Been There….Done That
Some say these are unexpected and unprecedented economic times. Media pundits, politicians and other folks that don’t have a clue, throw out scary, but often unreliable facts about our economy. So, despite what you may have heard, I am here to affirm the economy is not “in the toilet”, interest rates are not at historic highs, unemployment is near historic lows, and the government and their responses to catastrophe (Covid pandemic) after catastrophe (rising inflation) after catastrophe (environmental calamities) after catastrophe (immigration quagmire) are either the root cause or a significant contributor to the economic challenges facing our nation.
Let’s back up a bit though. The capitalistic, free-enterprise economic system we employ in this country is based on several critical factors. First, and foremost, is the dynamic of Supply vs. Demand. When supply exceeds demand in the longer term, inventories go up, production goes down, people are furloughed, jobs are eliminated all-together and prices for products and services generally decline. Prices rise when the reverse, demand exceeds supply, occurs. This affects dozens of things in the economic environment, not just prices. It affects employment, wages, corporate profits, innovation, research and development, interest rates, business expansion and government intervention, just to name a few.
Sometimes these swings through the supply/demand curve are short lived (recession caused by Covid 19, officially lasted for only two months), some are longer term problems (Great Depression 3 years, 7 months, officially). But, in all cases, this one dynamic affects every aspect of our lives; housing, transportation, wages, savings, investments, interest rates, prices for goods and services, EVERYTHING.
So how does it all interconnect? Let’s look at the most recent recession which was blamed on the Pandemic (February, 2020 to April, 2020). In response to the rapid and deadly spread of Covid 19 (called the “Great Recession”), employment in the U.S. suffered immediately and 24 million people lost their jobs in just three weeks in April. That represented a decline of -14.7 %. By comparison, the decline in employment in the last year of the Great Depression was -24.9 % in 1933. The decline in Gross Domestic Product (GDP) was -19.2 % for the Great Recession and -26.7 % during the Great Depression.
Interest rates, set by the Federal Reserve, in the overall market in March of 2020 were already at 0 % and Fed policies were already loosened to prop up the economy. But our government did what they always do when faced with difficult economic challenges they don’t fully understand, they threw a boatload of money at the problem. In the case of the Pandemic, that amounted to about $15 trillion dollars across two administrations. It didn’t matter who or what party was in control of the White House, the Senate, the Congress, on a national level or in each individual State. Our governments spent more money they didn’t have than at any other time in our history, raising the Federal debt to a record $ 26 trillion dollars.
While a lot of that money was beneficial to a large segment of the U.S. population, a lot of it was wasted on those who did not need it, those who committed fraud to get it, those who took the opportunity to change jobs, go back to school, and/or quit the workforce entirely skyrocketed almost overnight. Back in 1933, FDR pumped money into the system too. He declared a Bank Holiday over three days, sent millions to support the cash supplies of over half the banks in the country and convinced the American people that government had done their part, now it was up to the ordinary citizens to do their part. Namely, leave or return their money to the banks and apply for the hundreds of thousands of jobs being created through an onslaught of legislative action; including The Emergency Banking Act, Government Economy Act, Beer and Wine Revenue Act, Civilian Conservation Corp (CCC), the Federal Relief Act, the Agricultural Adjustment Act, the Emergency Farm Mortgage Act, the Tennessee Valley Act, the Securities Act, the Homeowners Loan Act, the Farm Credit Act, the Emergency Railroad Transportation Act and the National Industrial Recovery Act. And those legislative acts were passed in the first few months of FDR’s first term in office.
Unlike today, where trillions of dollars were unleashed to support people in all of the areas supported by legislation during the Great Recession, the people living during the Great Depression who lost their jobs back then, wanted to go back to work. They craved to go back to work.
Today, because of that artificial influx of cash into the marketplace, prices started going up because demand, regardless of unemployment numbers, continued to rise. People were still buying even though they were not working. Online purchases experienced staggering increases, savings account money was also injected into the economy along with record credit card debt.
Because companies could not find qualified or even trainable workers, production and services suffered causing severe shortages, bottlenecks, long delivery delays, outages and 45 minutes wait times to speak with a real, live customer service representative, regardless of what industry was involved. But, still, demand remained high. Because of that, prices started up and inflation, which had not exceeded +4 % a year for the past ten years, hit + 8.2 % in 2022.
My point is that seemingly every time our federal government inserts itself, be that through excessive regulation or a broad relief in regulation, or through monetary infusion, things can and often do go terribly wrong. Our economic system is not perfect. When things are good, most people win, some more than others. When things go bad, people suffer, some more than others, until the system corrects itself. And, trust me, I have been in business for over 50 years and been paying attention for longer than that, and it ALWAYS corrects itself as long as it is allowed to act independently of outside forces….like our government.