The current economic situation in the United States and around the world has many scared towards the future as high inflation coupled with high interest rates seem like a recipe for disaster. Yet much of this fear comes from the uncertainty of why we are in this situation in the first place which comes down to four main factors:
COVID19 Shutdowns
It is no surprise that a global pandemic that caused mass unemployment and government shutdowns would negatively impact the global economy. The coronavirus shutdowns were critical in that they created a sudden reduction in demand. This meant that when the economy began to reopen again, the supply chain which had readjusted for lower demand was suddenly put under high demand, and when there is high demand but low supply, prices go up in response. This was further exacerbated by the steep rise and decline in unemployment that further strained supply chains and the economy as a whole, creating a steep rise in prices.
COVID 19 Stimulus
The issue of Covid-19 was two-fold, not only did the shutdowns cause fluctuations in demand, but the high unemployment experienced briefly during the pandemic had a second negative effect: the need for government stimulus. Under the Trump administration, over 3.5 trillion USD alone was printed for COVID relief, and then under the Biden administration an additional 1.9 trillion USD was printed. There is no doubt that an increased money supply has the effect of pushing inflation upwards as when there is more money in the hands of people it pushes people to spend it thus increasing demand and increasing inflation.
Poor Monetary Policy
They say hindsight is 20-20 but the Federal Reserve knew what was coming and the pandemic only exacerbated that. In 2017 the Federal Reserve began a policy of quantitative tightening(QT) in which the money supply is lowered through the selling of Fed assets. However, under the pressure of President Trump, Federal Reserve chair Jerome Powell halted QT in 2019. This was not new as the Fed has consistently backed off of necessary economic policy in fears of short-term economic issues. Nonetheless, this meant that the economy would not be curbed enough leading up to the coronavirus pandemic so when quantitative easening (QE), wherein the Federal Reserve buys assets and increases the money supply, was put into place, its effects on inflation would be heightened.
Furthermore, this hesitancy in implementing QT was not in a vacuum, as the Federal Reserve has also steered clear of raising interest rates when necessary. This meant that inflation would not be curbed as easily so interest rates had to be raised more dramatically, thus causing the issues present today where inflation is high and so are interest rates.
Deficit Spending
For decades now the government has been running on varying degrees of deficit (barring the surplus seen under the Clinton administration) with these past couple of years being the worst seen yet. Deficit spending creates a host of issues, many of which have not been realized yet, that create the issues we see today. Whether it be uncontrolled spending creating heightened demand or the increased fears that lead to a higher supply of bonds, inflation will follow this deficit spending. In the end, the government is addicted to spending yet fears raising taxes, creating a ticking time bomb for the economy and one that hopefully will never be realized but is only coming closer to inevitability.
Ultimately the economy is a beast that is difficult to understand and these four issues are only the surface level. So long as the United States stands as the controller of global trade, the economy will iron out its kinks and move forward. Times are currently tough for many people in America and around the world, and unfortunately, it feels as if politicians only have the worst solutions to these existential problems. However, the invisible hand of the economy is strong and will guide us forward so although no one can predict what will happen in the future, you can rest assured that humanity and the economy it created will try their best to keep surviving, meaning low unemployment and good access to what people need.
Felix Puig Seppalainen is the senior political editor of Polinsights. He is a rising high school senior. Following the 2020 election, he cemented his love for politics and economics and have pursued those studies ever since. For fun, he trades in the stock market, learn history, and predict elections which led to his invitation to partake in Polinsights and take a part in this work of democratizing the access to information on politics.
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