‍How does our economy actually work?

Well, this may sound like an over simplified answer to that question, but it is really about people and business spending money.  I know, that’s a crazy thought, it’s not actually the government helping boost the economy and prevent poverty by giving money away through welfare and food stamps or the Fed flooding the market with additional dollars through quantitative easing. If people and businesses can make more money, they will spend more money.  This spending can come in the form of purchasing everyday household goods like groceries, clothing or vehicles; or it can come in the form of capital purchases like manufacturing machinery, business vehicles or real estate; the list goes on, but I think you get the picture.  When one person purchases something by spending the money they earned, someone else sold that and it is taken in the form of revenue. Then, again I know this is crazy, but that cycle continues.

What has REALLY been going on?

To answer this question, we have to go back to the Financial Crisis of 2008.  We all know what happened here… Or do we?  Yes, we all know that there was a massive residential real estate crash that led to the greatest financial crisis since the Great Depression, we now call this the Great Recession.  This was caused by overly loose lending standards perpetuated by the growth of the Mortgage-Backed Securities program created by Fannie Mae and Freddie Mac.  Anyone and everyone with a pulse qualified to have a mortgage and, in many cases, multiple mortgages at or above 100% loan to value.  The problem was a huge percentage of these borrowers had no business ever having a mortgage, let alone the size of one they were approved for.  The second problem was that a huge percentage of these loans were ARMs (adjustable-rate mortgages).  Meaning that when the fixed rate period ended the rate either was floating or they had to refinance into another ARM.  This all would work fine if real estate values always went up.  Well, the opposite happened creating an onslaught of bankruptcies and foreclosures which crashed our economy faster than we have ever witnessed before.

This is when QE (Quantitative Easing) was invented by Ben Bernanke.  The Federal Reserve was basically saying, we will buy the bonds that no one will buy, we will lower interest rates (thus increasing the velocity of money), and we will in essence prop up this failing economy instead of allowing Americans to do their job and correct this, the Government and their sponsored entities were going to fix it.  In effect, saying you can depend on us to fix all of your problems.

QE set the stage for the most inflationary act that has ever been committed by creating more dollars out of thin air and providing the runway for this to be the “answer” to all economic problems globally.

Now we fast forward, skipping over several other implementations of QE along the way that were massively inflationary, to 2020 when the mysterious disease, COVID, came about. No one will ever forget the lock downs. You can’t go to work or anywhere else for that matter, completely stopping the economy, not only eliminating the ability to work, but the spending of money in the common ways we are all used to.  In response to the potential of literally every business in America failing, the government, once again, solves this issue by printing trillions of dollars.  

This time it was different though.  In the traditional form of QE, the money creation valve was the banks, and this was done by lowering interest rates creating more loan demand.  Thus, creating a mechanism of money creation via lending.  This is 100% controlled by the banks and the flow of this can be altered immediately by raising rates higher again decreasing loan demand.  The “stimulus "utilized to overcome the issues brought about by the shutdown was to remove the bank from the process and literally place real money in the hands of EVERY American taxpayer, $6 Trillion now immediately in the economy.  This is an irreversible inflationary act done by our government.  You can’t take that money back out of the economy.

People love having money which creates a blindness to the impacts these actions will have on the American, Global, Economy long-term.  Now, our government and its sponsored entities, the Fed, are attempting to correct a problem that wasn't created by rate induced money supply, by implementing the most aggressive rate increase in history…. Hmm.  Rates didn't cause the problem, but now rates are going to fix the problem???  Not possible. The money is already out, it can’t be taken back.  The inflationary damage has already been done and it cannot be reversed.  But the Fed can crash certain asset classes that depend on rates to determine their value, primarily Real Estate.  This, coupled with a CPI formula that removes any asset class that hurts the Index, produces fantom deflationary environment.  I don't have to tell you that residential real estate, food, and cars, to list a few, have not come down in price, they have continued to rise.

In summary, we have been going about this the wrong way since 2008.  Everything that the Fed has implemented since 2008 has created an unavoidable inflationary environment that will ultimately end in the demise of the dollar.

So what is the solution?

 Again, this is going to seem like an overly simplistic answer, but our economy is simply not that complex.  We need a government that is pro-business, pro-American, and pro-capitalism.  The small businesses in America make up 99.9% of all businesses in America and provide nearly half of the jobs available today.  The answer to our economy, in my opinion, lies in the growth of the small business. If 99.9% of all businesses and half of the jobs are small businesses, the government can actually help the WHOLE economy by incentivizing small businesses to grow and spend money.

Unfortunately, in the recent years, the government has made it dramatically harder for small businesses to grow through tax increases and the removal of bonus depreciation.  If there are tax incentives to make capital purchases and hire new employees, that are most likely needed by the business, small businesses will do it.  Bonus depreciation is one of the greatest ways to spur on economic growth because it gives massive incentive for companies to spend money on capital purchases which are the major drivers of the economy.  Magically more money is spent, more money is made and, I know this is a surprising one, more taxes are paid.  So, raising taxes and removing incentive programs does the exact opposite of what it is intended to do and the opposite solves the problems we are facing today.  AND, neither of these actions are inflationary in nature.

In conclusion, inflation is the killer of the American middle and lower class, the solution is to incentivize the small business owner to hire more employees, create an environment where they can pay better wages and bring back bonus depreciation to incentivize capital purchases.  The economy is a machine that needs fuel to run efficiently, money goes in, money goes out, taxes get paid and jobs get created.

Best,

David Morris

Co-Founder & Principal