Tag: inflation

Japan’s Keynesian Mirage: How Debt, Inflation, & A Collapsing Yen Expose A Failed Model

Japan’s yen crisis exposes the long‑running failure of the Keynesian strategy that has dominated the country’s economic policy: chronic deficits, exploding public debt, and engineered inflation are now eroding Japan’s purchasing power, competitiveness, and monetary stability.

For decades, many mainstream analysts pointed to Japan as proof that a rich, “monetarily sovereign” country could keep an extremely high public debt without relevant consequences. The argument was simple: as long as the state can issue its currency, it can always print whatever is needed to cover deficits, refinance debt, and support public spending.

In reality, that has meant public debt soaring to around 250% of GDP, one of the highest levels in the developed world, while repeatedly increasing government expenditure and leaving large, persistent deficits. Even the IMF notes that, even after several years of moderate growth, prudence is “key to keep debt‑to‑GDP on a firmly downward path,” admitting that the current level is a structural vulnerability.

Japan’s apparent stability depended on a crucial external factor, the country’s enormous exporting capacity.

As a leading exporter of cars, technology, and capital goods, the country attracted a continuous inflow of US dollars and foreign capital that supported a stable currency and kept inflation low, despite fiscal excess. That protective layer is eroding fast. Headline inflation has edged up from 1.4% in April 2026 to 1.5% in May, while core inflation has held at 1.4%, still below the Bank of Japan’s 2% target but clearly positive after three decades of near‑zero price growth.

A key factor of the Japanese model was its export engine and the “golden goose” of capital inflows.

These two factors allowed the country to live with large debt and deficits without immediately triggering high inflation. However, that mirage is vanishing as external performance falters and inflation, though moderate, bites into real incomes.

Keynesianism did not spur growth or improve Japanese citizens’ lives. It just bloated an unsustainable government machine.

Recent data show that price increases are now broad‑based, not confined to a few categories. In May 2026, overall CPI inflation was 1.5% year-on-year. However, food prices rose 3.5% year-on-year, which is a heavy burden for households. Goods inflation stood at 2.0%, while services inflation was around 1.0%.

Underlying inflationary pressures, particularly in services and wage‑sensitive sectors, are now embedded in the system rather than an isolated energy shock. Meanwhile, real net wages are stagnant or declining. Japanese citizens face an affordability crisis.

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Banking On Magic

Monthly Budgets Under Assault

American consumers are being squeezed. Between high grocery prices, rising utility bills, and hefty prices at the pump, little float remains in monthly budgets. An unexpected medical bill or car repair is all it takes to blow the household budget.

We’re all living through stressful macroeconomic crossroads here in mid-2026. For a while, it appeared the post-pandemic inflationary dragon had been slain. We were promised inflation would soon return to the Federal Reserve’s 2 percent target.

But that was before the U.S.-Israel attacked Iran and a new energy shock was triggered. Perhaps the MOU negotiations and reopening of the Strait of Hormuz, with UN evacuation, will soften things in the months ahead. Nonetheless, we do not expect there to be long-lasting relief.

When energy costs spike, they don’t just stay at the pump. They weave their way into the price of just about everything you buy, eat, or touch. And right now, as the Federal Reserve transitions into a new era under inbound Chair Kevin Warsh, the combination of elevated oil prices, persistent consumer price inflation, and nosebleed stock market valuations have created an abundance of risks that are not being properly appreciated.

In short, your purchasing power is being eroded, the new Fed chief is caught between a political rock and an inflationary hard place, and the stock market is behaving like gravity doesn’t exist. To understand why your monthly budget is under assault, we must look at how inflation is composed.

Economists love to talk about core inflation. This metric conveniently strips out food and energy prices because they tend to be volatile. It’s the economic equivalent of saying, “Aside from the rain, it’s a perfectly dry day.”

But as consumers, we live in the real world. We can’t choose to skip buying food or filling the gas tank.

Invisible Tax

Right now, the headline numbers are singing a discordant tune. The May 2026 Consumer Price Index (CPI) report clocked in at a stubborn 4.2 percent year-over-year inflation. The April Personal Consumption Expenditures (PCE) index – the Fed’s preferred metric – sat at 3.8 percent. Both are a country mile away from that 2 percent target.

