Martin Cantor, BridgeTower Media Newswires
The good economic news is that unemployment levels are at record lows as more than 90% of the 22 million pre-pandemic jobs lost to government policies that closed down the economy have returned as businesses ramp up hiring activity. The bad news is that growth is sure to slow as the Federal Reserve begins curbing inflation, which is at a level not seen in 40 years with consumer prices increasing by 7.5% fueled by record high oil prices and the highest gas prices since 2008.
Controlling and bringing down inflation is a complicated matter which has been made more complex by the Russian invasion of Ukraine, the relentless supply-chain issues, the reluctance of the oil producing countries including Russia to produce more oil, that America produces 15% less oil daily than it did a year ago while consumption remains unchanged, and the flood of dollars pumped into the economy by the Fed’s quantitative easing policies adding over $1.5 trillion to the money supply since the pandemic began. Then there is the nearly $7 trillion national debt increase since 2019, which in part fueled the pandemic-related financial rescue and stimulus spending since 2020. Recall that the American Rescue Plan provided stimulus checks, child-care credits, enhanced unemployment benefits of which the first $10,200 was untaxed, rent and homeowner assistance dollars and funding sent to state and local governments as well as school districts.
All these additional dollars, fueled by government borrowing, were pumped into the economy to replace the gross domestic product sent to the sidelines as governments worldwide shut down their economies. Former Federal Reserve Chairman Arthur Burns once concluded that excess government spending leads to inflation. For example, the United States national debt, now at $30 trillion and 124% of 2021’s $23.9 gross national product, increased by 32% from pre-pandemic 2019, when the $22.7 trillion national debt was 107% of the $21.3 trillion GDP. The GDP during that period only increased by 12%. Therein lies the problem.
All this has added pressure on the critical long-term borrowing rates. The 30-year mortgage rate is the highest in two years and putting downward pressure on what homeowners can afford with mortgage interest now taking a larger share of the dollars spent on a house purchase. Another Federal Reserve chairman, Alan Greenspan, observed that long-term interest rates are important to businesses because higher rates result in less spending for job-creating capital investment. Higher long-term rates cause the economy to slow.
Greenspan believed that a gap of a 3 to 4 percent difference between long-term and short-term interest rates resulted in an “inflation premium.” Furthermore, instability in controlling inflation leads to uneasiness on the bond markets, higher interest costs and higher oil prices. That is what current Fed Chair Jerome Powell has to address. Powell has to increase short-term interest rates to narrow the inflation premium. A dicey proposition. Ultimately, too many miscalculations of short-term interest rate increases could lead to a recession.
With inflation caused by too many dollars chasing too few goods, which the Fed can control, other factors outside of the Fed’s control such as supply-chain issues and demand for oil outpacing supply makes that task that much more difficult. With recession hanging in the balance, much rides on the Fed getting this right.
—————
Martin Cantor is director of the Long Island Center for Socio-Economic Policy and a former Suffolk County economic development commissioner. He can be reached at EcoDev1@ aol.com.
