Unsustainable, A Perfect Storm

The tea leaves are gathering, struggling through the “pandemic of the unvaccinated,” suggesting that our explosive economy of soaring values just might not be sustainable. Aside from our own issues with particularly virulent COVID outbreaks among those too young yet to be vaccinated or those too stubborn and unvaccinated to understand the risk they pose for themselves and the rest of us, we must realize that a largely unvaccinated world “out there” is a breeding ground for toxic COVID variants. And viruses do not respect international borders. Sooner or later…

There is a confluence of variables, beyond the above health issues, that also portend a dramatic fall in values, from stocks to real estate. Unfilled jobs tell some economists that there is plenty of growth left in the system, but most of the workers so affected are in the lesser paying labor force. Right-wing proselytizers tell us that if we pay them too well, if we provide universal health and childcare, the economy will collapse. You can always tell when rich people do not want to elevate those at the bottom or the middle rungs of the economic ladder; they always refer to “creeping socialism.” They want more money for themselves. They simply focus on the word “social” to conflate “socialism” with “social programs.” By way of example, public primary and secondary schools are just “social programs,” government ownership of businesses and real estate is true “socialism.”

But well beyond the war of words is the level of disruptive polarization that has ripped this nation apart. And as any economist will tell you, given enough destabilizing disruption and sooner or later the underlying market confidence will erode taking the economy with it. We have culture wars. Almost a third of our nation believes that Donald Trump was elected president. Taking the ability to vote away from liberal-leaning minorities is now a mandate for populist conservatives who do not see any other way to hold power. And these are simply the political factors that suggest a severely contracting economy is in the wind. Our youngest citizens entering the workforce face staggering student loan repayments and home costs that they cannot afford.

While the seeds of this collapse were also born of the slam of the pandemic combined with the ineptitude of the Trump administration, the fall will likely occur during the Biden years, and he and the Democrats will inevitably be blamed for the effect. Trapped in the middle of this concern is the Federal Reserve, dealing with issues like interest rates and money supply. If they allow interest rates to rise to a more natural level, highly leveraged corporate America and an overheated real estate market that is priced based on monthly carrying costs and not true values will face a plunge in share prices and real estate values. The Fed cannot keep interest rates at this level forever. But…

When Trump’s 2017 slash of corporate tax rates from 35% to 21% pumped one of the biggest windfalls to corporate America in history, companies simply bought their own shares or effected mergers and acquisitions, a bidding war which exploded the value of the stock market while failing to create greater spending on job growth or research and development. Abnormally low interest rates further fueled this fury. In short, the share prices increased solely because the government gave companies a whole lot more cash. There was not so much “there” there.

When the pandemic hit, some businesses (which depended on public attendance) faced a slump while others found a mechanism to pare their labor force (they pretended that to be temporary, but all too often it was permanent) and use the downtime to install job-replacing artificial intelligence driven automation. That moved the stock market even higher. Income inequality got so much worse; the United States now had the highest level of such inequality in the entire developed world. By a huge margin. Shareholders and senior management were earning embarrassing and unprecedented levels of income and compensation. Workers less.

As COVID restrictions eased, pent up consumer demand exploded, but can this represent something more than a temporary market condition? And exactly what do the litany of climate-change-caused natural disasters – from desertification to coastal erosion to wildfires to flooding – tell us about our economic future? How about housing costs?

Low interest rates pushed the real estate market into overdrive. Decades of underbuilding also dropped housing inventory through the floor. Short supply and lower rates priced housing not based on the true value of “house plus land” but based on affordability. People made “buy” decisions based on monthly carrying costs, not price. “Over asking price” sales were now common. For those who owned a starter home, now was the time to capitalize on the hyper-growth of that home and step up to the next level before the inventory contracted even more. Frenzy. For renters, as values soared, rents went up.  Pandemic layoffs or vaporizing small businesses added defaults and evictions to the litany of problems. Governmental limitations and stimulus checks would obviously run their course. And then what? 

“According to [their Chief Economist Mark] Fleming, in April, First American Data & Analytics’ nominal house price index increased 16.2% year over year, the fastest pace since 2005, and rapid appreciation is driving declines in affordability, despite rising incomes and lower mortgage rates.

“Nationally, according to our Real House Price Index, housing affordability declined in April on a year-over-year basis by 7%, the most since December 2018, he said. ‘Furthermore, homes typically remained on the market for 17 days in April, a record low. Multiple-offer bidding wars are common across the full spectrum of home prices.’” DSNews.com, June 28th. 

The market continues its overheated ways, a factor that will continue for quite a while. The reality today is that the average American can no longer afford to buy a home in 70% of the United States, particularly in the hot job market cities. Rising rental rates combined with increasing gentrification are pushing too many Americans into exceptionally long commutes; they are forced to move farther away from job-convenient housing that is no longer affordable. While homelessness is often a product of factors that include mental illness, disability and addiction, increasingly it is a direct result of housing costs. 

So here we sit, watching a series of contradictory forces push against each other as jobs go unfilled, housing prices continue to soar and share prices increase. Yet the last time we experienced such political polarization, the nation erupted into the Civil War. The pandemic, which was beginning to fade in this country, is coming back with a vengeance with the Delta variant. While jobs are unfilled, it’s mostly because workers want a livable wage. With the polarization of home ownership and income inequality at unprecedented levels, we seem to have sacrificed upward mobility and with it, hope. We really need a big “adjustment” based on a harsh reality check. When it comes, unfortunately, history tells us that those of us in the middle and at the bottom of the economic ladder will bear the brunt of that contraction.

I’m Peter Dekom, and who among us truly believes that these purported “good times” are completely sustainable for the long haul?