Better times ahead
Back in the early 1980s, a co-worker of mine and his wife became first-time homeowners. They felt pretty good about getting their new house and signing a mortgage note at a whopping 18% interest rate! By today’s standards, that’s pretty unthinkable. While much time has passed since those days, we’ve had only six new presidents since Ronald Reagan: three Republicans and three Democrats.
The average annual 30-year U.S. mortgage rate in 1981 was 16.6%. Since then, there has been a fairly continuous decline. Last year, the rate for a 30-year mortgage averaged 3.05%.
Similarly, the U.S. inflation rate in 1980 was 13.55% and the federal funds rate peaked at 20%. Last year’s projected inflation rate was just 0.62% and the fed funds rate was just a quarter point above zero. For economic hawks who fear inflation, suffice it to say that money has rarely been cheaper. In recent times, only during the 2008 Great Recession were these numbers anything like what they are today.
The timing around all of this could not be better, with Dee Cee passing a $1.9 trillion stimulus package in the Biden administration’s first 50 days. That legislation, of course, follows the $2.2 trillion CARES Act passed under President Trump in March 2020.
As the COVID fog begins to lift, the economy is now awash with cash. And it’s not just cash from the federal government. We are poised to begin a sharp V-shaped recovery from a year of reduced consumer demand across nearly all business sectors. Cash has been quarantined on the sidelines.
The 1918 influenza pandemic was responsible for an estimated 50 million or more deaths worldwide. In the United States, about 675,000 people died from that flu pandemic. On its heels, however, came the Roaring Twenties, a decade of economic and cultural prosperity in both the United States and Europe.
As of mid-March 2021, the COVID-19 pandemic has been responsible for nearly 540,000 U.S. deaths, including more than 10,000 deaths here in Virginia. Looking back to the pandemic a century ago, it’s not hard to imagine that a Roaring 2020s will soon follow this 21st century global pandemic.
Managing a recovery is never easy.
Any tendency to lionize the “Reagan Revolution” generally skips right past the high interest rates, the high inflation and high government spending, as well as the high federal budget deficits that characterized the Reagan years.
During the Japanese economic bubble of the late 1980s, real estate and stock market prices became greatly inflated. By 1992, those asset prices were in a freefall. In hindsight, Japan’s response to this decline has largely been characterized as too little, too late. And as a result, the Japanese recovery took almost three decades.
Similarly, the Obama administration’s response to the Great Recession of 2008 has been characterized as overly cautious, leading to a longer and slower recovery period than anyone would have wanted.
In Virginia, our economy particularly benefits from federal spending. Let’s not forget that the Northern Virginia juggernaut rose from swampland during the New Deal-fueled spending recovery from the Great Depression in the 1930s. During the Bush-Cheney administration, the commonwealth particularly benefited from military spending on hot conflicts in Iraq and Afghanistan.
This time around, it is good to see Dee Cee pivoting from trickle-down to trickle-up economics, by putting money directly into the hands of consumers. It is also gratifying to see federal spending moving beyond just the military and technology and into health care and the environment. Virginia stands to gain from all of these new policies.
Let the good times roll!