Why the Economy Will Remain Weak for Far Longer Than Anyone Is Admitting

I stopped at a coffee shop a few days ago after returning from a meeting. I got my coffee and quietly sat down at a small table in the back corner. I opened up my laptop to begin digging into the due diligence on a property I was considering as an investment. But before I could get into my stride, my attention was grabbed when I heard a pundit on a national news program, which I won’t name, loudly proclaim that despite the inflation you and I see in everything we buy today, our economy will bounce right back.

It reminded me of when you scroll across one of those posts on social media where you’re not quite sure whether to give it a laugh, cry, or angry reaction. 

Here’s the thing—what he said was utterly false, and if he weren’t on a national news program potentially influencing millions of people, I wouldn’t care. But the claims like this that he and so many others like him have been making lately are putting people at risk. That’s because most Americans, unfortunately, are not financial experts—they’re ordinary people who work hard all day to support their families, so they don’t have the time to research every claim made by people on the news.

Now you might wonder why these pundits, positioned as financial experts, would spread false economic information. Are they uninformed or are they lying? And if the latter, what would they have to gain from that?

That’s a fair question. And one with a simple answer. The truth is that many of these “experts” work for giant financial institutions. When they have an opportunity to speak to a vast audience, as one would find with a national news outlet, they can often sway the public’s financial decisions. By steering people towards or away from certain financial decisions, these institutions can reap massive profits at the expense of ordinary Americans.

So I want to paint a clear picture of the economy that’s based in reality so that armed with accurate data and a historical perspective, you can make well-informed decisions to protect your financial future.

Inflation is sticky and will remain so for the foreseeable future

After first claiming that inflation was all in our imagination for months, financial pundits and politicians alike switched to promising us that it was just transitory, saying it would just go away in a few weeks. About one year in, most people have started to see through these claims. 

Inflation is here to stay, for several reasons, and the first is probably the easiest to understand. I like to compare the situation to exercise. Think about it like this—people don’t become overweight overnight…that comes from numerous unhealthy choices made over an extended period. It shouldn’t surprise anyone that this also means losing that weight overnight is impossible.

It’s the same with inflation. 

The factors that led us to where we are today have been at play for years. As a result, the damage inflicted on our economy is like the proverbial “death by a thousand cuts.” Much like how it takes longer to heal a body that has suffered extensive damage over time, it also takes longer to heal an economy that has suffered extensive damage over multiple years.

This is the primary reason the inflation we’re facing today will remain with us for at least the next several years if not decades.

Elected officials are doubling down on the policies that caused this in the first place

Most of us can agree that politicians usually put their own interests first, and it’s no different when making policy decisions. Our elected officials will say and do almost anything to get elected and stay in office. 

This often includes campaign promises that are a taxpayer-funded bribe to voters. You’ve seen several examples of this firsthand, including the pandemic stimulus, bank bailouts, student loan forgiveness, auto bailouts, and numerous others over the years. 

While these programs may have seemed necessary to prevent financial catastrophe, and they were undoubtedly presented that way by politicians, in reality, they were not. They were a primary factor in the massive inflation we’re all facing today, and likely hurt our economy exponentially worse than they helped. In other words, they had a net negative impact.

How did we let this happen?

It’s easy to blame our elected officials for our economy; they deserve it. Still, the American public is also to blame for not holding them accountable and demanding better financial policies. The problem is that most Americans lack the financial literacy even to know there’s a problem with these policies in the first place.

The solution here is first to start teaching financial literacy to our children, as many Departments of Education have started doing recently. I was personally involved in the development of Florida’s new curriculum. I can say that I’m excited by the passion I see in the people involved, and the fact that this movement is growing. 

At the same time, many more adults are also talking about this topic. By tackling this from both ends, in teaching students in school, and more adults learning on their own, we stand a good chance of seeing more intelligent economic policies in the future, but this is a problem that’s been brewing for decades, so it likely will take a decade or more to resolve.

Sometimes, the cure hurts too…

You’ve probably heard talk of the Fed taking action to fight inflation lately. They have a delicate balancing act to manage, between keeping inflation under control and fostering an environment for economic growth. They often fail in this role by waiting too long to act or acting too aggressively. (There are plenty of other things they do that cause tremendous adverse outcomes in our economy, but that’s a topic for another day.)

The Fed's primary tool to fight inflation is increased interest rates, which hurts everyone to some degree, especially when you look at the ripple effect throughout the economy.

For example, when we talk about interest rates, the first thing we typically think of is mortgage rates and higher mortgage interest rates mean fewer people are buying homes. Now, you may think that if you’re not buying or selling a home, that won’t affect you, but think about everyone else involved in that transaction. The money those agents make goes back into the economy when they pay their team, buy goods and services, and pay their taxes. Related fees go to various companies involved, including home inspectors, insurance companies, title agencies, and more. That money further circulates as those recipients spend what they’ve received.

Higher interest rates mean less access to capital

It’s not just mortgage rates that are affected when the Fed raises interest rates, though. All types of business and personal lending are affected as well. As interest rates climb, not only does credit become more expensive, but it also becomes more challenging because lenders underwrite more aggressively to reduce their risk. 

That certainly affects the auto industry—a foundational part of our economy. But it also affects small businesses across the board in an even bigger way, and this is particularly concerning because they employ 99% of America’s workforce. Unlike big businesses, they don’t have easy access to tons of capital, so when they run into a financial crunch, they’re faced with one of two options—either lay employees off or go out of business.

It doesn’t take an economist to see how this can spiral downward rapidly and cause our economy to unravel further. 

It’s especially problematic when you consider that business and personal debt levels are at historic highs, and defaults are skyrocketing. This is a proverbial “perfect storm” waiting to unleash further destruction by pushing lenders to sit on capital. At the same time, they wait on the sidelines to see what happens, causing even more stagnation in our economy.

How bad is it all? Look at M2

M2 is an economic “canary in the coal mine” because it is an early indicator of economic health. This is a measure of the movement of the money supply, or its velocity, within our economy; a higher volume is a good sign because it indicates confidence and growth, while a lower volume is a bad sign because it indicates the opposite. 

M2 is the Fed's estimate of America’s total money supply, including all of the cash we have on hand and money deposited in checking accounts, savings accounts, and other short-term assets like certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.

So, how bad is the situation here? To put it all into context, M2 has been steadily declining since April of 2022—something we haven’t seen happen in over 74 years! And the US money supply has declined by 2% or more only four other times since 1870. In each of those cases, a major economic downturn followed.

In other words, our economy is on a precipice, teetering terrifyingly close to sliding off the edge into a deep recession.

Muddling Through—How To Maintain Stability 

We’ve seen this movie before. However, most of the citizens of America are too young to remember the “stagflation” of the 60s and 70s era. This was a period of higher inflation and an anemic economy at best.

Interest rates remained higher as the government and the Federal Reserve attempted to reduce the high cost of living. Sound familiar? Mark Twain famously said, “History may not repeat, but it often rhymes.”

If we take the lessons of the prior inflationary years to a personal level, this would be an excellent time to reduce expectations and expenditures where possible. Budgets will become tight as the economic malaise of worker layoffs and corporate bankruptcies increase. Using what you already have and not replacing that used car or remaining in that smaller house for the time being may serve you well. It’s not fun, it’s certainly not what anyone wants, but maintaining a prudent lifestyle during more austere times is a discipline that will see you through to a better economy.

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.