Sive Morten
Special Consultant to the FPA
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Fundamentals
It was an interesting week, and lot of events, but I would mention two of them. First is raising of PPI inflation with solid tempo, second is - huge drop in the US durable goods orders and industrial orders. Combining these two numbers let us to make definite conclusions on economy conditions and on crisis timing, suggesting that the decision on where the US economy will go has to be made fast. It is almost no time for thinking. For the truth sake, it should be said, that this decision is mostly political rather than economical. Because the decision, what the US will do now is directly related to long-term political strategy in what direction the US intends to move on foreign arena.
Market overview
The US dollar rose to a more than one-week high on Friday after a mixed batch of data showed the U.S. economy remained stable with small pockets of weakness, suggesting the Federal Reserve could keep interest rates higher for longer or reduce the planned number of rate cuts this year. Data on Friday showed a solid U.S. manufacturing sector, with output rebounding by 0.8% last month after a downwardly revised 1.1% decline in the prior month. Analysts at Citi, however, said in a research note that the rebound in February partly reflects the revisions lower to January output and the reversal of a "weather-related drag in January in non-durable goods manufacturing sectors.
U.S. consumer sentiment and inflation expectations were little changed in March, a survey showed on Friday. The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 76.5 this month, compared to a final reading of 76.9 in February.
The U.S. dollar was also boosted by data showing hotter-than-expected producer prices last month and fewer people seeking unemployment claims, which suggested that the Federal Reserve could reduce the number of rate cuts this year. Data on Thursday showed the U.S. producer price index for final demand rose 0.6% in February after advancing by an not revised 0.3% in January. Economists had forecast the PPI climbing 0.3%. In the 12 months through February, the PPI surged 1.6% after advancing 1.0% in January. The report followed data on Tuesday that consumer prices increased strongly for a second straight month in February.
A separate report from the Labor Department was also better than expected, showing that U.S. initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 209,000 for the week ended March 9. Economists had forecast 218,000 claims in the latest week.
The U.S. central bank's policy meeting is set to run from March 19-20 and while the market is not expecting any change in interest rates, investors will be closely watching for revisions to the dot plot. U.S. rate futures have pared back the chances of a rate cut at the June meeting to 57%, from about 67% late on Wednesday, according to LSEG's rate probability app. For 2024, the market is now pricing in less than three rate cuts, down from between three to four roughly two weeks ago.
Another piece of data on Thursday showed some deceleration in spending. U.S. retail sales rose 0.6% last month and the numbers for January were revised lower to show sales tumbling 1.1% instead of 0.8% as previously reported. The retail sales report, however, has not dented the market's growing conviction that the Fed's rate-cutting cycle will be gradual.
In an illustration of just how quickly this year's slightly hotter inflation readings so far can feed consumer expectations, the New York Federal Reserve's latest household survey might be another red flag at the central bank. Longer-run household inflation expectations deteriorated in February, the Fed survey showed. Although the outlook one year out was steady at 3%, respondents' view of inflation three years from now climbed to 2.7% from 2.4% - the first rise since September.
Ten-year yields backed up to about 4.10% on Monday and held there overnight. Fiscal policy twists were also in the background for Treasuries. U.S. President Joe Biden sketched his policy vision for a potential second four-year term on Monday, unveiling a $7.3 trillion election-year budget aimed at convincing sceptical Americans that he can run the economy better than Donald Trump.
Biden's budget for the 2025 fiscal year, which starts this October, includes raising the corporate income tax rate to 28% from 21% and forcing those with wealth of $100 million to pay at least 25% of their income in taxes. A proposal to bring down deficit spending by $3 trillion over 10 years would slow but not halt the growth of the $34.5 trillion national debt. Deficits would total $1.8 trillion in the 2025 fiscal year, 6.1% of GDP, before falling to under 4% over a decade, the White House forecast.
Elsewhere, the Bank of Japan started to make arrangements to end its negative interest rate policy at the March 18-19 meeting, Jiji news agency reported. The yen firmed against both the dollar and euro after the report but it has since weakened versus the greenback. Preliminary results of Japan's spring wage negotiations are due on Friday, with several of the country's biggest companies having already agreed to meet union demands for pay increases.
The Bank of Japan will ditch its negative interest rate policy in April, according to just under two-thirds of economists polled by Reuters, although a growing minority now expect it to happen this month compared to only a few surveyed in February. A strong 80% majority of economists in the poll, 24 of 30, expect the central bank to end yield curve control (YCC) - a policy that guides the 10-year-bond yield around 0% with a loose cap of 1% - either this month or next.
Japan's Jiji news agency reported last week the BOJ is considering replacing YCC with a new quantitative framework that will show in advance the amount of bonds it will buy in the future. The BOJ will likely offer numerical guidance on the amount of government bonds it will buy upon ending YCC and negative interest rates, sources have told Reuters. Many analysts suggest that this will be new era for Japanese financial markets and could have big resonance as Japanese bond market is almost $9Trln
The European Central Bank council last week began a discussion on when to reduce interest rates, council member Olli Rehn said on Friday.
The Bank of England will likely play for time in Thursday's rate announcement as it awaits greater clarity on wage growth, which remains stronger than in the U.S. or the euro zone. The BoE is expected to start cutting borrowing costs from 5.25% - the highest since 2008 - in August, a Reuters poll showed, potentially bringing up the rear, behind both the Fed and the European Central Bank. Markets will watch for any change in language about putting the BoE's Bank Rate "under review" and any shift in the balance of votes after February's three-ways split. And Wednesday's inflation reading could cause a last-minute rethink.
Wednesday's Fed meeting is all about gauging policymakers' views on the timing of rate cuts, the resilience of the U.S. economy and the possibility of an inflationary rebound. Fed funds futures price in around 80 basis points of cuts from more than 150 priced in in January.
What are recent CPI/PPI and Goods orders numbers about?
So, here is few charts that we need for discussion. They clearly shows the situation in the US, EU and GBP. So, the sharp drop in US industrial orders in February and
a decline in other related indicators, for example, basic orders for durable goods fell by 0.3%, while the forecast for growth of 0.2% and the January indicator -0.1%. At the same time, despite that PPI still stands in negative area, showing cumulative deflation in the sector of all manufactured goods, the trend towards inflation increases, as there is not even a hint of declining of Core inflation:
This situation looks extremely alarming. The process of de-industrialization is clearly gaining speed against the background of clearly rising prices for final products.
In fact, this means that an increasing number of components are imported to the United States, and not of domestic production. And this categorically requires the US political leadership to make a principled decision on supporting the real sector in two ways - shift demand from import onto domestic produced goods. Second - increase domestic production per se. To coup these problems the US needs to make huge capital investments, which, inevitably, will cause a sharp increase in inflation.
The picture is very bleak in Western Europe. 3-month average UK GDP declines for 5 consecutive months, while annual GDP dynamics in negative or zero for 4 consecutive months. The number of unemployed in Britain is the highest in 2 years, excluding covid period. Industrial production in the euro area -3.2% per month, for capital goods -14.2%. Which is -6.7% per year - very close to the 15-year bottom set in September 2023 (-6.9%). Just for comparison let's say that -8% is the pace of the US 1930-1932 Great Depression.
In both the United States and China, the main engines of the global economy, the situation has become clear: if nothing is changed, the decline in industry( that has begun) will accelerate. If the industry is supported (through monetary policy easing), then inflation will increase. If you tighten it to finally finish off inflation, which clearly tends to increase, then the industry will collapse even faster.
Experts suggest that the decision on this issue is not within the authority of the monetary authorities, it is a political problem. The problem is however, that such fundamental decisions can be made only in one case: if there are strategic plans and their framework accept possible deterioration in one of the fundamental directions of socio-political policy. Other words speaking, the degradation of economy has to be scrutiny prepared, to be temporal and manageable, and the whole process has to be under control as a part of long-term plan.
Meantime the degradation is clearly rising. An example is the graph of the growth of serious crimes related to shoplifting in the United States:
And the relationship of the interest rate with the financial condition of households, more precisely, their willingness to buy investment goods (invest in public debt):
And the mentioned strategic plans need to be explained to the population, because they suggest drop in living standards, poverty increasing... otherwise serious destabilization is inevitable. But, as the situation shows, the Western elite has no strategic plans. And neither at the level of consensus, nor even at the level of individual merged groups. And this means that a radical deterioration of the situation is almost inevitable. Moreover, judging by the indicators, the moment of the collapse (most likely related to the collapse of financial markets) is quite close.
At the same time, the tension on stock market is spinning up (and we think on Bitcoin as well). First is Nvidia shares somehow start showing "interruptions" in cloudless growth. Previously we already have mentioned big sales by insiders, GS warns about coming volatility jump, and recent cash flows hint that Tech hype is coming to an end. The most interesting thing with recent statement that capital is flowing into Real Estate where prices have dropped and if you do not need the loan you could get primary real estate for descent money.
Several of the largest real estate investors - including U.S. giants LaSalle, Greystar, Hines and Federated Hermes, France's AEW and Germany's Patrizia - told Reuters they saw tentative signs of deal activity rebounding. In CRE market everything stands poor, but, at the same time - this is great opportunity to grap premium squares for low money. Goldman Sachs Asset Management will resume "actively investing" in U.S. commercial property this year because the market is bottoming out, its real estate head said, while other investors said the market downturn still had further to run.
US outperforms but at whose expense?
February the US budget report shows scaring numbers guys, but somehow it keep functioning, supported by debt injections. Obviously, to make this injections there should be demand for the US debt or external capital inflows. This lets the US economy to outperform its rivals. Brief look at the US budget tells that America spends twice as much as it earns, the US Treasury reported.
The cost of servicing the US national debt has already exceeded $1 trillion on an annual basis, and the country issues $1 trillion in government bonds every 100 days to ensure the smooth functioning of the government.
So far, at the very least, Europe and Japan have been forced to pay. But all the fat has already been removed from them. Who should we take off from now to continue this celebration of life? We're not occasionally mentioned Japan above and possible change of the rate. Yes it is very small for now, but in perspective it could change the global capital balance.
We know already about Porsche plant in the US. About 27% of surveyed Austrian companies intend to move their production to the United States in the next two to three years amid rising costs, reports der Standard, citing a study by the Republic Chamber of Commerce. Rumors tell that the conflict and energy crisis in Europe was initiated by the United States to ensure its re-industrialization (despite the fact that, of course, it was hampered by deeper reasons such as the lack of trained personnel with sufficient qualifications and worn-out infrastructure), skeptics rolled their eyes and they said that such cunning plans do not exist. Perhaps it doesn't happen. But then this is a very lucky coincidence or rare luck.
And here is illustration how EU/Japan "fat" was burned already. Changes in real wages in G7 countries. The numbers are telling. In Europe it is quickly becoming not very warm, safe, comfortable and satisfying to live:
Demand from households is also stand near the edge. Above we've shown you BofA chart - relation between interest rates and households' activity on financial markets. Now JPM also shows this from different angle, hinting that households' "free money" stands near the levels where they stop buying financial assets. All these moments confirms the same suggestion that the US is strongly limited with the time for making vital decision on the futures of its economy and in what direction to go.
Americans, following the government, are spending more than the budget allows, so they are aggressively increasing loans. As a result, the cost of servicing consumer loans for the average household for the first time in at least half a century exceeded the cost of servicing a mortgage. Which in itself perfectly characterizes the situation among consumers in the States: in order to maintain consumption levels, debts have to increase. At the same time , delinquencies on such loans reached new highs.
The credit boom supports the economy even in the context of tight monetary policy. But credit money spent today means a reduction in the income base in the future. Interest on loans will reduce Americans' possible spending on consumption and suppress its growth. Writing off these debts is a blow to the country’s banking system, which is already experiencing a crisis of falling prices for debt securities and the commercial real estate market. Bloomberg, meanwhile, began to worry about rising inflation - this is clear throwing of this topic in public sphere. Against this backdrop, prices for long-term bonds are falling and yields are rising.
Now the question is not whether the debt will get out of control, but who will get the blame. This is why Trump said that he would like the crisis to happen before he wins the election ( I don’t want to be the next Hoover, untie me now ). The desire to reduce the budget deficit are a direct path into the deep, because GDP does not fall solely due to the fact that the state budget has a deficit of 8% of GDP, that is, expenses not covered by income, and thus most supports demand in the economy.
That is, D. Trump needs a Republican Congress and Senate so that at the beginning of next year they can postpone the issue of the national debt ceiling for some 4 years and begin to really solve the problems. Even via high inflation period. As long as there is no reduction in GDP, which can only be achieved if the deficit is maintained. If there is no Republican control over the Senate and the House, a political crisis is guaranteed, and of a larger scale than now, because it is fewer and fewer time left and reserves of margin for national economy are melting fast.
Ratings agency Standard and Poor's says borrowing around the world is exceeding pre-pandemic levels and warns of possible risks for financial markets. S&P forecasts that countries will borrow $11.5 trillion in long-term debt this year. The US will have to borrow the most, selling $4.5 trillion in debt, followed by China in second place with $1.7 trillion. Also in the top five are Japan, the UK and the EU.
Some of this amount will be used to pay off and refinance old debts, and only $3.4 trillion is expected to go to plug holes in budgets. That's up from $2.6 trillion in 2023. The result of all this will be an unconditional increase in taxes. Not through a direct change in tariff rates, but through inflation. There is no truly good outcome. Absolutely everyone is borrowing money like crazy. And J. Yellen already said about this in recent Fox interview.
It was an interesting week, and lot of events, but I would mention two of them. First is raising of PPI inflation with solid tempo, second is - huge drop in the US durable goods orders and industrial orders. Combining these two numbers let us to make definite conclusions on economy conditions and on crisis timing, suggesting that the decision on where the US economy will go has to be made fast. It is almost no time for thinking. For the truth sake, it should be said, that this decision is mostly political rather than economical. Because the decision, what the US will do now is directly related to long-term political strategy in what direction the US intends to move on foreign arena.
Market overview
The US dollar rose to a more than one-week high on Friday after a mixed batch of data showed the U.S. economy remained stable with small pockets of weakness, suggesting the Federal Reserve could keep interest rates higher for longer or reduce the planned number of rate cuts this year. Data on Friday showed a solid U.S. manufacturing sector, with output rebounding by 0.8% last month after a downwardly revised 1.1% decline in the prior month. Analysts at Citi, however, said in a research note that the rebound in February partly reflects the revisions lower to January output and the reversal of a "weather-related drag in January in non-durable goods manufacturing sectors.
U.S. consumer sentiment and inflation expectations were little changed in March, a survey showed on Friday. The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 76.5 this month, compared to a final reading of 76.9 in February.
The U.S. dollar was also boosted by data showing hotter-than-expected producer prices last month and fewer people seeking unemployment claims, which suggested that the Federal Reserve could reduce the number of rate cuts this year. Data on Thursday showed the U.S. producer price index for final demand rose 0.6% in February after advancing by an not revised 0.3% in January. Economists had forecast the PPI climbing 0.3%. In the 12 months through February, the PPI surged 1.6% after advancing 1.0% in January. The report followed data on Tuesday that consumer prices increased strongly for a second straight month in February.
A separate report from the Labor Department was also better than expected, showing that U.S. initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 209,000 for the week ended March 9. Economists had forecast 218,000 claims in the latest week.
The U.S. central bank's policy meeting is set to run from March 19-20 and while the market is not expecting any change in interest rates, investors will be closely watching for revisions to the dot plot. U.S. rate futures have pared back the chances of a rate cut at the June meeting to 57%, from about 67% late on Wednesday, according to LSEG's rate probability app. For 2024, the market is now pricing in less than three rate cuts, down from between three to four roughly two weeks ago.
Another piece of data on Thursday showed some deceleration in spending. U.S. retail sales rose 0.6% last month and the numbers for January were revised lower to show sales tumbling 1.1% instead of 0.8% as previously reported. The retail sales report, however, has not dented the market's growing conviction that the Fed's rate-cutting cycle will be gradual.
In an illustration of just how quickly this year's slightly hotter inflation readings so far can feed consumer expectations, the New York Federal Reserve's latest household survey might be another red flag at the central bank. Longer-run household inflation expectations deteriorated in February, the Fed survey showed. Although the outlook one year out was steady at 3%, respondents' view of inflation three years from now climbed to 2.7% from 2.4% - the first rise since September.
Ten-year yields backed up to about 4.10% on Monday and held there overnight. Fiscal policy twists were also in the background for Treasuries. U.S. President Joe Biden sketched his policy vision for a potential second four-year term on Monday, unveiling a $7.3 trillion election-year budget aimed at convincing sceptical Americans that he can run the economy better than Donald Trump.
Biden's budget for the 2025 fiscal year, which starts this October, includes raising the corporate income tax rate to 28% from 21% and forcing those with wealth of $100 million to pay at least 25% of their income in taxes. A proposal to bring down deficit spending by $3 trillion over 10 years would slow but not halt the growth of the $34.5 trillion national debt. Deficits would total $1.8 trillion in the 2025 fiscal year, 6.1% of GDP, before falling to under 4% over a decade, the White House forecast.
Elsewhere, the Bank of Japan started to make arrangements to end its negative interest rate policy at the March 18-19 meeting, Jiji news agency reported. The yen firmed against both the dollar and euro after the report but it has since weakened versus the greenback. Preliminary results of Japan's spring wage negotiations are due on Friday, with several of the country's biggest companies having already agreed to meet union demands for pay increases.
The Bank of Japan will ditch its negative interest rate policy in April, according to just under two-thirds of economists polled by Reuters, although a growing minority now expect it to happen this month compared to only a few surveyed in February. A strong 80% majority of economists in the poll, 24 of 30, expect the central bank to end yield curve control (YCC) - a policy that guides the 10-year-bond yield around 0% with a loose cap of 1% - either this month or next.
Japan's Jiji news agency reported last week the BOJ is considering replacing YCC with a new quantitative framework that will show in advance the amount of bonds it will buy in the future. The BOJ will likely offer numerical guidance on the amount of government bonds it will buy upon ending YCC and negative interest rates, sources have told Reuters. Many analysts suggest that this will be new era for Japanese financial markets and could have big resonance as Japanese bond market is almost $9Trln
The European Central Bank council last week began a discussion on when to reduce interest rates, council member Olli Rehn said on Friday.
The Bank of England will likely play for time in Thursday's rate announcement as it awaits greater clarity on wage growth, which remains stronger than in the U.S. or the euro zone. The BoE is expected to start cutting borrowing costs from 5.25% - the highest since 2008 - in August, a Reuters poll showed, potentially bringing up the rear, behind both the Fed and the European Central Bank. Markets will watch for any change in language about putting the BoE's Bank Rate "under review" and any shift in the balance of votes after February's three-ways split. And Wednesday's inflation reading could cause a last-minute rethink.
Wednesday's Fed meeting is all about gauging policymakers' views on the timing of rate cuts, the resilience of the U.S. economy and the possibility of an inflationary rebound. Fed funds futures price in around 80 basis points of cuts from more than 150 priced in in January.
What are recent CPI/PPI and Goods orders numbers about?
So, here is few charts that we need for discussion. They clearly shows the situation in the US, EU and GBP. So, the sharp drop in US industrial orders in February and
a decline in other related indicators, for example, basic orders for durable goods fell by 0.3%, while the forecast for growth of 0.2% and the January indicator -0.1%. At the same time, despite that PPI still stands in negative area, showing cumulative deflation in the sector of all manufactured goods, the trend towards inflation increases, as there is not even a hint of declining of Core inflation:
This situation looks extremely alarming. The process of de-industrialization is clearly gaining speed against the background of clearly rising prices for final products.
In fact, this means that an increasing number of components are imported to the United States, and not of domestic production. And this categorically requires the US political leadership to make a principled decision on supporting the real sector in two ways - shift demand from import onto domestic produced goods. Second - increase domestic production per se. To coup these problems the US needs to make huge capital investments, which, inevitably, will cause a sharp increase in inflation.
The picture is very bleak in Western Europe. 3-month average UK GDP declines for 5 consecutive months, while annual GDP dynamics in negative or zero for 4 consecutive months. The number of unemployed in Britain is the highest in 2 years, excluding covid period. Industrial production in the euro area -3.2% per month, for capital goods -14.2%. Which is -6.7% per year - very close to the 15-year bottom set in September 2023 (-6.9%). Just for comparison let's say that -8% is the pace of the US 1930-1932 Great Depression.
In both the United States and China, the main engines of the global economy, the situation has become clear: if nothing is changed, the decline in industry( that has begun) will accelerate. If the industry is supported (through monetary policy easing), then inflation will increase. If you tighten it to finally finish off inflation, which clearly tends to increase, then the industry will collapse even faster.
Experts suggest that the decision on this issue is not within the authority of the monetary authorities, it is a political problem. The problem is however, that such fundamental decisions can be made only in one case: if there are strategic plans and their framework accept possible deterioration in one of the fundamental directions of socio-political policy. Other words speaking, the degradation of economy has to be scrutiny prepared, to be temporal and manageable, and the whole process has to be under control as a part of long-term plan.
Meantime the degradation is clearly rising. An example is the graph of the growth of serious crimes related to shoplifting in the United States:
And the relationship of the interest rate with the financial condition of households, more precisely, their willingness to buy investment goods (invest in public debt):
And the mentioned strategic plans need to be explained to the population, because they suggest drop in living standards, poverty increasing... otherwise serious destabilization is inevitable. But, as the situation shows, the Western elite has no strategic plans. And neither at the level of consensus, nor even at the level of individual merged groups. And this means that a radical deterioration of the situation is almost inevitable. Moreover, judging by the indicators, the moment of the collapse (most likely related to the collapse of financial markets) is quite close.
At the same time, the tension on stock market is spinning up (and we think on Bitcoin as well). First is Nvidia shares somehow start showing "interruptions" in cloudless growth. Previously we already have mentioned big sales by insiders, GS warns about coming volatility jump, and recent cash flows hint that Tech hype is coming to an end. The most interesting thing with recent statement that capital is flowing into Real Estate where prices have dropped and if you do not need the loan you could get primary real estate for descent money.
Several of the largest real estate investors - including U.S. giants LaSalle, Greystar, Hines and Federated Hermes, France's AEW and Germany's Patrizia - told Reuters they saw tentative signs of deal activity rebounding. In CRE market everything stands poor, but, at the same time - this is great opportunity to grap premium squares for low money. Goldman Sachs Asset Management will resume "actively investing" in U.S. commercial property this year because the market is bottoming out, its real estate head said, while other investors said the market downturn still had further to run.
US outperforms but at whose expense?
February the US budget report shows scaring numbers guys, but somehow it keep functioning, supported by debt injections. Obviously, to make this injections there should be demand for the US debt or external capital inflows. This lets the US economy to outperform its rivals. Brief look at the US budget tells that America spends twice as much as it earns, the US Treasury reported.
