The Economy

The overstimulated superpower

Some of that fiscal and monetary stimulus is still coursing through the system, keeping growth artificially high and inflating both consumer and asset prices.

After the pandemic struck, presidents Donald Trump and Joe Biden unleashed about $10tn in new spending, $8tn of that after the brief, lockdown-induced recession of early 2020 was over. US government spending has been running at a yearly level about $2tn higher than its pre-pandemic norm, and is on course to set records as a share of GDP.

Meanwhile, the rest of the developed world has been heading in a different direction. In the years since the start of the pandemic, rising deficits amounted to a cumulative 40 per cent of GDP in the US, twice the average in Europe, and a third higher than in the UK.

By some estimates, fiscal stimulus accounted for more than a third of US growth in 2023; without it, the US would not look like such a marvel compared with other developed economies.

Even more under appreciated than the boost from runaway government spending is the way monetary growth has been supercharging the economy and the financial markets. The Fed created so much money during the pandemic that by some measures the excess has still not been fully absorbed by the economy.

The broad measure of money supply known as M2, which includes cash held in money market accounts and bank deposits, as well as other forms of savings, is still well above its pre-pandemic trend. In Europe and the UK, where monetary stimulus was less aggressive, M2 has fallen back below trend.

This liquidity hangover has countered Fed interest rate hikes and helps explain the current behaviour of asset prices. Corporate earnings are up, on strong GDP growth, but prices for stocks — not to mention bitcoin, gold and much else — have been rising even faster. This odd combination — higher stock valuations despite higher rates — has not happened in any period of Fed tightening going back to the late 1950s.

A similar levitation act is visible in the US housing market; despite higher mortgages rates, prices have risen steadily and faster than in other developed nations. Since 2020, the total net worth of US households has risen by nearly $40tn to $157tn, driven by home and stock prices. For the better off, this “wealth effect” is a happy turn. More Americans plan to vacation abroad this summer than at any time since records begin in the 1960s. For the less well off, who summer locally, do not own a home and tend to be younger, these conditions are less felicitous.

Bingo.

 

They haven't. Inflation (as people use the term -- i.e. consumer prices of goods and services) is running hotter here than in Europe. Eurozone CPI @ 2.4 percent in March. 3.5 percent in the U.S.

The caveats for that. ... 1) The way they measure is slightly different, so who knows if it is apples to apples, and 2) Along those lines, the numbers are complete bullshit anyhow.

More importantly, inflation is expansion of the money supply. It's not CPI, even though people don't understand this. Rising consumer prices MIGHT be a consequence of debasing your currency by creating more and more credit (i.e. -- money). But how that inflated money supply affects everyone depends on the mechanism the central bank uses to unleash it. For example, quantitative easing, which blew the size of the Fed's balance sheet up by trillions of dollars, didn't put that money into the broad economy. ... it funneled it through the banking system to people who already had money. ... i.e. it made the rich richer. It's why even though prices keep going up continually because of their monetary shenanigans, their recklessness over the last several decades didn't primarily run up the price of milk (although consumer prices have risen), it ran up the price of Tesla stock much more. Rich people who have been the beneficiaries were taking that excess money and bidding up the prices of risk assets (things they could do with that much more excess money), not consumer staples.

That changed dramatically during the pandemic, when fiscal recklessness and monetary recklessness got joined at the hip and they went absolutely nuts (what Ruchir is talking about). Fiscally, the huge debts our government was running were being funneled into Joe Sixpack's pockets, too! It was the stimulus checks and the programs to pay people who weren't working and the welfare programs that were expanded. The Fed monetized all of that debt.

The amount of money they helicopter dropped was massive. And because that monetized debt wasn't just going into the stock market and housing prices like it had largely been for a decade and a half (although it did. ... remember the meme stock and cryptocurreny crazes?). ... that is when you saw the genie get out of the consumer prices bottle and "inflation" (as people use the term) became a household word.

But inflation itself is just expanding the money supply. When the effects are seen in the stock market or in art or fine wine prices or the housing market because artificially low rates blow up prices, the sugar high they are giving inevitably ends in a debt crisis. You are mispricing debt. ... and blowing up asset prices on the back of that "free" money. And eventually that always ends badly, whether it was the crash in 1929 or what happened in 2008.

When the effects are seen in consumer prices (because you helicopter drop the money so everyone grabs some), it riles up the masses because if you think of consumer price inflation as a tax (you are inflating away the debt that is behind it and making people pay for it with higher prices), it's the most regressive tax there is.

 

First quarter GDP +1.6% vs. 2.4% estimate.

 

The other half if this is that the PCE deflator was way up (3.7 percent).

Maybe it will click with people that we are mired in a stagflationary environment.

Along the lines of what I have been trying to point out on here the last two years when they drop GDP numbers. ... our government has been running massive deficits, it spends the money ineficiently (and corruptly), but nonetheless, that spending has been passed off as economic growth in those "bad news for Biden" GDP numbers people would breathlessly come on here to post about.

In the latest number. ... the amount of government spending dropped off from 4.6% to 1.2%. ... and surprise, surprise, the GDP number doesn't look strong at all.

If we were relying on actual economic activity (supply and demand / buyers and sellers who bear the cost and benefits themselves of exchanging money for things), people would realize that the economy we're all actually living in is in contraction.

Even with the government hijacking more and more things, we are getting anemic growth overall for the fantasy (that is on its last legs). ... coupled with rising prices.

They engineered stagflation that we are not getting out of without people accepting that the fantasy world of endless debt and government making things "free" can't persist.