In Clint Eastwood’s 1992 movie Unforgiven, the scrolling script claims his character William Munny is of “notoriously vicious and intemperate disposition.”
Rather like the stock market.
A theme of the movie is: What you were may revisit you. Same in the stock market. And the economy.
From 1912-1920 during the Woodrow Wilson administration, consumer prices rose 82%, data from the Minneapolis Federal Reserve show. Wages rose fast too as the newly minted central bank, the Federal Reserve, juiced the supply of money.
In 1921, Warren G Harding was elected President on a platform to cut taxes and pare back a federal government bloated by World War I. Determined to bring an unaccountable bureaucracy to heel, Harding shepherded the Budget and Accounting Act of 1921 to congressional approval. It’s the reason we have the GAO – Government Accountability Office.
When Harding died suddenly in 1923, the vacationing Vice President Calvin Coolidge was sworn in as President under kerosene light by his father, a notary public.
Coolidge and Treasury Secretary Andrew Mellon (the great businessperson of his day) aimed to further Harding’s policies and brought the top tax rate down from 73% to 25%. By prioritizing budgets, President Coolidge also shrank government, paid the national debt down by a third, and balanced the budget throughout his presidency.
These are singular modern achievements. Prices fell by 15% during the Coolidge administration. The USA was so productive under Coolidge that we got the five-day work week. Saturday off!
But intemperance is residual. Inflation 1917-20 averaged over 16%. Prices remained much higher than before the so-called Roaring Twenties.
Certain to win again in 1928, Coolidge declined to run, and the country elected Herbert Hoover. And the stock market crashed, and the economy plunged into the Great Depression.
Was it fiscal discipline, prudence and budgeting that caromed the country into the fiscal maw? No. What we had been revisited us. Perhaps no amount of fiscal discipline can get a country past 80% inflation without consequences.
Markets and economies are vicious and intemperate. We forget during long placid periods lulling us into supposing we can escape consequences of past mistakes.
Which brings us to the present. I ran the data on the contribution to domestic output from government spending. Juxtapose the third fiscal quarter of 2023 with comparatives and it’s eye-popping. I ran averages since 1947, from Q2 2008 forward to capture the Financial Crisis, from 2020-2023 to show elevated Pandemic spending.
Government spending in 2023 roared, soaring 241% versus comparatives as massive appropriations hit the economic jugular vein. Defense spending exploded by more than 660% as America shoveled materiel into Ukraine. Half the added jobs since 2019 are in government. Include healthcare and education dependent on government spending and it’s 75% of jobs.
It’s how the US ran budget deficits of 6-7% annually (totaling $12 trillion since 2019) in what we were told was a strong economy.
In effect, we generated economic growth by having Ukraine lob millions of tons of munitions at Russia, by lavishing the fruited plain with public largesse, and by opening the southern border to millions of workers and consumers.
Stop doing all that and there are consequences.
The stock market is shuddering. We learn about notoriously vicious and intemperate – what you get when the drug is removed.
Does that mean we should stay on drugs?
Tim, you’re conflating disparate periods and things. The stock market is falling because of tariffs. The economy may face recession because of tariffs.
I wrote about tariffs. Recessions happen because people run out of money. If tariffs promote investment and jobs, we’ll be better off. But a drug-addled consequence lies between.
Tariffs were the only form of taxation in the USA until 1913. We had the biggest economic collapse in our history in 1929. I could make the case that income taxes and a central bank brought us to fiscal collapse. Both cause people to run out of money.
Anyway.
To the stock market, I wrote last week about how the bears are awake in Colorado and how they woke up in the stock market in December, evident in Demand, Supply and volatility.
In December, I wrote about the risk of a market correction in Q1.
If you want to know more about that and what’s ahead for US stocks, join our vigorous live discussion group for EDGE, our trading decision-support platform, at 230p ET Thursday, Mar 13.
Whatever happens next, two lessons. Fiscal discipline can forestall calamity but if your past was notoriously intemperate you may not outrun its ghosts.
And voters like fiscal responsibility. It’s a defense against the unforgiven acts of the past.
As to the stock market, investors and public companies, it runs on models and machines. Public companies, be beta. It’s your defense against viciousness. Investors, watch Demand and Supply. Imbalances are opportunities. Not threats.
