E.J. Antoni, a research fellow at the Heritage Foundation’s Grover Herman Center for the Federal Budget, as he breaks down the conflicting fiscal and monetary policies that are pushing the U.S. economy toward a crisis. E.J. argues that the Federal Reserve’s plan to cut interest rates won’t solve the deeper economic problems—such as runaway government borrowing and record deficits—that continue to threaten American financial stability.
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E.J. Antoni 0:00
If the federal government again is going to continue on this breakneck, reckless speed of borrowing, then you can’t moderate long term interest rates. So you know, fiscal and monetary policy at this point are at loggerheads, and the only thing the Fed can do is is try to hold back the flood the flood waters as best as best it can. Cutting interest rates is not the way to do that.
Andrew Brill 0:27
Welcome to wealth, and I’m your host, Andrew brill, we have reached the time the Fed will start cutting rates. How much and how often is the big question, and we’ll tackle that next, and also make sure you join us on Wednesday the 18th, at two o’clock for a live show right after the Fed announcement on how much the cut rates
Andrew Brill 0:51
I’d like to welcome in. EJ, Anthony. EJ, is a research fellow at the Heritage Foundation’s Grover Herman center for the federal budget. EJ, thank you so much for joining us. I guess my first question is, what federal budget? It seems like all we do is spend money.
E.J. Antoni 1:06
I would say that’s a pretty accurate assessment. What federal budget that’s that’s a good question. We don’t have a federal budget. We haven’t for years. You know, the Republicans in the House promised we were going to get our 12 appropriation bills. Here we are. We still don’t have them. It doesn’t look like we’re going to have them anytime soon. It looks like we’re just going to get, you know, another CR, another continuing resolution. So things haven’t really changed much. Unfortunately that you know that’s particularly troubling given the data that we just got from the Treasury Department. They released their monthly Treasury statement for the month of August. It was the worst deficit we have ever seen for the month of August, ever and and that includes the two blowout spending years, 2020, and 2021, when, when we had all those literally trillions of dollars in excess spending that was allegedly related to the covid pandemic. So, you know, unfortunately, things are getting worse, not better. We’ve already hit a $1.9 trillion deficit for the current fiscal year, and for those playing along at home, the current fiscal year doesn’t end yet. It includes the current month of September, so we still have a month to go, and we’ve already blown past treasuries deficit projections from earlier in the year. So yes, we’ll hit $2 trillion deficit yet again, without question, it’s not good. Yo, the this Treasury statement actually had a lot of other rather ignore ignominious first, not the least of which was interest on the debt has now cost over a trillion dollars for this fiscal year. And again, the fiscal year isn’t even done yet. So all of those folks who earlier in the year said, Alf, this trillion dollar on the debt, interest on the debt, yeah, that’s pie in the sky. It’ll never happen. Oh no, it did happen. And again, it’s getting worse. The fiscal year isn’t even done yet. So it’s a huge, huge problem, the fact that we just keep stringing together these, these more or less random, bloated spending bills without actually having, as you said, any kind of federal budget put together.
Andrew Brill 3:11
So and we’ll get into the lack of budget and the spending and all that. But I want to ask you about, you know, the economy as it relates to the average person, what are you thinking? Where is the economy right now?
E.J. Antoni 3:24
It’s a great question, because there seems to be this huge disconnect right now between how the typical American is feeling regarding the economy and our macro level data. And a big reason for that has to do with the way that we compute some of our statistics. So piggybacking on what we were just talking about in terms of this massive federal debt, because of the way we calculate, things like GDP, government spending gets thrown in there, but it’s not just simply direct government spending. In other words, if the government’s going to pave a road, let’s say and they go out and they buy the asphalt, or they buy the concrete that gets counted in the g portion of GDP of not gross, but rather government. So we have personal consumption expenditures, or consumer spending, as we usually call it. We have private investment, and then you have net exports, and the G is government, but that’s only direct government spending, when the government, however, hands out trillions of dollars, which they’re doing, over a trillion dollars a year to individuals, and what we call transfer payments, that includes things like welfare, that all gets counted, not in government, but in consumer spending. And so that is essentially bloating a lot of these, what we think are private spending numbers, but in fact, are simply hidden government spending, and as a consequence, if you’re not one of those people on welfare, then you’re really feeling the pinch today. Now, I’m sure some of the people on welfare are, you know, who are living on the dole are also feeling the pinch, but the fact is that consumer spending is nowhere near as robust as. As we think it is. And sure enough, that’s borne out in the polling data when you ask people you know not even about politics, like how, how do you do approve or disapprove of how Biden and Harris are handling the economy? Forget that. Just look at how people respond to questions directly about the economy itself with no political implications at all. Just how do you feel about the economy today, or how are your personal finances today? The responses are horrible, and they have been for several years now, and that is all despite, again, these overly optimistic, these very rosy, macro level reports that we keep getting. And I think a lot of that has to do with simply how those numbers are calculated. They are not reflective of how the average American is feeling today.
