Finance & Markets

The U.S. federal government published a December deficit of $129 billion, up 52% from the previous year. The private sector recession is clear as expenses continue to rise while tax receipts decline. If we look at the period between October and December 2023, the deficit ballooned to a staggering $510 billion.

You may remember that the Biden administration expected a significant deficit reduction from its tax increases and the expected benefits of its Inflation Reduction Act.

What Americans got was a massive deficit and persistent inflation. According to Moody’s chief economist, Mark Zendi, the entire disinflation process seen in the past years comes from exogenous factors such as “fading fallout from the global pandemic on global supply chains and labor markets, and the Russian War in Ukraine and the impact on oil, food, and other commodity prices.” The complete disinflation trend follows the slump in money supply (M2), but the Consumer Price Index (CPI) should have fallen faster if deficit spending, which means more consumption of newly created currency, would have been under control. December was disappointing and higher than it should have been.

The United States annual CPI (+3.4%) came above estimates, proving that the recent bounce in money supply and rising deficit spending continue to erode the purchasing power of the currency and that the base effect generated too much optimism in the past two prints. Most prices rose in December, and only four items fell. In fact, despite a large decline in energy prices, annual services (+5.3%), shelter (+6.2%), and transportation services (+9.7%) continue to show the extent of the inflation problem

The massive deficit means more taxes, more inflation, and lower growth in the future.

The Congressional Budget Office (CBO) expects an unsustainable path that still leaves a 5.0% deficit by 2027, growing every year to reach a massive 10.0% of GDP in 2053 due to a much faster growth in spending than in revenues. The enormous increase in debt will also lead to extremely poor growth, with real GDP rising much slower throughout the 2023–2053 period than it has, on average, “over the past 30 years.”

Deficits are not a tool for growth; they are tools for stagnation.

Deficits mean that the currency’s purchasing power will continue to vanish with money printing and that the real disposable income of Americans will be demolished with a combination of higher taxes and a weaker real value of their wages and deposit savings.

We must remember that, in Biden’s administration’s own estimates, the accumulated deficit will reach $14 trillion in the period to 2032.

This unsustainable level of fiscal irresponsibility will also lead to more massive money printing. The Federal Reserve will have to lead with larger federal fiscal imbalances than seen in crisis times, even considering estimates that assume no recession or crisis. So, if a crisis hits, the situation will simply explode.

Article originally published in Tomorrow’s Affairs

As we embark on the year 2024, the economic landscape is characterized by a blend of factors, including declining but still elevated inflation, potential interest rate cuts, increasing geopolitical risks, and soaring public debt.

The final quarter of 2023 witnessed a remarkable improvement in market sentiment. The moderation of inflation, strong corporate profits that exceeded expectations, and optimism regarding impending rate cuts all contributed to this surge.

The heightened complacency, evident in the “extreme greed” levels on the CNN Greed and Fear Index, resulted from aggressive rate reduction expectations by central banks and projections of a swift decline in inflation. However, as we move into 2024, parallels with the preceding year become apparent.

Contrary to market expectations, a “soft landing” is not enough to bring about the anticipated year of disinflation; a recession is the necessary catalyst.

An abrupt increase in the global money supply, standing at nearly $107 trillion by the end of the year, remained a bulwark against a recession in 2023, coupled with relentless government spending.

A lag effect

The contrast between alleged tight monetary policy and active fiscal measures has placed the entire negative impact on the private sector, bearing the brunt of rate hikes and declining monetary aggregates.

A manufacturing sector that remains in deep contraction is joined by a services sector that sees how consumers have almost depleted their savings for 2021.

Although inflation declined alongside monetary aggregates, the economic repercussions have been delayed due to a lag effect.

The full-scale impact of the 2023 monetary contraction is expected to manifest in 2024

The full-scale impact of the 2023 monetary contraction is expected to manifest in 2024, leading to a decline in inflation if the economy falters and private sector demand recedes.

However, the notion of a quick slump in inflation with no impact on growth or jobs appears increasingly implausible. Additionally, a looser monetary policy may contribute to commodities rebounding, attracting freshly printed money towards unconventional assets, and making the inflation decline more challenging.

The impact of debt and public spending remains a critical consideration. Will central banks uphold market support? How will taxes and macroeconomic factors shape the global economy? These questions underscore the delicate balance between recovery and potential risks.

A year of stagnation

In 2024, a prudent investment policy is recommended. Central banks are expected to maintain accommodative policies, injecting liquidity selectively. However, anticipated interest rate reductions may not be as significant as expected.

The global economy enters 2024 with less uncertainty. Geopolitical risks seem to have been discounted, and this may be a sign of excessive optimism in a year where global growth is projected to slow markedly, while the Eurozone and Latin America may continue to show worse growth than their counterparts.

2024 will likely be a year of stagnation with elevated public debt

Strong China and India growth will not likely change the weak trend of productivity and growth generated in most developed and emerging economies after years of debt-fueled government spending programs.

2024 will likely be a year of stagnation with elevated public debt. Thus, the expected quantitative tightening is likely to be less severe with a rising global money supply and improved credit conditions.

A risky environment for fiat currencies is anticipated, with ongoing destruction of the purchasing power of the domestic currencies as governments continue to increase their fiscal imbalances.

Gold and bitcoin may help citizens avoid the debasement of currencies without ignoring the large difference in volatility of each asset class.

Global loss of purchasing power is likely to continue even with declining annual rates of rise in consumer prices, with expected global inflation between 3.5% and 4%

Expectations of large rate cuts and even quantitative easing from the Federal Reserve may be too optimistic. In a U.S. election year, substantial changes in monetary policy are not anticipated.

