« It’s the economy, stupid » “It’s the economy, idiot,” whispered an adviser to Bill Clinton in 1992 to explain the Democrat’s victory over Republican George Bush senior, in the wake of a recession. « It’s the inflation, stupid », one would be tempted to paraphrase, with the approach of the mid-term elections which promise to be very difficult for the Democratic Party. The rise in prices, which reached 7.5% in January, a record since 1982, is turning into poison for the President of the United States, Joe Biden.
Admittedly, inflation is not yet the first subject of concern for Americans, as it was in the early 1980s. But it is cutting into the purchasing power of employees, while pessimism is spreading in the country: Consumer sentiment as measured by the University of Michigan is at a decade low, while only 25% of Americans think now is a good time to buy a home, discouraged by speculation, rising prices for building materials and the increase in the cost of money.
New Keynesian economist Larry Summers, who warned of inflationary risks in the spring of 2021, warns of the political havoc incurred, especially on the left. “Inflation contributes significantly to distrust of institutions and pessimism about the future. This is a terribly important thing at a time when our democratic institutions are being challenged.”explained in The Harvard Gazette Bill Clinton’s former treasury secretary. “If inflation had been better controlled, it is quite possible that the election of Richard Nixon in 1968 and that of Ronald Reagan in 1980 would not have taken place. »
radical remedy
After having long underestimated the inflationary risk, however increased by his massive stimulus plan voted in March 2021, Joe Biden has made it his number one subject, as has the Chairman of the Federal Reserve (Fed), Jerome Powell. On the markets, rumors are swirling, mistaking the Fed’s monthly seminars for emergency meetings, from which would come the decision of an unexpected and sudden rise in rates.
The memory of Paul Volcker, chairman of the Fed appointed in 1979 by the Democrat Jimmy Carter, is constantly mentioned, he who brought down inflation by sending the key rates of the Fed soaring to 19.1% in the first half of 1981. The remedy was radical. It plunged the United States into two recessions, in the first half of 1980, then from July 1981 to November 1982. The cost in jobs was painful, with a peak in the unemployment rate at 10.8% in 1982. It caused a crisis debts of emerging countries, in particular in Mexico. But inflation was defeated: from the peak of 14.8% reached in May 1980, it fell to 2.5% in July 1983.
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