Ruminations

I like to speak and write on topics that are not traditionally covered. This is because I believe that a lot of the narratives that exist in most media are simplistic and written for the lowest common denominator. When one’s thought process is shallow and it comes time to assign blame (a typical, but misguided, social response), the reason cited is shallow as well. This is especially problematic in the election cycles. (For bias’s sake, I am fiscally conservative and socially liberal, or in other words right in the center but not affiliated with either major party).

I’ve seen a lot of blame for supply shortages, inflation, and job layoffs, laid at the feet of the current administration. The problem with this narrative is that is false, especially when it comes to the economic cycle. The causes of each cycle are not the policies of the current administration, yes they might regulate or deregulate sectors, and increase or decrease taxes, which will add or subtract some momentum to the current cycles. However, these alone are not nearly enough to cause major economic disruptions like the one we are currently experiencing. The making of these typically lay years, if not decades before, and have been slowly compounding to where we reach a tipping point that causes adverse reactions to our current situation. The main causes of our current economic problems are few but powerful.

The first is both parties running a deficit year in and year out. We haven’t had a surplus since 2001… This has created an expectation where we expect to spend more than we take in yearly and when shocks to the system happen we expect the government to step in and help support the economy. Debt has become systemic within our economic system and will ultimately cause the US a massive fiscal rebalancing in the future. This rebalancing will be very painful as the levels of debt increase.

The second major issue is that we have had interest rates artificially suppressed for decades as well. This has caused a massive increase in risk-taking, (a prime example last year was the crazy single-day swings, 100% or more returns, and “mooning”). With capital so easy to come by, people were incentivized to put their capital in the housing, stocks, and crypto markets. This capital increased asset prices far more than what was sustainable, which in turn caused people to feel far more wealthy, even if it was paper gains. Those crazy gains cause other people to pile on and invest more pushing the prices up farther and farther. This led to people spending more and more on other facets of the economy, increasing demand and causing companies to produce more goods and services to keep up with the increased demand. Then when covid hit and the government put more money into the pockets of those who were most affected (and those who just took advantage), you had even more money chasing both returns and further increasing demand for goods and services.

Covid then led to supply chain issues in some key industries (and some artificial supply issues in others), this reduced the supply when you had artificially high demand, and voila you get an inflationary environment (too much money chasing too little supply). Which in turn causes interest rates to go up, pops the asset price bubble, and starts to reduce demand across sectors of the economy. This is where we are currently, working through the reduction in asset prices, AND reduction in demand, which will “normalize” our economy…

Now, this too is a very simplistic explanation of our current economic environment, however, it does show that the current economic “crises” is not a year or two in the making as the current narrative sits, but rather one that has its roots decades earlier. So rather than seeking simplistic blame, you need to expand your perspective and start incorporating a much more complete picture to explain the current circumstances. This applies to business, life, and much more. Broaden your perspective and your thinking. It will serve you well.

Ad Astra