We used to have a name for countries where the Government controlled the economy. We called them Communist — a place where the Government directed the “means of production” to use Karl Marx’s phrase.
Today, we may see such a transformation in a most unlikely spot.
Imagine where the Government spends one-quarter of all our income on a rescue plan. Or the President sets the Price of Gasoline? Or does the cost of doing business in America rise by $200 billion a year? Or where that same President selects one company over another? ( This has significant implications for investors.)
The place is America, and this is how America changed from a bastion of Free Enterprise to an Economy that more closely resembles the demand economy of the old USSR.
It’s been nearly three years since an obscure virus from a place named Wuhan, in China, began a series of events that would change our lives forever. Few of us had ever heard of Wuhan, and it was impossible to imagine that anything from such a faraway place could affect us here in America. Yet over the next few months, Wuhan and something called the COVID-19 virus would become our number one dinner topic.
I remember those early reports indicating that Chinese authorities had discovered a particularly lethal virus in the Hubei Province. I felt sympathy for those who might die of the plague but thought there was little chance it would have any impact on me or my family.
Little did I realize how interconnected today’s world is. Little did I know that the 2019 Military World Games had just concluded and that the possibility existed that a virus if indeed there was a virus, might have spread among the hundreds of soldiers, sailors, and airmen taking part in the games.
In review, it’s hard to imagine how different our world was back then. The world was at peace; China and Russia were our friends and allies. It was as natural as night and day for Americans, Chinese, and Russians to participate in an international sporting event to bring our countries closer together.
That has all changed now.
Today, the United States Government tells us that our number one enemy is China, followed by a close second with Russia. Last week, US Secretary of State Anthony Blinken reminded us to keep China on the watch as our primary foe.
Some of that hatred, no doubt, stems from the accusations that Wuhan was the origin of the Pandemic. An assertion that has yet to be verified. American observers initially estimated that the fatality rate for this Pandemic was nearly 1 in 10, which proved to be dramatically off the mark. But those first fatality estimates were sufficiently alarming for American mayors and governors to declare essential “Marshall Law” throughout their states and communities.
Only “essential” businesses were allowed to remain open. All the rest were to close, with their workers confined to virtual house arrest, forced to stay home in “self-quarantine.” Fundamental American concepts of due process and representative Government were thrown out the window, as these would be dictators vied for who might be the most draconian.
It was the raw exercise of power by a group that obviously should have never been allowed to have such ability. However, it did create a legal precedent, one we hope never to see again. The lockdown also profoundly impacted our economy. They brought the nation’s enterprise to a screeching halt. Economic activity in that second quarter of 2020 dropped by 30%, the most significant decline ever.
The American economy was sinking, which sent Washington into an all-out panic. Under then-President Donald Trump, the US Treasury and the Federal Reserve started shoveling money. New loans were invented, the Government created special credit facilities and made direct payments to State and Local Governments, Schools and Universities, Private Corporations, and individuals.
It was an example of pure Keynesian Economics, where the Government steps in and provides the liquidity needed to continue functioning in times of crisis. Before he finished, President Trump, his administration, and the Fed would provide $3 Trillion in various “stimulus” programs to see us through the crisis. Later, President Biden would add nearly $2 Trillion more during his first days in office.
Was the Stimulus needed? Yes, of course. It reflects just how bad off the economy was. Without a doubt, this country was economically comatose at the time. Without some radical measures, we would have descended into the worst recession of our lives. But two things remain: first, it was unscrupulous politicians, the Mayors, and Governors who put us there. Without those “quarantines” and “lockdowns,” all this wouldn’t have happened.
But second, the amount of Stimulus provided likely far exceeded what was needed economically. It was a politically charged time in Washington, in the middle of a Presidential Election. It’s never a good time to consider “public policy.” What began as a purely economic-centered program quickly became an opportunity to “payoff” pet projects and programs. In particular, the education and environmental industry benefited from programs that were more than what was needed to keep them functioning.
This last point is important because all those excess stimulus funds are a prime reason we have an inflation problem today. Suddenly, nearly $6 Trillion of new money was added to the money supply. As any first-year economics student says, “More dollars chasing the same amount of goods creates inflation.”
Of course, the Stimulus was not the only contributor to inflation; the rise in energy costs is also directly attributable to the increase in the Consumer Price Index. Throughout his campaign for President, Joe Biden promised to “outlaw fossil fuels.” And he’s been a man of his word.
On his first full day in the office, Biden canceled the permits to construct a new phase of the Keystone Pipeline. A pipeline that was scheduled to bring nearly 900K barrels per day from Canada to the United States. It would provide a steady, reliable source of gasoline and other products for American cars and homes.
Slightly over a year later, President Biden reacted to Russia’s invasion of Ukraine by cutting off all Russian oil and gas imports. Russia supplied at least as much oil and gas as the Keystone Pipeline would have provided. The cancellation of Keystone and the sanctions on Russia resulted in a loss of potential oil and gas imports of 10% to 12% of the country’s daily petroleum usage. It was the most significant drop in oil supply since the OPEC Oil Embargo of the 1970s when the oil price quadrupled from $12 per barrel to $42 per barrel. In 2022, the oil (WTI) price merely doubled from roughly $60 per barrel to $120 per barrel.
And just like in the 1970s, inflation surged, going from 4.6% in 2021 to nearly 8% in 2022, and most of that is directly attributable to the price of gasoline. Prices that correlated with the President limiting supply.
Today, we live in an America that has seen profound changes because of the events of the past three years. We are currently experiencing the effects of those events: shortages, inflation, supply chain issues, and increasing labor unrest, all due to the imbalances created by the Pandemic and the over-reaction by our politicians.
It isn’t the first time we’ve been through tough times. Generally, in the past, we’ve met these challenges through reform. The United States has been the world’s most effective self-correcting mechanism. Our Federal System’s distributive nature allows issues to be identified first and then various solutions proposed among the different states and localities. It’s a process that ultimately results in much-needed reform.
During the Great Depression of the 1930s, the nation identified Wall Street as a significant contributor to our economic problems. Over the next decade, the most insightful, far-reaching series of reforms were enacted into Law. Those reforms included the Securities Acts of 1933 and 1934, creating the Securities and Exchange Commission and defining and prohibiting fraudulent sales practices in the Securities Industry. Fraudulent Practices that led directly to the Stock Market Crash and subsequent Depression.
Those reforms provided the framework for what became the world’s most important financial system. Although these reforms did not change human nature, securities fraud still exists; the definition of what was fair and equitable versus what was fraudulent helped create today’s free and open securities markets.
Today, there is a growing consensus in the country that in reacting to the Pandemic, our political leaders overstepped their authority. Many of the ad hoc solutions created more issues than they solved. Fortunately, we still have the capability of self-correction. Properly applied reform could be as effective today as it was 90 years ago after the Great Depression.
It might be just the thing to bring us out of our economic funk.