3 Popular Overreactions to the Current Economy

Ironically, in a time when we have access to more information than ever, our access to truth seems to be shrinking. If you are like me, it is often difficult for you to find trustworthy sources for information these days. While left-wing and right-wing media companies fight a vicious war for the allegiance of the American consumer, misinformation, fearmongering, and propaganda now ooze from the mouths of those who were once our most trusted envoys for truth.

Even Finance and Economics, industries that were founded upon objective truth, have not been sheltered from this attack. In fact, in the wake of the political turmoil that has dominated the first two years of this decade, popular media has succeeded in infiltrating the minds of the American public by the doorway of their pocketbooks. Their tactics are simple: politicize everything, control everyone.

Armed with the potent weapon of economic uncertainty following an unprecedented pandemic and an unusual recession, the media industry has many investors overreacting to present circumstances at the expense of their hard-earned cash. By pushing narratives more grounded in political jargon than economic theory, media companies have monetized the fear of losing money, leaving behind a trail of misinformed readers as they rake in the profits.

The goal of this article is not to tell you that your favorite news outlet is feeding you lies, but to simply draw attention to popular narratives that have some truth to them but are still overreactions. Here at Narwhal, our aim is not to push political agendas, but to promote the greater good of our clients in everything we do. With this important qualifier, let’s look at three overreactions to our current economic situation that we are seeing in media headlines today.

Overreaction 1: Inflation is dangerously high across all sectors, and it will soon skyrocket to a level where the US dollar will be considered worthless.

There are two components to this statement that need to be addressed, but both have to do with inflation concerns. These concerns are based on the fact that inflation has been rapidly increasing for the past few months now. People who lived through the 1970s inflation crisis are seeing prices rise rapidly and are worried that history is doomed to repeat itself. At first glance, the situations seem similar. However, upon a closer look at inflation indicators, the picture is not as bleak as it seems.

Our most recent data tells us that inflation is up 5% from a year ago. At face value, that is an alarming number. However, high prices in the ever-volatile food and energy industries are largely to blame. The core price index, which excludes the aforementioned volatile industries, is increasing, but at a slower rate. Additionally, economists believe that most of the recent price increases are caused by supply bottlenecks resulting from the rapid rise in demand for consumer goods following the government’s dispatch of COVID-19 stimulus checks. In short, many companies are struggling to increase the number of goods they produce at a rate that matches the increase in demand for those goods. This causes shortages which, in turn, causes prices to rise.

For this reason, economists are not terribly concerned that inflation will continue to be an issue long term. Once companies are able to adjust to demand, most believe that inflation will retreat back to more typical levels. This brings us to the second part of our discussion on inflation. Many believe that the increase in the money supply resulting from the government's $1.9 trillion COVID-19 stimulus package is directly responsible for the rise in consumer prices. While increased government spending may contribute to elevated consumer prices, it is far from the only contributing factor. Further, the savings rate of American households increased significantly in 2020 and touched all-time highs by some measures, which flies in the face of the notion that stimulus checks rampantly increased demand. After all, if people are saving money, they’re not spending it.

For now, there is no reason to believe that the US dollar is at risk of being worthless in the near future. Although there is uncertainty surrounding the short-term outlook for inflation, most experts are less concerned that the high prices we are seeing right now will be sticky. Additionally, just the fact that we are the United States of America should help ease concerns about the dollar becoming worthless because there is, and will likely continue to be, a high international demand for the US dollar as a currency. This allows our government to put significant amounts of money into the economy without feeling the entire burden of the increased money supply on prices domestically.

Overreaction 2: The current administration’s unprecedented fiscal and monetary policies will soon lead to the US national debt ballooning to the point where creditors will start demanding debt repayments that the US cannot afford to make.

This concern about the level of debt that the current administration has already incurred often goes hand-in-hand with inflation concerns because they both are grounded in feelings about our government’s current fiscal policy. Because fiscal policy is so heavily politicized (which is reasonable), we should tread especially lightly when trying to extract an objective economic analysis about national debt from articles that are clearly written for the purpose of praising or condemning the current administration. For the purposes of this article, I will decline to take a political stance on what makes a good fiscal policy but will instead provide what I believe to be a rational and appropriate reaction to the way the government is spending money.

The first thing to understand when discussing the national debt is there is a common sentiment that Democratic presidents tend to run budget deficits and Republican presidents tend to run surpluses. However, the numbers simply don’t support this belief. Since Calvin Coolidge, only one president has not run an overall budget deficit during his term: Democratic President Bill Clinton. Of the four presidents that recorded the highest budget deficits that the US has ever seen, three of them are Republicans. All of this is not intended to villainize Republicans, but to simply challenge an established narrative that can be misleading. Although the deficit that the Biden administration is projected to run in 2021 will likely be the largest ever, the idea of presidents from both parties pilling onto the national debt is far from a novelty.