Thanks to ongoing geopolitical friction and conflict with Iran, a barrel of West Texas Intermediate (WTI) crude – the light sweet stuff – spiked above $100 a barrel in May. It has since dropped to about $69. However, this is well above the $57 price that a barrel of WTI crude fetched at the start of the year. Moreover, the Strategic Petroleum Reserve has been drained to a 43-year low. Refilling it will put an elevated price floor under the price of oil in the months ahead.

Higher oil prices haven’t just been an inconvenience for commuters. Rather, they’re a supply shock that behaves like an invisible tax on the entire global supply chain. When a barrel of oil crosses the triple-digit threshold, a domino effect ripples through the economy.

For starters, diesel fuel gets much more expensive. The trucks delivering fresh produce to your supermarket, the container ships bringing electronics across the ocean, and the delivery vans bringing packages to your doorstep all pass those fuel surcharges directly down the line.

Modern farming is also incredibly energy intensive. From petroleum-based fertilizers to the diesel that runs massive harvesters, expensive energy directly translates to more expensive eggs, milk, and bread.

So, too, there’s the rising input costs for petrochemicals. These are the building blocks of 95 percent of manufactured goods, including packaging, synthetic fabrics, medical devices, and construction materials.

When energy prices rise, it doesn’t take long for transitory spikes to harden into long-term, sticky consumer price inflation. Businesses can absorb higher input costs for a month or two, but eventually, they protect their margins by changing the price tags. That is exactly what we are seeing play out across the retail landscape today.

Oil prices may be moderating. But the impact on consumer prices from the oil price spike is here to stay.

This is why consumer prices will never return to where they were last year, and certainly not to where they were in January 2020. Not unless new Fed Chair Kevin Warsh gets his productivity miracle… 

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The U.S. Dollar’s Eroding Purchasing Power

The U.S. dollar has lost nearly 30 percent of its purchasing power since 2020, a stark illustration of inflation’s impact on American households. According to analyses citing data from the Consumer Price Index (CPI), what cost $100 in early 2020 would cost roughly $130 for the same goods and services by mid-2026.

The CPI is a statistical tool compiled by the U.S. Bureau of Labor Statistics (BLS). It tracks changes in the price of a basket of consumer goods and services. It shows a cumulative price increase of 29 percent over the past six years, equating to an average annual inflation rate of roughly 4.3 percent.

Factors driving the erosion include massive fiscal and monetary responses to the Covid-19 pandemic, such as trillions of dollars in government stimulus and Federal Reserve bond buying. This boosted demand, while supply chains faltered.

Inflation Understatement

Some argue that the CPI understates inflation by underweighting essentials such as housing, groceries, and fuel for many families. Reporting for The New American in 2008, analyst Dr. John Fisher explained that “changes to the CPI … have increasingly distorted official statistics” to create a false sense of economic stability. This distortion is destructive because “the Treasury and the Federal Reserve use the CPI as one of the measures for establishing U.S. monetary policy.”

The first major adjustment to how the CPI is calculated occurred under President Richard Nixon, with introduction of the “core” CPI, which intentionally omits essential items such as food and energy, though they are essential and their cost increases are often most acute. Commentators described it at the time as calculation of “inflation after inflation has been excluded.”

The next series of changes came in the 1980s, and they collectively produced a reported inflation rate roughly six to eight percentage points lower than the previous methodology would show. This is according to economist John Williams, who describes the adjustments at ShadowStats.com.

The substitution effect assumes consumers swap expensive goods for cheaper alternatives when prices rise, effectively penalizing households for being priced out of their preferred purchases. Hedonic adjustments, which discount price increases by attributing them to quality improvements in products such as electronics and automobiles, further suppress the reported number. Owners’ Equivalent Rent replaced actual home purchase prices with a hypothetical estimate of what homeowners would charge themselves to rent their own homes, a figure that consistently understates real housing costs.

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Open Borders Contributed to Real Estate Inflation

Politicians continue insisting that mass migration carries no economic consequences. Anyone who questions the policy is immediately accused of being anti-immigrant. That has always been the tactic. Rather than debate the economics, they attack the person asking the question. Yet reality eventually catches up with political slogans, and now even economists are beginning to quantify what common sense should have told us years ago.

