September 14, 2022
James Carville quipped “It’s the economy stupid” during a televised interview 30 years ago (1992) and is a key reason why George Bush Senior lost the election to Bill Clinton in 1992.
Here we are 30 years later and the opposite appears to be happening. After presidents Bush Jr., Obama, and Trump all doing everything in their power to goose the economy, a democratic president is trying to slow the world down!
Yesterday’s inflation reading (8.3% vs. 8.1% expected) was enough for the hopeful to reverse course on their investment strategy and tank markets.
To review some investing concepts for those readers who are casual investors there are three key components here:
- interest rates are broadly used by central banks to encourage or discourage growth and yesterday’s read on inflation suggests interest rates will continue to rise.
- interest rates affect disposable income (spending money) for all market participants. The rise in interest rates is already curbing spending on large items and the negative effects will continue as rates rise. Again, more rate rises are now being priced in after yesterday’s inflation reading.
- interest rates also reflect the return an investor expects in return for making a risky investment. As interest rates rise, fixed income investments will attract money away from equities causing even more turmoil in asset prices.
When interest rates are below the inflation rate, it broadly encourages investment, when interest rates are above inflation, it discourages investment. Over the past 30 years, the consistent decline in interest rates, along with the rise in money supply have made it almost impossible for the economy to shrink.

Note that the US federal funds rate has spent 12 of the last 14 years below 1% and the bulk of that time at almost zero. In the EU, central bank rates were negative, essentially forcing savers to use their money elsewhere. It’s been quite a stretch.
During this period, countries around the world have flooded their economies with money. Here is what has happened with money supply since 1980 in the USA

When James Carville uttered that famous quip, “It’s the economy, stupid”, there was about $3.3 trillion of money driving economic activity in the US (and around the world). At the last reading on August 31, the US had about 21.7 Trillion of money supply, seven times (7x) higher.
[Side Note, GDP in 1992 was about $6.6 billion, it is currently about $25 billion or about four times (4x) bigger.]
It may not be obvious, but a key issue with this progression is that asset prices have risen dramatically, but other key measures have not kept pace. This will lead to political difficulties as the US has clearly experienced with Donald Trump.
Here are some additional views of the US to help understand the disparities that will force a slowdown in the USA. To begin, voters decide on who gets elected and the key message (by Carville and everyone since) is that you have to make the voters feel wealthier to support the economy. In 1992, about 40% of all US wealth was held by the bottom 90% of the population. They were happy with that, and bought into the American Dream where hard work and opportunity would lead to increased wealth. By 2022 however, the bottom 90% of the population only have 31% of the wealth despite 30 years of sacrifice and hard work. This is made worse because their liabilities have also increased.

During the same period, the median family income has risen by about 27%. When taken in context with the seven fold rise in money driving the economy or the four fold rise in GDP, the rise in asset prices is easy to see. The money is not being distributed.

Of course for the lowest income participants in the economy, this is easy to see. The minimum wage in 1992 was $4.25/hr and rose gradually to $7.25/hr in 2009 where it still sits today. Again as a comparison the average cost of shelter alone has risen by 230%.

These statistics relate just to the USA, but similar stories can be seen in other economies around the world, particularly China and the EU. There are many more ways to look at an economy that is severely out of balance, and it is clear that policies that raise asset prices, raise the cost of living without improving the lives of the majority are running headlong into a wall of disgruntled voters.
The current (Biden) administration will raise interest rates to cool inflation before more damage is done to those least able to overcome the pressures of inflation, the poor and working poor.
Chairman Powell has said that there is pain ahead to reduce growth to below trend for the foreseeable future, and growth is still significantly higher than trend. Inflation is pushing prices up far too fast for those least able to manage the cost pressure and the reality is that markets will adjust downward.
Be careful with your capital. The central banks of the world have created a never before experienced array of financial pitfalls, while at the same time are ending a forty year run of easy money. The outcome is not at all easy to predict, but it is highly probable that the outcome will include substantially lower asset prices.