Who better captures the surreal nature of the last eighteen months than Dr. Suess, arguably one of the 20th century’s foremost philosophers? It has been breathtaking how much, and how ironically how little, the global economy has changed since the onset of the pandemic. The economy, employment and consumer consumption roared back in the last year, following the shortest and most extreme downturn in history. The catalyst? Debt. Debt fueled by government policy that made the massive monetary response of Great Recession look modest indeed.
A decade ago, then Fed Chair Ben Bernanke wrote an op ed in the Washington Post.
“Easier financial conditions (and with it an increasingly leveraged Fed balance sheet) will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increased confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will support economic expansion.”
History doesn’t repeat itself, but it does rhyme. The Federal Reserve, and Congress, took the lessons learned from 2008, drove interest rates to near zero levels and released a torrent of liquidity, with massive direct-to-consumer programs, forgivable Paycheck Protection Loans (PPP) and unprecedented unemployment benefits, to bridge the damage wrought by the global health crisis. Consumer confidence was restored, the Grinch was not allowed to steal Christmas and the specter of doom was allayed. Printing our way to prosperity!
Society’s relationship with and appetite for debt appears to be generational. Prior to the 1980s, the use of corporate, government and individual leverage was minimal relative to today; the Reagan years marked an acceptance of credit to fund everything from corporate takeovers to household goods. Equity markets soared in the 80s, but the real growth was to lie ahead – in the evolution and expansion of credit markets.
Government debt surged more than 35% in the last eighteen months, from already bloated levels, as pandemic fiscal and monetary policies transferred liquidity from the Fed balance sheet to businesses and consumers. But one year into the nascent recovery, inflation reared its ugly head – a function of worsening supply chain bottlenecks and wage pressures. The CPI rose 5.4% annualized through September, well above the Fed preferred target of 2%. Supply chain disruptions may be transitory as global system kinks are resolved, but this is the most significant increase in average hourly wages since the early 1980s. Walmart, FedEx and UPS are among the first mega distributors to move to 24/7 workdays to alleviate transportation logjams; but solving the supply chain problems may exacerbate wage inflation, as an increasing (and surprising) number of individuals are leaving the workforce. What will entice them back to employment? If inflation stays elevated, bond market vigilantes may drive interest rates higher, potentially threatening the access to and cost of credit. The Federal Reserve has fewer monetary options if inflation remains elevated. However, government, business and consumers have been enormously creative post pandemic in traversing the void between economic chaos and a sustained recovery. Sustained wage pressures are likely to lead to greater automation, eventually reducing reliance on human input. Until that happens though, we could experience higher wage inflation than we’ve seen in forty years.
“So be sure when you step. Step with care and great tact and remember that Life’s a Great Balancing Act.”
Dr. Seuss, Oh the Places You’ll Go!