The other type of economic control in Washington is the fiscal element. It originates in Congress, with government spending and tax policy. Spending can stimulate growth and taxes can restrict growth. The problem is that we are spending way more money than we are taking in. The Fed has two main jobs: to stimulate the economy when it is slowing, and to slow it down when it is overheating. We do not want hyper-inflation. If this continues, we will be burying our children and grandchildren in debt and inflation will take off. When this happens, policies must become much more restrictive or we could experience hyper-inflation, similar to what is occurring in some South American nations. Visit www.usdebtclock.org to see how bad the problem is.
Last March, we had a sharp drop in stock market values. In April, we made up most of the losses. This is not a normal market cycle. While markets will normally experience bull and bear cycles, they usually last years and not months. Recently, the stock market has been at all-time highs. The billions of dollars invested in vaccine research may have been the most important expenditure. Scientists around the world worked to develop effective vaccines that are now slowing the spread of the virus and will help us get back to normal. While we are not there yet, we can see the end.
Economic policy is dictated by two parties in Washington. Monetary policy is the work of the Federal Reserve System, which is supposed to be made up of non-partisan and experienced bankers. They exercise huge influence over interest rates through their policies and actions. When they are purchasing government debt, they can keep interest rates low. We were already in an artificial environment of very low interest rates. When the crisis hit, the Federal Reserve dropped these rates even lower, to near 0%. Congress took huge spending measures to stimulate the economy, including giving most people $1,200 checks. Maybe the government had to go “big” at that time, because no one knew what would come next.
There is no question that taxes will go up, and not just for the rich. They do not have enough money to pay the bills. It is going to be your retirement savings that pay for these expenditures. That is where the money is located. It often seems that the people who controlled their spending and saved for their dreams are the ones who must pay for those who did not. The Fed is on a high-wire balancing. It will have to raise interest rates probably sooner than it wants, which will have a negative effect on the stock market. The 10-year Treasury recently hit 1.71%. This is a gain of 90 basis points in the first quarter. Congress is determined to keep spending.
Lumber prices have doubled, as have many other household commodities. Used-car prices have risen to the point that some small dealers will not purchase inventory. Many businesses are having a hard time hiring new people and wages are going up. Yet Washington is providing incentive to not work. The Fed last year said it might accept inflation a little above its historic level of 2%. We are seeing this already in certain sectors. A recent report said grocery prices were up 3.5%. Gasoline prices have jumped and home sales are going up rapidly. There is a shortage of housing inventory, which will lead to higher prices.
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