Andrew Brill 5:45
Why do you think that is? EJ, you know, it seems that it would make sense to separate it out. Say, Okay, this is the government spending. This is what the consumer is spending, and it’s obviously buoyed up by what the government is spending. Where look, I was just reading this morning that the average, the average credit card debt per household, is up to $6,000 that’s costing the average household what two years ago was about 75 bucks a month, is not close to $120 a month. That just eats into your discretionary spending, I guess, or what you can spend money on. So why don’t we separate it out? Why don’t we tell the American people? Oh, you know what, this is where it’s at, and the economy is nowhere near what we’re telling you. It is.
E.J. Antoni 6:31
Well, I mean, we essentially do tell them. The problem is we don’t tell them in the headlines. A lot of that, I think, just has to do with the fact that the people who are writing those business headlines, unfortunately, just have no idea what they’re talking about. A bunch of journalism majors. Nothing against journalism majors, but a bunch of journalism majors are being tasked with writing news stories on economics and reading these government reports when they have no training in economics or business, they have no training in terms of how these statistics are computed, or what they mean, and so we shouldn’t be surprised when all of these reporters essentially just write a story based on the top line info from those reports, because that’s literally all those folks can understand. But shame on all of the actual economists who should know better, who don’t bother reading these reports, who don’t bother delving into the data and figuring out what is really going on, because, frankly, the information is there for anyone willing to go looking for it. Unfortunately, it’s just the case that most people don’t. And I think the other reason that we have to keep in mind, or the other thing we have to keep in mind is the fact that we are not living in normal times today. So under normal times, there wasn’t really much of a disconnect between the underlying details and the top line figures right. There wasn’t this huge disconnect between how the typical American was doing and what the macro level data was looking like. Same thing when we when we look at the jobs reports, when the headline number of jobs went up, it tended to indicate a very strong labor market, and when the headline jobs numbers went down, exactly the opposite. It indicated labor market weakness. Today. That’s no longer the case, because we are not living in normal times, and so part of the laziness on the part of economists, I think you can ascribe to the fact that they simply got used to not having to look at the details, to not having to look under the hood and see what is really going on within these reports, whereas today, you really do need to pay attention to that, because otherwise you will not see the reality of the situation. You will simply see the facade. So
Andrew Brill 8:43
it seems like a dire situation, and we’re on the verge of a rate cut, probably in the neighborhood of 25 bips. Is that even going to help the average American?
E.J. Antoni 8:53
No, it’ll help Wall Street, at least initially, you’ll you will get a resurgence of of equity prices, right? You will see more leverage. So again, all of that’s going to help reinflate asset bubbles. And whether it’s equities or houses, you know, housing, you name it, but it’s not really going to have much of an impact. You brought up credit cards, it’s not going to have much of an impact on that. But, you know, people are paying 30% interest right now on a lot of their credit card debt. I mean, that’s that’s insane, at least it’s insane, given you know the track record of the last 2530 years of credit cards, and that, I think, is is also part of the problem. We have raised more than a generation of Americans who have known literally nothing but an artificially low interest rate environment, and so they based a lot of their financial decisions on that reality, or thinking that that was a reality, when, in fact, it’s not. It was simply artificial. And as a consequence, they’ve loaded themselves up with debt, whether that’s student loan debt, auto loan debt, credit card debt, mortgage. Debt, you name it. And again, the consequence of that is now, as rates tick up, they are falling way, way behind. We have over a trillion dollars in credit card debt right now, for the first time ever, American families are paying over $300 billion annually on that credit card debt. And note, I’m not talking about paying down that debt. In other words, no principal payments, just interest payments. Are over $300 billion so you mentioned earlier, isn’t that going to bite into consumer spending? Yeah, it certainly is, and that’s one of the reasons why a lot of folks are becoming increasingly, you know, pessimistic about this economy, including Federal Reserve officials, and that’s why all of a sudden, you know, rate cuts are not only on the table, but frankly, at this point, a certainty for the next meeting. Why
Andrew Brill 10:49
don’t we regulate credit card interest? I mean, it 30% EJ is just, that’s just, that’s absurd to me. I think I remember when I got a credit card. Is 12% was like, pay off your bill or you’re gonna pay 12% interest. Now, there’s no way to get ahead of this. If you’ve fallen behind and you have credit, it takes you 2030, years just to make the minimum payment to pay off that debt. And if you need money, obviously you’re going back to the credit card. Why don’t we regulate these things.
