Abba have reformed. Nato is working out how to deal with an aggressive Russian president. And there are shortages of everything. There were already plenty of clues, but now it is surely official: the 1970s are back. The United States has recorded its highest inflation rate for 32 years, with a 6.8 per cent rate that far surpassed anything even the most pessimistic forecasters expected. In truth, Joe Biden is about to turn into the new Jimmy Carter, a lame duck Democratic president presiding over a failing economy – and the crisis is entirely of his own making.
We already knew the US was witnessing a bout of inflation. Even so, the latest numbers still came as a shock. At 6.8 per cent, it is up almost a whole percentage point in a single month, and may well climb higher still before it starts to come under control. A clearly rattled White House, aware that surging prices will start hitting people hard very soon, put out an optimistically pre-prepared statement arguing the rate would start to drop soon. And yet, it is hard to see who is likely to believe that.
The US is now close, or possibly beyond, the point where inflationary expectations are embedded into the system. Workers will demand higher wages to compensate for inflation, and firms will raise prices, creating a cycle that in the past has proved very hard to break, and always required deep cuts in public spending and crushing interest rates to bring under control. The result? President Biden is about, to adapt Mrs Thatcher’s famous description of socialism, to run out of other people’s money.
In reality, this is a mess entirely of Biden’s own making. He came into office with a bold plan to remake the American economy, and to permanently lift growth with vast spending programmes. But the president’s tax plans are already a mess, with his planned billionaire’s tax falling apart on first contact with reality, and with its replacement, a millionaire’s tax, unlikely to have much more chance of success.
To make matters worse, the budget deficit is blowing out of control, and now Biden will also face a massive increase in the cost of the Federal government, with wages, pension and welfare entitlements rising, and the cost of everything the government buys soaring as inflation rises. But this can hardly all come as a surprise.
Biden pushed through vast increases in spending, without sufficient tax increases, convinced that it would turbo-charge growth, despite warnings it would simply create inflation. Biden also stood by as the Fed kept interest rates close to zero even as prices started to edge higher. Now he has wrecked a perfectly healthy economy, bequeathed ironically by the reviled Donald Trump.
It surely can’t be long before there is a screeching U-turn in economic policy. Biden will have to cancel most of his spending plans, put in place some proper tax rises that will hit middle-class Americans hard, remain silent while the Fed starts raising interest rates, and work out how to cope with the inevitable recession with very little extra money to spend. When it happens, he will be a lame duck president, presiding over three years of economic misery before being ejected from office in 2024.