The private and public sectors of our economy have had a relatively easy ride the last three decades, although it is difficult to imagine when one looks at the current state of our economy: The vast number of unemployed, the rapid increase in the number of homeless and those living in poverty, plunging home prices, the meager increase in our gross national product, the surge in our annual deficits, and the spiraling national debt.
Prior to the current downturn, during the past 30 years, our country has seen an unprecedented decrease in regulation, reduction in federal tax rates, three decades of moderate inflation and declining interest rates, and an exponential increase in the value of real estate, commodity and stock values.
Supply-side economist have used these 30 years to promote their ideology by artificially altering the inevitable natural cycles that govern interest rates and inflation, and expansions and contractions; cycles that are meant to balance supply and demand. In doing so, they have failed to eliminate extremes before they became unmanageable bubbles that ended badly with prolonged consequences.
During our previous recession, Alan Greenspan and the Federal Reserve Board failed to ring out the excesses brought about by nearly a decade of economic growth. The pseudo downturn did realign some stock prices by bursting the technology bubble created by the mass number of duplicate, idiotic and dysfunctional businesses created by the Internet. But, it did not severely curb the exuberant stock market or dampen the real estate market. In fact, skewed statistics, inept government policies, questionable business practices, unfettered greed, and impaired judgment created a distorted interest rate curve that spurned an unnatural prolonged period of economic expansion and hyper inflated property appreciation.
But, the economic climate is changing. The economy is beginning to show signs of life and a new interest rate cycle may soon begin. Unfortunately, it may be one that proves to be most unpleasant. A theory exist that interest rates have a life of its own, and that every 25 to 35 years a new cycle begins to emerge, a cycle that is global and somewhat independent of business cycles. The second to the last interest cycle peaked in 1980-1981 at around 21 percent, and for the past 30 years interest rates have sequentially diminished until reaching their present trough.
This does not mean that recessions will not occur, or that interest rates will not fluctuate from time to time or from business cycle to business cycle, for we know that during downturns, interest rates are manipulated lower to spur economic growth. What it does mean is that during the next 25 to 35 year period, regardless of the severity or number of downturns, when the economy gains traction, interest rates will most likely resume their aggregate direction for the remainder of the period. Unfortunately, if history is an indicator of the future, that direction, in the long term, is not one favorable to economic expansion for the next cycle will be an upward one peaking sometime between 2036 and 2041. And, although the frequency of business cycles varies little in an upward or downward interest rate environment if the interest rate changes are moderate and incremental, there is one major difference. In downward cycles, the fed has more wiggle room to stimulate the economy because rates tend to stabilize and hold longer before continuing their stimulative downward cycle. But, in an upward cycle, rates can lag for a much shorter period before resuming their upward move, which has the potential of creating a greater number of disruptions in the economy.
During the last three decades, previous administrations and fed officials had a relatively easy time pushing the concept of supply-side economics: that is until our current economic implosion. The philosophy ‘if you make it they will buy’ is a relatively successful strategy to implement when you have most of the fiscal and monetary tools at your disposal which is generally true in an interest-rate friendly environment. During our last expansion, to stimulate demand for products that most middle class Americans did not need and could not afford, interest rates were lowered. When that failed to have the desired effect, regulations were altered. When that did not meet expectations, fraudulent methods were imposed to expand eligibility. But, this will not be the scenario during the next three to five business cycles. The period of easy money will soon come to an end. Interest rates will rise, more regulations will be legislated, and fraudulent practices rightfully, more scrutinized.
Furthermore, we have an aging population that has owned the extravagant homestead, the vacation home, the luxury boat, and the array of multiple cars: a populace that has now become wiser and more diligent as to how they spend their money. Real middle class earnings have not appreciated during the past decade as personal debt has mounted and real estate values have plummeted. Americans anticipate and fear higher federal, state, and local taxes, as well as higher inflation. And, increasing demand of developing nations for agricultural and natural resources restrict supply and therefore increase our cost for non-discretionary items like food and fuel. Therefore, most Americans have begun to realize they must live within their means which will continue to put downward pressure on the consumption of discretionary products. The day of mega homes, vacation homes, multiple cars and luxury boats will no longer be attainable by most members of the middle class.
The modern day historical average interest rate is 6.9 percent. Thirty years ago most homeowners would have been thrilled to secure a 10 percent or 12 percent mortgage. History has a tendency to repeat itself. The question is, has the fed and elected officials learned from the past to prepare us for the future? Considering the size of our national debt, I would say no, because no drastic measures have been taken to address the issue. If inflation and interest rates spike, our country will not be able to service our debt which will prove catastrophic for the dollar, the economy, and our nation. Inflation has already begun to slowly seep into our dismal recovery, and we may very well have entered a period of prolonged stagflation. If we fail to rein in our expenditures and increase our tax base, we will face hyper-inflation and eventual depression.
Climatic changes have begun to severely alter where and how we live and get our food and water supplies. Higher taxes will limit the amount of disposable income as will international competition for food, energy and commodities, which will increase costs, and moderate growth. We do not know if this will spike rates in the near future, or act as a drag and prolong or at least moderate the initial stage of the interest rate increases.
But, it may not be too late to change course. Congress needs to make the structural changes that will lead to a balanced budget and a substantial reduction in our national debt. They also need to choose the correct moral path in the geopolitical process; a path that does not need clarification or justification; a path that does not require us to provide economic aid to both sides in conflict; a path that does not require our military presence in every questionable arena; a path that will allow us to concentrate our resources and manpower in strengthening our boarders, infrastructure, and economy.
Often times, the beginning stages of an upward cycle in inflation and interest rates can be benign as long as the economy is in recovery and the increase is gradual and controlled, for moderate increases in each seem to stabilize the economy and prop up home and equity pricing. This first decade of the next cycle should provide enough time to meet these goals and change our present course in order to avert an economic calamity. Revolutionary breakthroughs in technology and energy types and usage could partially offset the effects of these changes by increasing productivity and reducing corporate margins, resulting in lower costs to the consumer if passed on. However, the best way too immediately offset inflation is to balance the budget and begin to eliminate our national debt.
Perhaps when looking toward our future we should take note of the rise and fall of the Roman Empire, an empire which used their military presence to extend their influence abroad and to expand their markets into occupied territories: an empire governed by self indulging aristocrats who seemed detached from reality while living a self-destructive opulent lifestyle that vastly differed from that of their populace. Perhaps the use of lead in the piping that supplied water to their extravagant Pompeii style homes distorted their cognitive skills. But, what’s our excuse.
America is no longer the only super power on the planet and may very well, during the next forty years, be bypassed by China as the dominant economic and military power. Although the Bric nations are currently experiencing high rates of inflation and their economies could possibly falter, it is clear that demand from China and India and Russia will continue to strain the resources of our planet, as will the resource rich nations like Brazil that will experience an economic renaissance of their own as they benefit from the goods and services they provide for these heavily populated countries as well as for their expanding middle and upper classes. We will eventually become the underdog in this pursuit for resources and global supremacy, and will therefore be forced to conserve, a goal best reached by living within our means.
Everything in life is cyclical, and the key to a healthy productive lifestyle is moderation. The same can be said of a healthy economy. If we as a nation learn to live within our means and rely less on materialistic items to bring pleasure to our lives, perhaps we will accumulate less and learn to again enjoy the simple things that brought us happiness; our families, friends, and fellowman, and an altruistic, productive lifestyle.