The Wall Street Journal

  • NOVEMBER 4, 2011

Inflation hits lower-income people especially hard. So why is the president ignoring rising food prices?

Barack Obama spends much of his time these days running for re-election, campaigning as a populist, bashing millionaires and extolling the Occupy Wall Street movement. Although “populist” means different things to different people, the Oxford American dictionary says it describes a politician who seeks to represent the interests of ordinary people. So how does the president measure up as a true populist? Not well.

Food prices are an important component of the living expenses of ordinary people, especially the elderly or families struggling to make ends meet. Last week the U.S. Department of Agriculture forecast that food prices will rise by 3.5%-4.5% this year, the sharpest year-to-year increase since 1978. (That year, by the way, was prelude to 1979-80 double-digit inflation, when prices at one point in 1980 were soaring at nearly 15% annually.)

Commodity futures prices for animal feed staples like corn and soybeans are riding high. Oil and gold blipped upward again last week after a hiatus that followed the end of the QE2 monetary stimulus. Overall, dollar inflation is approaching an uncomfortable 4% annually.

So what else is happening? The economy picked up a little steam in the third quarter, growing at an annual rate of 2.5% on the strength of higher consumer spending and business investment. But personal disposable income, inflation adjusted, dropped 1.7%, the first decline since the 2009 recession. The personal savings rate fell back to the recession level, a meager 4.1% of personal income. Why should anyone save, when money-market accounts yield only a skimpy half a percentage point?

What we have here looks like the early stages of stagflation.?

The Fed is financing the $1.2 trillion public deficit, currently 42% of the federal budget, and refinancing maturing debt. That usually injects new money into the economy, with the potential to lower the value of dollars and as a result, raise prices. Monetizing government debt has been a prescription for inflation since time immemorial.

The economy is growing just enough to possibly tap into the enormous excess of bank reserves—now about $1.5 trillion—that the Federal Reserve created with new money in 2009 out of fear of a liquidity crisis. A prime rate of only 3.25% is very tempting to business borrowers if they can get loans, which probably accounts for the third-quarter uptick in business investment in machinery. Lending from excess reserves, in essence, is a delayed release of new money into the economy.

None of this is happening by accident. It is a result of policies set by the president and Congress and implemented by the Federal Reserve. Contrary to the myth of “independence,” the Fed responds to the pressures from elected officials. It is following a deliberately inflationary policy in an effort to pump up asset prices and dilute the cost of financing a profligate government.

Not much of this is good for the ordinary guy. In fact, if prices continue their rise—as is likely—it could be devastating to household balance sheets. Inflation is a tax that hits lower-income people especially hard. And it is especially insidious because politicians invariably blame it on “greedy capitalists” rather than accept the responsibility themselves. The kids picketing Wall Street believe this stuff. The combination of inflation and today’s high rate of unemployment and underemployment—the so-called “misery index”—worsens the effect.

Are there any pluses to this policy? Well, if inflation spreads from commodities to assets, it might eventually serve the Fed’s goal of raising more home prices above water, thereby reducing the number of home foreclosures. But will the ordinary middle-income family be able to save enough for a down payment on a home with an inflated price tag?

Corporate stocks, also an asset, spiked upward from news of improved economic growth last week. They may be getting some lift from the Fed’s inflationary policies. That could have some benefit for ordinary people in that struggling pension funds would become more liquid and better able to meet their defined benefit obligations.

But sustained inflation is not good for stocks. It erodes the capital assets of corporations as the cost for replacing and upgrading plant and machinery rises faster than depreciation allowances. Corporations and state and local government entities trying to raise money from bond issues see the debt market dry up as investors become unwilling to accept the long-term risk of being repaid in devalued dollars. More stagnation is the result.

Giving stocks an artificial boost is mainly a policy that serves those millionaires and billionaires the president rails at as he targets them for higher taxes. Warren Buffett and George Soros will make another billion. It does little for Joe Six-Pack other than perhaps saving his pension if he retires soon enough.

As Mr. Obama flies from speech to speech at taxpayer expense in his fuel-guzzling Boeing 747, he may well have little understanding of how much his campaign rhetoric rings false in light of the economic realities he as president had an important role in creating. He probably thinks it’s still 2008 and he is still campaigning on a platform of “hope and change.”

But it’s 2011 and the president’s economic policies have been a disaster. The auguries for the future are not looking good. He is unlikely to change policies; it would be very difficult to do so with the federal fisc in such a mess. So his chosen solution is populist rhetoric. As the old saying goes, that won’t put food on the table.

Mr. Melloan, a former columnist and deputy editor of the Journal editorial page, is author of “The Great Money Binge: Spending Our Way to Socialism” (Simon & Schuster, 2009).

Write to George Melloan at george.melloan@wsj.com


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