Why did Donald Trump win on Tuesday?
There are lots of theories, but I think this chart played a big role. It shows how the Federal Reserve dramatically expanded its balance sheet in 2020 and 2021.
In other words, the Fed created a bunch of new money. And as Milton Friedman taught us many years ago, that’s a recipe for rising prices.
Which is exactly what we got! Simply stated, Fed Chairman Jerome Powell and his colleagues screwed up.
But you know what else Jerome Powell did? According to this ABC report, the inflation he created is responsible for putting Donald Trump back in the White House.
This is correct, but incomplete.
To really understand why voters were upset about the economy, it’s not just inflation.
It’s the fact that inflation has increased faster than wages, as showed by this chart.
The bottom line is that most voters have been on a treadmill. At best, their wages have kept pace with prices. But many have fallen behind.
And the one thing that is very clear is that there has not been growth in inflation-adjusted income. So no wonder voters are not happy.
Which now brings me to the ironic part. As you can see from this CNN story, there’s a dispute about whether Trump will try to force Powell to leave the Fed.
Even though Powell’s big policy mistake made it possible for Trump to win!
For what it’s worth, I’m sure that wasn’t Powell’s goal. Instead, he was just making mistakes, which is a long-standing tradition for the Fed (and other central banks).
Actually, there’s another ironic part of this story. Powell’s bad monetary policy actually began when Trump was in the White House.
In other words, it wasn’t Joe Biden’s fault. At least not at the beginning (the Fed’s bad monetary policy continued after Biden took office and the White House certainly didn’t object to that excess money creation).
Readers who like Trump will find this irony amusing. Readers who don’t like Trump will find it frustrating.
For a wonky person like me, I simply hope people learn the right lesson about clipping the Fed’s wings so that bad monetary policy is less like in the future.
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Image credit: Federalreserve | Public Domain.
