2022 here we come. I say welcome to the age of uncertainty, and welcome to the consequence of unintended consequences.
I think it would be hard to find those among us that wistfully yearn for the days of 2020 and 2021. If you are anything like me, you are glad to put these years into the rearview mirror. The COVID pandemic seems to have turned our entire society and economy into one collective, poorly faring “long” COVID patient.
In 2020 we entered the acute phase of the illness. The virus came on like an out-of-control freight train, we got sent home from work and began suffering at home, occasionally improving but never healing.
In 2021, however, the collective sickness spread to the entire body. The ICU was required, the prognosis was rough for a while. Compromises were weighed, difficult decisions had to be made, simple survival was the objective. Slowly and not without set-backs the healing began. The ventilator came off, now at the dawn of 2022 it's time to deal with the long-term damage of not only the virus but the countermeasures effected to defeat it.
The federal government, under both the Trump and Biden administrations, has been on an unhinged COVID spending spree like nothing before experienced. For my entire career, going back to the early '90s, federal spending as a percentage of the total U.S. economy as measured by GDP has been roughly 20%. Under Republican governments it may drift a little lower, under Democrats a little higher, but except for 2009 and 2010 following the financial crisis, the 20% level was something that could be comfortably relied on.
Enter the COVID crisis and the resulting Keynesian spending binge. Federal spending went from 21% of GDP in 2019 to nearly 32% in 2020 and an estimated 33% in 2021 (source: St. Louis Fed). This unparalleled level of federal financial meddling under the Trump administration seemed to come in the form of a fire hose, drenching every part of the economy in federal tax credits, program appropriations, loans and grants. The Biden approach, in Democratic fashion, is a bit more agenda driven with more of a targeted drenching of specific political groups, but a drenching nonetheless.
Under typical Keynesian economic school thought process, the government uses its spending capabilities to drive the demand side of the economy (stimulate buying) and support growth in times of crisis. I have to say, even in my undergraduate macroeconomic classes, I always thought the Keynesians showed an astonishing neglect of supply side forces in their theories, now I believe we are going to get to experience the unintended consequences of this philosophical short-sightedness.
Throughout the crisis the federal government has meddled with the demand curve, as well as the employment market, in ways that I think aren’t even fully understood. In 2022, I think we will get to see the result of this aggressive economic triage and federal employment meddling. Inflation is the unintended consequence leading out of the gate, but I suspect it simply won’t end with higher gas and food prices.
Not to be outdone, as we’ve discussed, the Federal Reserve has also been doing its part in the economic triage process, expanding the money supply by injecting newly created dollars into financial markets and keeping interest rates near zero, among other more opaque programs. The Fed’s aggressive treatment protocols are also expected to wrap up this year, and every time this type of band-aid has been ripped off in the past, there’s been some angst. I expect nothing different this time, and in 2022 we will soon find out.
If these enormous economic uncertainties weren’t enough, we also have a very consequential mid-term election, and a stock market sitting near to all-time highs. While 2020 and 2021 market returns were certainly very gratifying, I still say these are years I’d just assume forget. 2022, on the other hand, looks to be lining up as a New Year we are all likely to remember whether we want to or not.
Happy New Year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
