The Big Red Bouncy Ball Known as The U.S. Economy
Since the Great Depression in 1929, times of severe economic threat have demanded aggressive action by the federal government to spend money and otherwise sustain the economy until it can ‘bounce back.’ For example, between 2007 and 2009, the urgent needs of the financial crisis known as the ‘Great Recession’ demanded immediate and aggressive action from Congress and the Federal Reserve (Fed).
During and after the Great Recession, the Fed’s primary policy tool was a combination of low-interest rates and ‘quantitative easing,’ which is the Fed’s process of expanding its balance sheet by purchasing U.S. Treasuries and mortgage back securities from U.S. banks. The Fed also relied on a new tool — paying interest on excess reserves, which meant the money that would have otherwise gone to the U.S. Treasury was instead used to pay banks not to lend. It’s difficult to overstate the incredibly negative effect on typical Americans from the Fed’s actions during and after this 2007–2009 crisis.
Beginning in 2009, low-interest rates imposed by the Fed empowered large companies to borrow cheaply. This often resulted in big companies buying up smaller competing firms. Meanwhile, the Obama-era Dodd-Frank Act accelerated the banking sector’s consolidation. The Act significantly increased compliance costs for banks that proved insurmountable for many smaller regional and local banks — and so they closed their doors or merged with bigger banks.
It’s no coincidence that the sharp increase in wealth/income inequality in the U.S. in the past twelve years has come at a time of extreme actions by the Fed. America’s post-2008 economy hugely rewarded Wall Street and big business at the expense of main street and mom and pop shops. Even more absurdly, since 2008, the Fed has also actively punished Americans who did not participate in the subsequent stock market surge.
The low-interest-rate environment created by the Fed — previously without any historical precedent — actively undermined the ability for savings to grow in traditional savings accounts, C.D.s, government bonds, or other conservative assets. As a result, investors were pushed into the risky stock market and other, even riskier investments.
The Fed’s actions since 2008 created a financial system that not only binged on debt but also systematically underpriced risk. This becomes crystal clear when we consider the number of publicly traded companies today with billion-dollar-plus valuations that have never been profitable. As a result of the Fed’s actions, American savings and retirements have been pushed into investing in these bad businesses — especially in an age of ‘passive’ investing where robot algorithms automatically manage the financial future of millions of naïve Americans.
The difference between a recession and a depression
A recession is traditionally defined as two consecutive quarters of Gross Domestic Product (GDP) contraction. Recessions are regular occurrences, with eleven having occurred between 1945 and 2009, with an average of roughly 11 months between the peak and trough of each recession. A brief recession was triggered in the first quarter of 2020, along with the shutdown of large swaths of the U.S. The coronavirus pandemic brought it on. Many experts wondered if the pandemic might lead to a more extended, deeper, and more damaging event like the Great Depression.
The Great Depression of 1929 was remarkable for its depth and duration. It was a time when one in four workers were jobless, many households lost their savings when banks collapsed, and the stock market lost nearly 90% of its value. There were almost four consecutive years of economic contraction followed by an economic stagnation that lingered until World War II. It took three and a half years, from August 1929 to March 1933, to go from robust full employment to the depths of the Great Depression. With the coronavirus pandemic in 2020, we got there in less than three and a half months.
The Great Depression of 1929 and the Great Recession of 2007 began with asset deflation. Such ‘burst bubbles’ tend to create a longer recovery period. The economic crisis that began in early 2020 was not a banking crisis. It was the result of the coronavirus pandemic. And the so-called experts say there are today a host of government programs designed to prevent the U.S. economy from sinking into a years-long slump like the Great Depression.
Today we have tools such as Unemployment insurance which sustains at least some of the economic demand that vanishes when joblessness spikes and people have no income to spend. Today’s concepts of stimulus, macroeconomic management, and supposedly more sophisticated monetary policy are all legacies of the Great Depression and Great Recession — and were utilized during the coronavirus financial crisis of 2020.
But now, in post-pandemic America, we have sky-high inflation
For the 12 months ended March 2022, the annual inflation rate for the U.S was 8.5% — that’s the highest since December 1981, according to U.S. Labor Department. To deal with this epic issue, the Fed raised its target federal funds rate by a half-point on May 4th, 2022. This was the largest increase in the benchmark in more than 20 years. The thinking is that the Fed can crush inflation while not killing an economy that perpetually bounces between good times and bad. But the fear is that with its recent action, the Fed will slow down the economy so much that it bounces back into another recession.
This recent aggressive action by the Fed may bring relief from surging prices for consumers — but it also comes at a cost. The federal funds rate is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s actions still affect the borrowing and saving rates they see every day.
For example, since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark — so expect your annual percentage rate to rise within a billing cycle or two. Credit card rates are currently just over 16% which is significantly higher than nearly every other consumer loan out there — and may go as high as 18.5% by the end of the year (a record). Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are also affected by the Fed’s actions. Even the average interest rate for a 30-year fixed-rate mortgage was affected as it hit 5.55% on May 5th, 2022. That’s the highest since 2009 — and up more than two full percentage points from 3.11% at the end of December 2021.
As for the paltry interest earned on your savings — it tends to correlate to changes in the federal funds rate as well. As a result, the savings account rate at the largest brick-and-mortar banks has stagnated at rock bottom in recent years — currently a mere 0.06%, on average. Even top-yielding certificate of deposit rates are barely above 1% — and will likely rise only slightly with the recent actions by the Fed. We also must remember that because the inflation rate is now much higher than all these pitiful savings rates, any money in savings loses purchasing power over time. As this reality is created by the Fed, it pushes many investors toward the ‘always’ risky stock market where they position their hard-earned income into unwise investments.
*************
If you enjoyed this article, you might like my series of six self-published books designed to present ‘some of what I know so far’ on a wide range of interesting subjects, including human evolution, spirituality, politics, religion, finance, nature, science, ancient anomalies, the cosmos and so much more.
This article is compiled from chapter 3 of my fourth book in the series titled: “So, here’s some of what I know so far regarding Wealth, Greed, Politics and Power.”
You can find my books on Amazon by searching “books by Stephen Geist.”
Each of the six books has relevance to the other books but reading them in order is unnecessary. Each book can stand alone but reading all six books in the series would be better. Maybe you will awaken to a new state of ‘being,’ as I have — one that is both breathtaking and startling.
Also, if you enjoyed this article, please consider joining Medium and listing me as one of your favorite writers (so you will have access to all my work as well as the work of thousands of other excellent writers).
