I want to touch on a few economic myths to start the year, as these myths remain pervasive.
Myth #1: The Fed Controls Interest Rates
This was probably the biggest lesson over the last 18 months. Mortgage rates fell a full 1% from October of 2023 through September of last year – even though the Fed did not cut the Fed Funds Rate at all. Then, starting in September, as the Fed proceeded to cut the Fed Fund Rate a full 1% over a few months, mortgage rates shot up a full 1%.
Long-term rates are influenced by economic growth and inflation expectations far more than by the Fed. Yes, we see rates fall when the Fed cuts rates on occasion, but it is often just the bond market responding to the same economic factors that the Fed is either illuminating or responding to itself.
Myth #2: Lower Rates Are Always Good For Housing
This is a myth I sometimes exacerbate by pointing out how housing typically does well in recessions – in response to falling rates. There is an exception though, as it depends on how bad the recession is and how many jobs have been lost. If rates are plummeting in response to an exceptionally weak economy and much higher unemployment rates, the housing market may not always respond positively to falling rates. See post-2008 as an example. Yes, there was far too much inventory, and yes, people were very leery of housing in general, but the other issue was a sharp reduction in the number of gainfully employed potential buyers.
Myth #3: The Stock Market = The Economy
This is a myth that Mr. Trump exacerbated during his first term, as he referenced the stock market performance often. But we now know that a flood of liquidity/increase in the money supply (QE, bank loans, IPOs, etc.) and capital flight from other countries can drive stocks higher even if the economy is not particularly strong. In addition, most of America is missing out on the stock market boom, as the top 10% of Americans own over 90% of all stocks.
A thriving stock market helps the economy with its related wealth effect (people spend more when their investment portfolios are strong), but much of America is clearly struggling, as indicated by increasing unemployment, record credit card borrowing and delinquencies, car loan delinquencies, plunging manufacturing numbers, and very serious issues in the commercial real estate realm that are finally coming to a head – among other things.
Myth #4: The Dollar Will Soon Crash, Sending Interest Rates Through The Roof
This one is huge right now, as “dollar demise” predictions are everywhere because of our massive and quickly climbing debt load. But despite our debt load, the dollar is shooting up in value right now in fact – and wreaking havoc across the world. This is because the world is so dependent upon the dollar (so demand for dollars remains very high) and because other countries are in much worse positions than the U.S. I’ve blogged about this many times: Dollar Shortage Threatens World Economy; Will The Dollar Finally Die With The End of The “Petrodollar Agreement?”; and The U.S. Dollar Is Going to Collapse & It Will Be HORRIFIC! Buy Real Estate!
More myths coming tomorrow – including why government deficits don’t cause inflation and why a massive increase in government bond issuances doesn’t push up rates.
