I know several of my friends will hold a belief that our economy was on a brink of collapse or correction before the pandemic, in an effort to draw the spotlight away from what’s happening today. I get it. But there were no economic indicators to bolster that argument. Even when we inverted the treasury yield curve in 2019, even though Prof. Harvey at Duke said an inverted curve means recession, we didn’t slip into a recession; we grew. Economists went back to old school: An attractive business and manufacturing environment, with thousands of slashed regulations and lowered taxes, will create growth in jobs, growth in wages, and prosperity. Not for the rich – for everyone. And I’ve provided ample research, even from our own IRS, to prove that this happened in recent years. Millions rose from poorer income classes. Wages rose fastest in the lower wage classes. The level of poverty in 2019 hit the lowest rate since at least 1959. Now it’s 3% higher. The homeless population dropped to its lowest levels since at least 2005. The need and demand for public assistance (welfare, food stamps, etc.) all also dropped to some of the lowest levels since 1980 (over 80% less, in fact). These are real numbers. Not hyperbole. Real data. So, I don’t buy in to a pre-pandemic imminent collapse.
It is true, however, that economies run in cycles. They always do. They expand; they peak; they contract, they hit a trough. The science lies in minimizing contractions (both in rate and duration), and ensuring that GDP trends continue upward over time. Growing too fast (overheating) is ultimately just as dangerous as contracting too quickly (e.g., crashing). Take the 90’s: GDP grew at an overheated rate (over 4% for many of those years, driven by overvalued tech and a subprime loan housing boom), which culminated in the dot.com burst (cut GDP growth by 75% in a year) and then a foreclosure crisis (dropping GDP into deep recession territory in a year). 2010-2019, however, saw moderate and more stable growth. No scary indicators, and growth in wages and drops in joblessness that were not washed away by inflation. All of that changed in 2020, however, driven by one external force: Covid.
And yes – when asked if the rich got richer through all of this, I’d say yes to that as well. We all did. But not disproportionately, as many would imply. Those rich didn’t stuff their money into a mattress, they created jobs. They re-homed factories. To create a policy where the rich get poorer and the lower classes are the only ones that see increases, well, that “re-distribution” model is only truly realistic in communist ideologies, and that model has not only failed over and over and over, it has, in fact, created a “super elite, super rich” class in every single country that has tried it. Every single one. In the USSR, Cuba, Venezuela, China, North Korea, Vietnam, etc. Some of the richest people in the world are in China and the former Soviet Union bloc countries who pounced on certain industries when the Eastern Bloc collapsed.
But today: Goldman Sachs is now anticipating $100/barrel of oil. Pre-pandemic we hovered in the $50-$60/barrel range. We could keep that price stable because the US was a major exporting player in that market. At today’s close, we’re in the $85-$87/barrel range. And did you know: In the last year not only have we removed Russia sanctions on the Nordstream 2 pipeline to supply Europe with Russian energy instead of US energy, but (and you’ll love this one), we have now more than doubled – yes, doubled – our purchases of oil FROM Russia to the US. And now, after the poor pressor that Biden held this week, effectively opening the door for a “minor Russian incursion into Ukraine,” among other fumbles and ball-drops in his 2 hours at the podium, we see the major driver in energy prices start to dig in: Speculation. If we have a hurricane, speculators anticipate supply impacts. Prices rise on future deliveries. If we see a major issue in the Middle East, speculators again raise prices (we were more insulated from that in the last 3 years, but not any longer). And now, if we see a possible war in eastern Europe, speculators again dig in on oil futures.
And by the way: My hat’s off to Joe for standing there at the podium for 2 hours. I honestly thought he wouldn’t be able to do that. I was wrong. Now, the content of his statements that caused Psaki, Binken, Harris, and several others (including Joe himself) to go on the network circuit to clean up the mess over the next few days… I was probably pretty close in that prediction. And he enters year 2 by evacuating Americans from yet another country…
How to fix it? No single bullet here, but I’d start with this:
1. Stop pouring borrowed money artificially into the economy. We’re $4T into this – this year alone. That’s bad, and drives inflation through a number of factors.
2. Realize Covid is here to stay; focus on minimizing impacts. I’ve had 3 shots and now also Covid. Most of us are going to get it at some point. Stop with the mandates. Start planning on life with Covid and move on. Get testing availability into hyper speed (this should have happened a long time ago, but as factories that built test kits shut down in the last few months, the Fed slept), and focus on treatments.
3. Supply chain issues are largely self-imposed. Some friends say this is caused by demand, not supply. Well, yes but also no. Supply and demand are synergistically related. In a healthy state, if one changes, the other quickly responds to return to equilibrium (e.g., enough supply exists to meet demand). Covid caused demand to shrink, and supply therefore contracted accordingly. But demand started returning to normal levels (not huge spikes, or sudden jumps). Supply responded for a while, but has slowed substantially and not kept up. Now there are many reasons for this, but the slowed return to the labor market in certain industries (manufacturing and transportation), made worse by mandates and newer regulations (all in the last year), have compounded the supply side’s ability to respond as it should. Examples: In trucking, there are new mandates for truckers to be vaccinated before entering the US. Calif AB 5 has hampered independent truckers in the last 2 years. Corporate truckers are now also falling under mandates. The result: We have 80,000 open truck driver jobs…today. Stop self-bludgeoning the transport industry.
4. Re-open the US energy market. This will raise GDP, increase high-paying jobs, and re-insert a world price stabilizer. While we’re at it, get nuclear energy expansion back on the table.
Lots more ideas, but I’ll save those for another long post!