E.J. Antoni 11:22
In short, Joe Biden, he was the senator from Delaware, and was effectively a lobbyist for credit card companies for a couple of decades, and got a lot of the not just simply removal of regulations, which I’ll touch on in a minute, but actually got preferential treatment for the credit card companies, where they actually have essentially protections under the law, which other types of creditors don’t. Now going back to the regulation side, I think it’s important to note that credit card debt is not like a lot of other debts, insofar as well it’s, it’s, well, let me put it this way, you don’t have the same kind of collateral on that debt as you do for others. In other words, if you don’t pay your car loan, what happens? Well, the creditor can take that car from you, right? They can repossess the vehicle, and then they have an asset now which they can sell to try to recoup some or all of their of their losses on your loan. You don’t have that with credit card debt, it is an unsecured loan. In other words, you know, I can, for example, I can go out and simply rack up credit card debt eating at restaurants. What asset Are you going to collect on? I mean, my stored up fat, I don’t know. So as a consequence of that, when the credit card company finds you, finds your loan non performing. In other words, you’re behind on your payments. You’re not making payments. They have to sell that debt to a debt collection agency, and it very typically sells for somewhere between five and 12 cents on the dollar. In other words, they’ll lose like 90% of the money they gave you, and so they have to make up for that somehow, and and the way they do that is by charging what appear to be extortionate interest rates. So the fact that the rates are so high today speaks not only to the fact that there are other alternative uses for that money which pay a high interest rate. So for example, instead of a very risky loan to a consumer at 30% they can have a zero risk loan to the Treasury at over 5% using things like T bills. So there’s not only that dynamic, right, that the alternatives are going up in interest rates in return, I should say, so you need a higher return on credit cards. But on top of that, the rate of low non performance, again, defaults and delinquencies on credit cards is rising at the fastest pace since the global financial crisis. Now that’s not to say the levels themselves are the same. In other words, we’re going from, let’s say, 1% to 5% and before we went from 15% to 19% so the levels are not the same, but the rate of increase is the same. And that’s that’s particularly scary, because it points to where we’re likely going in the future. So as credit in other words, as credit card companies anticipate more and more people not paying back their debt, they’re hiking the interest rates in order to try to recoup those losses. So
Andrew Brill 14:25
the debt and the default on that credit card debt just gives you an idea of where we are in this country, and unfortunately, where we’re headed is Powell too late with this interest rate cut. I mean, we just spoke to somebody who said, We shouldn’t be cutting at all. But I think if you look at the market and the stock market, and you look at that sort of thing, like, yeah, why? Why have an interest rate the stock market keeps hitting higher levels. But when you look at the average person, you know, we need an interest rate cut.
E.J. Antoni 14:55
Well, the problem is that we’re doing something that’s not actually going to. To help the patient. Essentially, you’re if you have a person who’s riddled with cancer, they need chemotherapy and radiation, not a shot of morphine. Is that going to dull the pain and make them feel better in the short term? Sure. Is it going to help them in the long run? No, it’s going to eventually kill them. Actually, it’s going to further it’s going to do things like further suppress their their heart rate and breathing while the cancer is already doing that to begin with. I mean, look, at the end of the day, what we need is fiscal and monetary restraint and and cutting these interest rates. You know, we talked about earlier. Is this going to have much of an impact on things like people’s credit cards? No. I mean, unless you’re going to cut, you know, 400 basis points. It’s not going to have much of an impact in terms of reducing people’s credit card monthly payments. It’s not going to have much of an impact in terms of unfreezing or thawing out that the housing market. But what it is going to do is it’s going to re inject another round of hot air into the existing asset bubbles, mostly on Wall Street, on Main Street, to the extent that it applies to housing. But none of this is is good for the average American. Again, what we really need here is fiscal and monetary restraint. Why is it that interest rates are high? What are interest rates? They’re simply a price, the price to borrow money. And so why is the price to borrow money so high? Because the demand is so high. Why is the demand so high because the government’s borrowing so much money. We started the conversation on on our $2 trillion annual deficit. Imagine if you reduced the demand to borrow money by $2 trillion a year. What would that do to interest rates right now in the private economy, they would plummet. That would open up countless opportunities for not only more consumer spending, but also, more importantly, for more business ventures, for more investment. That’s where you get the driver of economic growth, which is where you get prosperity, which is where you get increases in real wages, for example. And so, you know, unfortunately, we’re talking about a supposed solution that is not actually going to address the underlying fundamental problems in this economy. You know, we still have inflation. And really, the Fed should not even be focused on the labor market. I understand as part of their so called dual mandate. It’s really a try mandate, because it’s the it’s it’s price stability, which they don’t do. It’s maximum employment, and then it’s also the moderation of long term interest rates. At the end of the day, the only thing the Fed can really affect is price stability. Even the moderation of long term interest rates is out of their hands, because if the federal government again is going to continue on this breakneck, reckless speed of borrowing, then you can’t moderate long term interest rates. So fiscal and monetary policy at this point are at loggerheads, and the only thing the Fed can do is, is try to hold back the flood. The flood waters as best, as best it can. Cutting interest rates is not the way to do that.
