Transcriber: Andru Shively Reviewer: David DeRuwe
The economic policy, especially, is beridden with political gambits
meant to retain power before the midterms,
instead of doing what’s best for the people.
There has to be awareness about these issues,
and pressure has to be put on politicians to change the direction.
Before speaking of recessions to come,
I want to talk about a very positively viewed policy in the COVID recession.
The high amount of cash distributed through fiscal stimulus
during the COVID pandemic helped a quick recovery.
The S&P 500, a global benchmark for US securities performance,
saw the highest growth ever recorded.
Employment jumped back to pre-COVID levels and the economy started growing again.
Trump was in office at the time, but this strategy can be mostly
attributed to the Federal Reserve President Jerome Powell,
the Fed basically being the central bank of the United States.
Now for COVID, this policy is not needed anymore.
In order to butter up voters, like Trump did with stimulus checks,
Biden is putting an irresponsible amount of money towards government spending.
Biden wants to provide for his voters, but this act of partisanship
is a detriment to the economy.
All the spending has driven inflation to new heights.
As of today, it’s at around 8.5%.
The Build Back Better infrastructure bill, for example,
has added 0.2% to inflation alone.
U.S. infrastructure may be behind,
but it’s not going to face total collapse anytime soon.
The only reason this bill was passed is because Biden is not sure
he can continue to keep control of the Senate,
the House of Representatives, and the presidency at the same time.
This is in part because Americans are unhappy with the inflation rate,
a rate he is directly affecting through these bills.
It is essential, however,
to differentiate between the Fed’s goals and the President’s goals.
The Fed is, mostly, politically independent
and is concerned exclusively with the economy.
This independence allows it to act with clarity,
something Biden apparently cannot.
A good example is the employment rate for people of working age.
It's a very important measure to help guide decisions regarding the economy.
Around 80% of working-age Americans are employed, bringing it to 2019 levels.
Inflation, however, is at a 40-year high.
With high employment and high inflation, the basic macroeconomic maneuver
demands a reduction in both monetary and fiscal policy.
But Biden wants to “make” in America.
He wants to create jobs and be known as the person to do so.
However, the reward is very low.
Increasing inflation by exorbitant amounts to create a few thousand more jobs
is not a good tradeoff.
And the repercussions are going to make themselves visible.
Not every hammer and paper press has to be made in America.
Buying from foreign manufacturers could be more effective
than trying to revive Detroit into its former industrial glory,
a project that at the best will start seeing significant success in ten years.
So the question is asking yourself again, why now?
It’s almost as if Democrats see the cycle as a last chance to control the Senate,
the House of Representatives, and the presidency at the same time.
And they want to set the tone for government to come.
Getting back to inflation, one of the most effective anti-inflation measures
is the ability, the Fed’s ability, to change interest rates.
Economists predict six 25-basis-point hikes this year, an aggressive strategy,
but one generally well-received by markets.
However, higher interest could lead to a higher probability of a recession,
but makes the worst outcome, stagflation, even less likely.
Stagflation is a mix of a stagnating economy and high inflation,
that last grabbed a major economy, Britain, in the 1970s,
and could lead to devastating default in the USA.
When countries face inflation, their currency devalues.
However, the dollar is performing better than almost any other asset class
at the moment, and this is due to three major reasons:
Countries are buying huge amounts of dollars due to its status
as a crisis currency.
Many other currencies are falling in relation to the dollar
due to local problems, among these inflation.
But the largest reason is that the dollar is the reserve currency of the world.
Countries have billions in reserves, mostly in dollars,
but artificially propping up a currency will, in the long run,
lead to major problems.
Ever since the dollar left the gold standard,
its value is based upon the credibility and integrity
of the United States government and economy.
To let that economy dwindle and stagnate is irresponsible,
and, in this overly globalized world,
we will have a major impact on the dollar’s role in finance.
One problem especially will be the stability of transactions.
Since countries will possibly move away from the dollar,
contracts will be made in local currencies,
making sanctions on currencies harder to enforce,
and exposing international contracts to extremely high volatility.
Zombies. To many, works of fiction.
But in the corporate world, they’re all around us.
Zombie companies are companies that have escaped,
often through overly-favorable market conditions and government support,
the natural selection at the base of capitalism.
Fiscal stimulus,
with historically low interest rates,
allow companies to borrow as much money as possible,
and booming markets make banks happy to give it.
If these smaller, riskier companies were to default on the debt,
it could send banks clawing for federal money,
money the Fed cannot afford to spend on an economy with such high inflation.
So-called junk bonds have already fallen in the ratings.
The average yield of a B-rated junk bond is at 7% already,
a clear sign risk is rising.
If many of these zombie companies were to fall into debt,
banks could not pay back their creditors,
and this would lead to a possible default of many banks themselves.
This could then spiral into people losing their jobs and not paying their mortgages,
adding to the rising delinquency rate already fueled
by the large amounts of subprime mortgages being issued,
the same mortgages that fueled the 2008 subprime mortgage crisis.
If it gets bad enough, people pull their money out of banks.
Now remember, banks only keep 10% of their cash in reserves.
Because of the billions stuck in illiquid investments,
banks will have to take money out of their liquid investments,
mostly stocks, at huge losses,
as markets will respond quickly and heavily to the events named above.
Once banks become incapable of supplying money to their clients,
there’s going to be a wipeout of financial institutions.
And I will say this again: the government cannot afford to bail out these companies.
This is by far the worst case scenario, but it is too likely to be ignored.
Precautions have to be taken, both immediate and long-term.
For the short term, an industry-spanning moratorium could postpone defaults
until inflation is in check.
During this moratorium period,
there could be an investigation into the state of debt in the US
Then, after the results of this investigation are clear,
the moratorium can be strategically lifted to spread out defaults
as to not hurt the economy too much.
For the long term, there could be restrictions
on how much debt companies can take out.
Banks should keep 45% in low-risk liquid investments,
to make sure that they can pay in times of crisis.
But most importantly, there has to be immediate action.
A moratorium is the quickest and easiest way to buy time.
Then more intricate plans can be developed.
So, why am I telling you all this?
It’s to show to you that the US is the cornerstone of the global economy,
and if current policies are to continue, it could deepen the chances
and the extent of the next recession drastically.
Biden promised to help fight inflation and help the economy.
Now, we have to hold him accountable.
Biden should follow the Federal Reserve and, first and foremost,
should reduce spending drastically.
So I call on you to tell others, inform others about these issues.
Because once enough people know about this, politicians will notice.
(Applause)
Thank you.