Since 1871, the optimum interest rate for the cost of capital for government borrowing has been 4.2%. This is the interest rate that the Federal Reserve is primarily targeting through monetary policy for equity, debt, and financial markets to thrive. This is an economic 𝛑 (pi) equation as a formula for managing the supply of money. Pi is a mathematical constant, approximately equal to 3.14159. It is defined in Euclidean geometry as the ratio of a circle’s circumference to its diameter (Wikipedia). Pi is a constant of a mathematical ratio. 4.2% is a government guideline constant for economic stability. In one sense, 4.2 is the pi of monetary policy.
Beginning in 2009 following the financial crisis of 2008, the Federal Reserve exercised quantitative easing (QE) for the purpose of keeping interest rates low. This policy, combined with excessive debt, has distorted the cost of capital in its natural commercial equation. Low interest rates impeded the bond markets. Now, because of government Covid expenditures, inflation has germinated. The Ukrainian-Russian war exacerbates supply chain disruptions causing commodity prices to increase.
When demand exceeds supply, inflation will occur. Raising interest rates is a tool the Federal Reserve has in its tool box to cool demand. When asked if recession is inevitable, Secretary Summers replied, “nothing is inevitable in economics.” However, he went on to say that because of current economic factors, the Fed is walking a tightrope.
When inflation exceeds 4.2%, the economy is too hot and needs to be cooled down with a corresponding rise in interest rates. When demand slows and resulting interest rates dip below 4.2%, the economy needs boosting through the availability of cheaper money and increased fiscal policy. Because the national debt is now 150% of GDP, higher interest rates for government borrowing threaten further deficits and the aggregate budget. Monetary policy is therefore limited in leverage.
All of this simply means that Secretary Summers’ prediction of an impending recession makes the same sense as his prediction of inflation in 2020. Natural principles of economics will force an economic correction.
Another tsunami building in the United States is the culture war between progressives and parents. The front lines revolve around curriculum in the elementary schools of America. The recently passed legislation in Florida prohibiting teachers from presenting views of sexuality to children as young as three years old is the flash point. Progressives criticize the bill as “don’t say gay.” Conservatives call it “let children be children.”
Progressives have declared that the legislation is unconstitutional because it violates a teacher’s right of free speech. This rejoinder further inflames the resistance of parents.
Public school teachers have a modified right of free speech. Federal judges do not speak their opinions on politics. Ethically, they are bound to avoid even the appearance of prejudices. Educators are public servants subject to the authority of an elected body closest to the citizens, the local school board. The public decides what will be taught and how it is taught. The public will decide the criteria and curriculum for a qualified education at every stage of a child’s development. The public will decide what is age-appropriate and when foundational issues of personal preferences and identity should be introduced.
It is unusual political circumstances when both inflation and culture wars are on the minds of the people at the same time. One usually eclipses the other.
As the fall election cycle of 2022 looms, the average citizen is rediscovering the power of the ballot box. Local elections from San Francisco to Norman, Oklahoma, are recording record voter turnouts. Covid mask policies and overreach by the state for control of family decisions are defeating progressives in grassroots elections, sending a forewarning of an election tsunami this coming November. A perfect storm of converging tsunamis is developing.
Economics threaten culture resulting in a political correction.
When a seaquake happens or an undersea volcano erupts, it does not always result in a tsunami. Yet, the tsunami warning goes out upon either event’s recordation. Upon such a forecast, people take precautionary measures and move away from the shoreline.
And, so must all governments and citizens, in light of current economic forecasts, take equivalent precautionary measures. Less government deficit spending with the support of all citizens would be a good start.
What is most critical now is to think through how to restabilize and rebuild if, in fact, an economic tsunami damages traditional financial structures and government services for society. And any change in government leadership, as a result of a political tsunami this November, must be sequenced by a definitive plan to restore the confidence of the citizens in their government.
What is most important now is for citizens to take control of their God-given rights through democracy. They must direct their leaders to recommit to the transcendent principles, like constant pi in mathematics, that dictate the proper ratio between government power and the people’s moral authority to govern their own families…
Remembering that regardless of political party or ideology, we’re all in this together.
My name is Marc Nuttle and this is what I believe.
What do you believe?