The United States Economy is not healthy. A simple statement with loads to unpack. The near sighted policies and decisions made by current and past administrations have been eating away at the health and stability of our economy for DECADES now. These decisions are based on exploited economic theory paired with the classic “not on my watch” perspective. It's been stated time and time again by many of the smartest businessmen and economists of our time as well as those before us, politicians on both sides of the political spectrum are not in it for us people of this country or the health of the economy. No matter what they say, no matter the show they put on, it's all smoke and mirrors that are increasingly becoming more and more obvious. Unfortunately, the “solutions” proposed are becoming more extreme and less sustainable. Housing metrics are the same or worse than the 2008 market crash, debt across the board are at all time highs, and moderate inflation has somehow turned into an acceptable norm.
Inflation has been absolutely destroying the value of the dollar, undermining our global economic capabilities while simultaneously decimating the people of our country who cannot afford it the most. It would be bad enough if the United States government were just printing the money. Instead they are doing much worse. They are borrowing the money and lying about the effects and their capability to pay it back. There has been a multifaceted approach to hiding the true impact of inflation that only continues to get worse as time progresses. Beginning with claiming it transitory, the government wanted to create the illusion to us people and the rest of the world that the money being borrowed would be paid back in due time and also that the Fed interest rate would be increased to “normal levels” once we were through the COVID-19 pandemic. The narrative was to continue normal operations as if the money was never borrowed. Don’t take the increase in the national debt, the debt to GDP ratio, or future troubling signs like an inverted yield curve into consideration when making financial decisions. Meanwhile, to this day we still are in an inflationary economic environment, we still are facing inflationary pressures in every possible aspect, we still have a delusional administration including the Fed and treasury that pretend they know what is going on and what the solutions are, we still see an inverted yield curve, we still see increasing prices, we still see all the problems we have been told not to worry about.
Another tactic used is the ever changing definitions and goal markers of all economic metrics. The most simple economic factor that should have no confusion to it is what is inflation. Inflation is the expansion of the money supply and credit. Simple as that, nothing more, nothing less. But, the current administration, treasury, and federal reserve have slowly massaged in the idea that it is something else. It is the result of capitalism! That one is very interesting considering there have been more than enough historical accounts of all styles and structures of economies face the issue of inflation. Even in our lifetime we have witnessed inflation ravage the country of Venezuela, what at one time was considered to be one of the beacons of socialism. Until it collapsed, then of course that just wasn't real socialism. It is also claimed that greedy corporations increase prices simply because they can and that's what causes inflation. The fact that every input price to get that jelly donut from the field to the bakery to the store to your mouth has increased is not considered. From oil to retail space to labor and more. What also isn’t discussed is how margins have been absolutely destroyed as businesses are doing everything they can to minimize passing the price increases over to the consumers. How producer price indexes have been increasing greater than consumer price indexes. Again, it's all used to manipulate the definition of inflation because at the end of the day the true definition of inflation points in one direction only. Directly at the government and all the entities intended to support our economic health and wellbeing.
The inflation rate itself has been an ongoing issue as well. It was and always has been stated that the average inflation goal rate is 2%. Anyone with the slightest bit of math skills understands that if your goal is to average 2, if you go above 2 you must then go below 2 with similar effective magnitude to average out to 2. As inflation skyrocketed due to the effectively 0% Fed Funds rate the economic powers that be knew there was no way to rope this wild horse in. They know that with the 7,8,9+ percent inflation rates to get inflation to average out at 2% they would need to increase the Fed funds rate to the mid to even possibly high teens. The issue with that is they do not want to have to deal with or be blamed for the short term economic chaos that would ensue. An increase in interest rates, especially so drastic, would be devastating to the stock market, the housing market, businesses and corporations, the United States credibility, and more. Anything that is leveraged with debt would immediately be underwater because the valuation of the asset that secures the debt would plummet below the amount it was secured for. Now, the loan is underwater because the asset that is intended to secure no longer can cover it when/if payment defaults and foreclosure/liquidation is required. To support their tactics and policies the goal has been changed from averaging inflation to simply reducing it to an acceptable range that they, but no one else, apparently have some special capability of knowing what that is.
