Economic Musings
“I have my books,
And my poetry to protect me.
I’m shielded in my armor.
Hiding in my room,
Safe within my womb.
I touch no one and no one touches me.
I am a rock
I am an island.
And a rock feels no pain.
And an island never cries.”
I am a guest on the Hugh Hewitt show most Wednesdays. Hugh has taken to primarily asking me about economic matters. That is, after all, in my wheelhouse as a CPA. And in elected office, the only committees I served on were all economy or budget related. I have gotten a lot of feedback from these appearances that people find my musings on these matters useful. So, here goes my perspective on the major economic forces at the moment.
I should point out that this is not, nor would I give, investment advice. These are just my perspectives on things which are for your information and are worth what you are paying for them - which is nothing.
With that caveat, here goes:
Economic Growth: I read a lot. I read the prognostications of those whose outlook is negative. These include “perma-bears,” bubble watchers, and people who want the economy to fail so Trump fails. I must say that as an accountant, I tend to look at the bad side of things disproportionately. We bean counters always try to be ready for when the bottom drops out. Someone who forecasts a recession every year will eventually be right. But being wrong for years along the way is not helpful. On the other side, are the “perma-bulls,” those who believe the business cycle has been repealed, and Trump fans who want him to succeed. I read them too.
In spite of my natural proclivity to side with “the sky is falling” people, I just don’t see it right now. The Atlanta Fed is projecting that the economy grew by 2.4% in the second quarter. Car and other retail sales are up. Asset values are holding up. Investment in AI and other equipment is rising. Even the Michigan Consumer Confidence survey is starting to tick back up. In the three states in which I spend virtually all of my time, it just doesn’t feel recessionary anywhere. The Big Beautiful Bill, for all its faults, does give certainty and will lower taxes for a lot of people with incomes below $200,000. The Democrats are outright lying when they say the opposite.
The Anti-Tariff crowd keeps screaming that these tariffs will cause recession, inflation or both. But there’s no evidence of that yet. Most of the evidence is that overseas businesses are absorbing much of the tariff cost and that production is being on-shored or moved to more friendly tariff countries.
So, as much as I might think it’s time for a downturn, I just don’t see it this year either in the statistics or in my “feel” for what is going on.
Liquidity: One of the things that has kept the economy up for some years now is liquidity. There is just a lot of cash out there to spend, invest or lend. I follow some liquidity measures and worldwide liquidity is not dropping and in fact is still increasing slightly as central banks around the world continue to print money or otherwise juice their economies with cash.
Inflation: The Federal Reserve has a target of 2% inflation. “Stable prices,” which means no inflation, is part of their “dual mandate.” We have been above 2% for years now. A lot of what the Trump administration is doing is inflationary. Tax cuts, liquidity injections, tariffs, less immigration and lower interest rates all encourage domestic growth but also inflation. In my opinion, they are fine with that. A little inflation (3-4%) in a growing economy will help the reduce the debt as a percent of GDP (by inflating it away) and help the average person’s wages to rise. As I said a few weeks ago, if inflation is 3% but your salary increases 6% and the economy is growing, you are happy. Getting rid of illegal immigration will help those at the bottom of the economic totem pole get higher wages because illegals work for less.
Interest Rates: The “Fed Funds rate,” which is the short-term risk-free rate that the Federal Reserve controls, is currently about 4.4%. Trump said last week he wants it lowered by 3%. That would make it about 1.5%. The current Fed Chairman is unlikely to follow that lead given that inflation is still above their target. However, there are three prospective new Fed Chairs out there who Trump might appoint who have all said that they would lower rates substantially and quickly. Chairman Powell’s term ends in May, 2026. So, that is the latest date at which such a reduction in interest rates might occur. But there are various scenarios under which this personnel change could occur earlier. That said, the Chairman needs the votes of other committee members to get something to happen. But complete revolt agains the wishes of the Chair are very rare.
Assuming short-term rates go down some time in the next nine months, what would the impact be? First of all, savers, and particularly seniors, would see a drop in their income. Those seniors are unlikely to want to take on more risk in order to keep their income up. So, cruise line bookings, and other things seniors do, might suffer. But the rate on car loans and personal loans would drop, which would benefit those industries. Also, many businesses are financed with short-term loans (3-7 years). Refinancing of those loans into lower rates would be a boon to those businesses and would save some of them from bankruptcy.
