By Stephen Kyne, CFP
For anyone with an economics background, the last year has been an interesting opportunity to witness the theories and accepted tenets put to the test.
We’ve seen an unprecedented shutdown of much of the private sector, a displacement of workers in nearly every sector, a breakdown of the supply chains providing the basic necessities of everyday life, and a massive taking from future taxpayers to help keep businesses and households afloat while government agencies debate a myriad of policy solutions of varying efficacy.
At its core, what this year has shown us is that economies are far too large an infinitely interconnected to be manipulated with precision: every policy has unintended consequences. Some of these turn out to be beneficial, and some to our detriment.
Because the economy was in such a strong position prior to the pandemic, we believe the timeline and breadth of the recovery will be relatively short and wide. Had we been in an economic downturn at the end of 2019, we would be singing a very different tune.
The U.S. government pumped $5 trillion into the economy last year in an effort to help households and businesses bridge the pandemic. While the intention is laudable, it is not without consequences. This money will need to be paid back at some point, with interest, by our children and grandchildren. Expect future tax rates to consequently be higher than today.
Having increased the money supply by 30 percent in just one year, the economy is now awash in cash, and is ripe to experience higher rates of inflation than many of us have seen in a very long time.
For over a decade, inflation has been extremely tame, but that is unlikely to last. Cases in point: the price of gas is up over 20 percent from pre-pandemic levels, and used cars are up 30 percent while clothing is up 7 percent. Higher inflation hurts the most economically vulnerable among us, including low-income families and the elderly, and may further exacerbate social inequities we are purportedly committed to quelling.