A new working paper from economists at the Federal Reserve Bank of Dallas examined the unprecedented surge in unauthorized immigration between 2021 and 2024. The researchers estimate that unauthorized immigrant workers accounted for roughly 30% of employment growth in the average metropolitan area during that period. More importantly, they found that in markets where housing supply could not expand quickly enough, a 1% increase in unauthorized worker inflows was associated with approximately a 2.2% increase in home prices and about a 1.4% increase in rents.

When population rises rapidly while housing construction fails to keep pace, prices climb. More people competing for a limited number of homes means higher prices. Demand rises faster than supply. The laws of supply and demand do not disappear because politicians prefer open borders. The Federal Reserve researchers also noted that housing construction did not expand sufficiently to absorb the additional demand, leaving existing residents competing for the same inventory. This is basic economics that governments have chosen to ignore.

The numbers illustrate just how severe the housing shortage has become. Freddie Mac estimates the United States remains short roughly 3.7 million housing units. The National Association of Realtors has repeatedly reported that existing home inventory remains well below historical norms, while the median existing-home price reached another record high during 2025. Meanwhile, mortgage rates have remained around 6% to 7% for much of the past two years, dramatically increasing monthly payments and pushing homeownership further out of reach for younger Americans. The result has been exactly what our computer projected years ago, employed adults increasingly remaining with their parents because housing has become unaffordable.

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“Unlike Anything I’ve Seen In 40 Years”: Explosion In Data-Centers And Memory Costs Fueling Third Inflation Wave

We’re finally starting to see hints of relief when it comes to inflation. Prices at the pump are starting to come down, monthly core CPI momentum has slowed, used cars were down around 2% YoY, and food inflation is starting to moderate. On the other hand, there’s America’s massive explosion in artificial-intelligence infrastructure – which is beginning to push prices up on everything from electricity to smartphones.

On Thursday Apple announced a 15-25% price hike on Mac computers and iPads, after CEO Tim Cook told the Wall Street Journal that the jump in costs was “unlike anything he had seen in any area in over 40 years.” An Apple spokesperson placed the blame on the “rapid expansion of AI data centers, which has created an extraordinary surge in demand for memory and storage,” causing component prices to surge.

As the Wall Street Journal notes; 

The money pouring into the AI arms race is unprecedented. Analysts peg capital spending at five of the so-called hyperscalers—Alphabet, Amazon, Meta Platforms, Microsoft and Oracle—at $741 billion this year, according to FactSet, up nearly 75% from last year.

Where is all that money going? While much of the conversation is focused on what AI can do, the build-out itself is strikingly physical, said Columbia University economist Stijn Van Nieuwerburgh. -WSJ

AI data centers require specific, sophisticated equipment to ensure cool, stable operation – as well as electric and fiber-optic cables and backup generators in order to keep them running 24-7. According to the report, Van Nieuwerburgh estimates that the AI buildout could cost somewhere in the range of $8 trillion over the next six years. As such, the demand for components shared throughout the economy (memory, for example), the effects are now trickling down to consumer electronics – like iPads. Other companies such as Nintendo, Microsoft and Sony have all raised prices on devices.

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The Myth Of Price Controls

The Cuban dictator Miguel Díaz-Canel’s recent admission that Cuba’s generalized price caps failed to contain inflation, generated shortages, encouraged illegal markets, and reduced tax revenues is another confirmation of a much older economic lesson: price controls do not solve inflationary pressures, and they intensify the distortions they are meant to prevent.

The Cuban case is especially revealing because the criticism comes not from ideological opponents but from the regime that imposed the controls and later conceded their failure.

According to Díaz-Canel’s own remarks, price controls in Cuba produced the opposite of their intended effect: instead of stabilizing prices, they encouraged product scarcity, illegal-market activity, higher effective prices, and falling tax revenues. The government’s decision to eliminate price controls therefore amounts to an empirical acknowledgment that administrative decrees could not keep pace with economic reality.

This episode matters beyond Cuba because it captures the core mechanism of price control failure. When official prices are fixed below levels that would clear the market, legal suppliers reduce availability, quality deteriorate, and transactions migrate to informal channels where the real market price reappears, often with a premium for risk and scarcity. Thus, inflation is not abolished by decree but only transferred from the official statistics into queues, shortages, and the underground market.

The Austrian School of Economics has long argued that prices are not arbitrary numbers but indispensable signals coordinating dispersed knowledge across an economy. Ludwig von Mises claimed that intervening against market prices does not eliminate the underlying forces of supply and demand but rather creates secondary distortions that generate demands for additional intervention. Friedrich Von Hayek reminded us that market prices transmit information that no planner can centrally aggregate in real time, making administrative price fixing structurally destructive.

