Why the FED is Horrified by High Inflation.

It is perpetually haunted by the Ghost of Republicans Past.

Inflation has been running hot, to the point where even the Federal Reserve has blinked in its months-long game of chicken.

But that begs the question of why the game was even being played in the first place.

You might say that the Fed sees an incomplete recovery from the pandemic requiring the economic boost of low interest rates. Sure, the stock market is on fire and unemployment is low. But there are also an historic number of job openings, and wages aren’t keeping up.

You might also say that the Fed sees the economy starting to overheat, with $2,000 sign-on bonuses at low-wage jobs, an out of control housing market, and wealth inequality widening every day, necessitating an earlier than anticipated interest rate increase.

I say there’s another explanation: Social Security.

The Social Security Explanation

When Social Security was first implemented, Congress set the payment levels.

Every now and then they would look at some economic figures, agree on a payment amount that made sense, and lock it in place for a while.

It was kind of like the federal minimum wage that way.

However, in 1973, the program was changed so the Cost of Living Adjustment (COLA) was based on CPI-W, with the first such adjustment made in 1975.

The only problem was that inflation was rising incessantly, peaking around 13% in 1979–1980. Fed Chairman Paul Volcker famously took interest rates to around 20% to combat inflation, but not before several years of increased cost to Social Security.

Somebody had to do something to prevent this from happening again.

As it turns out, several somebodies did several somethings.

The Dark Side of Reaganomics

The early 1980’s saw peak trust in trickle-down economics, which was the core of Reaganomics.

Unfortunately, it took another 30 years to prove that it was an historically awful economic choice, which has widened the wealth gap to the almost insurmountable levels we see today.

If trickle-down was the core of Reaganomics, then inflation reduction was the sordid underbelly. Double digit inflation was not going to fly with the voters, so the Reagan administration did a little “creative accounting” at BLS.

The Fed controls interest rates, but the federal government can control inflation via the Bureau of Labor Statistics (BLS).

Several tweaks were made to the equation that determines CPI, most notably the cost of renting a home replaced the cost of buying one.

Some economists and bloggers called this “cooking the books.” Regardless, CPI dropped to 2.5 percent by the middle of Reagan’s second year.

Inflation dropped over 80% within a year after the CPI change. There’s no way that happens in the real world without some serious calculation changes.

The Gingrich Republicans

If you happen to be of a certain age, you’ll remember Newt Gingrich and his Contract With America.

It was a great marketing prop, propelling Republicans to major victories in the 1994 midterms.

Gingrich was vehemently opposed to a Social Security COLA of any real size, and he went right after the calculation upon being sworn in as Speaker of the House.

He wasn’t alone, either. Former Fed Chairman Alan Greenspan forcefully testified about the “overestimation” of the CPI, resulting in “overpayment” to the nation’s retirees.

This politicization of the Social Security COLA calculation led President Clinton to the brink of changing everything.

Ironically President Clinton selected soon-to-be Fed Chair Janet Yellen as Chair of the White House’s Council of Economic Affairs in 1997.

One of Yellen’s first acts was creating what is known as chained CPI, a new calculation that would virtually eliminate cost-of-living increases for Social Security recipients.

The BLS, with a little coaxing from Fed Chairman Alan Greenspan, ultimately adopted the equation, but did not apply it to Social Security.

Social Security recipients barely dodged a bullet, but they’ve been dying by 1,000 paper cuts (i.e. calculation changes) ever since.

Post-Pandemic Inflation and Retiring Boomers

Currently, inflation articles abound, espousing everything from staying calm to outright freaking out. I’ve even written a few, here and here.

While it’s still a little early to get a final verdict, inflation is looking more permanent and less “transitory” every day.

And it is scaring the shit out of everyone as Boomers are retiring at a much faster pace than anticipated.

More retirees means more people are taking Social Security, which will increase the cost of the program ahead of schedule.

With historic national deficits already projected, high inflation/COLAs is a nightmare scenario.

The Takeaway

I’m probably sounding like a broken record by now, but this is just another example of how we’re on our own anymore.

Boomers and the older Gen X can depend on government help; maybe even a company pension.

Millennials and younger are going to get screwed.

• Social Security will have reduced payouts.
• “Retirement” will be solely funded by ourselves.
• The wealth gap means larger but fewer inheritances.

The shortsightedness of a powerful few has already left the masses with a less prosperous future.

Think long term.

Educate yourself.

Have a backup plan.

Sure, Modern Monetary Theory suggests endless money printing to fund the Social Security liability without negative consequences.

And if you believe that, I’ve got some beachfront property in Arizona I’d like to sell you.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.