Americans have the economic tiger by its tail and do not want to let go. Easy money is how the U.S. government controls the animal. Stop, and who knows what would happen.
The U.S. government, including the Federal Reserve, began stimulus in the summer of 2019 when signs of a slowing economy emerged. Then came the pandemic, and record stimulus followed. It revived the economy, which has since grown some sharp teeth in the form of inflation.
Depreciating assets like cars are supposed to fall in value, but they are rising. At one point this summer, used car prices had risen 42% from the previous year. Total inflation on consumers is estimated to be 5.3% since August 2020. That is the largest number since the 1980s, and it doesn’t even include the cost of buying a home, which has risen by 19% in the last year. According to DoubleLine Capital, add in housing costs and inflation would be 12%!
The surge may already be over. However, as long as the supply of homes and cars stays low, prices are likely to remain high. Low supply and high demand are classic economics, and they make a collapse unlikely. We may even see other areas, like rent, react in big ways to supply and demand before things calm down.
Free the economic tiger to rid ourselves of high prices? The Federal Reserve is thinking about it, but it continues to hold rates down. It also created $5 trillion over the last 18 months and is still treating 2021 as an emergency. The federal government’s 2020 deficit was a record $3.1 trillion. It will most certainly decrease in 2021, but spending will continue to outpace “revenues.”
From an economic point of view, the stimulus worked. The economy is booming. Demand is no longer a problem. For the first time that I can remember, the problem is supply. It is an unfamiliar problem with potential danger, but from my perspective, the government, especially the Federal Reserve, has no interest in freeing this economic tiger. (Some inflation may even help with the national debt as long as interest rates stay low.)
Americans have faced recessions, double-digit inflation, assassinations, impeachments, wars, terrorist attacks, housing and bank crises, tax hikes and cuts, regulation, and deregulation, as well as a global pandemic. Despite all this, we have found ways to be productive, and the Fed has come to help every time it has been needed. Over the last 50 years, the economy has become 337 times bigger and the stock market* 45 times larger. We will get through this.
