The Unraveling of the Inflationists' Story
Daniel Lacalle presents an analysis of the current state of the US economy. He notes that the 10-year government bond yield in the United States hit a low of 3.6% in September, but it has quickly climbed to 4.2%, nullifying the impact of any rate cuts. The primary reason for this is the rampant public spending and the dwindling confidence of bond investors in the government's ability to manage its public finances. Consequently, investors are apprehensive about a potential inflation surge.
Public Spending and Job Figures
The US government seems to be fixated on boosting the GDP through government spending and inflating job figures with public sector hires. This approach, however, is a recipe for disaster or stagflation. In just three months, the US debt has skyrocketed by over $850 billion. The government has stepped up its reckless borrowing, with almost half of that figure being an increase in borrowing in the past three weeks alone.
Future Implications
While the third quarter GDP will likely present a respectable figure, and government jobs will camouflage the jobs data, it is all setting the stage for a future catastrophe. The next administration will inherit a nearly insurmountable legacy from the current government. Even under the best circumstances, the Congress Budget Office (CBO) predicts an unsustainable $2 trillion deficit and $16 trillion in new debt over the next decade. This will lead to persistent inflation due to uncontrolled public spending and currency printing.
Investor Confidence and Policy Plans
It's no surprise that investors are skeptical of the Fed and continue to demand higher yields for US Treasury securities. If Kamala Harris wins the election, she is likely to accelerate the current inflationist policies. According to the CBO, her plan would increase debt by an additional $2.25 trillion. On the other hand, Trump plans to cut taxes and reduce the deficit with higher tariffs for importers. However, tariffs are a dubious method to balance the budget, and while the impact of tax relief on growth may be positive, it's hard to envision a significant reduction in the current deficit.
Need for Pro-Growth Strategies
The US needs pro-growth strategies and tax cuts, but no administration will be able to counterbalance a $1 trillion increase in mandatory spending with higher tax revenues. A drastic approach is needed to cut discretionary spending and stimulate growth with attractive taxation. Tax cuts are not inflationary; they simply put the same amount of money back into the pockets of those who earn it. On the other hand, rising expenditure is inflationary because it essentially prints a currency that has decreasing demand relative to issuance.
Market Reaction and Inflation Fears
The bond market is aware of this. Increased spending and the risk of higher inflation as printing spirals out of control and global demand for Treasury bonds decreases are concerning factors. Bloomberg Economics anticipates US headline and core PCE price indexes to rise 0.2% and 0.3%, respectively, in September, accelerating since August. This implies that annual core inflation may increase to 2.7%, and service inflation will rise above 3.8% even with a modest decline in shelter.
Fiscal Irresponsibility and Inflationism
The fiscal irresponsibility of the US government has been astounding, and the madness has intensified as the election process turned out to be less favourable to the incumbent vice president than polls suggested. Inflationism is the ideology that wins among economists close to the current administration as well as policymakers. The narrative is to convince you that inflation is low, that the battle is over and that everything is fine while you see your real wages and deposit savings disappear.
Bottom Line
The government's fiscal irresponsibility and inflationist policies are alarming. It's clear that the current state of affairs is unsustainable and that a drastic shift in economic strategy is required. What are your thoughts on this analysis? Do you agree with the concerns raised? Share this article with your friends and join the conversation. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