Andrew Brill 18:08
So we’ll get into, you know, Chairman Powell versus Janet Yellen, the Fed versus the Treasury, because that that, that’s definitely a problem. But I want to ask you about because you mentioned employment, employment, I think the last numbers came in 4.2 4.3% now, if employment is considered a 5% employment is considered full employment. And the Fed, at the beginning of the year, it was worried about CPI and ppi, and that’s what they were focused on. And all of a sudden, you know, unemployment went from 3.6 3.8 now it’s 4.2 why? Why are they so concerned about unemployment? I know that people need to make money and and they need to be able to spend that money, but unemployment isn’t near where it’s it’s seems to be a problem. Oh,
E.J. Antoni 19:00
100% and see, this is where we need to put to bed, this whole idea that the Fed is somehow data dependent or politically independent. They are neither, and Powell’s actions demonstrate that. To be clear, as much as I pile on, Powell and company, all the Fed chairman, you know, essentially, have been more or less subject to these political pressures and given into them. So it’s not as if Powell is, you know, the devil among saints, quite the opposite. But let’s not forget, Powell is the guy who, when inflation was running up to 40 year highs, sat on interest rates and kept them below 1% and while he was up for renomination to the Fed, during those hearings, he kept not only interest rates below 1% but said this 75 basis point hike, the jumbo sized rate hike, was off the table. As soon as he was confirmed by the Senate for another term, he delivered us four. Sure of those, you know, jumbo sized rate hikes in a row. So this idea that that he is somehow politically independent, again, it’s nonsense. Now, why was he even in that position to begin with? Because the White House purposely slow walked his renomination because they wanted to put as much pressure on him to keep interest rates low for as long as they possibly could. So if they had followed the normal schedule, then he would have, he would have already gone through his renomination process, you know, when the Fed was still hiking by quarter percentage points. And so they possibly could have gotten ahead of it, but they purposely subjected him to that political pressure, in other words, to ensure that he would keep rates lower for longer and again, what did it give us 40 year high inflation? So let’s fast forward to today. We are very close to an election. It would be certainly a boon to the people in power. Let me just put it that way, if we had another stock market boom right before the election, if we saw the Dow go up, you know, 2000 or 2500 points. Now, one caveat to this, that I think is important is that the calculus in terms of Powell has really changed within the last couple of months, because you had a Republican candidate who said, I not only will not renominate Powell, but I want his ass out of the job. On day one, I’m going to fire him as soon as I get in there. Trump was extremely, not only vocal, but passionate about getting Powell out of the Fed, even though there’s not even a protocol for how to do that. I mean, I don’t know if he thought he was going to send the Secret Service in and evict Powell out of, you know, the Eccles building, but whatever the case, he was absolutely on fire about getting Powell out of there. Conversely, Biden, what was he saying? Oh, yeah, I love Powell. He’s doing a great job. I’m going to keep him in there, and I want him to have a third term. So from Powell’s perspective, the calculus was very clear, Democrats need to get reelected so I can keep my job today. What’s happening? Well, Biden’s gone, and now the person who replaced him, Harris was one of only 13 senators to vote against Powell when she was in the Senate, so all of a sudden, Powell went from having an ally to more of a quasi enemy in terms of the Democrat candidate, and now Trump’s tone is completely changed. You can ascribe to that whatever motives you want, but the fact is, Trump is no longer saying that Powell is the worst Fed Chair ever. Instead, he’s saying that, once I become president again, I’m going to let him continue to serve. I’m going to let him serve out his term. He hasn’t said he’s going to renominate him. But, I mean, that’s a that’s an incredible difference from saying I’m going to get his again, get his butt out of the Eccles building on day one. So you know, again, the political calculus has has, I think, changed pretty dramatically for Powell at this point.
Andrew Brill 23:02
So is, are we walking this back too slowly? I you know we’re we expect a rate cut this week, the next FOMC meeting is the day after Election Day. So I guess after election day it doesn’t matter, because the president the country has picked their president, and then in December, we get another FOMC meeting and apparent rate cut. I guess. Do you think we’re looking at 75 basis points by the end of the year or one full point?
E.J. Antoni 23:31
Yeah, I think unfortunately, as much as I wish this wasn’t the case, I think a lot of that just depends on what happens on election day. And you know, I’ve heard a lot of differing opinions on this. I’m frankly not sure you know where I fall in terms of what Powell will do based on who actually wins, but at the end of the day, I still think you’re going to have one rate cut before the election, depending on what other kind of economic data comes in again. Before that time, you could potentially get an emergency rate cut as well, where they call a meeting. I mean, Greenspan famously did this, you know, in the 90s, where all of a sudden, like the news hit the wire up, fed, met today. And not only did they meet today, they cut rates. So it’s certainly possible. You know, we also saw this, by the way, in the in the global financial crisis, the whole mortgage meltdown, where the Fed took a lot of emergency measures that weren’t announced beforehand. People didn’t even know the Board of Governors was meeting, let’s say so that that’s certainly possible, depending on what kind of of economic data come in. And the reason I’m so hesitant to say yes it will or yes it won’t happen is simply because the underlying fundamentals in this economy have not been filtering through to a lot of the the macro level data, something again, which we we talked about earlier, but they are starting to do so, but very irregularly. We’re seeing the. The official labor market data soften incredibly quickly, where essentially the number of job openings have been cut in half in six months. In other words, six months from now, there’s very likely that if this trend continues, you’ll have no more hiring and only firing. At that point, we have seen drastic downward revisions to the number of jobs in this economy, not only in terms of the level of hiring in the monthly reports, but also in the annual benchmark. So all of a sudden, a third of the jobs that we thought we had added in the 12 year period. Oops, turns out they never existed. So that’s what I’m saying. As we continue to see the official data, I think, catch up to the reality. You’re going to have these, these economic reports that come in that are now all of a sudden reflective of reality, whereas before they were overly optimistic projections. So even if the economy is slowly deteriorating, the problem is that you initially, had such an overestimate that now, when you become accurate, all of a sudden it appears as if you’re falling off a cliff. And so when you get a report like that, again, there’s a good chance the Fed calls an emergency meeting and has an emergency rate cut.
