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Inflation will be with us for many years.  It cannot be otherwise

Inflation will be with us for many years. It cannot be otherwise

For many reasons, the Fed will struggle to contain inflation. This is partly related to the fact that the US public deficit has not decreased at all, and in fact we can say that despite the efforts verbally announced by Biden, the situation is the same as it was last year.

The data is this and it is simple:

  • The US government has a cumulative deficit of $1.1 trillion so far in fiscal year 2024 ($46 billion more than the same period in the previous fiscal year, once adjusted for timing).
  • Revenues reached $2.2 trillion as of February.
  • Outflows reached $3.3 trillion as of March.

This is according to the data he collected Dual political center.

These numbers do not include the $95 billion aid bill for Ukraine and Israel that Congress recently passed. So the outlook looks even worse. worst.

US budget revenue and expenditure forecasts

“As spending continues to exceed revenues, The deficit will exceed $1.5 trillion (averaging 5.6% of GDP) in Every year for the next ten years. Compared to May 2023 budget projections, the deficit is expected to cumulatively decrease by $1.4 trillion over the period 2024-2033. That’s what the Center for Bipartisan Policy says.

This report, which is already staggering in the size of the cumulative deficit, as well as the White House economic forecasts and those of the Congressional Budget Office, is overly optimistic. This is because no recession is expected, meaning there is no need for expansionary fiscal policy between now and 2054. 30 years without a recession is an incredible number.

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The Fed makes the same optimistic assumptions in its forecasts.

Summary of Fed economic forecasts for March 2024 versus December 2023

Compared to December 2023, The Fed raised its central direction for GDP forecasts, core inflation and the expected Fed funds rate, As I noted in my review on March 20 “A type of statistical graph The Fed is more optimistic about cuts in March than in December (Dot Plot is a chart that displays experts’ expectations about future interest rates9).

The main points are:

  • The Fed assumes that there are no recessions and that no matter what Congress does,
  • The Fed assumes that it will keep inflation at 2% over the long term.

In other words, the Fed assumes it has complete control over inflation, which recent years have shown is unrealistic.

Historically, the Fed has never predicted a recession, nor detected one in real time.

The deficit now stands at more than $34 trillion, and government debt stands at $27 trillion. Interest on the national debt exceeds $1 trillion. The Fed does not act to control interest rates, so money for investments goes instead to bondholders.

What will happen in the future with elections?

Neither party will be able to solve the deficit spending problem. The Fed will not reduce the deficit significantly, but it will redistribute it, which would be generated, at least in the short term, by lower taxes. Biden will continue on his current path.

The situation will get worse with the next recession. Unlimited fiscal stimulus has exacerbated the situation we find ourselves in, and there is no sign of a change in policy, regardless of who wins the election.

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This sets the stage for an inflationary environment for the US, as the Fed will try to keep things somewhat under control by keeping interest rates positive and relatively high, whoever wins the election.

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