Busted Control Surfaces

Art Attribution: Struggle for Supremacy, Robert Taylor (buy it here). You can’t have too much aviation art in your home or office.

 

Is the Federal Reserve Sabotaging President Trump’s Policies?

Last week, we received a slightly elevated July consumer inflation report, up 2.7% year-over-year, which is higher than the rates in June and May. The press blamed tariffs with headlines like:

”Inflation ticks higher as Trump’s tariffs kick in.” -Politico, August 12th

“Inflation remains elevated as Trump’s tariffs take hold.” -NPR, August 12th

“US wholesale prices jump in July as tariffs hit.” -BBC, August 12th

I’m generally not a fan of tariffs, particularly when other countries impose them unilaterally on the United States for decades. But whether you’re pro-tariff, anti-tariff, pro-free trade, pro-mercantilist, or pro-industrial policy, inflation is still a monetary phenomenon and not caused by tariffs (except under a rare set of conditions which we’ll see don’t apply here).

Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” That remains true, and to prove both Friedman right and the “blame Trump’s tariffs” press wrong, let’s take a look at what the media won’t: the “monetary phenomenon” of the last year.

Friedman’s license plate read: mv=py

That is, money supply x monetary velocity = the general price level x economic output. There’s nothing about “tariffs” in the formula. So what happens if, unlike the media, we bother to look at the “m” in the equation of exchange: the money supply?

M2 from July 2024 to July 2025 rose by 4.8%, which is entirely within the purview of the Federal Reserve. https://fred.stlouisfed.org/graph/?g=1LAKm

I’ll repeat both numbers: Prices rose 2.7%. The money supply rose 4.8%.

Since the Fed is in charge of monetary policy, tasked with meeting a 2% inflation target, and boasts of its independence, it is far more culpable for the 2.7% inflation report than any alleged effect of tariffs. For all that was required for the Fed to achieve its 2% year-over-year inflation target was to increase the money supply by a still-forceful 4.1% instead of the too-high 4.8%.

Why doesn’t the press mention this instead? Part of it is Trump Derangement Syndrome. A bigger part of it is the much longer-standing ignorance of what the Fed does, plus a tendency by the establishment—the media included—to rally around our central bank as some indispensable institution that bestows us with eternal economic salvation (hint: it’s neither).

Now, some more sophisticated people might say, “Well, the Fed has to offset real economic growth to keep prices stable, so of course it has to grow the money supply.” OK fine. From 2Q24 to 2Q25, real GDP rose by 2%. https://fred.stlouisfed.org/graph/?g=1LAKs

So if you print 4.8% more money chasing 2% more goods and services, the result is 2.7% inflation (1.048/1.02 = 1.0274), which is precisely the elevated inflation rate we got. Thus, the original point remains: none of the latest inflation numbers can be attributed to non-monetary factors, including tariffs.

The Fed printed money too fast. If it had simply printed 4.1% more money instead of 4.8% more money, then year-over-year inflation in July, even with offsetting economic growth, would have been dead on target at 2% (1.041/1.02 = 1.0206). But then, say the sophisticated Fed apologists, to slow down the rate of monetary growth, the Fed would have to raise interest rates, which would be bad, right? Not until considering an even better solution do they mention it. Namely, the Fed could have simply never lowered interest rates in the last five months of the Biden administration (September 2024 to January 2025). Had rates remained at the previous year’s level, a full 100 basis points higher, we wouldn’t be facing 2.7% CPI inflation today.

Inflation stood at 2.6% in October 2024 and 2.7% in November 2024. Given its dual mandate of full employment and a 2% inflation target the Fed’s rate cuts made no sense in late 2024, just as cutting rates today with 2.7% inflation also makes no sense.

But then the press wouldn’t have a Trump-linked scapegoat to headline.

To repeat: monetary policy is the purview of the Fed. The Fed is not only entrusted with it, Congress has granted it a coercive monopoly over currency, reserves, setting interbank interest rates and interest on reserves (IOR) rates, etc, to carry out its mandates. It has all the tools it needs to achieve any price target it wants.

Former Fed governor and short-list nominee for next Fed Chair Kevin Warsh said exactly this (about the Fed’s toolbox) in his recent Hoover Institution interview. However, the media reports “tariffs, tariffs, tariffs” while remaining silent on the money supply and the Fed.

