Feb. 4, 2022

Is Biden Following The Formula For Economic Disaster?

In Hollywood, they call it the formula.

It's the basis for nearly every romantic comedy since Hollywood began to make movies. Any astute observer is quick to recognize the formula: boy meets girl, boy loses girl, the boy finds girl again. And all ends with the happiest ending.

Now the characters all change, and the events are different, but the basic plot remains. A chance meeting, a loss, and a final reunion.

There is the same sort of formula, predictable, ever-present in nearly every major economic catastrophe.

We saw it back in the 1970s when a major external oil shock sent the economy into a tailspin.

First came the OPEC Oil Embargo. Gas and energy were hard to get. Cars lined up to fill their tanks.

The second phase began, the stratospheric rise in price. Inflation became the watchword of the day. As American's saw the price of nearly everything march higher and higher.

The public clamored for price relief. Someway to stop this runaway inflation. The President at the time was Richard Nixon, and he readily obliged with step number three in our formula: Wage and price controls. What better way, after all, to control rising prices, but by the dictates out of Washington?

It's all part of the formula.

Step one initial shortages, or other economic impairments. Followed by central political control, generally in the form of price control. Followed, at last by a major recession or even depression.

We've seen the formula repeated over and over in modern economies. Russia, with the ever-persistent food shortages, Venezuela most recently, and most likely Turkey shortly.

Now, like Hollywood movies, the characters change, and the circumstances change, but the results are almost always the same.

For Russia, it was often crop failure, for Venezuela the inability to sell their oil, and for America in the 70s the Embargo of oil from Saudi Arabia and others.

So that's step 1 of the Formula: Supply Shock.

Then markets naturally react to the lack of supply, with higher prices. That's how markets are supposed to react. It's not an aberration, it is the free and open market reacting to a lack of supply.

And, of course, it's exactly how our markets are working today. After governments locked down a half-million small, but “non-essential” businesses, after farmers dumped excess products such as milk and animal products, after oil properties were shut down, and pipelines canceled, after a quarter of our workforce was sent home to “self-quarantine” we have shortages.

Is anyone surprised?

And those shortages are leading to higher prices, inflation.

Again: is that a surprise?

It's the next step in our formula which will become critical.

Will this government, allow the marketplace to work through these imbalances?

If so, we may come out the other side, although having to endure a very difficult time. We can emerge with a healthy full-functioning economy.

'But my sense of it is that's not what Joe Biden will want to do. Anyone who began the first months of his Presidency by ruling time after time with mandates. He will want to put this economy under his control.

If that happens we will fall right in line with Russia, Venezuela, and America's own lost 1970s

I think it is inevitable that Biden will reach for control.

But will he get it?

Here's our saving grace. In his weakened political state, with his approval rating in the 30%s, the likelihood that Congress would grant him that control is remote.

And for that, we can thank our blessings.