Rates Versus the 1 Percent
11/30/2024
During the second half of Trump's first term, the economy was performing rather well. Well enough, in fact, that rising interest rates were a continued trend throughout his four year term. Rates began around a half of a point and nearing the end of his term had risen to nearly 2.5%. Then came covid and everything was soon turned upside down. The uncertainty caused markets to tank and naturally....people panicked. And just to prove how pervasive having the shit scared out of us was.....there was a toilet paper shortage. Then a paper towel shortage. Then a shortage of brown washclothes. Ok....I made that one up.
Because of the panic and the shutdowns, the government soon enacted relief in the form of PPP for businesses and "Economic Impact Payments" for workers. That seemed to calm the nerves of the nation. And as soon as they hit, I remember thinking how it would kickoff a barage of corporate plans to essentially transfer as much of those funds to the pockets of CEOs as quickly as humanly possible.
If I remember correctly, eggs and milk exploded and soon all grocery items began their pricing ascent. And of course, corporate america quickly learned that more profit could be drawn from this situation if the problematic issue was labeled as "supply chain" issues instead of simple "hoarding". Everything from computer chips to toys was quickly deemed in "short" supply. I mean, it makes sense if you think about it. A worldwide pandemic sends everyone into a death scare and naturally we all want to buy a new car right. Wrong! What sold cars were the companies "fabricating" a scare in anyone that would buy into the thought that dealers had the last cars that would ever be produced. And this tactic was used throughout each and every industry to spark sales during a very uncertain period. From this point on, corporate america was busy cashing in on everyone's newfound wealth. Soon after, even those that so vehemently deride the thought of a government handout were spotted driving new cars. Because, what says "elite classman" like a brand new full size SUV purchase when such a large chunk of the public was sick, hospitalized, or scared out of their minds?
This was a gift to America...and corporate America. In nine months, interest rates had bottomed out at essentially ZERO. Because of the uncertainty, the government announced PPP2 and the ability to apply for EIDL loans. And, of course, Biden couldn't be outdone. If Trump gave the people checks, then Biden decided he also needed to give out checks.....twice actually. Big business smiled. They began borrowing as much as possible in the form of zero percent loans, and yes, these new things called "forgivable loans". They could have just as easily been called "unforgettable loans", or simply "free money".
It was a strange time indeed. Many ordinary Americans were seriously struggling. Meanwhile, many wealthier Americans were thriving. Businesses....they continued their price increases even further; demanding more and more of those covid funds everyone had received. Fast forward 6 months and everyone is fawning over just how resilient we are as a country. So many countries were reeling economically, but here we were fostering the hottest economy in the WORLD. Big business was in the driver's seat smiling from ear to ear. Prices of all goods rose approximately 25%....or more.
To add some additional sweetener to all of this, Wall Street was seeing 40% increases in stocks. 401(k)s were up, and everyone was seemingly celebrating. Many thought this might be a fairly short lived environment, as did I. Then workers began leaving their jobs. I mean, they did have those checks after all. So maybe it was a good time to go on a hiatus of sorts. Now, here we are, prices are rising out of control, and employed Americans enjoying their "work from home" situation as well as those workers with their newfound "essential employee" labels decide it's time for more money. Surprisingly, every request for a raise was seemingly met with a "yes". Inflation heated up even more. Auto manufacturers began selling vehicles without chips....just a simple promissory note that they'd be installed at a later time. And everyone's current car or truck skyrocketed in value. "You mean I can sell my current automobile for more than I paid for it?" Everyone felt rich! Let's not even mention what happened in the housing market! What could go wrong after all? We, the nation of well rounded, self disciplined individuals that know how to manage uncertainty and rainy days, should not require any guard rails. Let the market decide! After all, if things go South, we'll just get more checks. This is the "new normal" right? Wrong again.
In June of 2022, the rate of inflation reached a staggering 9.1%, a number higher than we'd seen in 41 years. This got the attention of the Federal Reserve and Jerome Powell became a household name to all adults, not just the newsy types. At this point, current interest rates (federal funds rate) were at 1.21%, and the Dow Jones Industrial Average had eclipsed $34,000.00 It was clear that what was expected to be short lived or "transitory" was in fact, very persistent.
