Reagan & Volcker Killed Inflation. Will Biden & Powell Bring It Back From the Dead?

President Joseph Robinette Biden Jr. (JRB) aspires to be as transformative a president as was FDR in expanding the scope and scale of the US social welfare state. Biden is also the anti-Reagan president. He loves Big Government as much as President Ronald Reagan hated it. Furthermore, he has as much faith in Big Unions as Reagan distrusted them.

The Reagan Revolution didn’t last very long. President Ronald Reagan was a proponent of free-market capitalism. He was against big government. He championed the constitutional system of federalism and the republican system of checks and balances. Yet here we are three decades later with lots more crony capitalism and with the federal government bigger and more powerful than ever.

Conservative presidents have had very little lasting impact on the course of our nation. Progressive ones have made much more progress at leaving their marks. The legacies of Theodore Roosevelt, Woodrow Wilson, Franklin Delano Roosevelt, Lyndon Baines Johnson, Bill Clinton, and Barack Obama have radically changed our country. They all expanded the social welfare state to varying degrees. Now President Joe Biden intends to build on their legacies.

To some extent, the Reagan legacy was briefly revived by President Donald Trump. But now under Biden, the progressive agenda is back on the fast track. What is different this time is that Biden, unlike his progressive predecessors, seems to have no concerns about the deficits that will result from his mammoth spending programs. Sure, he is pushing to raise tax revenues to cover some of the costs of his spending plans. But revenues are very unlikely to come close to covering Biden’s ambitious expansion of the social welfare state.

Furthermore, Biden and his economic advisers seem to have no concerns about the inflationary consequences of their policies. On the contrary, they are pushing for higher wages and more power for labor unions. Their regulatory policies, especially the ones aimed at climate change, are going to add lots to the cost of doing business. Their plan to raise the corporate tax rate will do the same. Yet just last week, Treasury Secretary Janet Yellen said, “I don’t think there’s going to be an inflationary problem, but if there is the Fed can be counted on to address it.”

Reagan may not have been as transformative as other presidents, but he helped to end the Great Inflation of the 1970s by supporting Fed Chair Paul Volcker's tough monetary policies. He also accelerated the demise of the labor union movement in the private sector when on August 5, 1981 he fired more than 11,000 air traffic controllers who had ignored his order to return to work after their union, the Professional Air Traffic Controllers Organization (PATCO), had organized an illegal strike. That marked the end of the wage-price spiral of the 1970s, as many private-sector business executives, following in Reagan’s path, successfully pushed back against their labor unions.

Biden loves labor unions and intends to do whatever he can to bring them back in the private sector. He is also pushing to raise wages. Consider the following:

(1) Raising wages at federal contractors. On April 27, Biden signed an executive order that requires federal contractors to pay a $15-an-hour minimum wage. Currently, the minimum wage for federal workers is $10.95 per hour, and the tipped minimum wage is $7.65 per hour. According to The White House Fact Sheet, starting on January 30, 2022, all government agencies will need to incorporate a $15 minimum wage requirement into new contract solicitations, and by March 30, 2022 all agencies will need to implement the minimum wage into new contracts. Additionally, government agencies will need to implement the higher wage into existing contracts when contracts are extended each year.

(2) Promoting unions. On April 26, Biden signed an executive order that will create a task force to promote labor organizing at a time when just over 6% of US private-sector workers belongs to unions (Fig. 1). The White House task force will be headed by Vice President Kamala Harris with Labor Secretary Marty Walsh serving as vice chair. The order is in the tradition of the National Labor Relations Act, which was passed in 1935 under FDR to encourage worker organizing.

(3) Powell's dovish Fed. Meanwhile, last August, the Fed reworded its dual-mandate statement to prioritize “broad based and inclusive maximum full employment” ahead of maintaining price stability. It is now aiming to overshoot inflation above the official 2% target for a while to make up for undershooting it for so many years. Fed Chair Jerome Powell is the anti-Volcker, doing whatever it takes to bring back (some) inflation.

What about a repeat of the Great Inflation of the 1970s as a result of the current administration's policies? It could happen. However, that decade was uniquely inflation prone. Nixon devalued the dollar on August 15, 1971. The resulting surge in commodity prices was exacerbated by a food price shock (1972-73) followed by two oil price shocks (1973 and 1979). During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. Productivity growth collapsed during the decade. The result was an inflationary wage-price spiral [1].

This time may not be different. The dollar is down 12.3% since it peaked on March 18, 2020. Food, energy, and industrial commodity prices are soaring. Wages inflation may be starting to pick up. Labor unions in the private sector may still be weak, but the federal government under Biden is clearly on their side.

Does all this mean that a comeback for inflation is inevitable? Or are there offsetting reasons why this might not happen? I am on the lookout for—but don’t expect—an inflationary wage-price spiral. I do expect to see wages rising more rapidly in coming months given all of the above. The main reason is that I believe that productivity growth is set to move higher during the Roaring 2020s as it did during the Roaring 1920s [2]. I expect that it will be strong enough to offset the inflationary consequences of the Biden administration's inflationary policies. So far, so good [3].

So for now, I remain in the camp anticipating a transitory rebound in the inflation rate in the 3.0%-4.0% range in coming months before it settles back down to 2.0%-2.5%. Stay tuned. ______________________

[1] See my LinkedIn article, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?" December 12, 2020.

[2] See my LinkedIn article, "Comparative Roaring '20s," December 1, 2020.

[3] See my LinkedIn blog on productivity.

The One Percent: Off With Their Heads!

Socialists promote policies that they claim will lead to greater income equality. History shows that most countries that have embraced socialism have achieved income equality: Almost everyone is poorer than before socialism was imposed on them for their own good. Purchasing power is depressed for most people, and the quality of the goods and services they can purchase is poorer too.

Socialists often declare that the rich don't pay their “fair share” of taxes and must pay more so that the proceeds can be redistributed to boost the incomes of the poor. The problem is that the fair share that the rich must pay never seems to be enough. Higher and higher taxes on the rich result in fewer and fewer of them. Eventually, the only fat cats left are the socialist elites, who always get richer as most of the rich in the private sector get poorer. Needless to say, the poor also get poorer as a result.

In the US today, progressive politicians claim that the “One Percent” of taxpayers are compensated too much and don't pay their fair share of taxes. It's hard to deny that a few CEOs, especially the ones heading up technology and financial companies, get paid too much relative to the pay of their workers. Many professional athletes and Hollywood celebrities earn even more than top-paid CEOs. So the progressives could be right, but let’s see what the latest available data through 2018 show:

(1) Number of tax returns. The total number of all the tycoons on Wall Street, in Silicon Valley, in Hollywood, and on the playing fields—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.65 million taxpayers in 2018, exactly 1.1% of the 153.8 million taxpayers who filed individual income tax returns that year, according to the latest available data from the Internal Revenue Service (IRS) (Fig. 1). Adjusted gross income is income from all sources before subtracting deductions and exemptions.

By the way, the number of returns showing AGI of $500,000 and over has more than doubled since 2009. The rich have been getting richer, and there are more of them. What you won't hear from progressives is that the same can be said for all the other income groups other than taxpayers earnings less than $50,000, clearly showing that there are fewer low-income tax filers! Their headcount has dropped 6.1 million since they peaked at a record 95.0 million during 2011. Since 2009, the number of returns filed by taxpayers with AGI of $50,000-$100,000 rose 5.0 million, $100,000-$200,000 rose 7.6 million, and $200,000-$500,000 rose 3.7 million.

(2) Adjusted gross income. During 2018, AGI in the US totaled $11.6 trillion. The AGI of the One Percent was $2.5 trillion during 2018, accounting for 21.7% of the total, up from 13.9% during 2009 and exceeding the previous high of 21.7% during 2007 (Fig. 2 and Fig. 3). Over that same period, the share of taxpayers reporting less than $100,000 in AGI fell from 50.7% to 36.6% of total AGI.

That’s outrageous: The One Percent earned over 20% of all national AGI during 2018! Off with their heads!

Not so fast, Robespierre.

(3) Taxes. Collectively, during 2018, the One Percent paid $639 billion in income taxes, or 25.3% of their AGI (Fig. 4 and Fig. 5). That amount represented a record 41.5% of the $1.54 trillion in federal income taxes paid by all taxpayers (Fig. 6). That’s up from 29.8% in 2009. Meanwhile, the rest of us working stiffs, the “Ninety-Nine Percent,” picked up only 58.5% of the total tax bill during 2018.

