensible glidepath to a greener world. It is, after all, not necessary to damage the great American economy in the process of preventing the planet from overheating.