Category: Politics, Religion & Money

Unsustainable Fiscal Path

In April, 2021, I said, “I don’t see the $1400 windfall spiking inflation, and certainly not for very long.” I was wrong about the stimulus money, because of the persistent supply chain problems. Too much money chased too few goods, and inflation spiked.

I did better in saying inflation wouldn’t last for very long. Scott Pelley asks Jay Powell how that was done.

So, what about the unsustainable fiscal path the United States is on, according to Powell? This graph compares the national debt to gross domestic product over the past 55 years.

The problem of deficit spending getting ahead of debt started under Reagan. It was stamped back down during Clinton’s term. George W. Bush’s financial crisis of 2008 was where the debt-to-GDP ratio took off.

With interest rates at zero, there was a lot of borrowing during Obama’s administration (with some of that money going to the HITECH Act, that distorted the hospital software market, giving Epic Systems of Verona, Wisconsin a leadership position). The effect of the pandemic appears as a vertical line, with all debt and no product!

Republicans are going to insist that spending must be cut to deal with the unsustainable fiscal path. Democrats are going to insist that the ultra-rich pay more in taxes, and that corporations no longer be allowed to hold their profits in overseas tax havens.

Somewhere in the middle is a solution. I think it’s called compromising, which is something Democrats are willing to do. Republicans see that as a sign of weakness in their insistence on playing a winner-take-all, zero-sum game.

Something else Powell said is very concerning in the short term, regarding commercial real estate loans. “Certainly there will be some banks that have to be closed or merged out of existence, because of this. That’ll be smaller banks, I suspect, for the most part.”

Headline Answers Its Own Question

Inflation’s Down and the Economy’s Strong. So Why Isn’t the Fed Cutting Rates?

https://www.msn.com/en-us/money/markets/inflation-s-down-and-the-economy-s-strong-so-why-isn-t-the-fed-cutting-rates/ar-BB1hjHty

Inflation has been dampened and unemployment is low. Yay! The Fed’s two mandates have been achieved, and that’s why the Fed isn’t cutting rates.

But there is, of course, a “but.” Raising interest rates, back to where I think they should be, has exposed problems caused by the decade of zero interest rates and free money. Problems that have been compounded in the aftermath of the pandemic. The reality is simple and profound.

THE UNITED STATES ECONOMY IS BASED ON DEBT

If the Fed starts to lower rates before mid-year, it will be for one practical reason — to help commercial real estate developers and investors refinance their debts. The side benefit would be to boost residential real estate, but doing that risks increasing inflation, so I don’t see the Fed acting too soon. I’m sure they’re closely watching China’s real estate crisis.

https://www.npr.org/2024/01/30/1227554424/evergrande-china-real-estate-economy-property-collapse

P.S. In today’s NYTimes:

https://www.nytimes.com/2024/01/30/business/economy/fed-interest-rates.html

The Trusty Trustee

I thought I was done five years ago managing my late parents’ estate, but it seems a trustee’s work is never done. This came from American Express to correct an error they made in my father’s account.

So that’s $0.16 each for myself and my five siblings, and I’ll keep the extra four cents for my fee. But uh, oh. There’s no such account as The Estate of George Pratt, and as there was no formal dissolution process for the trust, I don’t know what its legal status is. I vow to earn those four extra cents by devoting myself full-time to the resolution of this pressing financial matter!