Looking at a house existing in our current economic state, it may be valued at $250,000 due to the capability to purchase it with such low housing market barriers (down payments, number of qualifying buyers, how much of the loan is interest vs principal, etc.). As soon as interest rates go up, say double (let alone to the level they need to go to truly begin reducing inflation) the value of the home dissolves. The marketable and creditable value of the house, even if it was appraised for the same monetary value, (which this wouldn't actually be the case further feeding into the drop in value) drops significantly. The bank isn't going to write a check for a house valued at $250,000 for $250,000. They need to ensure they get their money back if there is a default. The higher interest rate requires either the sale price to be lowered so the loan can cover the interest or a significantly higher down payment, or alternatively a combination of both. When housing, the stock market, business and corporations, households, vehicles, and pretty much every other facet of our society is overleveraged in debt, the problem explained with just one single house extrapolates across our entire economy.
Unfortunately, there really is we have nowhere to go but down from here. Whether that be next week, month, year, or even decade is the hard part to predict. The reason being is that so much of the short term economic health is determined by the perception of major economic decisions and the impact those major decisions have on the millions of smaller individual decisions that occur daily. Current and past administrations never want to be the bad guy. They don't want to end the party, to take away the spiked punch bowl because they'll be forever blamed for the immediate repercussions and never be re-elected, when in reality they should. Currently the Fed interest rate is still lower than the real rate of inflation, so we are operating in an inflationary environment where prices are going to continue to rise. The current Fed funds rate is 5.5%. The Fed has already made multiple statements in their press releases that suggest this is not increasing much, if at all, and it will certainly be coming back down in the coming years. They've stated the economy is at risk of heating up (getting better) too quickly, that interest rates are effectively unsustainably high, and they've backed off of the expected number of future rate hikes every time they’ve had a funds rate meeting. Everything the Fed says and does points to continued short term economic comfort at the expense of long term economic prosperity and stability.
There are a few directions we could go from here. If the Fed were to just stop moving the funds rate, that would be workable with enough time. The problem is they never provide enough time for the economy to adjust to their decisions. Effectively what would happen is everything would continue to rise in price as it has until the lenders have enough new securities to cover their old underwater securities while they wait for the underwater ones to go green or mature to completion. Then we would see our economy “normalize” to a 5.5% fed funds rate and there would be economic stability. The issue with this is mortgages are 30 year loans so the timeframe would be at a minimum measured in decades. Yet the Fed can't go 4 months without changing the interest rate and their position on the future.
Another alternative is one or continued significant interest rate hikes until the fed funds rate is higher than the real rate of inflation. This is considered by many the most right but the most short term painful decision. We would get out of the economic weeds much faster than the first scenario, but it would hurt a lot in the short run. As mentioned earlier, everything leveraged by debt would immediately become underwater as the asset would no longer cover its loan. It would cause market crashes and financial pain across the board but as stated it is often considered the most right. The reason for this is it's effectively like the “cold turkey” method of deficit spending. There always seems to be some problem or crisis that requires us to create this “one time” action that is economically unsustainable. Therefore, the only way to truly fix this mess is to just cut it off, call it done. Which would be done by dramatically and significantly increasing the interest rate.
The worst option is that the government, Federal Reserve, and Treasury all continue to act as they have for the last quarter of a century. This is certainly the most likely scenario, effectively guaranteed. The Fed funds rate might hit 6 percent, I would guess it certainly won't hit 7. As soon the opportunity arises they will begin pulling it back down continuing this cycle of ever increasing inflationary pressures pushing on every aspect of our economy. All it will take is a slight downturn in the housing market, a slight uptick in credit in default rates, any suggestion that the economy isn't as strong as they claim it to be and they'll begin pulling rates right back down. The unfortunate part is regardless of their attempts this is not a sustainable decision. If they don't choose to do something about it, the market will crash despite their efforts. Every day we are in an inflationary economic environment and every policy they pass that increases deficit spending only makes the economic house of cards they've built bigger and more unstable.
We are truly already a nation under water. We are over leveraged in debt in every way shape and form. Corporate and business, mortgage, household credit card, auto-loan, government, student loan, the list goes on and on. Debt is the only thing keeping our economy going. We are in a massive debt bubble and the Fed can try as it might but eventually the well will run dry. In the last 50 years alone we have managed to spend more time in inflationary distress than not. The 70’s showed us what not to do when it comes to inflation and interest rates. The 80s we saw some of the highest mortgage rates we've ever seen but our economy was strong and stable. 20% down payments and 9% interest rates on mortgages were not a problem for the average American because housing prices overall were affordable and not inflated. The 90s were just a party. Everyone was having a good time and the internet was about to push society into a realm most thought was impossible. From the turn of the century we have seen repeated unsustainable and irresponsible economic decisions due to this criss or that problem, near sighted policy decisions, and a not on my watch political view. Get your wetsuit and snorkel ready because every act, bill, proposal, and economic decision I see being made just continues putting us in deeper and deeper water.
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