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Inflation Reaches 4.2% as Prices Outpace Paychecks

There is a lot of political discourse about “affordability,” but the meaning of the term can be difficult to pin down.

Is it just a jargony way of talking about high nominal prices? Is it really all about housing? Could it be, as President Donald Trump has suggested, a “con job” invented by Democrats to make his administration look bad? Different people will have different answers, and I suspect we will continue to debate those questions through the midterms and into the 2028 presidential cycle.

But probably the most straightforward way to think about the “affordability” question is the relationship between two figures published monthly by the Bureau of Labor Statistics (BLS): average hourly earnings and the consumer price index. When the former is rising at a faster rate than the latter, the pay for the average worker is rising faster than prices. For that worker, life is getting more affordable.

When inflation is rising faster than wages, however, the opposite is true. And that’s what is happening now.

Wages grew by 3.4 percent over the past year, the BLS reported last week. On Wednesday morning, the BLS reported that inflation has climbed by 4.2 percent over the past 12 months, thanks in large part to a sharp increase in prices (fuel prices, in particular) since the start of the Iran war in March.

With prices rising faster than wages, the BLS also reported on Wednesday that “real average hourly earnings”—that is, wage growth once you account for inflation—were down by 0.3 percent in May.

Averages only get you so far, of course. Some Americans are feeling the sting of inflation more than others, depending on their purchasing habits and lifestyles, and wages are never rising for all workers equally. Still, there’s no getting around it: Life is less affordable now than it was a few months ago—before the Trump administration steered the country into a war of choice in the Middle East.

And, yes, the runaway inflation that America experienced during the first part of President Joe Biden’s term in office was a lot worse than what the country is seeing now. But since early 2023, wage growth had consistently outpaced inflation even as inflation remained above the Federal Reserve’s target annual rate of 2 percent.

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Oil Execs Warn Trump Gas Prices Are About to Get Hell of a Lot Worse

Gas prices could climb even higher in the coming months.

Industry officials have already warned the White House that the prices could spike yet again due to rapidly diminishing inventories, reported The Washington Post Thursday.

Since the beginning of the Iran war, commercial and government inventories have supplemented gas consumption across the U.S. The reserves have allowed prices to hover around $4.50 per gallon for the last four months—but that could change very quickly, according to oil and gas executives, who are often loath to make such alarming predictions.

“We’re sounding the alarm on these inventories going to record lows,” American Petroleum Institute CEO Mike Sommers told Fox Business. “We have to solve this problem in the Strait of Hormuz.”

Some inventories could be wiped out in a matter of weeks, according to the Post—just in time for summer holidays.

“I have absolutely no doubt the White House—from the president on down—is fully aware of the nearly universal alarm among oil companies and analysts about the direction of travel for oil prices this summer,” Bob McNally, a former Bush administration energy adviser, told the Post.

Yet Trump has been remarkably cavalier about the rising costs. With inflation at a three-year high, Trump stunned reporters, lawmakers, and voters alike on Wednesday with just four words: “I love the inflation,” he said.

“I love it,” he insisted, pledging that oil prices will drop “like a rock” when the war ends.

But the end of the war seems to be nowhere in sight. U.S. forces bombed Iran through two nights this week, part of the White House’s latest strategy to force Tehran to make a deal, despite the obvious risks of escalation.

“If we need to negotiate with bombs, we will negotiate with bombs,” Defense Secretary Pete Hegseth said Wednesday. “We will strike them hard tonight and hopefully Iran makes a good decision.”

Meanwhile, Trump’s allies aren’t so sure that their political movement will weather the brewing economic storm. The far-right populist rode the 2024 campaign on vehement promises of affordability; through his presidency, he swore that Americans would see lower utility bills, cheaper groceries, and more American-based jobs. But that hasn’t been the case.

Instead, as millions of Americans struggle with the rising cost of living and companies contend with rattled supply chains, the president’s inner circle fear that it might be too late to fix the problem for Trump’s midterm-dependent acolytes.

“Whether it’s peak inflation or not, it doesn’t matter,” one former Trump administration official told Politico. “The die has been cast in terms of how people are looking at the economy.”

