The United States economy, now sick with inflation, has been under the care of the foremost doctor of economics, Jerome Powell, the chair of the Federal Reserve. For his treatment to work he must first make a correct diagnosis. So what are the root causes of the current unbridled inflation? Several come to mind:
1. Supply chain disruption
2. High energy costs resulting from the Ukraine–Russia war
3. Increased cost of goods from tariffs
4. Increased money supply owing to quantitative easing
Interest rate hikes through tightening the money supply address only one of the root causes and do nothing to mitigate the other equally important ones. Without a comprehensive approach to eliminating these causes, inflation will remain unchecked and lead to higher wage demands, which in turn will continue to fuel the engine of inflation, thus perpetuating the vicious cycle.
The rapid and aggressive escalation of interest rates will undoubtedly cause a deep recession. When that happens it will take the patient a very long time to recover. Therapy offers limited benefits and is inappropriate for the diagnosis! If the problem is only obesity, why administer a potent cancer drug treatment that has multiple serious side effects? The solution, in this case, may be worse than the problem.
Even when a correct diagnosis is made and the right therapy administered, it is still important to remember that the remedy should not be applied too quickly for fear that the patient may not be able to tolerate it. For instance, when a patient is suffering from hyponatremia or has too little sodium content in his blood, too rapid a correction could be fatal.
The United States economy has long been accustomed to an extremely low interest rate environment, and an abrupt and rapid reversal in interest rates would likely precipitate dire consequences because consumers and businesses would not have time to adapt to the new norm.
On October 13, 2022, the Dow-Jones Industrial Average rallied 828 points, NASDAQ 232 points, and the S&P 500 ninety-three points. There are apparently enough investors who think that the market will soon turn positive again, as it did in March 2020 when the COVID-19 pandemic began, and in the spring of 2009 during the Great Recession. Little do they know that this time the road for a turnaround will be long and hard. If you think the market has performed poorly this year, wait another six months and you will realize that you ain’t seen nothing yet. The time bomb is ticking, but the party is still going strong while the revelers remain clueless!