Andrew Brill 26:14
We’ve heard a lot about, you know, the jobs that are being created, or the jobs that are where people are getting hired or part time jobs. And it occurred to me that, you know, what is the new norm changing? Are we going to, you know, the pandemic, everybody was working from home. Everybody wanted to work two or three days a week. We kind of got used to a little bit more freedom not being in an office, and all that is the is the norm. In your research, are you finding that the norm is changing, that the regular full time job that used to be there isn’t there anymore. And let’s face it, you know what a full time employee benefits are expensive. Other perks are expensive. So if you can hire a part time employee that you know, or two part time employees and don’t have to pay out those benefits. Obviously, the dynamic changes. Is our new norm changing.
E.J. Antoni 27:08
I think you’re spot on Absolutely. You know, the post pandemic economy is radically different in certain ways than in 2019 and actually, this is why I have a lot of sympathy for the you know, the bean counters at the Bureau of Labor Statistics, they are dealing with with a lot right now, with a lot of problems, and their models and methodologies that they relied on for a very long time and had a proven track record, all of a sudden are failing them. So that’s where I have a lot of sympathy now, where my sympathy goes away is the fact that these problems were evident in the spring of 2022 here we are, two years later, more than two years later, and nothing has been done to fix them. So now, now we’re going from, you know, I guess you could say ignorance to willful ignorance, right? And I will say this, the reasons behind why people why workers are behaving differently. Those reasons have also changed. So during the pandemic, people didn’t want to work as many hours. People wanted flexibility of things like being able to work from home. And today, the reason why people are getting, are changing work, or getting additional work or getting another part time job, is simply because they can’t make ends meet. It’s because we’re in a cost of living crisis. And this is part of the reason why the growth in non farm payrolls. That’s the jobs report that we get every month, right when you hear those headlines, oh, 100,000 jobs added. Those are non farm payrolls. One of the key reasons why that has been exploding the last several years is so many people who already have a job having to get a second job or a third job because they can’t make ends meet. And the consequence of that is, every time a business adds another payroll, even if it’s a part time, one doesn’t have to be a full time one. It gets counted as another job in those monthly reports. And again, the 40 hour a week job and the 20 hour a week job count exactly the same there. So it’s not as if you know. Well, let me, let me give an example. I think if I lose my full time job, working 40 hours a week, and I get two part time jobs, I now go from being counted as one job to two. I get double counted. Conversely, in the survey of households, that’s also part of that monthly jobs report, I still am only counted as a single person employed. And this helps explain the unprecedented divergence between those two surveys that we’ve seen the last several years, where the level of employment has been flat, and actually since November, has been going down, whereas the number of non farm payrolls, the number of jobs continues marching steadily higher. We are seeing fewer people employed, not more. We are seeing more people having to work multiple jobs. We’re also seeing. Seeing people lose their full time jobs and replace them with multiple part time ones. But and at first glance, you may think, Well, what does it matter if, if I lose a 40 hour a week job and I have to take 220 hour a week jobs, isn’t that kind of a wash if the pay is the same? No, because of something you mentioned already, which is benefits. And what we’re seeing today, right now is a lot of businesses letting go full time workers and replacing them with part time ones because they can’t afford benefits anymore. We forget that inflation doesn’t just hurt the consumer, it hurts firms as well. And sure enough, if we look at the data from the Bureau of Labor Statistics, where they provide a price index for not only consumers, but for businesses as well, the CPI and the PPI respectively. What we find is that they are both up almost exactly the same right, about 20% since January of 2021 in other words, all of the cost increases that you are seeing right now. So let’s say you go to the grocery store and you grab a dozen eggs, or 18 eggs, whatever it is, I go to Costco, so it’s like 72 at a time. You know, you buy your carton of eggs, and they’re up 50% in less than four years. It’s insane. But what we forget is that the store owner is also paying 50% more for those eggs, and that’s why, when we look at things like corporate profits. You know, the profit margins really haven’t budged. So even though the nominal profits have gone through the roof, you adjust for inflation, and you find out they haven’t in the same way that the typical American family has a paycheck which has never been larger. That’s a fact. Nominal pay has never been higher than it is today. On average, I know for some people, it’s not but on average, however, adjust for inflation and those larger paychecks right now by less than they did four years ago. Corporate profits are exactly the same again. Just within the last couple of weeks, we got data for retailers. We got data for manufacturers, all official data from the government. This isn’t my numbers. I’m making up the official government data show that those businesses profits are down in real terms, adjusted for inflation, they have fallen so, you know, kind of circling back here, I think that it’s really, really important to remember that while things may look very rosy on the surface, while the aggregate numbers are growing, that does not represent the reality that people, whether it’s a business owner or a consumer, that people are feeling.