What should be the fair share for the One Percent? Instead of about 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless paying more in taxes caused the One Percent to work less hard or leave the country, sapping their incentive to keep creating new businesses, jobs, and wealth here in America.

(4) Taxing math. To repeat, during 2018 the One Percent reported $2.5 trillion in AGI, which accounted for 21.7% of total AGI. They paid $639 billion in income taxes, which was 25.3% of their AGI but accounted for 41.5% of total income taxes paid to the IRS.

I’m sure there are plenty of progressives who believe that the One Percent should pay at least 50% of their AGI in income taxes. That would have amounted to an extra $600 billion in their tax bill for a total of $1.25 trillion in 2018. Total tax revenues would have been $2.1 trillion, with the One Percent’s fairer share of that at 60%. There would have been plenty more tax revenues for the government to spend and redistribute.

So let’s tax the rich much more! But if their fair share is raised again and again by the progressives, what will we do when the rich are all gone?

(5) Trumped. By the way, we can slice and dice the IRS data to see how President Trump’s tax reform affected individual income tax receipts during 2018 compared to 2017, i.e., before and after tax reform. The law retained the old structure of seven individual income tax brackets, but in most cases, it lowered the rates. The top rate fell from 39.6% to 37.0%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket was also unchanged.

The number of tax returns increased 0.6% from 152.9 million to 153.8 million, while AGI rose 5.7% to $11.64 trillion (Fig. 7 and Fig. 8). Total individual income taxes paid fell 4.3% to $1.54 trillion as the average tax rate fell from 14.6% during 2017 to 13.2% during 2018, which was the lowest since 13.1% during 2012 (Fig. 9 and Fig. 10).

The IRS data show the following declines in the average tax rates (based on AGI) for the following income groups:

$0-$50,000 (down 0.1ppt from 0.7% to 0.6%)

$50,000-$100,000 (down 1.4ppt from 8.9% to 7.5%)

$100,000-$200,000 (down 1.5ppt from 12.6% to 11.1%)

$200,000-$500,000 (down 2.6ppt from 19.2% to 16.6%)

$500,000 and over (down 1.4ppt from 26.7% to 25.3%)

(6) Three cheers for the Five Percent! These numbers suggest that the biggest winners were in the $200,000-$500,000 AGI group, accounting for 4.5% of all tax returns in 2018. They aren’t in the One Percent. They are in the “Five Percent,” the upper middle class with many of them owning their own businesses, which tend to employ lots of people. Arguably, their tax break provided them with more cash to expand their businesses, which certainly explains why the labor market was so strong in 2018 and 2019.

The Biden administration has pledged that the tax increases it intends to enact will only hit taxpayers earning more than $400,000 per year. The problem is that lots of these people tend to have their own businesses. The latest data available show there were just under 32 million pass-through businesses in 2013, almost 20 times the number of C corporations. There are surely many more such proprietorships today. An increase in their tax bills reduces the cash that they have to invest in growing their businesses. One way or another, a tax increase on them will hurt the wages and employment opportunities of lots of people earning much less than $400,000. Tax increases on the rich inevitably trickle down to the rest of us.

But at least there will surely be more income equality.

Running of the Bulls

Prince, Bowie, or Metallica? I’m still trying to figure out what will be the theme song for 2021. I’d been thinking “Party Like It’s 1999” by Prince until last week, when I suggested that “Space Oddity” by David Bowie might be more relevant if stock prices continue to hurtle into outer space. Either song would be consistent with a continuation of the bull market in stocks. Alternatively, perhaps I need to consider a far more pessimistic theme song like “For Whom the Bell Tolls” by Metallica.

There’s an old stock market adage: “They don’t ring a bell at the top.” My study of financial history suggests that the adage isn’t true: Credit crunches serve as bells. More specifically, financial crises that trigger a widespread credit crunch tend to cause bear markets in stocks as investors correctly anticipate that the credit crisis will cause a recession (Fig. 1). During credit crunches, the S&P 500 VIX, a measure of stock market volatility, tends to soar along with the yield spread between high-yield bonds and the 10-year Treasury bond (Fig. 2).

