Well, now I’ve gone and done it. I made one remark about government, and now I’ve got to jump on a plane. Two nights ago, I had dinner with a friend who runs one of the world’s largest geopolitical risk consultancies in the world. We talked about the world for at least two hours about different governments’ role in economies. Everyone wants to think about the next geopolitical threat around the corner. There’s chatter about Iran and the U.S. government. There are questions about China’s nuclear arsenal. There are worries about the Federal Reserve and what they’ll do with interest rates. But the single most important risk isn’t one factor like the ones I’ve listed. The single biggest risk is the role of government in economies, people’s lives, and everything else moving forward.
There has been a titanic shift in governments’ role around the world. What will governments’ role be on climate change, energy production, vaccine distribution, and good old fashion governance? Trust in institutions is eroding at a time that governments are doubling down on their roles. Keep this in mind because it’s going to affect the markets profoundly. It opens up questions about tax policy and social safety nets. Drill further, it opens up questions about people’s confidence in those systems. And it’s not just happening in the United States.
This is a global issue, and it’s one that simply can’t be solved overnight. So, why am I affected? Because I now have to go to Maryland this week to meet up with a professor from my graduate school to discuss this very subject. Many students are looking into the world of finance and geopolitics, and they do not see the big picture. I’ve been asked by my colleagues to school these kids a bit. So, here I go.
The Federal Reserve’s Role in Our Economies
Later today, the Federal Reserve will issue its latest guidance on interest rates. Following back-to-back monthly surges in interest rates, I am still not holding my breath for much of a shift in the central bank’s rhetoric.
Inflation isn’t going to peak just yet. And while they are suggesting that such inflation is “transitory”, it doesn’t address my bigger question. What is the Fed going to do about the current employment crisis in this nation?
The central bank has a dual mandate. Its first issue with monetary policy is to address inflation and use open market operations and interest rate changes to manage it.
But it also must focus on bringing the economy to full employment. We have millions of people who did not rejoin the workforce in the wake of COVID. Our employment to population ratio hit a decade high of 61.1% in February 2020. It plunged to 51.3% in April of last year. And it’s now sitting at just 58%.
That 58% is still historically low. Even in the wake of the 2008 financial crisis, that figure never fell below 58.2%. As you can see below, it’s not a very good story.
The United States operates on tax dollars, largely derived from income. We have erased a decade of gains after a historical drop-off in the previous decade. I need to hear the Fed’s plan. And I question the government’s role in all of this.