"The Big Switch"
From the monetary front to the fiscal front,
inflation continues to rage...
by Bill Bonner
Poitou, France - “He just refuses to die.” Our neighbor came over for an ‘apero’ yesterday. She told us about her poor father. “He’s 96 years old. He and my mother have been married more than 70 years. But he pointed to her last week and asked me: “Who’s that woman?” “It’s sad. He’s lived in that house for 50 years…but he can’t remember where the bathroom is. “When he got the Covid virus, we all thought he was going to die. But he just lost his mind.” What has to happen will happen, sooner or later. Often, it takes longer than you expect.
The Fed has increased its key lending rate faster and more than any Fed ever did. But the stock market hasn’t crashed. Unemployment is still low. And we’re still waiting for the recession. How come?
The Big Switch: Last week, we were exploring the issue. The secret, we believe, is that the federales have lost their minds. The Trump Team went bonkers in the Covid Hysteria, with a deficit of $4.2 trillion in 2020…then the Biden Bunch followed up with another $1.4 trillion deficit in 2021. (On Friday, we got distracted by RFK, Jr.’s congressional testimony…to which we will return tomorrow.) In the meantime…
It’s still ‘inflate or die.’ But now, consumer prices are coming down (No, they're not. - CP)…and the economy still lives. The reason, we believe, is that the source of inflation has largely switched from the monetary front (the Fed’s interest rates) to the fiscal front (federal deficits). The Fed is still lending at around zero cost in real terms. But now, in addition, the federal government is running the biggest budget deficits in history.
‘Inflation’ refers, technically, to an increase in the money supply…which typically leads to an increase in prices. In today’s global economy, you don’t even have to spike your own punchbowl; about half of the world’s central banks are still lending money below the inflation rate…some as low as 6% below consumer price increases. Some of it is likely to leak in your direction. But there are other ways to enliven a party. Turn up the music. Bring in a stripper. Pass out the hard drugs.
For the last 12 months, the US government has been throwing the biggest shindig in history – spending about $130 billion per week – or nearly 14% more than the year before…and 40% more than before the Covid era blowout. Bank bailouts…the slaughter in the Ukraine…a boondoggle for the silicon chip industry – it adds up. And now, government spending is headed toward 39% of the US economy (see below). Not since WWII has so much of US output been squandered by the government.
Bananaless Republic: The federales are taking charge of everything – deciding which industries will prosper and which won’t ...which news reports are ‘disinformation’ and which are truth…telling foreigners what kind of governments they must have, where their borders should be, and with whom they should trade. The feds rig US markets…crony-fy its capitalism…and run deficits more suited to a Banana Republic (without the bananas!) than to a serious, developed country.
The Biden administration, like the Trump Team before it, is not holding back. David Stockman: "For fiscal year 2023 to date the U.S. federal deficit is up a staggering $900 billion to nearly $1.4 trillion. That’s because YTD revenues are down $422 billion while outlays are higher by $455 billion."
You can’t make this up. The one-time capital gains windfall harvested in FY 2022 is long gone, but they are still spending like drunken sailors. During the first nine months of FY 2023 receipts of $3.4 trillion covered only 71% of outlays at $4.8 trillion. Back in the day that would have been called Keynesian fiscal stimulus with a vengeance. But, alas, we supposedly have an overheated economy with a historically low unemployment rate of 3.6%, but are running a budget deficit at 7% of GDP. (That's incorrect. "May 2023 ShadowStats Alternate Unemployment increased to 24.7% from 24.6% on top of U.6 increasing to 6.7% from 6.6%"
- CP)
Here’s the Financial Times with further comment: "Within 10 years, US government interest payments will exceed spending on defense and on social programs such as Medicaid. Through 2025, the trillions unleashed by this administration will push government spending up to 39 per cent of GDP, most of it not covered by new revenue. In other big developed economies, spending is poised to fall sharply as a share of GDP, while revenues hold up relatively well. Under pressure from Congress last month, Biden signed the Fiscal Responsibility Act of 2023, creating the appearance of a new restraint. Despite what look like large spending cuts of $1.3tn over 10 years, the US deficit is still projected to hover near 6 per cent of GDP throughout the next decade."
When the Music Stops: The Fed, trying to pin the blame on anyone but itself, did a study showing that while more than 60% of the price increases came from ‘excess demand,’ half of that demand came from the federal government’s deficits.
Government spending is not in itself “inflationary.” If the funds were borrowed honestly, the money supply would not increase. Consumer prices would not necessarily go up. Instead, as the feds’ borrowing increased, eventually interest rates would go up…stifling investment and spending, leading to a weaker economy and lower prices. That is what is happening now…but slowly. The yield on the US 2-year note has gone from around 2.7% a year ago, to nearly 5% today…while the price of oil has fallen from over $120 a barrel last summer to under $80 today.
Like monetary inflation, fiscal inflation (bigger deficits) can keep the party going…for a while. But the underlying pattern is much the same – bringing spending forward, while depriving the future of savings and investment. And either way, whether the source is fiscal or monetary, the formula is the same: either the inflation continues…or the boom dies."
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