The recent stock market rally suggests that investors believe the U.S. economy is finally regaining strength after four years of turmoil. Probably Wrong.
The Dow Jones Industrial Average hit a major milestone on May 16, surpassing 40,000 and has remained around that number ever since, meaning the Dow has risen 40% since its most recent low, recorded in September 2022. Both the S&P 500 and Nasdaq Composite also hit record highs last week.
As Joe Biden says, the economic expansion is not the result of some magical, deficit-generated government stimulus.
One reason for this enthusiasm is business. Profits are increasingSeven of the 10 economic sectors have risen over the past year, but some would argue that stocks are overvalued. The stock’s price-to-earnings ratio is high and on the rise.
Either way, investors appear to be hoping for an easing of monetary tightening from the Federal Reserve. Core Consumer PricesThe Dow Jones Industrial Average, which excludes volatile categories such as food and energy, posted its smallest gain since April 2021 last month. The Dow rose after the inflation report and pared gains after topping 40,000 on Thursday,” the Dow Jones Industrial Average said. The Wall Street Journal Reported last week.
Investors are thinking, and actually hoping, that the slight slowdown in inflation in April means the Fed will soon ease its unusually high interest rates and tightening of the money supply by reducing its bond holdings, allowing the economy to expand more quickly.
By one measure, the economy is doing well. Consumer spending. Ascended Since February 2021, it has increased by an astounding 29.5%.Keynesian The sensible view is that the (significant) increase in government spending since 2020 has stimulated demand and buoyed the economy.
I think there is a better explanation: continued increases in home prices are being driven in large part by rising consumer spending, and rising home prices are being driven by excessive federal spending.
According to the Wall Street Journal, the average monthly payment for a home purchase in the four weeks ending April 14 was $2,775. ReportsIn 2019, it was $1,242. The median household income in the U.S. rose 17.8% between 2019 and January 2024, from $65,712 to $77,397. That means the percentage of the median household income needed to pay a mortgage on a median priced home has risen from 22.7% in 2019 to 43% today. This is brutal.
Home equity accounted for 65% of Americans’ household wealth in 2021. According to Federal Reserve data, the median net worth of U.S. homeowners was $293,900 in 2019. Both figures have risen since then due to home price inflation.
That’s on paper. You need to live somewhere, so if you sell a house that’s going up in value, you need to buy another house that’s going up in value.
As a result, housing supply is at “historically low” today, he said. Redfin. Home sales are declining For two consecutive months 76% of Americans To tell Now is a bad time to buy a house.
But if you don’t move, the value of your home will increase, increasing the amount you can borrow against your (ever-growing) net worth.
If people don’t buy new homes, they have more cash to spend on other things. At the same time, home appraisals rise, and as homes don’t sell, money is diverted to other purchases and investments.
Meanwhile, for those who can’t afford to buy a house, Average Rent in the United States That’s a 22.5% increase from before the pandemic.
So the reported economic expansion is not the result of some magical, deficit-fueled government stimulus, as Joe Biden puts it. Rather, it is Household borrowing surgesreached A record $17.69 trillion In the first quarter of this year, homeowners will be able to get loans secured by their homes, but renters will have to pay much higher interest rates on their homes. Record your credit card debt(Pay particular attention to slides 5, 6, 13, and 14 in the linked article.)
All of this debt is due to inflation caused by federal overspending. If we compare the house price index and the change in federal spending from 1970 to the present, we see that: You can see Federal government spending was above trend in 2000 and will be well above trend in 2021. Home prices will rise in tandem.
The rise in home prices since 2020 is not due to improvements in home quality, which contributes over time, but not in 2-3 years. Price increases are tied to federal government spending, because the government is increasingly running deficits, which creates inflation through the Fed’s monetization of federal debt. In fact, “roughly 80% of the stock market gains under Biden have been phantom gains from inflation,” says the Prosperity and Liberation Committee. ReportsMuch the same is true for house prices.
Given these factors, the recent rise in stock prices does not appear to represent a significant increase in the real value of goods and services produced in the U.S. Rather, it is a side effect of the federal government’s continued and intensifying destruction of the economy.
Those with large amounts of money invested in stocks are probably happy right now, while almost everyone else is suffering from a host of economic problems created by Biden’s reckless federal spending increases.
