Dec. 31, 2021

The Dawning Of A New Year, And A New Economy!

Well, 2021 was quite a year. A year of tension and tragedy.

A year when the nation continued to be plagued with disease. John's Hopkins reports that more than 800k Americans have died from the Covid-19 Pandemic and its various strains since the pandemic began in 2020.

These numbers are made all the more tragic by the VAERS report that now over 20K American's have died from the vaccine administered to prevent the disease.

Our economy has also been buffeted by the Pandemic, and the political reaction to it. From that dreadful Second Quarter of 2020, when governors and mayors throughout the country placed their jurisdictions in absolute economic lock-down.

For the first time in our nation's history quarantining the healthy. Those that could have gone to work, were not allowed. Businesses that were deemed by executive order to be “non-essential” (quote-unquote). Were closed.

Many closed forever. I saw at least one estimate that claimed more than 400k small businesses went out, in that disastrous second quarter alone.

And as you would expect, the economy went into free fall. Had it continued in that locked downstate, the economy would have fallen by 33%, the largest economic decline in the nation's history. Exceeding that of even the 1930s.

The reaction from Washington has been nothing short of massive. With an initial stimulus package under President Trump, which amounted to slightly over a trillion dollars.

Followed by three more stimulus packages under new President Biden, amounting to an additional 8 trillion dollars.

The important thing to note here is that in total 9 trillion dollars entered the economy. And all of it came in this year 2021.

So is it any wonder that we had sustained economic growth. And we also had inflation. Washington pushed an equivalent of 45% of our annual income into the economy, in the form of “stimulus,” Actual checks paid to individual citizens, businesses, and government entities of all types.

Does that represent real organic economic growth?

Of course not.

And it's the reason that almost every economic report coming out of Washington, has a disclaimer that their analysts are not able to separate what is real from what is not. They delicately say, they can back out the income effects of the stimulus.

What this tells me, is that as 2021 ends, we really can't tell where our economy stands.

On the surface, it looks OK. GDP has been growing so far this year. But it's all based on stimulus dollars. At an amount that has never been approached before.

Think of it, nearly half of our national income in 2021, was the stimulus.

This naturally leads to the question: what would happen if that Stimulus were withdrawn?

And the answer will be known shortly in 2022.

Thanks to a stall-worth Senator from West Virginia, Joe Manchin,  much of this insanity was laid to rest when he indicated he was opposed to yet another stimulus package, this time called the "Build Back Better Program."

And so this year stimulus, at least of the level of half our economy will be reined in.

That's the fiscal side.

Down the street from the Capital, at the Eccles Building, the Federal Reserve is also indicating that they too, will become more circumspect this year.

It began in late summer with the Fed indicating that they were prepared to reduce the number of bonds they were purchasing each and every month. At that time the level was $120 billion in purchases, in an effort to provide additional liquidity to the financial system.

Wonder where all that money to buy stocks came from?

The latest indication from Chairman Jerome Powell is that the so-called taper, which has already begun could be completed by the end of the first quarter in 2022.

A massive 1.44 trillion dollars in annual liquidity push will end in as few as 90 days.

My cynical self says that may have an impact.

Finally rounding out this trifecta of economic change, the Fed Chairman promises to begin raising interest rates, after years of holding short-term rates at near zero.

Conventional wisdom is that the Fed will raise rates three times in 2022.

Not that rates have been steady. After 11 straight months of higher and higher inflation, we've already seen the Treasury Yield Curve climb substantially higher.

And as we pointed out in a recent podcast, we're now seeing 3 and 6-month T-bills yielding rates that are 5 or 6 times higher than they were at the beginning of the year.

Overall this is the largest change in basic economic policy that I have ever seen. And I've been around a long time.

I remember Nixon's wage and price controls, Carter's austerity, Paul Volkers interest rate hikes.

And none of these represented the across-the-board 180-degree change in Macro-Economic Policy that we're going to see now.

In years past it's always been one part of Washington that would tighten, while the rest would stand pat. Tighter monetary policy under Volker for instance, while Fiscal policy under Reagan didn't change.

But not in 2022.

This year everyone will slam on the breaks together. Money from the federal government, in the form of grants and loans, will become harder to get, at the same time that liquidity at commercial banks and financial companies will dry up, at the same time interest rates are slated to rise.

It should make for quite a ride.

So as the Crystal Ball in Times Square falls to mark the new year, it will also mark a very new economy.

Buckle up.

And that's my special New Year's Podcast.

Remember God has provided a message for times just like this.

“ If my people, which are called by my name, shall humble themselves, and pray, and seek my face, and turn from their wicked ways; then will I hear from heaven, and will forgive their sin, and will heal their land.”

2 Chronicles 7:14

Happy New Year My Internet Friend!