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Inflation rises to 4.2 percent in May, highest level in 3 years

The annual inflation rate increased to its highest point in three years as the cost of energy and other goods rose due to the Iran war, according to data released by the Department of Labor on Wednesday.

The consumer price index (CPI), a popular gauge of inflation, rose 4.2 percent over the past 12 months and 0.5 percent in May alone.

The CPI increase matched the Wall Street consensus and marks the first time that it has surpassed 4 percent since May, 2023, making it the highest rate since April of that year.

Energy prices rose 3.9 percent in May after having risen 3.8 percent in April and 10.9 percent in March, accounting for over 60 percent of the monthly all-items increase.

The Energy Information Administration reported that the average price for gas reached $4.49 in mid-May, compared to $4.09 in mid-April. In June, the national average has so far dropped to $4.15, according to AAA. 

The price of fuel has kept increasing as peace talks between the U.S. and Iran drag out, likely threatened by the latest exchanges, which could threaten an already fragile two-month ceasefire.

The food index also saw an increase of 3.1 percent over the past year, with a 0.2 percent rise in May. All other items saw a nearly 3-percent increase in the last year after also rising by 0.2 percent in May. 

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Abolish the Fed: The Root of Inflation, Debt, and the Destruction of the Dollar

In 1913, the year the Federal Reserve was established, an ice cream cone typically cost about $0.05 (a nickel), while the average American home cost around $2,500 to $3,500 to purchase or build. Today, the national average cost of an ice cream cone is about $4.00 to $5.50 for a single scoop, while the median sale price of an existing single-family home in the United States is approximately $404,300.

In 1970, the year before America went off the gold standard, gold traded at an average price of roughly $35.96 to $38.90 per troy ounce. Today, the live spot price of gold is approximately $4,320 to $4,350 per troy ounce.

The Federal Reserve, through its artificial control of interest rates, credit expansion, and increases in the money supply, is the root cause of inflation and the weakening of the U.S. dollar. In the United States, a capitalist country, we trust the market to set the price of shoes, sandwiches, movie tickets, and cars. Why do we not trust the market to set a market-driven interest rate?

If interest rates were determined by the market, they would never be artificially too high or too low, and America could avoid the cycles of boom and bust fueled by cheap money. Whether during a boom or a bust, both periods ultimately result in a weaker U.S. dollar. Eliminating the Fed would make the dollar stronger and economy more stable.

Before examining how the Fed contributes to inflation, currency devaluation, and economic instability, a few common misconceptions should be addressed.

First, it is not a hidden secret that the Federal Reserve is not a direct agency of the U.S. government. This is publicly available information. The Fed is a federally chartered, operationally independent institution. Its Board of Governors is a federal agency whose members are appointed by the President and confirmed by the Senate, while its 12 regional Reserve Banks are privately owned by member commercial banks. Congress retains the authority to alter or abolish the Fed by legislation.

Second, this arrangement is not unusual. Nearly every country has a central bank, although it may operate under a different name. Central banks exist on a spectrum from fully independent to fully government-controlled, with most operating as hybrids that combine varying degrees of operational independence with government oversight and accountability. The Federal Reserve is simply the American version of a central bank.

The Federal Reserve, created by the Federal Reserve Act of 1913, operates through three primary mechanisms: setting the federal funds rate, conducting open market operations, and regulating reserve requirements for commercial banks.

The core of its money-creation power lies in open market operations. The Fed controls the monetary base, currency in circulation plus deposit balances that depository institutions hold at the Fed, by buying or selling securities. When the Fed buys a security, it pays by crediting the bank’s reserve account. No prior savings are required. The reserves are created by accounting entry.

Those reserves flow into the broader economy through fractional reserve banking. When you deposit $1,000 in a bank, the bank keeps a fraction and lends out the rest. That money, spent and redeposited elsewhere, is lent out again. Through this money multiplier effect, banks expand the money supply well beyond the original deposit.

Since March 2020, the reserve requirement floor has been set at zero, meaning US banks face no mandatory reserve floor at all. The only remaining brake on credit expansion is the interest rate the Fed itself sets and can raise or lower at will.

The federal funds rate is the rate at which commercial banks lend and borrow excess reserves overnight. The FOMC meets eight times annually to set this target. This single administered price, set by committee rather than by markets, governs the cost of capital for the world’s largest economy.

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