Thursday, March 28, 2024

Top Capitol Hill Lawmaker Sees Recession Ahead

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Washington, D.C. – Fears of an imminent recession rose Wednesday as the U.S. raised by a quarter of a point Wednesday as part of its ongoing effort to fight inflation.

At just 25 basis points, the hike may seem modest and, as commentators have suggested, might be the last or one of the last hikes to be seen for some time. The markets are still jittery because of the recent and apparently narrowly-averted crisis in the U.S. banking system. Yet, as this is the ninth such increase since March 2002, making for the steepest rise in interest rates in 40 years, some influential leaders on are expressing concern the Fed is about to send the U.S. off a cliff.

“Higher interest rates mean more Americans unable to buy a home, small businesses that can't get a line of credit, and families buried in credit card debt they've taken on just to get through these last two years. The one-two punch of inflation and interest rate increases is taking its toll on working Americans around the country,” said U.S. Rep. Jason Smith, R-Mo., chairman of the powerful .

Heritage Foundation economist E.J. Antoni takes a more expansive view of the problem. He blames the current situation on “Trillions of dollars in excess borrowing (that) prompted an all-too agreeable Federal Reserve to keep rates far too low for far too long. That kept borrowing costs low for a profligate federal , but it also caused gross misallocations of capital while creating asset bubbles and inflation.”

The impact of the inflationary spiral that began after the Democrats in authorized trillions in new spending as part of President 's American Rescue Plan has been felt in ways that run the gamut from the sublime to the ridiculous.

In Manhattan, the world-famous Two Brothers Pizza has been forced by inflation to up the price of a slice. Formerly available for just a dollar, the chain has been forced to increase the amount it charges by 50% because “Inflation is affecting every single ingredient, every single item we use. Flour, cheese, tomatoes, gloves, paper goods, paper plates and napkins. Everything. Labor is definitely up, as well,” co-owner Oren Halali told the Post.

If pizza at $1.50 a slice doesn't turn your head, maybe what's happening to eggs will. Just in time for Easter, the Dollar Store announced it would no longer sell half a dozen eggs for 99 cents. The discount chain, which has 34,000 outlets across the United States, says the 60% increase in the price of hen fruit over the last 12 months, which has pushed the cost of a single carton to $4.25 and more in almost every part of the country means it can no longer afford to sell them.

If that were not bad enough, the hike in rates comes at a time when the stability of the American banking system is being questioned because two mid-sized regional institutions, Signature Bank/NY and Silicon Valley Bank, recently failed, it seems likely, because the management of both institutions failed to adjust their investment strategies in the face of higher rates.

This is something Smith also said was on his mind.

“Recent news about the banking system has also brought back terrible memories for many Americans concerned about what will be the next crisis to emerge in the wake of the Democrats' reckless spending,” Chairman Smith said in a release. “The last time America experienced the same combination of interest rate hikes and bank bailouts was right before the worst recession that most Americans remember.”

For the moment, most financial analysts seem to be thinking differently. The market conditions that brought down Lehman Brothers in 2007 and threatened to take much of the American financial sector with it are hardly similar to what forced the closure of either of the failed banks. Yet, because the system depends so much on continuing investor and depositor confidence, it's hard to predict if a tipping point is out there somewhere, ready to topple the economy into a deep hole. That, in turn, makes it hard to know what the Fed should do.

Antoni is sensitive to the problem. “The Fed has attempted to keep a lid on inflation with various mechanisms at its disposal, like paying interest on bank reserves and massive reverse repurchase agreements, but these have starved the private economy of capital while maintaining a stream of money for the Treasury and special interests. As interest rates belatedly rose, the Fed began popping the very asset bubbles it helped create. Banks today are finding themselves stuck with low-yield long-term US Treasury securities that no one wants, helping create liquidity problems. While banks like SVB were reckless, others were merely following the Fed's forward guidance – we should remember that Powell said a 75-basis-point rate hike was off the table, and then he promptly delivered four in a row. Individuals and businesses alike have been caught flatfooted by the Fed's abrupt changes in policy.”

“Likewise, the Biden administration as a whole continues sending mixed messages about which bank deposits are currently covered by the FDIC and which aren't,” Antoni continued, “while millionaires and billionaires are being bailed out after they failed to avail themselves of private insurance for their large deposits. That's like someone who chooses not to buy flood insurance but then wants a taxpayer-funded bailout after his home is destroyed in a flood. All of this malfeasance by the Federal government has left the common man with a paycheck that buys less, a mortgage he can't afford, a 401(k) that has tanked, and fear that his money isn't safe in the bank. And this whole chain of events began because politicians grew the and the expense of the family budget.”

The chance there is, no matter how small it might be, that things will get much worse before they get better cannot be ignored by Washington policymakers. The prudent thing to do, especially with U.S. indebtedness now equal to just about one year's total GDP, is to pursue modest reductions in the rate at which discretionary spending will increase.

This is the way the Republican-controlled Congress and President Bill Clinton worked together in the 1990s to bring the budget into a semblance of balance. It is theoretically possible for the federal government to spend more in the next fiscal year than it did in the current one and still have the budget headed toward balance if the increases are tied to population growth and inflation rather than political concerns and the need to buy votes. It's not possible to achieve anything good if the White House and the Democrats who control the U.S. Senate insist on continuing to give money away without regard to the cost, as happened with Biden's first so-called stimulus bill and with the Inflation Reduction Act.

It would be better to spend less, in real dollar terms, as families must do when they find themselves squeezed by price hikes caused by inflation. Politically, that may not be possible. Economically, however, bringing the rate of increase down wherever possible is a necessity.

The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.

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Peter Roff
Peter Roff
Peter Roff is a longtime political columnist currently affiliated with several Washington, D.C.-based public policy organizations. You can reach him by email at [email protected]. Follow him on Twitter @TheRoffDraft.

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