U.S. President Donald J. Trump promised today during his inaugural address that he would address the levels of inflation brought on by government overspending and high energy costs. He offered as a solution the old mantra, “Drill, baby, drill” implying that increases in the supply of American extracted and processed oil and gas would increase energy supply and drive down prices.
Like just about every elected official, President Trump has fallen into the trap of promising a solution to the economic phenomenon of inflation, and like almost every elected official, he fails to define the phenomenon. If Mr. Trump took some quality time out to secure the proper definition of inflation, he would take heed not to make the promise in the first place.
Inflation, as defined by economists, is a scenario where the spending capacity of consumers is greater than the amount of produce available for consumption. The result of this imbalance is that the excess money is used to bid up prices on the available goods. We tend to conclude that the bidding up of prices is the inflation when the bids merely increase price levels. The true inflation is found in the increase in money supply or monetary capacity, that leads to increases in price levels.
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For example, say you have a house. It’s a nice house. You and your spouse have had good times in the house raising kids, making johnny bread and saltfish, and drinking mauby. A passerby knocks on your door and asks if you would like to sell the house offering $500,000 as an initial offer. You turn the person down telling them that you had no interest in walking away from the great memories.
There are others that would like to buy your house, but a lack of money due to a myriad of reasons prevents them from making an offer. But let’s say those potential buyers are now flushed with extra cash. Stimulus checks, child support, inheritance, new jobs. Now these buyers are empowered to bid up the prices because their monetary capacity has increased.
The increased money supply led to an increase in offers at higher prices. Now those memories of fried fish and johnny cakes become fleeting as the reality of cash has you thinking of moving back to Nevis.
Under the Constitution, presidents do not have a duty to affect prices on consumer goods or manipulate the supply of money. A strict constitutionalist would tell you that the closest thing to monetary policy described in the Constitution is Congress’ duty to determine the value of coined money. So far, the closest that the 119th Congress has come to addressing the management of the money supply is HR 146, a bill introduced on January 3, 2025, by U.S. Representative Warren Davidson, Republican of Ohio.
HR 146 would prohibit the Board of Governors of the Federal Reserve System from paying interest on reserves held by a member bank in their master account with a Federal reserve bank. Paying interest on reserve balances is a primary tool that the Federal Reserve System uses when crafting monetary policy.
Influencing inflation means influencing monetary policy, a tactic that Mr. Trump has been promoting. Putting his weight behind HR 146 might be one way that he can gain influence over monetary policy at zero cost of political capital.
The other option he has is to reduce the amount of federal government money injected into the monetary system. If he takes that route, Mr. Trump will be faced with the question of which programs do I cut and by how much. This is where his “Department of Government Efficiency” should come in (the parentheses I have placed around “Department of Government Efficiency” should tell you how seriously I take this panel). To make any meaningful impact this panel would have to move with speed and intent given that the traditional time to deliver a budget is around the end of March to early April.
As a lame duck who is concerned about his legacy, Mr. Trump should want to demonstrate to the public in the FY2026 budget that his policy led to a reduction in inflation. He will also have to keep in mind the downside of reducing inflation. Reducing inflation means not just a fall in the levels of consumer prices but also a fall in asset prices. Overvalued asset prices are supporting the spending that keeps the economy going. Asset owners that provide the public and private sectors with liquidity want to see returns on investment including capital gains.
Does Mr. Trump want to leave the Republican Party holding a bag of coal come fall 2026, bearing the brunt of the angst of asset owners who may see a fall in the value of their assets?
Alton Drew
20 January 2025
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