Prices of consumer goods and home mortgage rates are going up, stock prices are going down, and the unemployment rate is at an all-time low of 3.6 percent.
What’s going on? What’s next?
I’m no economist, that’s for sure, so I’m just spitballing here: I think there are at least three forces at work right now which are unsettling the economy.
First, the global energy market is disrupted because of the war in the Ukraine. Russia is a major energy provider, and many nations (particularly N.A.T.O. members) are boycotting Russian exports as a way of sanctioning that nation’s aggression. So, there is the normal demand for energy which temporarily must be supplied by one less energy-supplying nation. In essence, there is a bidding war for petroleum right now which is causing energy costs to go up.
Energy costs certainly impact transportation, but energy is also required to produce just about every consumer product. Hence, costs of everything are higher now than before the Ukraine war.
President Biden is taking it in the neck for the high inflation right now (around 8 percent this month), but other countries are experiencing it, too. The U.K. is 7%, Italy is 7%, Germany is 7.6%, Mexico is 7.45%, India is 6.95%, and Brazil is 11.3%, to mention a few other countries.
It wouldn’t matter who was President right now, as the White House doesn’t control global oil prices and certainly didn’t start the war in Ukraine.
Secondly, there is the undeniable fact that the “sugar high” from the Covid-19 economic stimulus programs is wearing off. All of that “free” money that was hastily printed by Trump and Biden and shipped out into the economy had the effect of raising prices (stocks and real estate, in particular).
Third, is the changing Federal Funds rate (the interest rate that banks charge each other), which helped to supercharge the economy out of the 2008 Great Recession. That rate has been practically zero in recent years, encouraging investors to speculate on stocks using borrowed money and stimulating home purchases via very low mortgage interest rates.
The Federal Reserve, a bit late to the party but now fully-engaged in controlling inflation, is steadily raising the Fed funds rate. Almost immediately, the stock market got a downward jolt and home mortgage rates, which were at around 3 percent last year, have now climbed to around 6 percent for a 30-year fixed rate mortgage. On a $500,000 loan, that difference translates to an additional $800 per month payment.
Many households will be priced out of the home buying market because of this, and we can expect rental housing to see prices increases accordingly. New home building starts will decline, resulting in layoffs in that sector of the economy.
Of course, the Fed Funds rate increase will also have an upward impact on consumer credit card rates, which will stifle consumer spending accordingly.
Maybe that’s not such a bad thing, as Americans tend to buy more crap (on credit!) than they actually need.
But those very spendaholics will hold it against the Biden Administration and the Democrats… because they can’t afford that new speedboat that they wanted.
I would expect the Republicans to mercilessly hammer the Democrats about the crappy economy during the mid-term election campaigns, pretending that the world is going into the shitter because of bad Biden mojo.
That’s what the Democrats did when “Trump’s” unemployment rate hit 15 percent in 2020. It was true, technically, but that aberration was caused by a global pandemic.
Who said politics is fair?
Or, rational?
We once had a President who claimed that his Administration had a novel Coronavirus pandemic “under control” and that it was only impacting “five people, maybe only one guy”. There was “no need to worry”, “it’s only the flu”, and “it will go away in the Spring” that President told us on TV.
One million Americans have died thus far from Covid-19, more deaths than the United States has suffered in all the wars that it has fought.
Who ever said “presidenting” was easy?
The same guy who said, in 2016, that he would probably not play much golf while President, because he would be “so busy working hard for Americans”.
Yeah, politics is a strange business.
Both it and the economy are going to get very weird this year.