Easing in the middle of persistent inflation may worsen stagflation risk

Thirty major central banks are expected to cut rates in the second half of 2024, a year when more than seventy nations will have elections, which often means massive increases in government spending. Additionally, the latest inflation figures show stubbornly persistent consumer price annualized growth.

In the United States, headline PCE inflation in February will likely grow by 0.4%, compared with a 0.3% rise in January, and consensus expects a 2.5% annualized rate, up from 2.4% in January. This is on top of the already 20% accumulated inflation of the past four years. Core inflation will likely show a 0.3% gain, according to Bloomberg Economics, which means an annualized 2.8%, building on top of the price increases of the past years.

Thirty central banks easing and seventy national governments increasing spending in an election year means more fuel for the inflation fire in a year in which money supply growth has bounced significantly from its 2023 lows.

Central banks ignored monetary aggregates when they shrugged off the risk of inflation in 2020, and now they are, again, easing way too fast when the battle against inflation has not finished. Furthermore, the only real tool that central banks have used is hiking rates, because different parallel measures of money growth, including reverse repo liquidity injections, have kept money supply growth at an elevated rate even when the balance of the G7 central banks was moderating, albeit at a slower pace than announced.

Cutting rates may come too late because, by the time it is implemented, it will cause a double negative. Government deficits will be cheaper to refinance, bloating an already record-high public debt yet again, but those cuts may have little impact on small and medium enterprises and families because they suffer significantly more from the accumulated effects of inflation, which means weaker margins, more difficulties to make ends meet, and impoverishment.

We must also remember that these persistent levels of official inflation come after relevant tweaks in the calculation of the consumer price index. We certainly know one thing: consumers do not pay attention to the annualized rate of growth in prices, but to the accumulated level of destruction of their purchasing power, and everyone, from Europeans to Americans, knows that they have become artificially poorer by the insane fiscal and monetary policies implemented in 2020.

Nobody who takes inflation seriously would even consider easing in an election year, adding trillions of dollars of deficit spending to the fire of inflation. Furthermore, the history of inflation warns us about giving up easily and too fast.

The Fed is making a big mistake by cheering the headline economic figures that come from disguising a private sector recession with a massive increase in public debt and weakening employment figures embellished by temporary jobs and public sector hiring. Additionally, it is making a mistake by giving dovish signals that make market participants take more risk. There has been no relevant reduction in the money supply if we include the different layers of liquidity injections. Announcing forthcoming rate cuts will certainly make speculative debt rise but will hardly change the credit demand from the backbone of the economy, small businesses, and families. Since the US government has rejected any calls for normalization and instead added more deficits and debt as if rising bond yields were not a problem, citizens and businesses have already suffered greatly from ongoing inflation and rate increases. As such, the rate cuts will help an already bloated government spending and the zombie corporations that keep access to capital markets. Everyone else will be hurt both ways, with inflation and lower access to credit.

You may think all the above problems are policy mistakes, but they are not. This is a slow process of nationalizing resources. Inflation and artificial money creation through deficits and monetization are a gradual transfer of wealth from real salaries and deposit savings to the government. You are basically becoming poorer to sustain an ever-increasing government size. The next time you read that massive deficits and monetary easing are good policies for the middle class, ask yourself why you find it harder each year to pay for goods and services. The mistakes made in 2020–2024 will cost the middle class many more taxes, even if the government promises it will only be “taxes on the rich,” the oldest gimmick to raise your taxes. Mora taxes, persistent inflation, the hidden tax, and the loss of value of your wages. That is “easing” for you. A private sector recession with headline economic figures bloated by government debt. The recipe for stagflation.

The Poor United States Economic Sentiment Screams “Buy Gold”

The manufacturing and consumer confidence weaknesses of the United States are deeply concerning, particularly considering that all those allegedly infallible Keynesian policies are being applied intensely.