But long-term rates are another matter. The market controls those, not the Fed. When the Fed lowered short-term rates by half a point in September, 2024, the 10-year Treasury Bond rate went up by half a point. That is because the market expected that lower short-term rates would lead to longer term inflation.
The 30-year home mortgage rate is based off of the 10-year Treasury rate. If history holds true here, that could jump from 4.4% currently to 6% or higher, and mortgage rates would go up accordingly perhaps approaching 9%. So, does that mean a housing crash? Not necessarily. Lenders and home builders could take advantage of low short-term rates to start issuing 3-5 year adjustable rate mortgages amortized over 30 years. These could be 3% again under Trump’s desired interest rate. That would make a house payment relatively cheap and help the housing market. But….
And it is a big but. This is exactly what happened in 2007-2008 that lead to the housing crash and the great recession. People bought houses with a cheap payment they could afford. But the payment didn’t last and when it went up, they were foreclosed upon. If we went down this road, the regulation and underwriting of these loans would have to be completely different than it was then or we will get the same result. Greedy sharks will want to make a quick buck and damn the consequences. We can’t let them do that.
Treasury Debt: Last, but certainly not least, there is that little matter of the national debt. Many talk about the “bond vigilantes” who will come and force treasury to pay a much higher interest rate and will will enter a death spiral from which the nation will not recover.
There is no question that this is a real risk. But again, there are no signs of it right now. I monitor Treasury Debt auctions every week. They are finding plenty of buyers. Last week there was an auction of 30-year bonds that was actually quite good and saw robust demand.
Furthermore, the Trump team are not a bunch of dummies. They are doing things to create more demand for Treasuries. The recent crypto/stable coin bill for example normalizes and regulates these digital assets. Part of the regulation involves that whoever creates the “coin” back it with Treasury bills and notes. So, you go buy a digital coin and the person you buy it from has to buy some amount of treasury bills to back it. Hence, a totally new, and not insignificant, source of demand for Treasuries.
The Chinese are buying fewer Treasuries. But at the moment, the rest of the world is not. Canadians (you know, the 51st state) sold them in droves while mad at Trump a few months ago. They have now bought them back.
Furthermore, those lower interest rates that Trump wants will reduce the interest that the Treasury pays in the debt, thereby lowering the deficit. In June, the Federal government ran a surplus for the first time in many years. It’s only one month, but the deficit does show signs of starting to come down. The bond market will like that.
A debt crisis is not off the table. But neither are there any signs that it is imminent.
Bottom Line: I see storm clouds on the horizon, but no rain in sight for this year. Inflation will likely tick up while growth stays steady and positive. Short term interest rates will head down but long term ones will rise, if Trump gets his way. And the Treasury will not have a debt crisis for now.
If the Trump economic team is successful, and no “black swan” swoops in to mess things up, there will be more of the same in 2026. However, those are big ifs.
And of course, I could be 100% wrong about all of this. The Captivating Mrs. Campbell would be happy to enlighten you about other times I have been wrong. But one must plan ahead. And to do that, you must adopt some view of where you think things are going. This is mine.
Lately, I have a nostalgia thing going on with my music listening habits and am almost exclusively listening to 60s music. I have even changed the configurable gauges in my 2024 Mustang Convertible to the gauges of a ’67/’68 Mustang. So cool. I was four at the start of that decade and 14 at the end. But, I know 95% of all the songs played on Sirius/XMs “60s Gold”. I know the words to probably 70% of those songs. I attribute this in part to my much older brother and sister (13 and 11 years older) playing this music when I was too young to have a record player or radio. This week’s song is what I try to have my own financial plan be - a rock. A rock that can withstand whatever happens around it. In the words of another song from 1963 by The Essex, that is “easier said than done.”
And no, I have not mentioned Epstein. Imagine if there is no Epstein list and he committed suicide. Does that mean there were no aliens in Roswell, New Mexico in 1947 and Oswald shot Kennedy alone? What conspiracies will be left?
At least one thing I know for sure. Elvis Presley is not dead.
I Remain Respectfully,
Congressman John Campbell
Drive Fast & Live Free
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