It’s the story of a finely tuned economic machine that is as delicate and precise as a Swiss watch. It’s the American Economy and perhaps the most complicated social organization ever created.
Using sophisticated computer models, this American Economy was able to source raw materials and finished products from around the globe, offering the finest merchandise at the lowest price for consumers here in the United States, oil from Saudi Arabia, Televisions from Japan, iPhones from China, automobiles from Germany.
There had never been anything like it in history. Each component of this well-oiled machine must operate in complete harmony, lest deliveries are delayed and unhappy customers wait needlessly for their deliveries. We called this global operation the “Supply Chain.”
For the Supply Chain to function, it must have inexpensive financing, a cross-border payment system, perfect communication along the entire chain, and cooperative government tariffs and customs.
So perfect was this Global System that it had become invisible. Remarkably, only some people who used the Global Supply Chain fully appreciated all the elements involved. It seldom occurred to customers that those Televisions on the Walmart shelf came from Japan or that the Apple iPhone came from China. We took them for granted.
After all, that’s how Americans lived most of our lives, taking things for granted. That the lights come on every day, taken for granted. That there is gas to fill up the car is taken for granted. Food to eat, clean water to drink, ditto and ditto again.
While this wasn’t a perfect system, it was pretty darn close from an operational perspective. A well-ordered economy operating as close to optimally as had ever been achieved.
Managing that economy required a delicate touch, someone who understood the contributions of critical components to make the system work. Someone who appreciated that it took vast quantities of inexpensive Energy to connect the Supply Chain (the oil to power a mega cargo ship) and Energy to light those computer server farms. Someone who understands that much of this infrastructure was built with borrowed funds. Short-term loans and long-term bonds were used to construct the building and purchase the ships. And finally, someone who appreciated that all this was built by the intellect, labor, and imagination of a free people trying to make a better world.
Unfortunately, on January 20, 2021, we got someone who did not possess those attributes, an ideologue seeking to reform what he saw as a hopelessly decadent system. Joseph Robinette Biden Jr. was sworn in as the 46th President of the United States, and on his very first day in office, he started to “change” everything. Taking a sledgehammer to our delicately run economic system.
Biden immediately changed our energy component, canceling the Keystone Pipeline and declaring that he would “outlaw” fossil fuels. Out when the inexpensive Supply Chain. Gone was the cheap fuel used to power those ships from China and around the World. Gone were the low gasoline prices. And, as the Bureau of Labor Statistics noted, a new phenomenon began: inflation. For the first year of this recently revived inflation, the number one component was Energy. Today, those higher, inflation-generating energy costs have filtered throughout the economy, but we must remember it all began with that Biden-induced hike in energy costs.
Of course, Washington does everything possible never to connect those two dots: Energy and inflation. We are to believe that our nation’s public policies are always favorable. That Washington or, heaven forbid, a President would never actually cause inflation. But the results speak for themselves.
Like one wrong turn that leads to another, rather than address our growing energy issue, Washington chose to fight the “Inflation Monster.” Although he was initially reluctant, Federal Reserve Chairman Jerome Powell and the rest of the crew at the Eccles Building signed on to the Inflation Battle after Powell had a “sit down” meeting with the “Big Guy.” So the Fed went from “Inflation is transitory” to the most aggressive inflation fighters ever.
Here is a little math puzzle: did you know the rise in interest rates from 1/4%, where we began a year and a half ago, and today’s 5 1/4% is a rise of 2000%? On a $2,000 loan that you and I might borrow, the interest charged last year was just $5. Today, the interest charge is $100. But the interest differential for businesses, which borrow much more significant amounts, is even more dramatic. Last year, the $ 2 million loan interest charge was just $5K. It wasn’t a big deal. This year, on that same $ 2 million loan, the interest charge is $105K, an expense that would be hard to meet for any company suffering from poor cash flow.
Of course, any discussion of the current economy would only be complete with a mention of the COVID-19 Pandemic and the devastating second quarter of 2020. This historic decline was unmatched in our history. During that quarter, our economic production (GDP) fell further and faster than at any other time, even including the Great Depression of the 1930s. It is no exaggeration to say that the Pandemic and its associated economic lockdown was the equivalent of a significant natural disaster or even a war.
The best analogy I can think of is a small town that burnt to the ground. Imagine, for a moment, what that town might need. It would need lumber and other building supplies to rebuild. It would also need financing to purchase the supplies to rebuild and tide them through the downtime. Some provision for food and temporary shelter. Just the sort of support that the Red Cross provides after a tragedy.
If, instead, imagine the Red Cross dropped by, gave everyone a check, and left. We wouldn’t think much of that kind of a recovery program. Yet that’s what this government did: give us a stimulus check and leave. The result was that we all suffered through Supply Chain interruptions. The person in charge of that issue, Pete Buttigieg, took time off to welcome a new baby. Apparently, the Supply Chain recovery was not seen as a priority for the Secretary of Transportation.
Unfortunately, this Administration’s inability to see the need for continued support has been an ongoing characteristic of Washington. In the year and a half following the Pandemic, Americans have seen continued high energy costs and much higher interest expenses. So, when Supply chains needed to be rebuilt and reestablished, they had to deal with higher shipping expenses (Energy) and financing expenses (interest rates). It’s not ideal for building a recovery.
So the results have been predictable: since Biden’s inauguration in January 2021, the country’s Real Gross Domestic Income (GDI) has not improved an inch. For nearly three years, our combined incomes, after accounting for inflation, have been flat. Put another way, there has been no recovery. But higher interest rates and energy costs lead us toward a Credit Crunch. It’s a time when rising monthly expenses will lead some to default on monthly expenses and, in turn, cause the overall economy to fall into recession.
You are likely already seeing signs of a Credit Recession in your neighborhood. Look for small shops going out of business, people turning back those expensive leased automobiles, and luxury items like boats and RVs going up for sale. They’re all signs that money is getting tight. People can no longer afford life’s little extras. It’s back to basics for many, resulting in fewer sales and a general decline in business activity.
A Credit Crunch is headed our way.