Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.
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The Federal Reserve and European Central Bank repeat that the recent inflationary spike is “transitory”. The problem is that investors do not buy it.
Inflation is always a monetary phenomenon, and this time is not different. What central banks call transitory effects, and the impact of supply chains are not the real drivers of inflationary pressures. No one can deny certain supply shock impacts, but the correlation and extent of the increase in prices of agricultural and industrial commodities to five-year highs as well as the abrupt rise of non-replicable goods and services to decade-highs have monetary policy to blame. Injecting trillions of liquidity makes more funds chase fewer goods and the rise in the real inflation perceived by citizens is much larger than the official CPI.
Anyone who believes the “rich” and large corporations will pay for $28 trillion in debt or the $2 trillion in new deficit has a real problem with maths.
Biden’s announcement of a massive tax increase on businesses and wealthier segments of the population simply makes no sense. The tax hikes will have a significant impact on economic growth, investment and job creation and do not even scratch the surface of the structural deficit. Even if we believe the Gross Domestic Product growth and revenue estimates announced by the Biden administration, the impact on debt and deficit is negligible. So, what is their response? That debt and deficits do not matter because the key now is to spur growth and the cost of borrowing is low despite rising debt.
Furthermore, the Biden administration has been inundated by MMT (Modern Monetary Theory) proponents who passionately believe that deficits are good because they attend to the rising global demand for US dollars. Additionally, the Biden administration argues that the deficit increase is not a problem because the Federal Reserve continues to purchase government bonds, keeping yields low and debt costs stable.
There is an overly optimistic consensus view about the speed and strength of the United States’ recovery that is contradicted by facts. It is true that the United States recovery is stronger than the European or Japanese one, but the macro data shows that the euphoric messages about aggregate GDP growth are wildly exaggerated.
Of course, Gross Domestic Product is going to rise fast, with estimates of 6% for 2021. It would be alarming if it did not after a massive chain of stimuli of more than 12% of GDP in fiscal spending and $7 trillion in Federal Reserve balance sheet expansion. This is a combined stimulus that is almost three times larger than the 2008 crisis one, according to McKinsey. The question is, what is the quality of this recovery?
The International Monetary Fund has published its April outlook for the global economy. It has been hailed by most commentators due to the strong upgrade in GDP recovery. The report states that “global growth is projected at 6% in 2021, moderating to 4.4% in 2022. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility”.
However, there are important warning signs that should be considered because headlines have been predominantly euphoric about this optical upgrade.