Sunday Morning Economics - An Update And A Prediction

The over-expansive monetary policy and flooding of the economy with liquidity in 2020 under the Former Guy and continuing with the largess under the rule of the Current Guy it should come as no surprise the surge in inflation that we have been witness-too.

There is a combination of good and bad news with regard to the United States' near economic future.  Which would you like first?  Good news or bad news?  Good news you say?  I agree - eat dessert first.

The good news is that the Fed would appear to be putting the brakes on inflation.  Not a full stop - rather a slowing of growth and a retreat in a handful of sectors.  The bad news is that there is a very real possibility that this will come at the cost of a recession.  Is this an absolute certainty?  Nope.  But it is a probability.  Compounding this is the specter of a fight over the debt ceiling. 

In 2022 the Fed spurred interest rates four times in increments of 75 basis points.  And they did it again at the beginning of this month - which is kinda a big deal inasmuch as this old man hasn't seen that since the early 1980s.

Coincidentally, the Fed reduced market liquidity at the breathtaking pace of $95 billion a month by choosing NOT to rollover its portfolio of maturing Treasury securities.  The swing from loosey-goosey Covid policy to the belt-tightening of the last year is quite unprecedented.

A handful of forward-looking economic indicators suggest that housing costs (accounting for 40% of the CPI) are now falling.  No surprise there - mortgage rates today are double what they were at their historic lows in 2022.  Additionally, wage inflation has softened to 4.5% and the Purchasing Managers Indices imply the economy is at the possible threshold of a recession.

The country is reporting blow-out job growth with unemployment at its lowest level since 1969.  If you want a job in America you can probably get one.

Conclusion:  the tea leaves are mixed.  Under ordinary circumstances a recession might be mild or avoided altogether in the form of a soft landing.  Unfortunately, the circumstances are neither ordinary nor fortuitous.  The nihilists (a minority of Kevin McCarthy's caucus) still seem bent-upon blowing shit up and burning it to the ground.  This is hardly good faith bargaining or governing by means of responsible forward-looking budgeting. 

Sigh.

The last time this happened in 2011, vulnerable financial markets were rattled by the mere prospect that our government would default on its obligations which led to a downgrading of Treasury Bonds by the ratings agencies as it became clearer that we might not be a reliable borrower.

Do I think there will be a default?  

First-off, this blogger had to turn-in his crystal ball when he retired from the day job.  But my reading of the tea leaves suggests that there will be an agreement at the last minute of the last hour.  There will be an abundance of drama - followed by an agreement.  It will likely take the form of caps on discretionary spending, the formation of a commission or committee that will propose entitlement reforms along with rules for any proposals to come to the floor for a vote. 

Or I could also be full of it.  Or just pulling your leg for fun.

You're probably scratching your head and wondering.  To which my answer would be this:

McCarthy's caucus is singularly focused on one thing and one thing only: 

Restoring the Former Guy to the White House 

I think they understand that if they reach for another bridge too far a default would instantaneously result in a collapse of the global currency markets, throw the US economy into a deep recession, further cascading into a shit show of economic nonsense.  As their nest eggs evaporate retirees would revolt at the ballot box, Trump would be thumped in 2024, McCarthy would lose the house, the Dems would increase their hold on the Senate and Old Uncle Joe would have to don his crazy aviation glasses to avoid the glare of victory.  

Or maybe they don't understand this.

If it were me, I wouldn't want to die on that hill.  But nobody listens to me anyway.

Bottom line is Kevin is talking.  Biden is talking.  Which is good. There will be an agreement and I don't think the debt ceiling will be breached. Some forward-looking budget restraint would be a good thing.  Nevertheless, there will be theatrics.  Strap-on your harness and buckle-up.  As the days lengthen, spring is going to be awash in drama.

Stay-tuned......