As Americans think, this holiday season will do more to determine the country’s short-term economic future than any political or investment decision.
We can look at corporate earnings, trade data, and capital flows at will, but if enough people think the cost of living is too high, their jobs too precarious, and their prospects too precarious, the economy will slow or slide into recession.
Politicians have long understood what the great economist John Maynard Keynes called “animal spirits”. The leaders of both parties talk predictably about the economy when their opponent is in the White House. Economic pessimism benefits the party trying to regain power.
Remember how President Donald Trump’s opposition in both parties said his victory would weaken the economy? I bought her argument, and she and I were completely wrong. Instead, under Trump, the economy grew at lightning speed until the COVID-19 pandemic effectively crippled the world.
Trump fueled growth by pressuring the Federal Reserve to keep interest rates low, which made mortgages and corporate loans cheap. The stock markets rose and retirement accounts grew thicker. Then he lowered taxes, which made everyone feel more affluent. The popular mood made the difference.
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Trump’s policies, of course, had consequences. It drove up property and stock prices to record levels, causing the current property crisis. He has driven the national debt to an absurd level. But nobody cares about these things until the bubbles burst or inflation sets in.
Inflation is every third word a Republican says today. They do not mention the role of the pandemic in falsifying annual statistics, nor do they explain how the economic dynamics cannot be compared to the 1970s. They want to increase anger over volatile food and energy prices.
President Joe Biden has a harder needle to thread because inflation could get out of hand if he’s not careful. Biden uses a variety of tactics, but he is emulating Trump’s strategy of spending trillions to boost the economy and win re-election in 2024.
Biden started the US $ 1.9 trillion bailout plan, followed by the $ 1 trillion bipartisan infrastructure legislation, and now the $ 1.9 trillion Build Back Better plan is through the House. That’s nearly $ 5 trillion to be spent getting people back to work when the Senate passes the final bill.
Republicans and Conservative Democrats argue that so much government spending, even spread over a decade, will exacerbate inflation. Economists disagree. Some like Clinton-era Treasury Secretary Lawrence Summers are sounding the alarm bells while current Treasury Secretary Janet Yellen and others say inflation will slow down.
The honest answer is we don’t know. But consumer sentiment experts know that inflation expectations generate real inflation. In other words, if Americans believe inflation will be a long-term problem, their animal spirits will create a self-fulfilling prophecy.
Biden’s recent announcement that the United States, China, Japan, India and the United Kingdom would release oil from their strategic reserves is an attempt at expectation management. By lowering gasoline prices, he hoped to ease inflation fears.
The president’s re-appointment of Jerome Powell, a Republican Trump appointee, as chairman of the Federal Reserve, hopes Biden will show he is ready to control inflation by keeping a conservative on interest rates.
Eventually, Biden signals that he will not allow price gouging to boost inflation by instructing the Federal Trade Commission to investigate whether oil companies are manipulating gasoline prices.
Make no mistake, however; these are primarily PR exercises to calm the animal spirits and calm market speculators.
The development of the strategic oil reserve will not control long-term global crude oil prices. But Biden tells overseas producers that he won’t allow OPEC and its allies to play games.
Powell’s reappointment will not appease the Republican critics who will slam Biden every day no matter what action he takes. The FTC investigation won’t come up with anything because prices have had to go up; the industry cannot sustainably supply gasoline at $ 1.89 a gallon.
As I wrote during three presidencies, the White House has very little real power when it comes to managing economic growth. The president cannot spend money without the approval of Congress, and he cannot increase the money supply without the Federal Reserve. All he or she has is the bullying pulpit.
To understand where the economy is going, do what the professionals do: look at the Conference Board’s monthly Consumer Confidence Index and the University of Michigan Consumer Sentiment Index. They give a good idea of the mood of the consumer.
However, don’t expect clarity. They’ve been zigzagging over the past year because the pandemic is still breaking new ground. The virus is still in charge.
Tomlinson writes commentaries on economics, economics, and politics.