Andrew Brill 32:33
EJ, where do we go from here? I you know, and that was one of my questions, is that the amount of money that people are making, according to all the reports, is more. The wages are up, but we’re able to buy less with those wages. So how do we get that under control? How do we get prices to come back down? How do we get that 50% margin to be on, you know, a lot those eggs? How do we get the price of those eggs back down? Where, you know, what I can have, you know, a few extra dollars in my pocket to go out to dinner where, you know, the average American can’t do that.
E.J. Antoni 33:12
Great, great question, and I think it’s probably worth pointing out, not only do those paychecks not go as far because of higher prices, but more and more of those paychecks are now also going to pay interest to pay finance charges. So for the if we just look at the typical American household, you have lost several $1,000 in purchasing power. In other words, again, your larger paycheck actually buys you less. But on top of that, you’re also facing 1000s of dollars more in finance charges. So we talked about those credit cards. Look at mortgages. Not only have home prices exploded, but you’re no longer getting a mortgage for 3% you’re getting it for 7% so you’re paying 1000s of dollars a year more in interest. So you put just those two effects together, and it’s as if you took over $8,000 out of the annual budget again, of the of the typical American family, kind of that stereotypical family of four with both parents working, how do we get out of this mess? Great question. The only good thing I would say about the fact that all of our economic woes are self inflicted is the fact that if you simply reverse all of the bad public policies that got us here, you will also reverse all of the bad effects of those policies. So there’s really nothing fundamentally wrong with the American economy. The problem is the anchor we have thrown around the neck of it, quite frankly, which all dates back to this, this runaway government spending. And just to show you that this truly is not political, it’s about policy. You can look at both sides of the aisle and find plenty of blame to go around as. Much as as much as it’s been a very, very contentious Congress where, you know, Kamala Harris, for example, had to be the tie breaking vote on two massive spending bills which accounted for trillions of dollars. You still have to accept the fact that trillions of dollars in government spending was passed by the Senate because Republicans went along with Democrats who wanted to spend all this money so people who think like the GOP hands are somehow bloodless here. Spare me. That’s not the case. There are big spenders on both sides of the aisle, and there are elites on both sides of the aisle. And maybe the Democrats want to waste trillions of dollars domestically, and Republicans want to waste trillions of dollars overseas. How? However, however you want to, you know, slice that. I don’t care. The fact is, both parties have spent money we don’t have, and everyone is feeling the consequence of that. So how do we get out of this? You got to cut the spending. I mean, you just have to. And the scary thing is we have dug ourselves into such a deep hole right now that if you just look at mandatory spending, which is you can more or less think of as money that’s already promised to go out the door in the future, and you add on to that interest on the debt that accounts for all government revenue, for all all receipts coming into the treasury. So any discretionary spending, which includes the entire defense budget, any discretionary spending is by definition, deficit spending. So again, how on earth do you get out of that that seems like you’re in the financial doom loop. It seems very much like a family who gets into so much credit card debt that the interest payments on those credit cards exceed their income, and so they’re literally having to finance the finance charges, which means even if they don’t spend anything else on the credit cards, the balance on those cards continues to grow and the interest payments continue to grow exponentially. The only way out of this is going to be a combination of fiscal and monetary restraint, along with growth, and I mean, a lot of economic growth, one of the key reasons why, during the Obama years, for example, so many conservative pundits ended up with egg on their face when they said, you know, everything Obama does is going to kill growth, it’s going to cause inflation, it’s going to ruin the economy. And yet the economy was a painfully slow recovery, but it was still a recovery that was largely because of the fracking boom, hydraulic fracturing, horizontal drilling, all of those different technologies became mainstream, and what it did is it flooded the market with cheap, abundant, clean energy, and the result was you pushed down prices throughout the economy, which helped counter the increases from all of that excess government spending and borrowing. So you kept down prices, you kept down interest rates, and you spurred economic growth by pushing out that supply side of the of your supply and demand model. So you not only added growth, but you reduced prices. It was really a perfect storm. Think of how much better things would have been without all that excess government spending. But I think that essentially is the formula you’re going to have to use again today. You’re going to need to unleash American energy. And I think we really underestimate, frankly, just how much energy affects the price of everything we do and everything we buy. So this, this, by the way, is not even a matter of simply energy itself as an input, but it’s the fact that things like natural gas today are the, are the source of virtually all our chemical blend stocks in this country. You know, we don’t really use oil for making chemicals that much anymore, because there is such a price premium attached to oil compared to natural gas in this country, most of the world still uses oil, which is why the global benchmark for crude, Brent, always has a price premium compared to the American benchmark, WTI or West Texas Intermediate, but it is so insanely cheap for us to get natural gas out of the out of the ground and to process it, refine it here, that we use that to make everything from the polyester fibers that go into clothing, you know, the plastics that are used in, you know, in car parts, for example, We use it for making pharmaceuticals, for for making cosmetics, you name it. I mean, we even use it to make engine oil. Think of that. We don’t even use oil anymore to make engine oil because it’s so cheap to make it in a lab with natural gas. And so we have a huge competitive advantage compared to the rest of the world in making the inputs for literally countless products. I mean it genuinely, I think, can’t be oversold, how much of a boon to this country it would be to get energy, get energy prices down, and to get more of it out of the ground. So
