The Two Ugly Paths Now Facing The U.S. Economy
Submitted by QTR's Fringe Finance
I was watching Andrew Ross Sorkin on 60 Minutes last Sunday. Sorkin was on the show to promote his new book, 1929: Inside the Greatest Crash in Wall Street History — and How It Shattered a Nation.
When Leslie Stahl asked him during his interview whether we would have another crash, Sorkin answered: “The answer is, we will have a crash. I just can’t tell you when, and I can’t tell you how deep. But I can assure you, unfortunately, I wish I wasn’t saying this, we will have the crash.”
At one point he says “We are either living through some kind of remarkable boom, [or we’re reliving] 1929.”
I thought to myself: hell, I can do better than that, and I didn’t even write a book about 1929. Because at this point, the real question is not whether we are headed toward some sort of financial reckoning…the question is what form that reckoning takes.
And after looking at the current economic landscape, I increasingly believe there are only two realistic outcomes over the next several years: a soft default through inflation or a hard default through financial crisis. The former seems more likely than the latter, and can be confusing to people because nominal prices staying steady or rising while inflation runs out of control won’t look like a “crash” that most of 60 Minutes’ viewers will expect. It’ll be a crash upward.
To understand why, let’s start with where we are right now and summarize a lot of what I’ve written about over the past month or two. There’s four key things I’m watching:
inflation
market valuation
the consumer
the bond market
These four things have worked together to produce a combination that I believe is close to locking up the economy and taking away any response options from the Central Bank that won’t have immediate and ugly consequences.
Inflation remains structurally above the Federal Reserve’s target despite one of the most aggressive rate-hiking cycles in modern history. Even now, inflation is still running around 3.8%, nearly double the Fed’s stated objective. This is no longer a temporary post-pandemic distortion that policymakers can dismiss away with optimistic forecasts and revised models. Inflation has become embedded across the economy, from housing and insurance to healthcare, wages, food, and government spending itself. The cost structure of modern American life has permanently shifted upward, while policymakers continue pretending that...(READ THIS FULL COLUMN HERE).