Occam's Razor

Our yo-yo stock markets are yo-yoing again, in the down direction. Pretty much all the major indices are in bear territory now, which means they’re off twenty percent or more from recent highs. That matches pretty well with my portfolio.

The reason they’re down though has less to do with underlying economics than the Federal Reserve, which seems determined to beat inflation by making marginal people poorer.

Of course, the Fed says they hope that won’t happen and they can engineer a soft landing where inflation eases and hardly anyone is impacted by catastrophic events like losing their job or their housing. But after its recent three-quarters point interest rate hike, Fed Chair Jerome Powell made it abundantly clear that, if necessary, the Fed is willing to raise interest rates so high to address inflation that people will be out of work and likely out of their homes too.

This is because he sees inflation as the bigger problem. The Fed wants inflation in a “normal” range of two percent or so per year, not the eight percent or so we have now. To do that, you either have to increase supply or cut demand. The Fed can do little to increase the supply of anything other than money. Increase interest rates high enough, which they can do, and the economy cools, which means demand drops and often a recession occurs too.

The curious thing is that the Fed largely caused the inflation we are now experiencing. I’m not saying they created the pandemic, but as a result of it they took all sorts of extraordinary actions to turn around an economy that was slumping severely. They cut interest rates to almost nothing and bought tons of assets with dollars they created to help push up equity prices.

And it worked. All that cheap money had to go somewhere, so businesses found ways to spend it, often to buy back their own stocks. In the process stocks rebounded nicely and rich people got a lot richer. As for those who can’t afford much or any stocks, well, they mostly scrambled as usual. As a result of all this cheap money, real estate markets super inflated, dramatically raising the cost of houses.

We bought our house in 2015, brand new, for about $480,000. The two houses across the street from us, both somewhat larger but with walkout basements and a commanding view of the valley, sold for crazy prices. One sold for $975,000. A retired lawyer and his wife had no problem paying premium for the house. We’re not planning to go anywhere, but I’m certain if we sold our house we’d get at least $625,000 for it. It’s our only appreciating asset at the moment.

Those without gobs of money generally can’t afford to buy a house, so they rent, and lately pay through the nose for it. They generally pay as they go and with the cost of rent and food inflating making ends meet often means hunger. My wife spends one day a week at the local food bank and can document that the scope of community hunger is increasing exponentially. Some are living out of their cars, if they are fortunate to have one, or in tents in the woods.

If you let a bunch of economists control the money supply, all their solutions will be economic ones. For other solutions, we have to depend on a sharply divided Congress that can rarely even pass a major spending bill. In any event, unless the Federal Reserve Act is repealed, the Fed will keep using its economic hammer to solve problems it often creates, and those with little in the way of power and assets will generally be the ones to pay the real price.

It shouldn’t surprise anyone that by making others miserable, homeless and impoverished you aren’t really solving a problem like inflation. The effect of these policies though does seem like a lot of social engineering: to ensure that those people are kept in the economic place where their betters want to keep them: poor, miserable and desperate. Many of our betters though want to screw these people even further: taking away reproductive choice and not allowing them to even acquire Plan B. If some of these expectant mothers die from ectopic pregnancies, well, thems the breaks.

Here in Massachusetts, we voters will get a chance to vote on a referendum in November: a four percent surtax on taxable incomes of $1,000,000 or more. Money from this is supposed to go for transportation and educational expenses. It’s likely to pass, having been delayed for many years by various court challenges funded by rich Massachusetts residents. This will likely result in dire warnings that our rich people will move to other states; New Hampshire, after all, is just next door and doesn’t have an income tax. Our state definitely needs more money for schools and infrastructure.

But even this doesn’t address the fundamental issue. And that is that to live decently in America today requires a lot more money than it used to. We need a whole lot more social services spending, not less. And since the majority of our wealth is possessed by a tiny portion of our population, absolutely they should be paying to make this possible.

It’s encouraging to see unionizing efforts underway in many industries, but this alone won’t solve the problem. We need massive investments in affordable housing, free education in public schools through college, heavily subsidized childcare and a first rate transportation infrastructure. Since Ronald Reagan was elected we’ve been shortchanging the needs of the poor and working class, making simply affording a roof over your head unaffordable for many.

What we don’t need is a Federal Reserve using its gigantic hammer to try to solve problems through inflicting more pain on those who invariably will be asked to pay the price. Those who should pay the price for fixing these problems are those who spent forty years profiting from underinvestment in social services. It’s likely that their bloated portfolios would hardly register the difference.