Andrew Brill 39:55
it seems to me. EJ, that if you or I didn’t. Have the money to spend. We just couldn’t spend it. At some point, the creditors are gonna come after you and say, hey, look, you know, where’s my money and but the government just seems to print more money and say, Okay, well, we’ll spend more. And the the fiscal irresponsibility is definitely a problem, which leads me to Chairman Powell versus Janet Yellen. And whereas everything that Powell seems to be trying to do is offset by everything that Yellen does, it’s just okay, print more money. Let’s sell more bonds. It’s devaluing the dollar. It’s it’s a huge problem. Why can’t they work in concert with each other to get things back to where there’s there’s not excess, but where we can all live
E.J. Antoni 40:46
comfortably. Well, because every time the federal budget increases, the family budget has to decrease. Look, there’s just no way around that. The government can’t spend $1 unless it takes it from you first. Now it doesn’t have to take it through an explicit tax, like the federal income tax, it can take it through an implicit tax, like the hidden tax of inflation, and that’s really been the chosen vehicle over the last several years. You know, again, Powell, at the end of the day, serves political masters, and he needs to keep interest rates on treasuries as low as he possibly can, and he’s been doing everything he can do to make that happen, whether it’s flooding the economy with money or even just trying to manipulate money so that it moves away from the private sector and to the public sector. A couple of ways they’ve been doing that would be paying interest on reserves to banks, but also using reverse repurchase agreements again in order to try to funnel that money towards the private sector. Now, those those familiar with both of those mechanisms are probably scratching their head, saying, wait a second, those are interest payments to the private market. How is that helping? Essentially, what it does is it allows Powell to create money for the Treasury to spend, but then to sterilize that money. And the whole reason why that’s important is the fact that most of the inflationary effect of the Fed creating money for the Treasury to spend does not come from that initial process. Instead, once the Treasury spends that money, it works its way through the banking system. And because we have a fractional reserve banking system, the money multiplies there. And so most of the effect of that, of that money creation for the Treasury doesn’t come from initially giving it to the Treasury. It comes from its activity in the banking system. Well, both paying interest on reserves and reverse repurchase agreements sterilize that in other words, they stop that second part of the process from from ever happening. And the problem there, although it does reduce the inflationary impact, is that you have removed all of that capital, literally trillions of dollars, from the private sector. And when the private sector has less capital available, interest rates for private sector activity go up. So you have artificially reduced interest rates for Yellen, but you have artificially increased interest rates for the rest of us. The other thing that’s really, really important to realize is that Yellen by shifting away from medium and long term issuance of government debt and plowing everything into short term issuance. In other words, in other words, T bills, the maximum, the maximum term on T bills is 52 weeks. For those not familiar, what that has done is essentially increase the amount of treasuries out there that are frequently treated like cash. In other words, these things are so darn liquid because they mature so quickly that a lot of people have no problem holding them and treating them as if they were purely liquid, because I can hold this and know that I’m literally going to get my money in a matter of weeks. So it’s as good as here anyway, that has essentially had the effect of increasing the money supply by the equivalent of about $1 trillion so that has completely canceled out a trillion dollars of balance sheet runoff, or Qt quantitative tightening that PAL has been doing. I mean, I do not exaggerate when I say monetary and fiscal policy at this point are just at loggerheads. They truly are right now, and what Yellen is doing is is adding an artificial stimulus to the economy in an election year. There’s no doubt about that, but it’s going to cause a tremendous amount of pain next year, regardless of who wins, even if, even if her side wins the election, it’s going to be incredibly painful when that, when all of that money gets pulled out of the economy in 2025 and not only that, but instead of locking in that debt at longer terms but lower interest rates, it has all been. Getting rolled over repeatedly at over 5% so you are we talked earlier about how we’ve spent over a trillion dollars this fiscal year in interest on the debt. 100 billion of that so about 10% has been the result of Yellen artificially moving money out of longer term and into shorter term maturity treasuries. This didn’t have to be this way, but it’s being done for political purposes, and this all devalues the dollar. Yes, yes. 100 questions.
