Reducing Government Spending Is Key To Reduce Inflation

The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.

Markets and economists are beginning to recognize that a serious rationalization of spending is the only way to prevent a debt crisis and reduce inflation in the United States. In the latest estimates published by the Treasury, the accumulated deficit between 2024 and 2034 would reach $14 trillion. Considering the path of uncontrolled public debt and rising fiscal irresponsibility reached over the past four years, many feared a debt crisis looming. In a period of peace and recovery, a 6.4% budget deficit indicated the lowest economic growth, adjusted for debt increases since the 1930s. Market participants now appear relieved and are discounting a declining deficit as well as a stronger currency.

Inflation is always a monetary phenomenon. Governments create inflation by issuing constantly depreciating currencies, eroding purchasing power through massive spending, and subsequently eroding productivity and the real value of wages and savings. Therefore, strengthening the currency, restoring confidence in public finances, and reducing inflation are all part of the same policy: curbing government deficit spending.

The addition of Ron Paul to the Department of Government Efficiency, under the leadership of Elon Musk and Vivek Ramaswamy, is encouraging. Mr. Paul knows the inefficiencies and excesses of government better than most politicians. All three of them have a clear objective: cut spending wherever it is possible. When economists say it is impossible to reduce government expenditures, they usually use aggregated items. However, a large part of non-interest discretionary spending goes to more than 1,350 subsidy programs. With a budget nearly $2 trillion larger than in 2019, there is significant room for reduction.

Optimism among market participants is obvious. The S&P 500 has reached an all-time high, and this time, interestingly, it’s not due to expectations of increased currency printing and deficit spending but rather the opposite. Previously, markets viewed a stronger US dollar as a negative factor, but this time, it has proven to be the opposite. The dollar index is up 4.6% this year, and the S&P 500 has soared 27%. Since the U.S. election result, the dollar index has increased by 1.5%, while the S&P 500 has experienced a surge of over 2.5%.

Inflation expectations for November should not surprise anyone who looks at the still uncontrolled deficit. According to Bloomberg Economics, core inflation should remain high in November, at 0.3% month-on-month and 3.3% year-on-year. We expect a 0.2% rise in headline inflation, bringing the year-over-year rate up to 2.7% from 2.6%.

The expected level of inflation is intolerable in a country that enjoys global technology leadership and record energy independence, two disinflationary factors. Therefore, inflation is not only stubborn but unjustified.

Some economists warn against a strong dollar because they want a weak currency to disguise unsustainable fiscal imbalances. However, there is no strong economy with a weak currency.

A depreciated currency is not a tool of economic growth, but a policy supported by cronyism and bureaucrats aimed at subsidizing their inefficiencies at the expense of citizens’ real wages and deposit savings.

For the first time in years, we may see a real supply-side plan. This administration deserves some trust, as the alternative would have led the United States into an economic catastrophe.

The new administration must understand that the only way to maintain and strengthen the U.S. dollar’s reserve status is to curb deficit spending and reduce debt while accelerating productive economic growth and private investment. Argentina’s Milei has demonstrated that eliminating deficit spending can significantly reduce inflation. The United States needs to implement drastic measures to eliminate the bloated expenditure path of the past four years and restore confidence in the solvency of the public sector.

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