Opinion: The party’s over: Fed and Congress withdrew support from workers and investors

Even government reports fastest economic growth in nearly 40 yearsThe historic gains in income and wealth that have inflated the economy in 2020 and 2021 are rapidly fading.

Air is escaping from the economy. The air that lifts the working class from the COVID pandemic is fading. The air that drives returns and investment-class portfolios is fizzled out. The atmosphere that intoxicated the stock market, bond market, housing market, crypto market, SPAC, NFT, and memes is vanishing. The consumer price hype is going on, going on.

The massive stimulus unprecedented in the recent past has been replaced by an unprecedented drop in income and wealth. Wages are not keeping up with inflation and the investment class is becoming nervous and defensive.

The groan you hear is the sound of a belt.

Negative monetary and fiscal policy

Fiscal policy has turned markedly negative, dragging down the economy it once boosted. Income support for workers, businesses and local governments has been withdrawn. It’s time to stand up for yourself. After increasing by more than 5% in the first year of the pandemic, fiscal policy will subtract about 2.5% per year from growth over the next two years, he said. Hutchins Center’s financial impact measure.

And now the Federal Reserve is telling us plainly that The era of free money is over. Fed Chairman Jerome Powell just announced the last call. punch bowl will not be reloaded this time. It was closing time at Saloon Central Bank.

Hot news: Powell says Fed ‘intends’ to raise rates in March to combat high inflation

The possibility of a job-killing hard landing can’t be ignored.

It’s been too long since the Fed did this. The Fed, as most investors know, is the institution that supports stock prices whenever it shows signs of a bear market. But with inflation at 7.1% in the past year, The Fed is back in full Paul Volcker mode. At least, that’s what Powell wants us to believe.

Follow the full inflation story at MarketWatch.

inflation causes

Obviously, much of our inflation problem actually stems from big shock both supply and demand have little to do with monetary policy, interest rates
or money supply. Many things cost more now because COVID has disrupted all the fragile global supply chains that modern multinational financial capitalism has brought together to connect cheap and raw labor. raw materials to markets in advanced and emerging economies, where people with money live.

This is where inflation will come from in 2021

You want a car but you can’t get one because Taiwan can’t produce or supply enough computer chips to meet the demand. It will take time to build capacity and realign supply chains, but delayed gratification is a lost art. We are used to getting whatever we want when we want it. So we pay whatever it takes to get it now.

The COVID recession was the first recession in history that made most people richer than before.

COVID has also altered conventional spending patterns. With less access to direct services such as travel, entertainment and leisure, people naturally buy more things – durable goods – to replace the services they crave but cannot afford. enjoy anymore.

But part of our inflation problem is the classic imbalance of too much money chasing too few goods and services. The COVID recession was the first recession in history that made most people richer than before. Congress has pumped trillions of dollars into household and business bank accounts. The Fed has pumped trillions of dollars into reserve balances, and some of that has poured into financial markets. And the crypto world has made trillions of dollars out of thin air, the ultimate currency.

Fiscal policy supports working-class incomes while full confidence and credit by the Federal Reserve stands behind investment-class portfolios. Everyone feels richer and they spend like that.

The “problem” of too much money is being solved, even before interest rates rise for the first time.

Real disposable income fell at a 5.8% annualized rate in the fourth quarter.


Real income decreases

Income is now falling like a rock. Most of the support that Congress provided last year and the year before has been withdrawn. Real disposable income (adjusted for purchasing power) fell at a 5.8% annual rate in the fourth quarter and has targets for further reductions in the first quarter as the refundable child tax credit is gone and inflation eats away at any wages workers earn.

Workers managed to save some of the profits that Congress had previously provided, but they would soon pass that. Then hunger and the need for shelter will send millions back into the workforce, doomed to take any job, no matter how unsafe, inhuman or underpaid. It will give new meaning to the phrase “The Great Resignation.”

What about the wealth of the investment class? As of early January, it is up about 30% ($30 trillion) since the deepest of the sell-off in March 2020. The S&P 500 is down about 10% from its peak. Little by little, financial markets are re-pricing the value of the Fed’s put – the now-obsolete assumption that the central bank will continue to refill the punch bowl whenever it looks like the party might be. finish.

If the Fed doesn’t support asset prices anymore, then most assets look a bit (or a lot) overvalued. They will soon find a new equilibrium. But odds are that the wealth of the investment class won’t grow by $30 trillion over the next two years.

Where does that leave the economy? Powell said that the economy is strong and people can take the Fed’s anti-inflation medicine. But I think it’s the noise. Below the surface, the foundation looks feeble.

The question for Powell is: Who will crack first?

Join the debate

Nouriel Roubini: Inflation will affect both stocks and bonds, so you need to rethink how to hedge

Rex County: Why is interest rate not really an appropriate tool to control inflation?

Stephen Roach: Thankfully, the Fed has decided to stop mining, but they have a lot of work to do before they get us out of the hole we’re in.

Lance Roberts: Here are many reasons why the Federal Reserve is not raising interest rates as much as expected


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