Our Day of Economic Reckoning

Member Group : Lincoln Institute

The pandemic and the response to the pandemic have left the global economy in a precarious position.

The consistency of the optimism of solid economic growth following the reopening are echoed in virtually every economic corner of the world.

Just as then Federal Reserve Chair Alan Greenspan made mention of “irrational exuberance” of asset values followed by major market declines in 1996, the mere mention of something other than massive economic recovery are met with jeers and criticism from a cancel culture society.

But just as Greenspan discussed in his book, The Age of Turbulence, the economic swings since the 1970’s seem to swing more severely with each succeeding downturn.

The current economic climate is ripe for a reset, a reset for which most are unwilling to consider and are equally unwilling to prepare for.

Our national debt is $28 trillion and climbing rapidly to $31 Trillion after the most recent stimulus bills being signed into law.  Interest rates for 7 to 30 year maturities are rising rapidly whereas the velocity of money is plummeting to its lowest level in history.

In but one more measure of concern is the amount of “negative interest rate” debt worldwide in 2021.  Such negative interest rate debt stands at over $19 trillion worldwide.

In my lifetime I have been witness to some fairly catastrophic events. While in Eastern Europe, I witnessed the aftereffects of the fall of the Soviet Union.  I served in Iraq and briefly in Afghanistan.

In our own nation, I have seen the dot.com bubble bursting in 2001, the collapse of the housing market in 2008, and now the pandemic of 2020.

There have been panics throughout the history of the world. In the United States there have been the panics of 1819, 1837, 1857, 1873, 1893, 1929 as well as the most recent financial calamities.

The panic of 2020 and its aftermath in 2021 are different.  We must understand those differences and deal with the entire spectrum of economic consequences and not just with those that make us feel complacent and comfortable.

In the Panic of 2020, the economy had been so strong in its underlying fundamentals that the triggering event, a pandemic, should be easy to overcome because of that underlying strength.  The economic difficulty though is that we, and we alone, hold the key to whether the cure is worse than the disease.

Rather than government spending and monetary policy helping our economy, it is entirely possible that the perceived rational theories of fiscal policy and monetary policy may have negative effects when irrationally applied. Temporarily stimulating measures of such policies may have a valuable effect when smoothing economic cycles but when a society becomes dependent upon such stimulating policies the cliff is merely getting higher from which we will inevitably fall.  Deflationary spirals and economic reset (read potential depression) are possibilities which must be examined in order to be avoided.

Our economy has become dependent upon the irrational behavior of the federal government’s spending beyond its means, and a Federal Reserve intent upon manipulating interest rates.

Only by rationally reining in fiscal and monetary policies will our economy avoid the perfect storm.

For instance, a declining velocity of money means people are hoarding cash and not spending it and that is despite horrible very short-term interest rates of near zero!

In an article by an analyst at the Federal Reserve two reasons were given for this decline in the velocity of money:

“And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:

  • A glooming economy after the financial crisis
  • The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds

In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy (i.e., the zero-interest rate policy).

The implications of these two potential causal factors are that the Federal Reserve is in fact perpetuating the financial crisis and not solving it.  The historic low velocity of money which the Federal Reserve has reported for over 13 years reflects people hoarding money and not spending it.  The implications of this massive hoarding of cash are unknown.

Not to be outdone, the federal government, to stimulate demand, has been using deficit spending but, once again, to extremely limited effect.

Expansionary fiscal and monetary policy therefore have had little to no real effect on the economy because all other participants in the market are offsetting these expansionary efforts as reflected in the declining velocity of money.

Now is the time to challenge conventional wisdom of the efficacy of fiscal and monetary policy before the results of poorly thought out fiscal and monetary policies leads us to our proverbial day of reckoning, a day for which we are not prepared.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives.  He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at [email protected].