While the VIX doesn’t rise on a predictable schedule as does the sun, its rising can also shed light. In addition to rising during bear markets, it also rises during stock market corrections and minor panic attacks (Fig. 3 and Fig. 4). Since the start of the bull market in 2009, Joe and I have counted 69 panic attacks. The latest one occurred when the Nasdaq fell 10.9% from February 12 through March 8, mostly on jitters over the backup in bond yields. By the way, we count last year’s selloff as a panic attack rather than an outright bear market. (See Table of S&P 500 Panic Attacks Since 2009.)

The unusual frequency of panic attacks during the current bull market suggests that investors have remained jittery ever since the last bear market during the Great Financial Crisis (GFC) and prone to hear warning bells. Ernest Hemingway, who wrote the novel For Whom the Bell Tolls (1940), suffered from tinnitus, a constant ringing in his ears as a result of injuries sustained in World War I. Similarly, investors traumatized by the GFC remain easily convinced that another bear market is imminent.

No alt text provided for this image Yet despite their propensity to panic, stock market investors are reveling in a festive mood with the bulls stampeding. Hemingway’s The Sun Also Rises (1926) portrays American and British expatriates who travel from Paris to the Festival of San Fermín in Pamplona, Spain, to watch the running of the bulls and the bullfights; merrymaking in the festive atmosphere provides them with an escape from reality, for the time being.

Contrarians aren’t indulging in the stock market’s revelry; they see too many indicators flashing that stock market sentiment is unduly bullish. For them, the sun will soon set, providing a good reason to take profits before darkness.

On the other hand, there is plenty of liquidity to drive stock prices higher without a significant correction. M2 is up by an unprecedented $4.2 trillion y/y through February (Fig. 5). Furthermore, over the past 12 months through February, personal saving totaled a record-shattering $3.1 trillion. All that occurred before the third round of relief checks ($1,400 per eligible person) was sent by the Treasury to over 250 million Americans since mid-March.

MAMU, here we come! In my latest book, The Fed and the Great Virus Crisis, I predicted that MMT + TINA = MAMU, where MMT = Modern Monetary Theory, TINA = there is no alternative to stocks, and MAMU = the Mother of All Meltups. (See the relevant excerpt.)

That might turn out to be the new adage for our times. Now let’s have a look at the latest running of the bulls:

(1) Party like it’s 1999. The Nasdaq continues to party like its 1999 (Fig. 6). The tech-heavy index is up 104.8% since March 23, 2020 through Friday’s close. The Nasdaq bottomed on October 8, 1998 following the Russian debt and LTCM crisis. It was up 113.4% on a comparable temporal basis to the current bull run. If the Nasdaq’s bull run is about to turn into a stampede, as happened during the last leg of the 1999/2000 bull market, then it could double in value over the next six to nine months as it did back then. The S&P 500 is up 87.1% since March 23, 2020 through Friday’s close. That’s well ahead of 1999, when it was up 33.4% on a comparable temporal basis (Fig. 7).

(2) Stretched valuation. The S&P 500’s forward P/E continues to fluctuate around 22.0, as it has over the past year. That’s not far off its record 25.7 valuation multiple during April 1999. On the other hand, the forward price-to-sales ratio of the S&P 500 has been setting new record highs for most of the past year, rising to 27.9 on Friday (Fig. 8).

(3) Bullish sentiment running wild. The Bull/Bear Ratio compiled by Investors Intelligence was relatively elevated at 3.77 during the week of April 13 (Fig. 9). By historical standards, the percentage of bulls was particularly high at 63.4%. Bears are relatively scarce at 16.8%, as are investors expecting a correction at 19.8%.

The running of the bulls is even more discernible in the Bull/Bear ratios based on survey data compiled by the American Association of Individual Investors (Fig. 10).

(4) Fun for almost everyone. Measures of market breadth show that the bull market has broadened since early last September. The ratio of the equal-weighted to the market-cap weighted S&P 500 stock price indexes has been rising since it bottomed on September 1 (Fig. 11). The percentage of S&P 500 stock prices above their 200-day moving averages (dma) rose to 96.2% on April 16, exceeding the 96.0% reached on October 16, 2009 (Fig. 12). The S&P 500 was 15.4% above its 200-dma yesterday (Fig. 13). That’s a relatively high reading. During April 16, the percentage of S&P 500 companies with positive y/y stock prices changes was 93.1%, around previous cyclical highs (Fig. 14).