As such, global demand for dollars is expected to rise, creating a favorable environment for dollar-denominated assets.

Numerous risks cast shadows on the economic horizon, including more persistent inflation, unanticipated impacts on business margin and profits, potential currency depreciation in emerging markets, the ongoing China-USA trade conflict, the war in Ukraine and Israel generating widespread geopolitical risk, and the spectre of a black swan event in the debt market causing a credit crunch.

2024 is likely to be very similar to 2023. The long-term trends of weak productivity and GDP growth, high debt, rising government size in major economies, increases in taxes, and erosion of the purchasing power of salaries and savings will continue.

Equities may react positively to looser monetary policy, but the macroeconomic path to stagnation remains.

The monumental fiscal and monetary hole that Peronists Massa and Fernández have left for Javier Milei is difficult to replicate. Ex-president Mauricio Macri himself explained that the inheritance Milei receives is “worse” than the one he found from Cristina Fernández de Kirchner. Peronism leaves a country in ruins and with a massive time bomb for the next administration.

The enormous economic problems of Argentina start with a primary fiscal deficit of 3% of GDP and a total deficit (including interest expenses) exceeding 5% of GDP. Moreover, it is a structural deficit that cannot be reduced unless public spending is slashed. Public expenditure already accounts for 40% of GDP and has doubled in the era of Kirchnerism. If we analyze Argentina’s budget, up to 20% is purely political spending. The previous left-wing administration only cut spending on pensions, which were half of the adjustment in real terms, according to the Argentine Institute of Fiscal Analysis

Massa and Fernández’s interventionist policies and price controls have left a shortage of meat and gasoline in a country rich in oil and livestock, demonstrating again what Milton Friedman said: “Will we read next that government control of prices has created a shortage of sand in the Sahara?”

We must not forget that the Fernandez administration leaves Argentina with an annual inflation rate of 140% following an insane increase in the monetary base of more than 485% in five years, according to the Central Bank of Argentina.

This confiscatory and extractive fiscal and monetary policies have created a disaster in the central bank reserves. Fernandez leaves a bankrupt central bank with negative net reserves of $12 billion and a time bomb in remunerated liabilities (Leliqs) that exceed 12% of GDP and effectively mean more money printing and inflation in the future, when they mature. With a country risk of 2,400 basis points, the self-proclaimed “socialism of the 21st century” government has left Argentina and its central bank officially bankrupt, with 40% of the population in poverty and with a failed currency.

Milei must now confront this poisoned legacy with determination and courage. Macri, who suffered from the error of gradualism, recently argued that there was no room for mild measures, and he is right.

Milei has promised to shut down the central bank and dollarize the economy. However, can it be accomplished?

The answer is yes. Absolutely.

To understand why Argentina must dollarize, the reader must know that the peso is a failed currency that even Argentine citizens reject. Most Argentine citizens already save what they can in US dollars and conduct all major transactions in the US currency, because they know that their local currency will be dissolved by government interventionism. The government has 15 different exchange rates for the peso, all fake, of course, all of which have only one objective: to steal from citizens their US dollars at a fake exchange rate.

The central bank is bankrupt, with negative net reserves, and the peso is a failed currency. Therefore, shutting down the central bank is essential, and the country needs to have an independent regulator without the power to print currency and monetize all the fiscal deficit, and it must eliminate the possibility of issuing the insane Leliq (remunerated debt) that destroys the currency today and in the future.

Shutting down the central bank requires an immediate and strong solution to the Leliqs, which will have to include a realistic approach to the monetary mismatch in a country where the “official exchange rate” is half the real market rate against the US dollar. Taking a bold step to recognize this monetary mismatch, closing the central bank, and ending the monetization of debt are three essential steps to end a path to the destruction of a country comparable to that of Venezuela. Milei understands this and knows that the US dollars that citizens save with enormous difficulty should flow back to the domestic economy by recognizing the monetary reality of the country making the US dollar a legal tender for all transactions.

The monetary issue is one side of a hugely problematic coin. The fiscal problem needs to be addressed. Milei needs to put an end to the bloated fiscal deficit, and that requires an adjustment that eliminates political spending without destroying pensions. This must involve selling some of the many inefficient and bloated public companies and the excess spending in purely political subsidies. Secondly, Milei must put an end to the ridiculous trade deficit. Argentina must slash the misguided protectionist and interventionist laws if the Peronists are open to the world to export all they can. To do this, it needs to put an end to the ridiculous “currency exchange rate clamp” and the 15 false exchange rates that the government uses to expropriate dollars from citizens and exporters with unfair rates and confiscations.

Taxes need to be lowered in a country that has 165 taxes and the highest tax wedge in the region, where small and medium-sized enterprises pay up to 100% of their sales.

Argentina must change what is currently a confiscatory and predatory state. Additionally, bureaucratic barriers, protectionist measures, and political subsidies must be removed. Furthermore, Milei must ensure legal certainty and an attractive and reliable regulatory framework where the ghost of expropriation and institutional theft does not return.

Milei’s challenges are many, and the opposition will try to sabotage all market-friendly reforms because many politicians in Argentina became very powerful and rich turning the country into a new Venezuela.

If Argentina wants to become a thriving economy that returns to prosperity, it needs a stable macroeconomic and monetary system. It must recognize it has a failed currency and a bankrupt central bank and implement the urgent measures required as quickly as possible. It will be difficult but not impossible, and the potential of the economy is enormous.

Argentina was a rich country made poor by socialism. It needs to abandon socialism to become rich again.