Bad News, I’m Afraid

A Worrying Forecast [The Daily Reckoning] May 07, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Bad News, I’m Afraid Portsmouth, New Hampshire [Jim Rickards] JIM RICKARDS Dear Reader, Most economists don’t believe we could have stagflation today. The prevailing view is that recessions are characterized by higher unemployment and reduced spending, and inflation is triggered by full employment and increased spending and therefore they cannot both happen at the same time. This prevailing view is wrong, as I explain today. Yet it’s a powerful narrative that blinds most analysts to situations where stagnation and inflation are both happening at the same time. That’s stagflation and it is emerging today. The first wing of the stagflation thesis is stagnant growth. This can take the form of an outright recession (two consecutive quarters of declining GDP) or simply slow growth at a rate below the potential growth of a strong economy. The U.S. economy has grown in recent years, but growth has remained below historical averages. What growth we have had wasn’t due to monetary policy. It’s been the result of extreme fiscal policy including annual deficits that are now approaching $3 trillion per year. Fiscal policy that involves direct government deficit spending does produce growth that monetary policy cannot. The question is: at what cost? Basic Keynesian economics holds that government spending at a time of recession or when consumer savings are too high can stimulate growth. If the national debt is moderate, it’s possible to get more than $1.00 of growth for $1.00 of government spending financed by borrowing. Today, these conditions don’t apply. The Keynesian Multiplier Is Broken The national debt-to-GDP ratio is 134%, the highest in U.S. history. Government spending is often directed at non-productive projects such as the Green New Scam and subsidizing illegal immigration. When debt rises faster than GDP, which it presently is, the debt-to-GDP ratio grows, and the Keynesian multiplier shrinks. You are trying to borrow and spend your way out of a debt crisis, which can only end in default (unnecessary since the U.S. can print dollars) or hyperinflation (likely). Those extreme outcomes (default or hyperinflation) happen in the endgame, which can be years away. What happens in the meantime is not much better. Any debt-to-GDP ratio above 90% will produce a Keynesian multiplier of less than 100%. With a debt-to-GDP ratio of 134% the U.S. can only expect more debt and weaker growth from fiscal policy. This may provide a short-term boost for Biden in an election year, but it’s a long-term drag on growth for the U.S. In the end, the U.S. is now Japan. The Japanese debt-to-GDP ratio is about 300%. [Your Credit Card: Declined?]( [click here for more...]( Take a moment and picture this scenario: The line at the gas pump is getting longer as you insert your credit card for the second time. It’s not just you. Everyone is declined. Something doesn’t seem right. A sinking feeling sets in as you realize something has gone terribly wrong. [Click Here For This Urgent Prediction]( Japan has been in one long depression since 1990 punctuated by nine separate technical recessions. Japan cannot “stimulate” its way to growth. They can only continue deficit spending to prop up nominal growth while making their debt ratio and slow-growth problems worse. The U.S. (and much of the world) is following the same path. Stagnation in the form of weak growth and occasional recession is the future of the U.S. economy despite recent strong quarters. The stagflation hypothesis is entirely intact. Inflation While the stagnation hypothesis is open to some debate, there is no debate about the persistence of U.S. inflation. Inflation has been going up for three straight months. In fact, inflation has been in a persistent range centered around 3.3% for 10 months. Inflation is back. In truth, it never went away. Oil prices are one factor. The price of oil was $68.50 per barrel last Dec. 12. It peaked above $86 in early April and has since pulled back a bit to $78 today. But the trend has been higher. That oil price surge has not worked its way through the supply chain yet. It’s resulted in some price increases, but more are in the pipeline. It'll keep inflation at current levels or higher in the months ahead. The Fed is looking for signs that inflation is coming down but they’re not going to get them. Other factors driving inflation from the supply side include the Key Bridge collapse in Baltimore, the closing of the Red Sea/Suez Canal shipping route and continued fallout from Ukraine war sanctions. Some of these supply side constraints may be deflationary in the long run but they are definitely inflationary in the short run. When you add it all up, the inflation hypothesis is strong and getting stronger. Growth is also slowing, as I explained above, so both components of the stagflation thesis are intact. But the Fed and their Wall Street toadies can’t see that. Garbage in, Garbage Out That’s because the Fed forecasting models are junk science. Those models will always get the wrong result. If that’s true (it is), and if Wall Street is following the Fed (they are), then Wall Street will get the forecast wrong also. It’s the blind leading the blind. [Biden Replaced In 2024 Election Plot?]( [Click here for more...]( We can start with the Phillips curve. This model says that there is an inverse correlation between unemployment and inflation. If unemployment is low, one should expect inflation to be high, and vice versa. The rationale is that tight labor markets lead to wage demands that increase spending and feed inflation. The problem is there’s no empirical data to support the model. In the early 1960s, the U.S. had low unemployment and low inflation. As late as 1965, inflation was only 1.6%. In the late 1970s, the U.S. had high unemployment and high inflation. Inflation peaked at 13.5% in 1980. Unemployment that year was 7.8%. Unemployment peaked at 10.8% in November 1982. Inflation that year was still 6.1%. In the 1930s, the U.S. had high unemployment and low inflation (actually deflation). Unemployment was estimated at about 24% in 1932. Inflation that year was negative 10.3%. In 1973–1975, the U.S. had low unemployment and high inflation. In October 1973 unemployment was only 4.6%. Inflation that year was 6.2% on its way to 11.1% in 1974. In other words, the Phillips curve is junk science. There are many causes of both unemployment and inflation, but a strict inverse relationship is not one of them. The Fed Doesn’t Even Get Interest Rates The Fed also takes the view that interest rate cuts offer “stimulus” and interest rate hikes offer “monetary tightening.” That’s also false. During times of severe economic distress (the Great Depression is a good example), interest rates drop to near zero. When economies are booming, interest rates rise because companies are competing for more funds to expand capacity and to make investments. Things can go too far. High rates will eventually lead to overcapacity and recession. Low rates will eventually lead to investment opportunities and a new expansion. But those turning points happen at the extremes as part of a normal business cycle. In the normal state of affairs, higher rates are associated with good times and low rates are associated with recessions or worse. The Fed has this exactly backward. The Fed doesn’t lead the business cycle, it chases it. In short, the Fed is persisting in tight monetary policy in order to fight inflation. But inflation is not caused by the Fed. It’s caused by supply-side disruptions (oil and transportation bottlenecks) and a range of other factors the Fed doesn’t control. The Fed is tightening into what may quickly become a recession. Yet inflation is rising because of supply chain problems, asset bubbles and rising wages. This is a recipe for stagflation. It’s coming soon. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. Just like I anticipated, the stock market’s next big drop looks like it’s beginning. I don’t want to alarm you. But I fear that in a short time, [millions of Americans could watch their 401(k)s and their IRAs spiral toward new 52-week lows.]( That’s why I’m urging you to take immediate action. I just called in a favor from [one of my most prestigious financial contacts.]( He's a retired hedge fund manager. And, at my request, he’s agreed to teach my readers a [simple strategy]( that could protect you from the market’s next death spiral. And truthfully, if you follow his instructions, you could significantly boost your income before the new year. [Go here now for details.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We allow the editors of our publications to recommend securities that they own themselves. However, our policy prohibits editors from exiting a personal trade while the recommendation to subscribers is open. In no circumstance may an editor sell a security before subscribers have a fair opportunity to exit. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. All other employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. Please read our [Privacy Statement.]( If you are having trouble receiving your The Daily Reckoning subscription, you can ensure its arrival in your mailbox by [whitelisting The Daily Reckoning.](