Economic Patience

Economic patience is hard, especially when the DOW drops 10% in just 2 days and our retirement plans take a big hit. However, it’s important to have a historical perspective to calm our fears and know that things will gradually improve if we take corrective actions and give them time to work. For example, the U.S. Prime Rate hit a record high of 21.5% in December of 1980. The U.S. was in a deep “stagflationary” recession with unemployment at 8%, inflation at 13.5%, and oil prices at $147 / barrel in today’s dollars. Times were bad. So how did things turn out and how long did it take?

The medicine needed to cure the sickly 1980 U.S. economy was hard to swallow, but the medicine gradually worked. The national shift to supply side economics, expanded domestic oil production, and the Reagan tax cuts led to increased business capital investment, lower unemployment, higher wages, and more consumer spending – which has always been the driving force behind our economy. Inflation plummeted from 13.5% to 1.9% by 1986, unemployment fell from 8% to 5.3% by 1988, and the Prime Rate dropped from 21.5% to 7.5% by August 1986. The U.S. subsequently enjoyed lengthy economic expansions from 1982 to 1989 and again from 1991 to 2000 after a brief economic contraction in 1990. So, what’s the difference between then and now?

Since 1980, U.S. government debt has exploded from $908 billion to $36.6 Trillion today – an astronomical increase of 3,931%. Annual deficit spending has also skyrocketed from ($73.1) Billion in 1980 to ($1.81) Trillion in 2024 – a jump of 2,376%. Expressed another way, U.S. Debt / GDP was 25.5% in 1980 and has ballooned to 99.6% (est.) as of December 2024. This is akin to an American household living on an annual salary of $100,000 while having interest bearing debt of $99,600. Our nation is now spending a record $1.2 Trillion annually on interest payments alone while Americans are being crushed under a mountain of debt.

According to the Wall Street Journal, U.S. imports of foreign made goods exceeded the exports of domestically produced goods by a whopping $1.2 Trillion in 2024. Why does this matter? Because trade deficits are a form of consumption borrowing that produces no tangible asset or future return on investment – much like credit card borrowing to pay for a vacation vs. taking out a mortgage to buy a home. Forbes magazine asserts that the U.S. trade deficit and the U.S. budget deficit are related in that they both represent a “bad kind of borrowing” that doesn’t fund asset purchases or generate higher future income. These spending and trade deficits simply fund future deficits.

In the dark days of 1981, President Ronald Reagan famously said:

“In this present crisis, government is not the solution to our problem; government IS the problem . . . it is time to check and reverse the growth of government, which shows signs of having grown beyond the consent of the governed”.

How can Americans remain free when every individual U.S. citizen, including babies and the elderly, is burdened by $107,275 of debt and each individual U.S. taxpayer is being crushed by $323,050 of debt (source: www.usdebtclock.org as of 4/6/2020)?

The magnitude of our growing national debt, annual spending deficits, and burgeoning trade deficit require drastic short-term actions to return our country to long-term fiscal health. The U.S. can’t defy financial gravity much longer with these unsustainable numbers. Agree or disagree, the creation of DOGE and the implementation of tariffs are intended as the strong medicine our nation needs today to treat our fiscal ills. The question is this: will the American consumer be a good patient and have the short-term resolve to allow DOGE and tariffs enough time to work?

Time will tell. The next 6 months may be the most important time in U.S. economic history.