Of More Money and Higher Prices

 

Photo by Shane on Unsplash

We have a new occupant of the Oval Office.  I did not hear his inaugural address, uncertain who would forget it more quickly, myself or its deliverer.  Inaugural addresses are highly forgettable literature, Lincoln’s first and second addresses (the second especially) the only ones that anyone can seem to remember, and worthy they are as exceptions to the genre.

I have been remembering the mountains of money that the government has been spending that it does not have, wondering where it is coming from even more than where it is going.  It is hard to find anyone who can tell you much with certainty about either.  The current attention is more focused on plans to spend yet another two trillion dollars that the government does not have on things that are not very clearly explained.  This would be on top of the most recent trillion dollars approved by Congress drawn from an empty well to be spent watering many a hidden garden.

I can understand the first round or two of multi-trillion dollar government expenditures.  Since government caused the collapse of a strongly growing economy by shutting down commerce and locking up the population, a strong argument can be made that paying these victims is not exactly a bailout as it is compensation.  To quote Will Rogers, if Stupidity got us into this mess, then why can’t it get us out? 

A serious problem seems to be that once you get into the game of paying people more to stay at home than they can earn on the job, how do you bring the game to an end.  The plan of the new Oval Office occupant seems to be to go into extra innings but continue serving spiritous refreshments well past the seventh inning.  How will the people get home safely once the game is over?

The classic formula for inflation is to have too much money chasing too few goods and services.  The kindling for a roaring inflation would appear to be carefully set. The Treasury and the Federal Reserve have been dramatically expanding the money supply, with the Federal Reserve supporting the market for the government’s electronic debt (not much money is printed on paper anymore) by purchasing gobs of Treasury securities from banks, paying the banks with electronic credits on their accounts held at the Federal Reserve, which the banks cannot find much to do with.  At the same time, many governors continue to issue orders to suppress the supply of goods and services.  As Elon Musk reportedly said last year, if you don't make stuff, there is no stuff.

If this worry is well-founded, then why have we not yet seen any inflation, government spending surges and the Great Cessation having been Federal and State policies for nearly a year?  A very good question, the answer to which may be found in the savings rate.  While a lot of electronic money has been going into people’s bank accounts, people have been shy about spending it.  The personal savings rate jumped in 2020 from about 7% to nearly 35%.  Worried people hoard more than toilet paper.  And a lot of things that people might spend money on, such as travel, suddenly were not available.  I was surprised last year when our car insurance company sent us a rebate:  insurance losses were down because people were traveling less.

The roads are a bit more congested these days, and the economy is showing strong signs of trying to recover.  Even the savings rate is coming down, dropping to about 13% as 2020 approached its close.  More activity is good, but what is the Federal Reserve going to do if more people spend more savings faster than more goods and services are provided?  How will the Federal Reserve respond to another couple trillion dollars of deficit spending to stimulate an economy that is already on a recovery trajectory and families continue draining their savings?  They could allow interest rates to rise, to encourage people to keep some of their money in savings accounts that have paid less than a penny a year per dollar saved.  Recent Federal Reserve comments, though, declare that is not on the table.

In the late 1970s, when Jimmy Carter was president, economists invented the term “stagflation,” as inflation was high and the economy was in the doldrums.  Joe Biden was a relatively new Senator back then.  Maybe he will remember those days.  That economic pattern served no one well.

Of Good Banking and the New Year

 

Photo by bamagai at Unsplash

A year in retirement can give you perspective, particularly a year fraught with ample opportunity to do some good amidst challenge, risk, and danger of various flavors.  Such was the year behind us.  Does the year ahead offer any less?

Many such thoughts were brought to mind in a recent conversation with the chief financial officer of a community bank.  As you would guess, we discussed the outlook for banking.  I observed that the condition of the industry reminded me of the dot-com bust of 2000.  While the economy was in decline, hit a second time by the terrorist attacks of September 2001, the banking industry was thankfully in strong financial condition.  The dot-com bust had a securities market and Silicon Valley locus.

As in 2001, so also today, the banking industry is strongly capitalized, liquid with financial resources, well positioned to fund economic recovery.  Fortuitously, that position is matched by a host of potential customers, especially entrepreneurs eager to start up new businesses or expand ones that survived the government-led shutdowns.  Among those entrepreneurs are many people whose businesses closed not from bad business plans, but due to the Great Cessation of 2020.  That is to say, there are people who want to start new businesses who know how to run businesses, if government strictures will let them. 

Their problem is one of resources exhausted by trying to keep their businesses floating as the tide went out.  As the tide is coming back in, there is a ready supply of people who would like to have a go with a new boat.  Good bankers have always been in the business of finding and funding good risks. 

Banks grow as their customers and communities grow.  Good banking fosters and facilitates the generation, management, preservation, and application of wealth. 

Bad banking bleeds wealth, which is why failed banks should be allowed to fail, to end the drain on the economy and to make room for the productive work of good banks, new and old.  Good bankers do their work by insightful weighing of opportunities and risks, tailoring terms and conditions to such opportunities and risks.  Bad banking either mistakes opportunities, or it miscalculates or ignores risk, or both.  Which, by the way, is why governments should stay out of the business of banking (other than as prudential supervisors), as the history of government shows an atrocious record of missing opportunities and miscalculating risk, sometimes for the short-term benefit of government’s associates.

The other day I saw a happy video from the chief executive officer of a southwestern bank.  Her timely message was of gratitude to the bank’s customers for constant communication and support.  In return, she offered a reaffirmed invitation apropos to serving in a way tailored to customers’ financial needs.  Reach out to the bank, including its CEO, 24-7 for financial service.  In conclusion, she pledged the bank to “connect you with others in our community who can serve you best.”  Now, that is good banking.