By Rex Nutting
Even as the government reports the fastest economic growth in nearly 40 years , the historic gains in income and wealth that inflated the economy in 2020 and 2021 are fading fast.
The air is coming out of the economy. The air that cushioned the working class from the COVID pandemic is leaking away. The air that boosted the profits and portfolios of the investing class is deflating. The air that intoxicated the stock market /zigman2/quotes/210599714/realtime SPX +2.02% /zigman2/quotes/210598065/realtime DJIA +1.34% /zigman2/quotes/210598365/realtime COMP +2.76% , the bond market /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.26% , the housing market, the crypto market /zigman2/quotes/31322028/realtime BTCUSD +0.14% , the SPACs, the NFTs and the memes is fizzling away. The air that inflated consumer prices is going, going, gone.
The massive unprecedented stimulus of the recent past has been replaced by massive unprecedented dampening of incomes and wealth. Wages are not keeping up with inflation, and the investing class is getting nervous and defensive.
The wailing noise you hear is the sound of belts tightening.
Negative fiscal and monetary policy
Fiscal policy has already turned sharply negative, tugging down on an economy that it once pushed up. The income support given to workers, businesses, and local governments has been withdrawn. It’s time to stand on your own. After adding more than 5% in first year of the pandemic, fiscal policy will subtract about 2.5% a year from growth over the next two years, says the Hutchins Center’s fiscal impact measure.
And now the Federal Reserve is telling us clearly that the Era of Free Money is over. Fed Chair Jerome Powell just announced last call. The punch bowl isn’t going to be refilled this time. It’s closing time at the Central Bank Saloon.
The possibility of a hard landing can’t be disregarded.
It’s been so long since the Fed did this. The Fed that most investors know is the one that always props up stock prices whenever it gets a whiff of a bear market. But with inflation running at 7.1% for the past year , the Fed is back in full Paul Volcker mode. At least, that’s what Powell wants us to believe.
To be clear, much of our inflation problem really just stems from the massive shock to both supply and demand that had little to do with monetary policy, interest rates /zigman2/quotes/210002368/delayed FF00 0.00% , or money supply. Lots of things cost more now because COVID disrupted all of the fragile global supply chains that modern multinational financial capitalism has strung together to connect cheap labor and raw materials to the markets in the advanced and emerging economies where the people with money live.
You want a car but you can’t get one because Taiwan can’t make or deliver enough computer chips to satisfy the demand. It’s going to take time to build the capacity and reknit the supply chains, but delayed gratification is a lost art. We’ve become accustomed to getting anything we want at that exact instant we desire it. So we pay whatever it costs to get it now.
COVID also twisted the usual spending patterns. With less access to face-to-face services such as travel, entertainment and recreation, people naturally bought more stuff—durable goods—to replace the services they craved but could no longer enjoy.