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But should we blame him for our current economic malaise?

When I was a young pup, I remember Uncle Cal frequently referring to certain elected officials as “a Horse’s Ass”. Back then, I didn’t know what he was trying to infer, but it sure sounded good!

Uncle Cal is long gone, but it seems the supply of Horse’s Ass elected officials has expanded significantly and I’m frustrated, angry and simply miserable as I watch and listen to ‘broadcast journalists’ and various political pundits who seem to have no grasp of economics as they explain current economic conditions to an audience of [potentially] economic illiterates. Thus, the origin of my current ‘rant’:

Stock Prices, Inflation, Recession & Economic Cycles

Economic cycles – also known as business cycles — are a reality, and they can be tracked over time.

They generally are predictable, although not in precise time frames. Economic cycles consist of four identifiable phases or stages:  (a) Expansion; (b) Peak; (c) Contraction; and (d) Trough.

Every economic cycle includes a period of euphoria and exuberance marked by a sustained period of economic growth; followed by a period of uncertainty and lethargy linked to a period of economic decline.

The Great Recession officially ended in June 2009. By the time Donald Trump took office in January 2017, he inherited an economy in its 91st month of economic expansion.

That expansion continued into 2020, becoming the longest period of expansion on record, peaking at 128 months in February 2020.

Donald Trump has never failed to speak his mind.  During the campaign leading to the 2020 presidential election, Trump proclaimed, “If (Joe Biden) is elected, the stock market will crash!”. [In 2018, Trump said, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” In late January 2020, Trump also said, “We have it (coronavirus) totally under control. It’s one person coming in from China. It’s going to be just fine.”]

Facts are facts:

• Five years ago (October 20, 2017) the S&P 500 closed at 2,575; it closed today (10/20/2022) at 3,666, an overall 5 year gain of 42%; an average of 7.3% per year.
• Ten years ago (October 2012), gasoline sold for $3.62 per gallon in Florida.  AAA shows the current Florida price per gallon at $3.38.
• Case-Shiller reported a ten year 288% price increase for housing in the Tampa Bay area (where I currently live) from Mid-2012 to Mid-2022.  This is partly due to (1) recovery from the Great Recession; (2) stimulus due to artificial below market interest rates (Fed Policy); and (3) supply/demand imbalance primarily due to local and regional housing policy decisions over time.
• The most recent CPI-U release from BLS reflects an annual inflation rate of 8.2 % through September 2022, the highest in four decades.  Yet, if we look back to 2012, we can see the average annual rate over that decade computes to about 2.5% annually, with near zero periods during the Pandemic.

What’s really going on? There are a number of pieces to this puzzle, including:

• The lingering effects of a Pandemic;
• The Russian invasion of Ukraine;
• Aftershocks (direct and indirect) from draconian tariffs enacted beginning in 2018;
• Ongoing ripple effects from the 2017 Tax Cuts and Jobs Act (TCJA); and
• Various supply chain issues, both domestic and international.

The root cause of our current intersection of inflation and stock market volatility likely traces back to 2010, when the Fed launched “QE2” – quantitative easing – essentially increasing liquidity in the domestic economy to stimulate economic growth. One of the outcomes from QE is a decrease in bond prices due to falling interest rates, combined with a run-up in stock prices as investors search for yield.

When the Fed announced its QE2 plan in November 2010, 30-year mortgages were at 5%; and the S&P 500 index was 1,200.  Over the course of the next few years, rates on 30-year mortgages dropped as low as 3.3%, while the S&P 500 index inched toward 2,010 (which it reached in September 2014).

Meanwhile, the CPI from 2010 to the end of 2020 remained relatively calm, reflecting the lagging effects of the economic recovery which began in mid-2009.

It is relatively easy to look into the rearview mirror now to observe that the Fed’s responses to (a) the Great Recession; and then (b) impacts of Covid on our economy helped to create an environment which fueled the inflation we are facing today.

In March 2020 — in addition to a promise to inject a Trillion dollars into the U.S. banking system — the Fed cut the federal funds rate to a range of 0% to 0.25%.

The rapid and aggressive response by the Fed likely saved our economy from implosion, but also helped inspire a dramatic run-up in both stock prices and home prices:  The S & P 500 index rose from 3,000 in early March 2020 to reach 4,700 in November 2021 as investors chased phantom returns on investment. (Stock prices were further bolstered by massive stock buybacks inspired by the 2017 TCJA).

Home mortgage interest rates are a critical determinant of purchasing power for most borrowers.  As far back as 1971, 30 year fixed-rate mortgages had never been offered below 7%; they moved up to 9% in 1974; climbed to 11% in 1979; and reached a peak of 16.6% in 1981.

Our economy is a long game.  The few months when home mortgage interest rates were at or below 5% is an aberration enabled by Fed policy.  Now that long-term mortgage rates have settled into the 7% to 9% range [which seems rationale and appropriate based on history], home prices will also stabilize.

It seems convenient for some to blame Joe Biden for (a) high gasoline prices; (b) rapidly rising consumer prices; (c) a stock market ‘meltdown’; and (d) even for supply chain dysfunctions.

A quick look at history confirms that there is a rather significant lag between the point when policy is affirmed and enacted; and the future point when we begin to see and experience results from those actions.

The Biden White House has pledged to fight against inflation, and has stubbornly refused to blame the Fed for our current economic symptoms.
Although there seem to be plenty of contributing factors, the real truth is:  We relied almost entirely on monetary policy to steer the ship for more than a decade, and that approach brought us to this moment, not 24 months of Democratic control in the White House.

And, if the Fed would just slow down their relentless and uncompromising initiatives to raise interest rates to the point of choking off the economy as they attempt to rein in inflation, we might experience a smooth correction, and a gentle return to the economic expansion phase we all want to see.