Economically We Won. We Need To Act Like It!
In 1980, the inflation rate was 13 ½%. A few years before in our commercial real estate leases, we instituted a semi-annual consumer price index. Our company did that for a couple of reasons. The main one was we didn’t want large rent increases all at once to seem too burdensome for our tenants.
We lived with what would be considered high inflation for most of the late 1960s, 1970s, and early 1980s. From 1967 until 1986, inflation was never near 2% for any year. For most of that period inflation was above 4%. But there was one year during Reagan’s administration when the rate was above a bit above 3% and people celebrated the good economic news that inflation was under control. This year inflation is running at 3.2%, and people are behaving like the economy is in the toilet.
In 1968, the unemployment rate was at 3.4%. That was during the height of the Vietnam War when the military had 3,550,000 in its ranks. That year saw the lowest unemployment rate since 1952 at 2.7% when we were fighting the Korean War. The unemployment rate today is 3.5% and there are 1.3 million in the military services. Our total population in 1952 was 153 million and in 1968 it was 196 million. Today it is 340 million.
Our economy was hit hard by Covid. The only other thing I can remember in my adulthood that disrupted the system comparatively were the two oil embargoes of the 1970s. We used an enormous amount of oil to power our economy and everyday life back then. It took some time for the nation to bounce back. More than the few years it has taken this time.
What the American people are feeling is not an economic problem but a political one. Economists think there is a lag in economic perception in society of one to two years. The numbers speak for themselves. So far, the predicted recession by most of us has failed to materialize.
When does the Federal Reserve and the Biden Administration declare victory? They should have already done so except for one thing. About 30 years ago, the Fed decided that a 2% inflation rate was the target number and has stuck to it ever since. The 2% number was not based on anything more than central bankers speaking to each other. Former Fed Chair Alan Greenspan thought it was a good target that wasn’t formally adopted by them until 2012.
In their quest for a 2% inflation number, the Federal Reserve may plunge the economy into a recession. Since investment rates track inflation rates, a low percentage could create problems for our economy and has done so in the past. By chasing returns, investors bid up asset classes creating bubbles. Where once conservative investors would love to be in CDs and Treasuries, they could not earn enough in the recent past. It drove them to riskier investment products.
In its pursuit of a 2% rate, the Fed may drive up the unemployment rate by raising interest rates too high for no good reason. Having lived through the inflationary times of the late 20th century, I don’t want to see a return to 18% mortgages. There is a happy medium.
Perhaps it is time to not balk at 3 or 3.5% inflation in our economy. When a downturn does come, we will be able to fight it because we do have interest rates that can be manipulated. Unless new research shows the validity of having a maximum 2% inflation rate, it is time for the Fed to rethink this number.
