Policymakers are running for the exits when it comes to answering for the state of the economy. Excuses range from Russian President Vladimir Putin to COVID-19. Those excuses have some merit. But whatever peripheral justification is pulled out of the hat, the fact remains that economic duress was inevitable given the way politicians on both sides of the aisle have used and abused the economy over the last two decades.
We, and just about every other financial expert, have been writing about the inevitability of inflation and economic duress for years. So how did our leaders not see the financial damage being done by the continuous injection of fiscal and monetary poison into our economic veins? It seems it simply was not politically convenient to be concerned about the economy as it was being stuffed with more pork.
We as a country must take responsibility for what is happening. We are doing this to ourselves by electing people who are markedly unqualified for leadership positions.
Leadership is not about being able to deliver people good news – fabricated or not. It is about being able to explain the inevitable bad news and providing tangible solutions that make sense. When was the last time you saw that in Washington or in most state capitols? Who was the last American leader who reminded us that there is no free lunch? Does anyone represent the concerned middle anymore?
We have heard all the excuses for not seeing inflation and economic shortages coming. Here’s the evidence. You be the judge.
Exhibit 1. Our national debt has ballooned to $30.5 trillion. That didn’t happen in the last three months. It was $6 trillion in 2000 and $14 trillion in 2010. The resulting interest cost on federal debt even before recent increases in rates is likely to be a whopping $60 trillion over the next three decades. Who spends that kind of money when they don’t have it?
Exhibit 2. The Federal Reserve’s balance sheet reached $9 trillion this year, meaning that the Fed has printed some $8 trillion to respond to the Great Recession and COVID-19 since 2008, when the Fed’s balance sheet was about $800 billion. Even more disturbing, the Fed was purchasing nearly 60 percent of the notes being issued by the Treasury. Can anyone legitimately be surprised that such fiscal/monetary gymnastics contributed to the inflation we are experiencing today?
Exhibit 3. While it is still the strongest among a collection of weak currencies, the dollar’s deterioration is causing nations to consider abandoning it. In 2000, the dollar represented 71 percent of global reserve currencies. Today, it has slipped to just 59 percent, a trend that hints at the U.S. losing the inherent advantages and support derived from a dollar denominated trading system.
Exhibit 4. Extraordinarily low interest rates encouraged companies and individuals to lever up. Corporate debt has increased to $11 trillion, or nearly half of the total U.S. economy, and household debt has reached $15 trillion. With interest rates having doubled in the last several quarters, those borrowing costs will become an ever-increasing weight on the economy.
Exhibit 5: Eighty percent of the dollars in circulation have been created in just the last two years, providing a strong incentive to undertake marginal loans and investments to put that excess cash to work, particularly when interest rates hovered at close to zero percent.
Exhibit 6: Median residential real estate home prices have increased 30 percent in the last year due to a shortage of supply and the vast amounts of mortgage credit available at rates kept artificially low by Fed policies. Those trends are never sustainable and have always been a sign of bad things to come.
Exhibit 7: Inflation has risen steadily to 8.3 percent from just .5 percent over the last two years. Did our leaders need a neon sign warning them that this might not be “temporary”?
Exhibit 8: The federal debt has increased to 125 percent of gross domestic product, the highest level since the height of World War II. Who believes that this level of debt (or more if trends continue) is sustainable?
Exhibit 9: In each of the financial panics since 1980, Congress and the Federal Reserve have bailed out portions of the economy to create a soft landing. Fair enough, but those actions have now conditioned markets to expect that there will be no penalty for taking sizable risks since the Fed will surely bail them out.
Exhibit 10: Our leaders have stood idly by as China moves to surpass the U.S. economically, technologically (artificial intelligence, 5G, quantum, rare earth minerals) and militarily by 2030. The consequences of those events could be devastating.
The American people have been distracted by fictional issues and tricked into believing that spending more than the country has to make everyone’s life easier is the path to success. It never has been and never will. Nearly everyone should realize that. Now we must elect qualified people who are willing and able to act responsibly. That is going to require a significant change in voters’ mindset.
Thomas P. Vartanian is the author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions and the Technology that Will Change it All” and executive director of the Financial Technology & Cybersecurity Center. His new book coming in February 2023 is “The Unhackable Internet.” William M. Isaac is former chairman of the FDIC and Fifth Third Bancorp and is chairman of the Secura|Isaac Group and Blue SaaS Solutions.