(5) Another adage. Here’s another old stock market adage: “Sell in May and go away.” While doing so might make sense this year since bullish sentiment is so high, I’ve never been a fan of this adage. It doesn’t always work, and even when it does, the investor is left with the problem of determining when to get back into the market. Proponents of the adage say to come back after October, but there have been plenty of times when that advice would have meant missing a summer rebound that followed a selloff in May.

(6) Speed bumps. The meltups in some asset prices are starting to run into some regulatory headwinds. We anticipated this might happen in the SPAC market. We last did so in the March 16 Morning Briefing. We wrote: “The bottom line is that a few of the speculative excesses in the market are under scrutiny by the regulators. The SEC is warning about SPACs with conflicts of interest, and the major central banks are warning about cryptocurrencies being used for illegal activities.”

On April 21, CNBC posted an article titled “SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest.” It noted: “After more than 100 new deals in March alone, issuance is nearly at a standstill with just 10 SPACs in April, according to data from SPAC Research. The drastic slowdown came after the Securities and Exchange Commission issued accounting guidance that would classify SPAC warrants as liabilities instead of equity instruments. If it becomes law, deals in the pipeline as well as existing SPACs would have to go back and recalculate their financials in 10-Ks and 10-Qs for the value of warrants each quarter.”

Cryptocurrencies also have had a bad case of the jitters over the past week or so on rumors that the Treasury Department could be looking to crack down on financial institutions for money laundering using cryptocurrency. During her congressional nomination hearing on January 19, Treasury Secretary Janet Yellen suggested that lawmakers “curtail” the use of cryptocurrencies such as bitcoin. Her concern is that they are “mainly” used for illegal activities, including “terrorist financing” and “money laundering.”

Adding to the jitters in most financial asset markets was President Joe Biden’s plan, announced Thursday, April 22, to raise the capital gains tax from 20.0% to 39.6% for taxpayers earning over a million dollars. Since capital gains are also subject to the 3.8% Medicare tax, the new capital gains rate would be 43.4%. Larry Lindsey, who worked for the Bush administration, described this proposed increase as a “punitive” tax on the wealth.

On the other hand, Goldman Sachs opined on Friday, April 23 that the end version likely will be something considerably less severe, which explains why stock prices rebounded that same day following the previous day’s selloff on the Biden proposal.

Outcome Rather Than Outlook; Reacting Rather Than Preempting

The Fed I: Backward Looking. Just in case we didn’t get the Fed’s memo on the change in its monetary framework, Fed Governor Lael Brainard explained it very clearly in a speech on March 23 titled “Remaining Patient as the Outlook Brightens.” Throughout her talk, she stressed very important distinctions in meaning between “outlook” and “outcome” and between “preempting” and “reacting.” She concluded her speech with her punchline: “By taking a patient approach based on outcomes [emphasis added] rather than a preemptive approach based on the outlook, policy will be more effective in achieving broad-based and inclusive maximum employment and inflation that averages 2 percent over time.”

Brainard acknowledged that the efforts of public health, fiscal, and monetary policymakers “have contributed to a considerably brighter economic outlook.” However, she stated that the Fed’s “reaction function” had changed in response to the pandemic. The Fed governor explained: “The FOMC has communicated its reaction function under the new framework and provided powerful forward guidance that is conditioned on employment and inflation outcomes. This approach implies resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance.”

In effect, the Fed’s policy responses will be backward looking rather than forward looking. In an April 11 interview on CBS 60 Minutes, Fed Chair Jerome Powell reiterated this message as follows:

(1) Inflection point. He started with a very upbeat outlook: “What we’re seeing now is really an economy that seems to be at an inflection point. And that’s because of widespread vaccination and strong fiscal support, strong monetary policy support. We feel like we’re at a place where the economy’s about to start growing much more quickly and job creation is coming in much more quickly.” He concluded the interview by saying “I’m in a position to guarantee that the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.”

