The U.S. economy is currently yielding some favorable numbers. These include rising economic growth, impressive job growth, and low unemployment. Not so favorable numbers include a still high 6.5 percent year over year inflation rate. We remain in a bear market for financial securities. But even these two measures appear to have reason for some optimism. Even though short of the Fed’s goal of two percent, inflation appears to be retreating from its peak high. Gas prices have dramatically decreased to around $3.00 per gallon, depending on location. Although still in a bear market, there is some babble about the potential for an anticipated bull market with profits for those who have continued to invest during the bear market.

But what about 2023? As baseball sage Yogi Berra has reminded us, “it’s hard to predict stuff, especially in the future.” Economists can’t predict the future, nor can anyone else, including professionals who manage billions of dollars.

Nevertheless, we all make decisions based on assumptions or beliefs, if only implicitly, or just plain guesses about the future. And it’s inevitable that assumptions, beliefs, or guesses about the economy are going to be all over the place when we can’t even agree on the present state of the economy.  

Interpretation of the economy is often political. When Trump was running for election in 2016, he insisted that “this is the worst economy ever.” Shortly after election, he insisted that the economy he inherited was the greatest ever, due to his brilliance, of course.

Republicans are singing this song again, insisting that this is the worst economy ever, due to Joe Biden, of course. Some critics insist that we are due for total collapse, the US dollar becoming worthless due to “out of control federal spending.” Others use scare tactics for financial motives, such as urging people to put their money into gold, and “I have the perfect solution for you.”

As always, there are real economic issues. The long standing trend of inequality of income and wealth continues, with multi-millionaires becoming billionaires and multi-billionaires, while so many continue to struggle, even holding multiple jobs just to get by. There seems to be little popular support for politicians who are willing to seriously address this phenomenon.

The shorter run problem is inflation, with the Fed charged with solving it, even though the Fed is not equipped to do it. Although federal spending is expansionary, spending under the Biden administration cannot legitimately be blamed for world-wide inflation. There is war in Ukraine, and, to put it mildly, dangerous tensions with Russia, all having serious effect on world energy, grain, and food prices. Future shortages are predicted for prescription drugs, cement, sand, olive oil, poultry and eggs, tomatoes, oranges, lettuce, butter, beef, and even beer and distilled spirits, due to factors including plant diseases, drought, and material and labor shortages. 

An example is Avian Flu that resulted in the necessary slaughter of millions of chickens. So, $5.00 for a dozen eggs? That has nothing to do with Joe Biden or the American Rescue Act. Nor does it have anything to do with the Fed that can’t solve the problem by raising short term interest rates. 

There are help-wanted signs everywhere you go. There were beginnings of labor shortages prior to the Pandemic. The Pandemic changed much, but has just accelerated a trend that was already underway. Members of the huge Baby Boom Generation are now between ages of 59 and 77, retired or soon will be. President Biden had nothing to do with that, nor can the Fed do anything about it. There are fewer people of working age to replace them, especially with the low unemployment rate of 3.5 percent.

So if the Fed can’t solve it, who can? Longer run ways to address inflation through public policy involve politically tough choices and legislative action. Good luck with that!

The shortage of child care is a major impediment to women getting into the paid labor force. The recent Supreme Court decision making it difficult or impossible to terminate unwanted pregnancies has made this situation even worse.

Migrants are fleeing oppressive regimes and/or dangerous living conditions in Latin America and would be willing to work in low paid, and even dangerous, jobs in the U.S. But the likelihood of immigration reform that would make this more feasible is slim to none.

Meanwhile, even though the Fed can’t solve these supply issues, all eyes nevertheless remain on the Fed and their sole tool of manipulating short term interest rates to curb demand that is not the major cause of this inflation. And, of course, raising interest rates to suppress demand definitely causes the economy to retract — as it is designed to do. The ideal outcome would be to curb demand enough to reduce economic activity enough to reduce the inflation rate without causing a painful recession.

This tough balancing act contributes to uncertainties and wide range of predictions for the economy, and for financial markets in particular. Some predict continuing inflation and dismal financial markets. Others believe that the worst inflation is over and predict a bull market to arrive soon.  

There is another threat that has become more obvious, and potentially far more consequential, than Fed action, including any errors it might make. That threat is the possible political failure to raise the federal debt ceiling, the result of which would prevent the U.S. government from paying bills it has already incurred. If that were to occur, it would shake world-wide faith in the U.S. government as the world’s safest borrower — U.S. government bonds as a safe place to park money.

U.S. default on its debt would have world-wide repercussions, a severe U.S. recession, or worse, and tanking financial markets that would make the current bear market look like a minor dip.

Financial markets hate uncertainty. We are currently witnessing the unfolding of potential disaster that could be avoided,

Unwillingness of the government to pay its bills is far worse than the federal spending that is also income to its recipients. The nation doesn’t need more uncertainty piled on existing uncertainties.

— John Waelti’s column appears monthly in the Times. He can be reached at jjwaelti1@tds.net.