Andrew Brill 45:31
A problem with trade with you know this now, it becomes a global problem, doesn’t it? 100%
E.J. Antoni 45:38
that’s absolutely right. And essentially what we’re seeing at this point is the fact that things like the yield curve, which is that relationship between short and long term rates, which a lot of markets use as a very, very important signal, it’s become kind of meaningless today. It truly is amazing how much of our economic data on which we used to rely so heavily, on which major decision makers relied so heavily, whether it’s the Fed or a major investment house or a government bureau, all of that data is getting kind of worthless at this point, whether it’s the yield curve or the jobs data.
Andrew Brill 46:15
So if we were able to create energy fracking, use natural gas to make all the things that you were talking about. Can we export that? Because that would increase the value of the dollar.
E.J. Antoni 46:27
We certainly could export it, absolutely. But one of the things right now that is hampering exports because, believe it or not, we’re actually drilling and mining like crazy right now in this country in order to meet global demand when you have a lot of places around the world like Europe that have basically just shut off the taps to all their own energy. That’s why, for example, Russia is now importing more energy to the EU than ever before, despite all the sanctions. I mean, the crazy thing is, all those sanctions are doing is bankrupting our our so called European allies. But if we actually get rid of all the red tape that has been put on American energy exports over the last three years or so, you would have an energy export boom. You would you would see the, you know, the tankers for for LNG, for example, shipping out from the from the Gulf and from the East Coast, and heading over to Europe and other places around the world too, quite frankly.
Andrew Brill 47:27
And that would give a huge boost to our economy, wouldn’t it?
E.J. Antoni 47:31
It certainly would, and not just in terms of the official data. I mean, obviously it would increase what we call net exports. So that would, that would add to GDP. But also the other thing it does is, and this goes back to what you said with with strengthening the dollar, is it gives people something to actually buy with our currency. And that’s been a big, big problem for for literally decades, people were essentially taking our currency and holding it as as the reserve currency of the world. That’s all beginning to unwind. A lot of that has to do with how we have mishandled the situation in the Ukraine, and the very terrible steps that we have taken there with with confiscating dollar reserves, for example, taking money that that wasn’t even ours. So however you feel about that conflict, it was a terrible monetary move, and one of the effects of that has been people deciding to dump the dollar, whether for forex or for international exchange. The consequence here is that as the position of the dollar, as the world’s reserve currency, unwinds, we need to find uses for people’s dollars, and if we don’t, we are going to have 70 years worth of deficits come pouring back to this country. That’s when you’ll see a real inflation. So
Andrew Brill 48:49
what am I missing? If all these things that we talked about are so good for the country, why are we not doing these things?
E.J. Antoni 48:56
Well, just because they’re good for the country doesn’t mean they’re good for the politicians who run the country, I think that’s a really, really important distinction that that we have to make so often politicians from, again, from both parties. The uni party is a very real thing, folks, both, both parties will have politicians telling you, I want the country to be successful, right? I want the American middle class to be strong. Blah, blah, blah, blah, blah. Why is it your actions never actually match your words? Maybe it’s because your words are lies. Maybe it’s because you’re not really in it for the American middle class. You are in it for yourself. And I think this is one of the reasons why the presidents who have been most successful, not just politically, but I mean most successful in terms of of what they did for the economy were those folks who had a vested interest in the economy. In other words, they they personally did better when the economy as a whole did better. There’s a lot to be said about putting someone in power who might not be the most benevolent. Of folks, but who has the most vested interest in our own success? So
Andrew Brill 50:05
where can we find you? Where can we look at your research, you know, social media, or at the Heritage Foundation? How can we find you?
E.J. Antoni 50:12
Best place to find me is actually going to be on x the handle there is at real EJ and Tony. Look for the blue check mark, because there’s tons of crypto scammers out there, but that’s the best place to find me. I post all my articles that I write, there a lot of my research, and you’ll also find all kinds of daily reviews of economic data that’s coming out. I actually read through all these reports because I don’t have a social life, and that way you don’t have to delve into them. You don’t need the background in economics. Everything is in plain English for everybody to understand.
Andrew Brill 50:44
EJ, thank you so much for joining me. I, you know, this was very, very informative on a little bit of a scary level, but also, you know, a very, very productive conversation. I really appreciate your time and joining me.
E.J. Antoni 51:00
Oh, it was my pleasure. Thank you for having me.
Andrew Brill 51:03
Thanks so much for watching our discussion here on wealthion with EJ Anthony. He is very knowledgeable and paints a picture that isn’t all that pretty. So if you need the facts on being financially resilient, please head over to wealthion.com forward, slash free, and fill out the form for a free, no obligation financial review. And of course, if you could like and subscribe to the channel, we greatly appreciate it. Don’t forget to turn on notifications. So you know when we post new videos on wealthyou And please do the social media thing with us. All the links are below in the description. And if you like this content and are looking for more ways to achieve long term wealth, watch this video next. Thanks again for watching until next time, stay informed, be empowered and may investments flourish. You.
