The recent stock market rises suggest investors believe the U.S. economy has finally regained its strength after four years of turmoil. Unfortunately, they are probably wrong.
The Dow Jones Industrial Average surpassed a major milestone on May 16, rising above 40,000 and hovering near that number since then. That represents a 40% increase over the Dow’s September 2022 recent low. Last week, the S&P 500 and Nasdaq Composite both hit record highs as well.
The economic expansion is not the outcome of a magical, mystical government stimulus created by deficit spending, as Joe Biden would tell you.
One explanation for this exuberance is that business profits are up, having risen in seven out of 10 economic sectors over the past year. One might well argue, however, that stocks are overvalued because price-to-earnings ratios are high and rising.
In any case, investors appear to be anticipating an easing up on money-tightening by the Federal Reserve. “Data Wednesday showed that core consumer prices, which exclude the volatile categories of food and energy, last month posted their smallest increase since April 2021. The Dow climbed after the inflation report and then crossed 40,000 Thursday before paring its gains,” the Wall Street Journal reported last week.
Investors are thinking — hoping, really — that the slight slowing of inflation in April means the Fed will soon relent on its tightening of the money supply through unusually high interest rates and reductions of its bond holdings, allowing the economy to expand more rapidly.
By one measure, the economy is going gangbusters. Consumer spending has risen by a startling 29.5% since February 2021. The conventional (Keynesian) wisdom is that the (massive) increase in government spending since 2020 has buoyed the economy by stimulating demand.
I think there is a different and better explanation: The ongoing increase in housing prices is a large contributing factor to the rise of consumer spending, and the increase in housing prices is being caused by excessive federal spending.
The median monthly payment for a home purchase was $2,775 in the four weeks ended April 14, the Wall Street Journal reports. In 2019, it was $1,242. The median U.S. household income rose by 17.8% between 2019 and January 2024, from $65,712 to $77,397. That means the share of the median household income required to pay the mortgage on the median-priced house has risen from 22.7% in 2019 to 43% today. That is brutal.
Home equity accounted for 65% of Americans’ household wealth in 2021. According to Federal Reserve data, U.S. homeowners in 2019 had a median net worth of $293,900. Both of those numbers have risen since then because of housing price inflation.
On paper, that is. You need to live somewhere, so, if you sell your increasingly valuable house, you need to buy … some other increasingly valuable house.
As a result, the housing supply is “historically low” today, according to RedFin. Home sales have fallen for two months in a row, and 76% of Americans say this is a bad time to try to buy a house.
If you do not move, however, the rise in the value of your home increases the amount of money you can borrow against your (ever-greater) net worth.
If people are not buying new homes, they have more ready cash to spend on other things. The simultaneous increase in house valuations and inability to sell homes moves money toward other purchases and investments.
Meanwhile, for those who cannot afford to buy a house, the U.S. median rent is 22.5% higher than before the pandemic.
Thus, the reported economic expansion is not the outcome of a magical, mystical government stimulus created by deficit spending, as Joe Biden would tell you. Instead, it is being driven by a rapid increase in household borrowing, which reached a record $17.69 trillion in the first quarter of the year. Homeowners can borrow against their houses, whereas renters are stuck paying much higher interest rates on record credit card debt. (Note especially slides 5, 6, 13, and 14 at the linked article.)
All this borrowing stems from inflation caused by federal government overspending. If you compare the housing price index with the changes in federal spending from 1970 to the present, you can see federal spending moves above-trend in 2000 and much above-trend in 2021. Housing prices rise in tandem.
The post-2020 increase in housing prices is not being caused by a rise in the quality of housing — the latter does contribute over time, but not over the course of two or three years. The price increases track with federal spending because the government is increasingly running deficits, which create inflation via the Fed’s monetization of the federal debt. In fact, “about 80% of the stock rise during Biden’s tenure has been phantom gains due to inflation,” the Committee to Unleash Prosperity reports. Much the same certainly applies to housing values.
Given these factors, the recent stock market increases do not appear to be indicative of a great increase in the real value of goods and services produced in the United States. On the contrary, they are a side effect of the federal government’s ongoing and intensifying economic destruction.
Those who have large amounts of money invested in stocks are surely happy now. Nearly everybody else is being brutalized by the multitude of economic ills resulting from Biden’s reckless increases in federal government spending.
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