(2) Recovery redefined. Got that? The Fed will keep policy ultra-easy until the recovery is complete. But wait a minute—real GDP is likely to be back in record-high territory by the second quarter. It is on the verge of a complete recovery. That’s true, but Powell and Brainard said that “broad-based and inclusive maximum employment” is one of the outcomes they want to see before the Fed starts tightening. Both also want to see inflation moderately above 2%. Powell explained: “And the reason for that is we want inflation to average 2% over time.”

(3) Fed funds rate staying put. Once the Fed achieves this outcome, “that’s when we’ll raise interest rates,” Powell said. When asked whether interest rates might remain unchanged around zero through year-end, Powell said, “I think it’s highly unlikely we would raise rates anything like this year, no.”

The Fed II: Ghost of Greenspan Past. What about asset inflation? In his interview, Powell was asked about it and responded: “[W]e do look at asset prices. And I would say, you know, some asset prices are elevated by some historical metrics. Of course, there are people who think that the stock market is not overvalued, or it wouldn’t be at this level. We don’t think we have the ability to identify asset bubbles perfectly. So … what we focus on is having a strong financial system that’s resilient to significant shocks, including if values were to go down.”

What about Archegos? This hedge fund, disguised as a “family office,” blew up earlier this month when its speculative bets in the stock market crashed and burned, leaving billion-dollar craters in the earnings of a few of its brokers. Powell’s response gave me an unsettling sense of déjà vu all over again. He said:

“This is an event that we’re monitoring very carefully and working with regulators here and around the world to understand carefully. What’s concerning about it … and surprising, frankly, is that a single customer, client, of one of these large firms could result in such substantial losses to these large firms in a business that is generally thought to present relatively well understood risks.”

That reminds me of the following remarks by Alan Greenspan for his October 23, 2008 testimony before the House Committee on Oversight and Government Reform at a hearing on the role of federal regulators in the Great Financial Crisis:

“As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.”

During his Q&A exchange, Greenspan acknowledged the error of his ways: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, [was] such [that] they were best capable of protecting their own shareholders and their equity in the firms.”

(For more thoughts regarding that testimony, see my 2020 book Fed Watching for Fun and Profit, particularly Chapter 5 titled “Alan Greenspan: The Great Asset Inflator.” Chapter 8 is titled “Jerome Powell: The Pragmatic Pivoter.” When and if I write a second edition, I might have to change that to “Jerome Powell: Another Great Inflator.” His policies have the potential to inflate not only asset prices but also consumer prices.)

The Fed III: New Monetary Policy Approach. All this amounts to a backward-looking, rather than a forward-looking, monetary policy approach. Ironically, all the talking Fed heads now are saying that their “forward guidance” is no longer relevant since that was based on their outlook, which has not been relevant since the pandemic started. What matters now is the outcome, which can only be known after it happens!

Forward-looking guidance has now morphed into backward-looking guidance. In effect, Fed officials are saying, “We’ll let you know when we are ready to raise interest rates after we get the outcome we were seeking.”

Confused? If not, you should be. Now take a deep breath and try to fathom the following Fed speak from a March 25 speech by Fed Vice Chair Richard Clarida:

“The changes to the policy statement that we made over the past few FOMC meetings bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August. In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of ‘shortfalls [emphasis added] of employment from its maximum level’—not ‘deviations.’ This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it will conduct policy to achieve inflation outcomes that keep long-run inflation expectations anchored at our 2 percent longer-run goal.”

You can come up for air now.

The Fed IV: By the Numbers. The Fed’s balance sheet continues to expand to infinity and beyond. That’s been happening since the Fed adopted QE4ever on March 23, 2020. Here are the mind-boggling relevant stats since then through the April 7 week:

(1) Assets. The assets side of the Fed’s balance sheet is up $3.0 trillion over this period to a record $7.7 trillion (Fig. 1). The Fed’s holdings of securities is up $3.2 trillion to a record $7.1 trillion. The difference between these two series is composed mostly of the assets held by the Fed’s emergency liquidity facilities, which has declined $167 billion since March 23, 2020 (Fig. 2). It remains $260 billion above last year’s low during the week of February 26.

