375: Stalking Economists for Answers: Richard Duncan

Last week I called the economy schizophrenic. Actually, that's an insult to schizophrenics. This is simply a dysfunctional economy. It's the product of a good idea called capitalism with excessive intervention—namely by the Federal Reserve Bank of the United States. Today's economy reminds me a little bit of the movie, Jurassic Park. Altering the natural order of things has unexpected consequences… like a T-Rex eating you alive. Similarly, the Fed printed money for years and kept interest rates at artificially low levels—even when it probably didn't need to. Sure, raising rates 10 years ago might have caused a little recession along the way, but that's NORMAL. Instead, they decided to take intervention to a new level. Rather than seeing the role of business cycles in a healthy economy, they became reactive to equity markets. To be clear, keeping equity markets in a bubble has never been a mandate of the Federal Reserve. But there they were. They would threaten to raise rates, the markets would panic sell and then the Fed would quickly back off. The Fed was playing a game of chicken with investors and the investors won over and over again—so much so that people began to believe that the Fed wouldn't ever let the markets go into free fall. Then Covid happened and, with it, something unprecedented. True helicopter money was released into the hands of ordinary Americans by the United States government. You see when the Fed prints money it lands in the arms of banks who would simply hoard it. This time, things were different. People needed the money to eat so the government put it into their hands. And that, along with high demand for goods because of a crippled supply chain lit the fire of rapid inflation—the worst we have seen in 40 years. Of course, somehow the Fed didn't realize that it was real at first and didn't act quickly. In hindsight, gradual increasing of rates would have made sense and probably prevented the need for extreme measures. Instead, it waited for things to get out of hand and then put its foot on the gas like never before. Now we are sort of in no-man's land. Inflation seems to be getting under control. There is some distress in the economy as seen by bank failures and corporate bankruptcies at 2010 levels. The commercial real estate markets are a mess. But…we also added 339,000 jobs last month. Why? I don't know other than to guess it has something to do with optimism that the Fed will change course and become Dovish with rates. In other words, businesses may not believe that the Fed will let things get that bad before they reverse course and start cutting rates. It reminds me of a spoiled child who knows that if he whines long enough his parents will give in. It's not the kid's fault that he behaves that way. It's the way the parents taught him to behave. Similarly, businesses and investors don't really believe the Fed when it says enough is enough about low rates and money printing. I'm not sure that I do either. So, that's this non-economist's take on what's going on with the economy. There's a good chance that I have several flaws in my argument but, as I've said before, I'm trying really hard to make sense of it so I can move forward. Richard Duncan is a real economist—one who recently spoke to Congress on what he believes needs to be done to move America ahead. He has some pretty good ideas about what's going on with the economy now that I think will be useful to you. Listen to my interview with him on this week's episode of Wealth Formula Podcast!