The guest commentary below was written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
If we search the news from 2007, we can find plenty of headlines with the IMF and the Federal Reserve predicting a soft landing. No one seemed to worry about rising imbalances. Market participants and economists like to believe the central bank will manage the economy as if it were a car. The current optimism about the U.S. economy reminds us of the same sentiment in 2007.
Many readers will argue that this time is different, and we will not see a 2008-style crisis, and they are right. No crisis is the same as the previous one. However, the main pushback I get when discussing the risks of a recession is that the Fed will inject all the liquidity that may be needed. Quantitative easing is seen as the antidote that will prevent a crisis. However, if the only antidote to prevent a 2008-style contraction is monetary easing, then the risk of stagflation is even higher. So, the good news for those fearing a recession is stagflation.
I already mentioned a few times that we are in the middle of a private sector recession disguised by insane government spending. The latest purchasing managers index (PMI) readings confirm it. S&P Global mentions that “further loss of service sector momentum weighs on overall US economic performance” and “manufacturing firms continued to register a decline in production,” with service sector firms recording the slowest rise in business activity in the current eight-month sequence of growth. U.S. consumer confidence declined in August. The Conference Board consumer confidence index slumped to 106.1 in August from a revised 114 in July. Consensus expected 116.
Even more concerning is to admit that the services sector and consumption are held by debt increases. In July 2023, the personal savings rate was 3.5 percent, well below the pre-pandemic average of 6.9 percent. In the second quarter of 2023, total credit card debt rose above $1 trillion for the first time ever, reaching a record total household debt of $17 trillion, according to the New York Federal Reserve.
Rising debt is keeping GDP afloat in the United States. Meanwhile, inflation expectations remain elevated, the pace of rate hikes has yet to show its complete impact on the economy, and monetary aggregate declines are showing that the entire burden of the monetary policy contraction is falling on the shoulders of the private sector. A rising government deficit means higher taxes, higher inflation, or higher debt in the future.
The reason many economists believe in a soft landing is simply because rising fiscal and debt imbalances have not generated a significant impact on the broad economy. They may be right to believe there will not be a recession soon. However, the longer it takes to see an inevitable recession, the worse the impact will be. Trying to disguise what would have been a logical technical recession after such an enormous monetary and fiscal boost in 2020–21 is likely to make it worse, as economic agents are led to believe that rate hikes will not hurt and, even more optimistically, that credit supply will be unchanged.
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ABOUT DANIEL LACALLE
This is a Hedgeye guest contributor piece written by Daniel Lacalle and reposted from his website. 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. View all posts by Lacalle on his website.
Twitter handle: @dlacalle_IA
LinkedIn: Daniel Lacalle