One more thought that puts this all in historical perspective: The United States was a major tariff/protectionist country in the late 19th century. Republican administrations and Congresses dominated the post-Civil War era, and during that time, the Republicans were a pro-tariff party that imposed tariffs throughout. So, if tariffs cause inflation, why was there not only no high inflation, but prices fell by 39% or an annualized inflation rate of -1.0% during the golden era of protectionist tariffs? https://www.officialdata.org/1865-dollars-in-1913?amount=1

The answer is that there was no Fed printing fiat money. And tariffs didn’t cause inflation then either. The effects of tariffs on inflation are similar to those of oil, with both often misunderstood. When either tariffs or more expensive oil raise the prices of certain goods, especially inputs for other products that get purchased by consumers down the line, consumers ultimately do pay more for them. But if the money supply remains constant, then those same consumers will have less money left over to buy other products whose prices will necessarily fall due to decreased monetary demand. British economist David Ricardo understood this as early as 1810, during the Great Bullionist debates. Yet over two centuries later, journalists and even many economists continue to promote the tariff or oil “cost-push” fallacy.

Overall, with tariffs or higher oil prices, there is no inflation in the general price level… unless one of the two things also happens: 1) The central bank prints more money (the actual cause of the inflation) 2) The higher oil prices or tariffs begin to impact output and real GDP suffers by going negative (not the case in the late 19th century and GDP rose 3% in Q2).

Trump’s tariffs are not causing inflation. The Fed is continuing to inflate the money supply too fast. Still, the Fed’s culpability—for the latest inflation report, for 2021 and 2022’s inflation, for the 2008 financial crisis, for the recent housing bubble, and the last half century’s multiple asset bubbles and boom-bust cycles—is once again ignored by the press.

 

Green Chili Burrito

If it doesn’t make you hungry, you’re not human.

 

Bullet Points:

** Did General Dynamics build a triangular aircraft (looking a lot like the A-12) called the F-121 Sentinel?

** Illinois Gov. J.B. Pritzker is locked in a fierce competition with California Gov. Gavin Newsom. Newsom gave commercial driver’s licenses to illegal aliens who are killing Americans, but Pritzker rose to the challenge. He just signed a new law allowing for taxpayer-funded college financial aid for illegal aliens. The bill’s sponsor said it’s about “making sure no student is left behind because of where they were born.” But if they were born in another nation and are here illegally, shouldn’t they be left out of taxpayer-paid benefits intended for citizens?

Illinois Republican Rep. Mary Miller said that “allowing taxpayer-funded financial aid for illegal aliens is a slap in the face to hardworking Illinois families and students. Our state is drowning in debt, yet JB Pritzker is determined to drain even more taxpayer dollars to reward illegals. It’s absolutely shameful.”

Of course, that would imply that anyone running for office as a Democrat has a sense of shame. It’s hardly a requirement these days.

** IARPA – transferred from CIA to ODNI.

** Iraqi Popular Mobilization Commission head Faleh al Fayyadh defended the Popular Mobilization Authority Law against domestic critics during an interview with Iraqi media on August 20. This law, which Parliament has yet to vote on, would likely increase Iran’s influence in the Iraqi political and security spheres by formalizing key structures of the Iranian-backed Popular Mobilization Forces (PMF) within the Iraqi security apparatus. The US government has stated that the PMF must be disbanded altogether.

** Democrats’ claim that you can’t lower crime by simply arresting and jailing criminals is proving to be about as accurate as their claim that you can’t stop illegal immigration by securing the border. Just 11 days after assuming control of the Washington, DC, police department, the feds have seized 59 firearms and made over 380 arrests, including over 160 illegal aliens. They include known gang members and those with additional charges such as “assault, kidnapping, burglary, larceny, commercialized sexual offenses, (and) smuggling illegal drugs like heroin.” The DC police union also released some numbers comparing crime levels to just one week prior. Carjacking is down 83%, robbery is down 46%, violent crime is down 22%, car theft is down 21%, property crimes are down 6%, and assault with a deadly weapon is down 6%. Additionally, all crimes are down 8%.

Sen. Mike Lee posted on X, “Turns out you can just start arresting criminals and scare them out of victimizing innocent people. Did the DC Council know that was an option?”

** Your word of the day.

** Ten days in a row without a murder in Washington D.C. – it’s a record!

 

Identify the Aircraft

1

 

2

It appears to be AI, but it’s actually not.

 

Identify the Rifle

3

Identify the Armor

4

 

 

Parting Shot

 

End