Politics aside, the sheer value of the US national debt can be concerning. Currently, the US government has over $28 trillion in debt. To put that in perspective, that’s $85,000 for each member of the US population. At a surface level, this number is alarmingly high. However, when put into its proper context, $28 trillion becomes much less terrifying. A useful exercise for this is to think of the government as a regular person who has a given income and debt. The average American carries $90,460 in debt and makes $62,843 a year. In other words, the average American has a debt-to-income ratio of 1.44. Now, imagine the US government is a person. It carries approximately $28.4 trillion in debt and makes approximately $21.4 trillion a year, equating GDP to income. Therefore, the US government’s debt-to-income ratio is only 1.35. So, if the US government were just a regular person, it would be in a better position to pay off its debt than the average American. With this framing in mind, the number $28 trillion doesn’t seem so bad.

Additionally, there is concern that countries (particularly China) will suddenly demand the US to pay back all of its debt at once, plunging the nation into a massive debt crisis. This is an extremely unrealistic scenario. First of all, that is not how bonds work. When other countries buy US bonds, they are agreeing to loan the government money at a certain interest rate for a defined period of time. Thus, China, for example, could not legally demand that the US immediately pay out the full value of its loan today on bonds that are set to mature in 2030, just as much as your bank cannot demand that you pay back your entire home loan within the fifth year of your 30-year mortgage. Second, US bonds are among the most highly demanded government bonds in the world, not because their interest rates are sky-high, but because other governments are confident that the US will not default on its loans. For these reasons, economists have little concern that the US will default on its debt any time soon.

Overreaction 3: The current administration wields tremendous power over long-term market outcomes, so liquidating all non-cash positions is the best thing you can do to protect your money.

This is, by far, the biggest (and potentially most costly) overreaction that we will cover in this article. Many people who disagree with the Biden administration’s fiscal and monetary policies are pulling their money out of the market because they are concerned about the future of the economy. This can be a massive mistake that could cost you a lot of money. In order to understand why, it is very important to make the distinction between economies and markets. The American economy is just the big picture view of the wealth and resources that make up the nation. Most of economics simply deals with the consumption and the production of goods and services. The economy is heavily influenced by the current administration in the short term and the long term. We are still feeling the effects of economic policies that President Franklin D. Roosevelt put into place nearly 90 years ago. It is not so with markets.

A market is simply a system in which two or more parties engage in exchange. There are many kinds of markets in an economy: stock markets, bond markets, housing markets, etc. These markets operate within an economy but are rarely controlled by one governing entity. Markets are reactive, and they can change by the second with new information. A company’s share price could triple in five seconds following the announcement of a buyout agreement and could plunge just as rapidly after a particularly disappointing earnings call. For this reason, the current administration has little impact on what the market will look like long term. Since markets fall under the umbrella of the economy, a given administration will likely impact markets in the short term. However, a president can only impact the market for a maximum of eight years. After he leaves office, the market will adjust to the policies of the new president. Keep in mind, a market that responded negatively to one administration could soar under another.

This brings me to my next point: you do not realize a gain or loss on your investment until you sell the asset. Chances are, if you were to hold all your assets today for another ten years, their market values would be significantly different than they are now. Therefore, liquidating all your assets into cash because you disagree with how the current administration is running things will most likely lose you money. Think about it. For liquidation to be a wise financial decision, you will have to both sell your assets and buy them back at just the right moment – something that even professional portfolio managers have difficulty achieving. Odds are, you will miss the timing on one, if not both, and as a result, lose money.

What you do with your assets is completely up to you. At Narwhal, we believe your money is your money. We work for you, not the other way around. That being said, it would be neglect on our part if we did not offer our advice on important financial decisions. If you are concerned about the way that the current administration is running the country financially and you do not plan on needing to liquidate your assets in the near future, wait it out. Remember, you do not gain or lose money on an asset until you sell it. Even if your retirement account is currently trading at a market value of 50% less than your principle (a very unlikely extreme scenario), in ten years when a new administration comes in, it may be worth 50% more than your principle. Markets are rapidly changing and, thus, swings in market prices have less of a long-term impact, and volatility is easier to tolerate. If a temporary change in the administration running the economy causes you to jump off the path to profit that you have meticulously followed up until this point, the odds that you will lose your hard-earned money are exceedingly high.

Conclusion

As I conclude, I find it important to reiterate that our goal in posting this article is not to take a political stance, but to do our duty as a wealth management firm to ensure that our clients are informed. News headlines can inspire panic. I will be the first to admit that I, too, find myself getting caught up in the emotions of a distressing headline. It is easy to overreact to something that we read on the internet or saw on TV. If it weren’t, the media industry as we know it wouldn’t exist. We hope that this article has helped calm potential fears about the future of your investments. By providing a context that makes it easier to understand the big macroeconomic issues we are facing today, we hope to have helped you face difficult financial decisions armed with economic understanding rather than media propaganda.