After more than $20 trillion in stimulus plans since 2020, the economy is going into stagnation with elevated inflation.
Global governments announced more than $12 trillion in stimulus measures in 2020 alone and central banks bloated their balance sheets by $8 trillion. The result was disappointing and with long-lasting negative effects: a weak recovery, record debt, and elevated inflation.
Of course, governments all over the world blamed the Ukraine invasion on the nonexistent multiplier effect of the stimulus plans, but the excuse made no sense. Commodity prices rose from February to June 2022 and have corrected since. Even considering the negative effect of rising commodity prices in developed economies, we must acknowledge that those are positives for emerging economies and, even with that boost, the disappointing recovery led to constant downgrades of estimates.
If Keynesian multipliers existed, most developed economies would be growing strongly even discounting the Ukraine invasion impact, considering the unprecedented amount of stimulus plans approved.
However, consensus estimates show an even worse outlook. Global growth should stall at +1.8 percent, with the euro area at zero growth and the United States at just 0.3 percent, with inflation reaching 6 percent globally, 6.1 percent in the euro area, and 4.1 percent in the United States.
Only a handful of countries are expected to reduce debt in 2023, with most nations continuing to finance bloated government spending with elevated deficits and tax hikes. A world where governments are constantly eroding the purchasing power of currencies and slashing the disposable income of taxpayers with rising taxes is likely to show weaker growth trends and worsening imbalances.
The narrative all over the world is to try to convince us that past-peak but elevated inflation is “falling prices” and that everything is good when debt increases, growth stalls, and the purchasing power of salaries and savings is wiped out slowly.
There’s no success in stagflation. It’s a process of impoverishment that hurts the middle classes immensely, while excessive government spending is never curbed.
2022 was the year that killed MMT, the science-fiction fallacy of Modern Monetary Theory. Countries with monetary sovereignty such as Japan or the UK found themselves in an unprecedented turmoil created by the illusion that rising deficit and debt would never cause significant problems. It only took a few rate hikes to dismantle the illusion of perennial money printing as the solution to everything.
2022 also showed that it’s false that massive deficits are reserves that strengthen the economy. The United States suffered the most severe inflation blow in 30 years even while being energy independent and benefitting from exporting natural gas and oil to the rest of the world. If the ludicrous MMT narrative was true, the United States shouldn’t have suffered any inflationary pressure.
2023 is expected to be the year of stagflation. Of course, most strategists are betting on inflation falling rapidly in the second part of the year, but that seems inconsistent with their estimates of deficit spending and growth.
The uncomfortable reality is that nations have created a long-lasting decline by pushing the limits on demand-side policies and government intervention.
Many celebrated the decision to use governments and central banks as the lenders of first resort instead of the last option, and what has been created is a problem with difficult solutions.
There seems to be no incentive to reduce the fiscal and monetary imbalances built over two decades, and therefore the result will be weaker growth and impoverishment.
No government wants to acknowledge the risk of central banks reducing their balance sheets. Even the most aggressive strategist fails to dare to estimate a $3 trillion quantitative tightening because they all know that the effects could be devastating. However, to truly normalize, central banks should reduce their balance sheet by at least $5 trillion. Governments and investment banks fear a gradual $3 trillion tightening because it can lead to a financial crisis. Those same market participants know that a $5 trillion tightening would undoubtedly lead to a financial crisis.
The reason why everyone expects a 2023 divided into two parts, a first half of poor data and a second where growth picks up and inflation plummets, is because market participants need to create a narrative that shows a quick fix to the above-mentioned disaster. However, there’s no quick fix, there’s no soft landing, and there isn’t a chance of solving the problem by keeping elevated deficits, massive central bank balance sheets, and real negative rates.
If we want to look at the options, there are only two: fixing the problem created in 2020, which means a global recession but probably not a financial crisis, or not fixing it, which means elevated inflation, weaker growth, and another bad year for risky assets, which can lead to a financial crisis.
Unfortunately, when governments all over the world decided to “spend now and deal with the consequences later” in 2020, they also created the seeds of a 2008-style problem.
