Hangovers from the GFC and Covid

The rescue policies of 2008 and 2020 prevented deeper crises but left the US with persistent distortions in monetary policy, public finances, consumer behavior and housing, while disproportionately benefiting Baby Boomers.

• The Federal Reserve maintained an effectively zero-interest-rate policy from the Global Financial Crisis until inflation emerged in 2022, while expanding forward guidance, projections and public communications.
• US debt-to-GDP rose above 100%, annual budget deficits remain unusually large, and the deficit is running at 6% of GDP despite efforts such as DOGE to reduce government spending.
• A declining labor force, driven by tighter immigration and Baby Boomer retirements, limits growth unless productivity accelerates through measures such as artificial intelligence and regulatory relief.
• Consumers' balance sheets and employment remain solid despite persistently weak sentiment, and the author rejects expectations of a broad spending slump, partly attributing pessimism to political polarization and social media.
• Housing affordability is at record lows; existing mortgages average 4.3% versus 6.7% for new mortgages, discouraging owners from selling and keeping inventories and prices constrained.

Takeaway: Investors should view high deficits, restrictive housing conditions, the difficult normalization of the Fed's balance sheet and labor-force constraints as enduring macroeconomic hangovers, while strong spending by wealthier Boomers may continue to support the economy.