Today’s guest post is by Michael (Mish) Shedlock. He’s an economist and member of the DKI Board of Advisors. I’ve read and admired his work for years. The key points in his piece that follows is that no matter who wins the election in November, the US will continue to spend insane amounts of money, that government projections never include periodic problems like inflation, and that the Fed is trapped and going to have difficulty controlling inflation. For those of you who like Mish’s work as much as I do, you can check out his blog MishTalk.
For many reasons, the Fed will struggle to contain inflation. This is part one, deficit spending and interest on the debt.
Key Points
- The government is running a cumulative deficit of $1.1 trillion so far in FY2024 ($46 billion more than the same period in the prior fiscal year when adjusted for timing shifts)
- Revenues were $2.2 trillion through February
- Outlays were $3.3 trillion through March
The above is according to the BipartisanPolicy Organization.
Those numbers do not include a $95 billion aid bill for Ukraine and Israel that recently passed Congress.
The projections look worse.
Revenue and Outlays Projections
“As spending continues to outpace revenues, deficits will exceed $1.5 trillion (an average of 5.6% of GDP) in each of the next ten years. In comparison to May 2023’s budget outlook, deficits are projected to be a cumulative $1.4 trillion less over FY2024-2033.”
This report as well as White House economic projections, and Congressional Budget Office projections are all too optimistic.
Q: Why?
A: None of them factor in a recession all the way through 2054.
The Fed makes the same optimistic assumptions in its
Fed Summary of Economic Projections March 2024 vs December 2023
Compared to December of 2023 the Fed upped its central tendency of GDP expectations, core inflation, and the expected Fed Funds Rate as noted in my March 20, assessment Fed’s Dot Plot is More Hawkish Towards Cuts in March vs. December
The key points are the Fed assumes no recessions and the Fed assumes no matter what Congress does that it will hold inflation to two percent over the long term.
In other words, the Fed assumes that it is in control when history suggests that it isn’t.
The Fed has never forecast a recession, nor has the Fed spotted one in real time.
The deficit is now over $34 trillion with debt held by the public at $27 trillion. Interest on the national debt is over $1 trillion.
Money that would go for investment instead goes to bondholders.
Neither party will fix deficit spending. Nor will the Fed.
And it will get worse in the next recession. Unrestrained fiscal stimulus contributed to the mess we are in, and nothing suggests a policy change no matter who wins the election.
In the past two decades, the Fed did have some favorable global factors that held down inflation. Those factors are gone.
We had several different things happen at once, which makes it difficult to isolate out root cause contributions of the various factors. Deficit spending is certainly a factor, as is the Fed’s interest rate policy. I have to wonder, though, if there isn’t a substantial impact from the move to zero-reserve banking. From February 2020 to June 2020, the M1 money supply QUADRUPLED. Prior to that, it had taken 18 years for the M1 to quadruple.
Maybe that’s a policy that it’s time to reverse.
These are great points, Scott. I think you’re correct that there are multiple factors involved here including the way the banking system can “create” money. While there are (and will continue to be) multiple contributors to inflation, the one thing I know is that if Congress continues to overspend by trillions a year, we’ll definitely see continued and increasing inflation. Thanks for the smart comment!