Considering the insanity of deficit spending driven by entitlement programs, the decline in the headline University of Michigan consumer sentiment index in March to 76.5 from 76.9 is even worse than expected. Let us remember that this index was at 101 in 2019 and has not recovered the brief bounce shown by the re-opening effect in March 2021. Consumer confidence is still incredibly low, and a decline in the expectations index fully explains the most recent decline. Persistent inflation, high gas prices, and declining real wages may explain the poor expectations of the average citizen. Furthermore, this poor consumer confidence reading comes after poor control group retail sales last month.

No, this is not a strong economy. The consumer confidence index, labor participation, and unemployment-to-population ratios, as well as real wage growth, remain massively below the pre-pandemic level, and this after $6.3 trillion in new public debt that will likely reach $8 trillion by the end of 2024.

The manufacturing weakness of the United States is also a problem because this should be a period of high growth, considering the opportunities generated all over the world. Industrial output bounced 0.8% in February, but the January figure was revised to a larger 1.1% slump. If we factor in the decline in the Empire State survey to -20.9 in March, it looks like the manufacturing decline will persist.

The shape of the United States economy also reflects the impossibility of the soft-landing narrative. Inflation remains well above target, and bond yields are reflecting the reality of persistent inflation. Furthermore, money supply growth stopped declining months ago.

If the money supply rises and government spending continues to rise, the Fed will be unable to cut rates, and the impoverishment of citizens will continue.

This is the result of insane fiscal policy that increases spending and taxes. Weak growth, manufacturing decline, and worsening consumer confidence.

Demand-side policies and Keynesian experiments are leaving a once-strong economy on the same path as the euro area: stagflation. A warning sign should be the fact that the increase in public debt completely justifies the gross domestic product recovery.

This is the problem of extraordinary monetary and fiscal experiments. Governments embrace massive spending and debt monetization under the premise that they will implement control policies if the warning signs appear, but when they do, they never stop spending. Economists close to the government said that the administration would reconsider and adjust its budget if inflation rose, and alarm bells rang. Now we have heard all the alarm bells, and the administration continues as if nothing happened. The Inflation Reduction Act became the Inflation Perpetuation Act; the rise in government borrowing is now evident in the ten- and 30-year curve; and the private sector is in an obvious contraction.

Trusting governments to moderate spending after an expenditure binge is simply a very dangerous bet that always ends with worse conditions for citizens. Once they start, they cannot stop, and the inevitable end is higher taxes, weaker growth, lower real wages, and a decline in the purchasing power of the dollar. All the figures in the US economy scream “buy gold” because the government will always prefer to destroy the currency than to moderate the budget deficit and government size in the economy.

U.S. Swing States Misery Index Shows Bidenomics is Failing

One of the most dangerous things that a government can do is present a glossy picture of the economy at a time when families and small businesses are suffering. Governments are always optimistic, but sending euphoric messages tends to backfire, especially when the situation for the middle class is complicated.

In the United States, the Biden administration’s message of “the strongest economy in decades” is not just an exaggeration; it may anger voters who suffer the burden of negative real wage growth, accumulated inflation, and higher taxes.

Continue reading U.S. Swing States Misery Index Shows Bidenomics is Failing

Bitcoin Will Not Kill the US Dollar, The Government Will.

In a recent interview with Seth Meyers, President Biden mentioned that the United States has the strongest economy in decades. However, the reality shows that the 2023 GDP growth adjusted for the accumulation of public debt was the worst since 1930. The U.S. national debt hit $32 trillion in June 2023 and surpassed $33 trillion in September. The U.S. national debt now stands above $34 trillion and is rising by $1 trillion every hundred days. The trend is exceedingly worrying because the next trillion comes faster every time, and all this is happening in an alleged recovery with strong employment growth and rising earnings.

Debt matters, and there is a reason U.S. citizens do not see such a positive picture. Negative real wage growth, diminishing purchasing power of salaries and savings, and a much tougher position for families to make ends meet.

Continue reading Bitcoin Will Not Kill the US Dollar, The Government Will.