(2) MMT. Over the past 12 months through March, the US federal budget deficit totaled $4.1 trillion (Fig. 3). The Fed financed 51% of this deficit by purchasing $2.1 trillion in US Treasury securities over this period. As of March, the Fed held a record 25.6% of the total of marketable US Treasury debt (Fig. 4). That’s Modern Monetary Theory (MMT) on speed and steroids.

(3) Notes and bonds. Over the past 12 months through March, the Treasury issued $2,081 billion in notes and bonds (Fig. 5 and Fig. 6). Over that same period, the Fed purchased $1,615 billion in the Treasury’s notes and bonds. It bought them in an effort to keep a lid on bond yields. The 10-year Treasury bond yield has rebounded nonetheless, but it would probably be higher today but for the Fed’s purchases.

(4) Reserve balances. As a result of the Treasury’s record budget deficit and the Fed’s record purchases of securities, the total deposits at all US commercial banks has increased $2.4 trillion y/y to a record $16.7 trillion through the March 31 week (Fig. 7). Another result of T-Fed’s MMT on speed and steroids is that reserve balances with the Fed has jumped $1.2 trillion y/y to a record $3.9 trillion during the April 7 week (Fig. 8). That well exceeds the impact of the previous three QE programs on reserve balances.

(5) The others. Meanwhile, the assets on the ECB’s balance sheet also continue to soar. During the April 2 week, this series was up €2.3 trillion y/y to a record €7.5 trillion (Fig. 9). The BOJ’s assets rose 18% y/y to a record ¥714 trillion during the March 26 week (Fig. 10).

I also track the assets of the People’s Bank of China (PBOC). However, we believe that China’s bank loans data are a more useful measure of the PBOC’s ultra-easy monetary policy since the Great Financial Crisis. From the end of 2008 through March 2021, they are up a staggering $23.3 trillion from $4.4 trillion to a record $27.7 trillion (Fig. 11). Over the past 12 months through March, these loans are up a record $3.1 trillion (Fig. 12).

All together in US dollars, the assets of the Fed, ECB, and BOJ are up $6.9 trillion y/y through the March 26 week to a record-high $23.1 trillion (Fig. 13 and Fig. 14).

The Myth of Stagnating Real Wages

In the past, I often have observed that, contrary to popular belief, inflation-adjusted wages have been expanding rather than stagnating for many years. Wage stagnation has been a popular myth perpetuated by progressives bemoaning workers’ plight to promote their own political agenda.

Naturally, progressives want even more progressive income taxes on higher-income workers and more social benefits for lower-income ones. Their goal is to redistribute income to reduce income inequality. They’ve actually succeeded in doing so, but they never seem to be satisfied. They always want more taxes and more benefits. The result is more “big government.” For now, let’s update the data that belie their basic claims:

(1) The wrong measure of inflation-adjusted wages. One measure of real wages seems to confirm the progressives’ stagnation thesis. Inflation-adjusted wages—defined as AHE divided by the CPI—peaked at a then-record high of $23.49 per hour during January 1973 (Fig. 1). It remained below that level until April 2020. That’s over 47 years! As of February 2021, it was only 1.4% above the 1973 peak. That’s pathetic.

I mean that analysis is pathetic. The CPI is widely known to be biased to the upside. A far better measure of consumer prices is the PCED. When we use that series to deflate the AHE series, we find that inflation-adjusted wages did stagnate during most of the 1970s through the mid-1990s. But it started moving higher around 1995 and has been achieving new highs since January 1999, rising along a trend line of 1.2% per year (Fig. 2).

(2) Rising standard of living. That represents a very solid increase in the purchasing power of consumers and in their standards of living! The real wage has increased 38% over the past 26 years from $16.18 during February 1995 to $22.34 during February 2021. Keep in mind that I am using AHE for production and nonsupervisory workers, who account for roughly 80% of private payrolls. This series certainly isn’t upwardly biased by the earnings of higher-wage workers.

Data available since 2006 show that AHE for higher-wage workers, on an inflation-adjusted basis using the PCED, rose 12.0% from the start of that year through February of this year (Fig. 3). Over the same period, AHE rose 19.5% for lower-wage workers.

Any way we slice or dice the data, the conclusion is the same: The income stagnation story is a myth. Standards of living have been rising for most Americans most of the time.