The Federal Reserve began talking about how important it was to begin cooling inflation. Due to our high level of intelligence, maybe Powell should have said. "Prices too high. You spend too much. This ends badly if we stay the course." While almost everyone agreed, only the economists, top earners, and corporate america understood this also meant we'd need to cool the economy as a whole. Wait, what? You mean we are TRYING to bring this fairytale economy to an end? When we pump more money into the economy, a nation of savers gains wealth.....a nation of spenders however, increase the price of everything.....salt and potting soil included. By December of 2022, the federal funds rate had incrementally increased to 4.1% since June. But there was a disconnect, the Dow Jones had risen 7.93% during the same time period.
In my eyes, the Federal Reserve was encouraging two things. One...we all have a tad more self control over our spending. Two...the titans of industry, as a result, would begin to cut prices. That's simple demand side economics. What most don't realize is.....supply and demand economics no longer apply as they once did. In a country where so much money and wealth has been consolidated into such a small portion of the population....they control the supply. CEOs say "If we are only selling half of what we were, let's raise prices by 50%!" That's right, they can do half the work to produce a product or service, and get paid the same amount...all because of our lack of self control. (Thanks Amazon.) So....obviously prices stayed stubbornly high and because we, as Americans, are terrible at "not" spending money.
We now had a dilemma. For the Federal Reserve to effectively control inflation, more interest rate increases were necessary. They essentially were tasked with creating enough pain in the job market and at the cash register so we were forced to make choices. At a point when corporate america had already gouged us unapologetically, they finally began to see the writing on the wall. They could either cut prices now, or cut prices later. Unfortunately, for us, they've chosen later. They have decided to stick it to everyday Americans until the pain is so great, their A.I. economic forecasting models start to light up the boards. That pain is most assuredly coming in the form of layoffs. And, as you've probably heard.....corporate america is not shy about admitting to the people where this is headed. So we now have a fight between the Federal Reserve and the people that basically run shit around here....the 1%.
Layer the unemployment timeline over top of the interest rate timeline and you can see the relationship rather easily. The game of "Chicken" has continued for quite some time now. The Fed in one car, traveling at a predictable rate of speed in one direction. And the 1%, the ultra wealthy, racing in their overpriced sports car at a rapid pace in the other. Both trying to control each other...closely gauging when their opponent may flinch. What happened to the "We're all in this together" mantra. Well, for those that haven't been paying attention....that was ditched quite a ways back. And, the 1% appear quite comfortable leaving that idea laying dead on the side of the road. When rates go up, someone employed by the 1% loses their job. Meanwhile prices are kept stubbornly high by corporate america....daring the Fed to raise rates again. This fight is being played out right in front of our eyes. The 1% has the wealth and power to control the narrative that says "The Fed is killing you America. Look at what they are doing!" Meanwhile, the Fed, is restating its case over and over again, rather monotonously and mild mannered, "Prices are still just too high".
You might find yourself asking "Who's winning this fight?" In a country infatuated with competition and winning, that's the natural response. Honestly, while it appears the 1% have the upper hand....only time will tell. I honestly think the more important question here is "Who's losing?" And the definitive answer to that question is US!
Let's track back a moment, before covid, when the economy was humming along under Trump. Rates had already began to increase in 2019. In fact, they reached 2.42%. A real estate loving Trump began demonizing the Federal Reserve chair, Powell, in an attempt to pressure him into lowering rates. If memory serves, he even threatened to fire him. Trump was not concerned that inflation had already began trending above the targeted 2% rate. What can we glean from this? First, inflation was coming whether we liked it or not, Biden or Trump. Let's remember that the court of public opinion has overwhelmingly found Biden as the guilty party here. However, the stimulus checks were fuel to that fire. Second, Biden or Trump can't effectively control inflation or prices. They can rail against whomever they choose, but the 1% ultimately controls the economy.
It's probably smart to keep your eyes on this fight. With Trump heading back to the oval office, and already escalating the attack on the Powell (a Trump appointee), things may get even trickier moving forward. Don't be fooled into thinking rates can't begin a steady ascent once again. And if they are slashed to zero under the pressure of Trump, well the 1% gets that much stronger don't they. But at least we can squeeze another new cell phone on the Visa. Ahh...bliss.
References....
https://fred.stlouisfed.org/series/FEDFUNDS
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/
https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm