Cryptocurrency: Solves Problems Govts Banks And Politicians Create

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2023: You Wanted Endless Stimulus, You Got Stagflation

Authored by Daniel Lacalle

2023. Stagflation After Failed Stimulus.

After more than $20 trillion in stimulus plans since 2020, the economy
is going into stagnation with elevated inflation. Global governments
announced more than $12 trillion in stimulus measures in 2020 alone,
and central banks bloated their balance sheet by $8 trillion.

The result was disappointing and with long-lasting negative effects.
Weak recovery, record debt and elevated inflation. Of course,
governments all over the world blamed the Ukraine invasion on the
non-existent multiplier effect of the stimulus plans, but the excuse
made no sense.

Commodity prices rose from February to June 2022 and have corrected
since. Even considering the negative effect of rising commodity prices
in developed economies, we must acknowledge that those are positives
for emerging economies and, even with that boost, the disappointing
recovery led to constant downgrades of estimates.

If Keynesian multipliers existed, most developed economies would be
growing strongly even discounting the Ukraine invasion impact,
considering the unprecedented amount of stimulus plans approved.

Now we face a 2023 with even more disappointing estimates. According
to Bloomberg Economics, global growth will decline from a poor 3.2% in
2022 to a worrying 2.4% in 2023, significantly below the pre-covid-19
trend but with higher global debt. Total global debt rose by $3.3
trillion in Q1 2022 to a new record of over $305 trillion-mostly due
to China and the U.S., according to the IIF.

However, consensus estimates show an even worse outlook. Global growth
should stall at +1.8%, with the euro area at zero growth and the
United States at just 0.3%, with inflation reaching 6% globally, 6.1%
in the euro area, and 4.1% in the United States.

Only a handful of countries are expected to reduce debt in 2023, with
most nations continuing to finance bloated government spending with
elevated deficits and tax hikes. A world where governments are
constantly eroding the purchasing power of currencies and slashing
disposable income of taxpayers with rising taxes is likely to show
weaker growth trends and worsening imbalances.

The narrative all over the world is to try and convince us that
past-peak but elevated inflation is “falling prices” and that
everything is good when debt increases, growth stalls and the
purchasing power of salaries and savings is wiped out slowly.

There is no success in stagflation. It is a process of impoverishment
that hurts the middle classes immensely while the excessive government
spending is never curbed.

2022 was the year that killed MMT, the science-fiction fallacy of
Modern Monetary Theory. Countries with monetary sovereignty like Japan
or the UK found themselves in an unprecedented turmoil created by the
illusion that rising deficit and debt would never cause significant
problems. It only took a few rate hikes to dismantle the illusion of
perennial money printing as the solution to everything.

2022 also showed that it is false that massive deficits are reserves
that strengthen the economy. The United States suffered the most
severe inflation blow in thirty years even being energy independent
and benefitting from exporting natural gas and oil to the rest of the
world. If the ludicrous MMT narrative was true, the United States
should have not suffered any inflationary pressure.

2023 is expected to be the year of stagflation. Of course, most
strategists are betting on inflation falling rapidly in the second
part of the year, but that seems inconsistent with their estimates of
deficit spending and growth.

The uncomfortable reality is that nations have created a long-lasting
decline by pushing the limits on demand-side policies and government
intervention.

Many celebrated the decision to use governments and central banks as
the lenders of first resort instead of the last option, and what has
been created is a problem with difficult solutions.

There seems to be no incentive to reduce the fiscal and monetary
imbalances built through two decades, and therefore the result will be
weaker growth and impoverishment.

No government wants to acknowledge the risk of central banks reducing
their balance sheet. Even the most aggressive strategist fails to dare
to estimate a three trillion US dollar quantitative tightening because
they all know that the effects could be devastating. However, to truly
normalize, central banks should reduce their balance sheet by at least
five trillion US dollars. Governments and investment banks fear a
gradual three trillion tightening because it can lead to a financial
crisis. Those same market participants know that a five trillion
tightening would undoubtedly lead to a financial crisis.

The reason why everyone expects a 2023 divided in two parts, a first
half of poor data and a second where growth picks up and inflation
plummets, is because market participants need to create a narrative
that shows a quick fix to the above-mentioned disaster. However, there
is no quick fix, there is no soft landing and there is not a chance of
solving the problem by keeping elevated deficits, massive central bank
balance sheets and real negative rates. If we want to look at the
options, there are only two: Fixing the problem created in 2020, which
means a global recession but probably not a financial crisis, or not
fixing it, which means elevated inflation, weaker growth and another
bad year for risky assets which can lead to a financial crisis.

Unfortunately, when governments all over the world decided to “spend
now and deal with the consequences later” in 2020 they also created
the seeds of a 2008-style problem.