17 Feb America’s Economic Future

“Predictions are hard, especially about the future.” – Yogi Berra

TLR recently presented a reality-perspective to Cassandra and received the following reaction.

THE REALIST:        Good morning Cassandra. I understand you are pressed for time today.

CASSANDRA:          Good morning Mr. Realist. I apologize, but I do have time sensitivity.

THE REALIST:        Not a problem. I have only one question. It was posed by TLR readers. They’ve asked what direction the American economy will take this year. TLR is not an oracle, and although TLR‘s readers themselves are bullish, everyone’s thinking has been muddied by disparate analyst predictions. All we hear is confusion: bullish growth forecasts, imminent recession warnings, rising inflation vs. threatening deflation, Fed policy shifts, etc. The media have been echo chambers of partisanship with Fox and MSNBC taking opposite positions on virtually everything even current economic realities. Those on the right see dark skies and deepening gloom, while those on the left see sunshine and roses. The rest of us are happy onlookers lulled entranced by ever-rising equity markets.

The emphasis of right-wing commentators has been that inflation not only has not disappeared, it is entrenched. Food and housing prices are continuing to rise. With interest rates at their highest in 2 decades, many Americans are overwhelmed by credit card and student debt loads. Higher inflation means that Americans’ home-ownership aspirations are being stymied by sky-high prices and unaffordable mortgage rates. Any number of Americans remember the economic times America enjoyed under Donald Trump. Today’s economy is noticeably more difficult.

Left-wing pundits accurately point out, however, that a majority of Americans have seen their wages rise faster than inflation. They have well-paying jobs and, with more jobs than available workers, have the ability to explore a range of employment options. Inflation is measurably easing and GDP is rising, a potent combination that has boosted consumer confidence. The left credits Joe Biden’s Inflation Reduction Act and his Administration’s regulatory actions that in their view have fueled good times. Many Americans have no recollection of the pre-pandemic economy and few Americans previously experienced the level of GDP growth and stock market elation that America is experiencing today.

The real economy falls somewhere between these polarized extremes. While consumer confidence indeed is improving, economic sentiment has not reached the levels seen in 2019. While the rate of inflation is declining along with energy prices, the prices of retail goods, food, oil and gas are higher than they were 4 years ago. America’s economy nevertheless is enjoying virtually unprecedented employment and unemployment rates with rapidly rising retirement incomes fueled by higher interest earnings and record-breaking stock market performance … all of which, of course, also is driving up wages and exacerbating inflation.

This past week saw a surprising blip in inflation, leading some to renew their fears of decelerating growth, forthcoming recession and tumbling stock market prices. Many fear the effects that escalating conflicts in Eastern Europe and the Middle East will have on supply chains, energy prices and inflation. Yet all such concerns may be offset by already significantly easing inflation, lowered interest rate expectations, and the boost to productivity from generative AI that is increasing productivity, creating new jobs and accelerating GDP growth.

With that as backdrop, Cassandra, what is your view? What do you foresee for the American economy in 2024?

CASSANDRA:          You are correct, Mr. Realist, that the American economy has been walking an economic tightrope, balancing inflation and growth. Unfortunately, the sad reality is that America’s high-wire act cannot continue. Although both President Biden and President Trump deserve much of the credit for its success, as does Jay Powell, they (and more so America’s Congress) also deserve blame for America’s precarious economic position. An accident is waiting to happen. America is approaching the edge of an economic cliff.

My immediate concern for 2024 flows from the fragility of the commercial office sector, which has the potential to tip over regional banks and, consequently, the American economy. That would trigger another round of QE by the Federal Reserve which would accelerate inflation. Inflation has not been defeated, Mr. Realist. Sure, inflation has been drifting lower over the past year, but that drift hasn’t offset previous price increases totaling >30%. The recent leveling off is transitory. Permanent purchasing power has been lost while Federal deficit spending continues at ~$2 trillion/year …, most assuredly inflationary. Should the stock market slip – and equity values are excessive –, the pain will quickly spread. And, of course, America’s growing debt already exceeds 130% of GDP. At some point that debt will begin a death spiral .

Recognize, Mr. Realist, that there also are any number of unknown unknowns (in addition to the known unknowns), any one of which could plunge America into an economic crisis. War, plague and climate catastrophe are three of today’s Apocalyptic Horsemen. With wars in the Middle East spreading, wider conflict beckons. Triggers include Iran’s Houthi-proxy attacks on Red Sea shipping (which already have reduced Suez Canal traffic by >40%), Hezbollah’s mounting aggressions against northern Israel, further Hamas outrages and their Gaza repercussions, the PA’s West Bank failures, turmoil in Iraq, Jordan or Egypt … and a soon-to-be-nuclearized Iran itself. Conflict also is set to boil over in Europe with President Trump’s call for an end to Ukraine aid and American withdrawal from NATO on offer for the Russians “to do whatever the hell they want.” Putin will take America at the Republican Party’s word after Congress’s failure to approve assistance for Ukraine, Israel and Taiwan. Should Congress not reverse course, Ukraine will fall this year. Russia’s militarized economy and seasoned troops then will roll into the Baltics and, in time, expand into the rest of Europe. Add to that, Mr. Realist, the threat to Taiwan, which increasingly offers a useful distraction for an economically distressed China. When the opportunity arises, President Xi will grab it. With these pressures, it will be impossible for the Dollar to retain its exorbitant privilege. A downward Dollar spiral will supercharge inflation and upend the stock market.

Volatility therefore will mark America’s economic future, Mr. Realist. It will reveal how impossibly high the economic tightrope has been strung.

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