The cost of servicing the US national debt has already exceeded $1 trillion on an annual basis, and the country issues $1 trillion in government bonds every 100 days to ensure the smooth functioning of the government.
So far, at the very least, Europe and Japan have been forced to pay. But all the fat has already been removed from them. Who should we take off from now to continue this celebration of life? We're not occasionally mentioned Japan above and possible change of the rate. Yes it is very small for now, but in perspective it could change the global capital balance.
We know already about Porsche plant in the US. About 27% of surveyed Austrian companies intend to move their production to the United States in the next two to three years amid rising costs, reports der Standard, citing a study by the Republic Chamber of Commerce. Rumors tell that the conflict and energy crisis in Europe was initiated by the United States to ensure its re-industrialization (despite the fact that, of course, it was hampered by deeper reasons such as the lack of trained personnel with sufficient qualifications and worn-out infrastructure), skeptics rolled their eyes and they said that such cunning plans do not exist. Perhaps it doesn't happen. But then this is a very lucky coincidence or rare luck.
And here is illustration how EU/Japan "fat" was burned already. Changes in real wages in G7 countries. The numbers are telling. In Europe it is quickly becoming not very warm, safe, comfortable and satisfying to live:
Demand from households is also stand near the edge. Above we've shown you BofA chart - relation between interest rates and households' activity on financial markets. Now JPM also shows this from different angle, hinting that households' "free money" stands near the levels where they stop buying financial assets. All these moments confirms the same suggestion that the US is strongly limited with the time for making vital decision on the futures of its economy and in what direction to go.
Americans, following the government, are spending more than the budget allows, so they are aggressively increasing loans. As a result, the cost of servicing consumer loans for the average household for the first time in at least half a century exceeded the cost of servicing a mortgage. Which in itself perfectly characterizes the situation among consumers in the States: in order to maintain consumption levels, debts have to increase. At the same time , delinquencies on such loans reached new highs.
The credit boom supports the economy even in the context of tight monetary policy. But credit money spent today means a reduction in the income base in the future. Interest on loans will reduce Americans' possible spending on consumption and suppress its growth. Writing off these debts is a blow to the country’s banking system, which is already experiencing a crisis of falling prices for debt securities and the commercial real estate market. Bloomberg, meanwhile, began to worry about rising inflation - this is clear throwing of this topic in public sphere. Against this backdrop, prices for long-term bonds are falling and yields are rising.
Now the question is not whether the debt will get out of control, but who will get the blame. This is why Trump said that he would like the crisis to happen before he wins the election ( I don’t want to be the next Hoover, untie me now ). The desire to reduce the budget deficit are a direct path into the deep, because GDP does not fall solely due to the fact that the state budget has a deficit of 8% of GDP, that is, expenses not covered by income, and thus most supports demand in the economy.
That is, D. Trump needs a Republican Congress and Senate so that at the beginning of next year they can postpone the issue of the national debt ceiling for some 4 years and begin to really solve the problems. Even via high inflation period. As long as there is no reduction in GDP, which can only be achieved if the deficit is maintained. If there is no Republican control over the Senate and the House, a political crisis is guaranteed, and of a larger scale than now, because it is fewer and fewer time left and reserves of margin for national economy are melting fast.
Ratings agency Standard and Poor's says borrowing around the world is exceeding pre-pandemic levels and warns of possible risks for financial markets. S&P forecasts that countries will borrow $11.5 trillion in long-term debt this year. The US will have to borrow the most, selling $4.5 trillion in debt, followed by China in second place with $1.7 trillion. Also in the top five are Japan, the UK and the EU.
Some of this amount will be used to pay off and refinance old debts, and only $3.4 trillion is expected to go to plug holes in budgets. That's up from $2.6 trillion in 2023. The result of all this will be an unconditional increase in taxes. Not through a direct change in tariff rates, but through inflation. There is no truly good outcome. Absolutely everyone is borrowing money like crazy. And J. Yellen already said about this in recent Fox interview.
