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Daniel Lacalle

Daniel Lacalle



Articles by Daniel Lacalle

The Misery Index Shows Bidenomics is Failing

6 days ago

One of the most dangerous things that a government can do is present a glossy picture of the economy at a time when families and small businesses are suffering. Governments are always optimistic, but sending euphoric messages tends to backfire, especially when the situation for the middle class is complicated.In the United States, the Biden administration’s message of “the strongest economy in decades” is not just an exaggeration; it may anger voters who suffer the burden of negative real wage growth, accumulated inflation, and higher taxes.According to a study by the Tax Policy Center, 20 to 30 percent of middle-income households saw a tax hike in 2022 and according to the Tax Foundation, workers bear an estimated 70 percent of the corporate income tax hikes.

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Global Debt Levels Are a Ticking Time Bomb

11 days ago

The relentless increase in global debt is an enormous problem for the economy. Public deficits are neither reserves for the private sector nor a tool for growth. Bloated public debt is a burden on the economy, making productivity stall, raising taxes, and crowding out financing for the private sector. With each passing year, the global debt figure climbs higher, the burdens grow heavier, and the risks loom larger. The world’s financial markets ignored the record-breaking increase in global debt levels to a staggering $313 trillion in 2023, which marked yet another worrying milestone.In the Congressional Budget Office (CBO) projections, the United States deficit will fluctuate over the next four years, averaging an insane 5.8 percent of GDP without even considering

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Central Bank Digital Currencies Are Dangerous and Unnecessary

17 days ago

The main central banks have been deliberating on the concept of introducing a digital currency. However, many citizens fail to grasp the rationale behind it when the majority of transactions in major global currencies are carried out electronically. Nevertheless, a central bank digital currency is much more than electronic money. I will explain why.Central banks are raising interest rates and enacting restrictive monetary policies as quickly as governmental regulations allow because they are aware that monetary factors are the primary cause of inflation. Central banks have recently lost credibility by initially disregarding the inflation danger, then attributing it to transitory factors, and finally responding belatedly and gradually.In a world where there is an

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The Fed Cannot Cut Rates as Fast as Markets Want

18 days ago

Market participants started the year with aggressive expectations of rapid and large rate cuts. However, after the latest inflation, growth, and job figures, the probability of a rate cut in March has fallen from 39 to 24%. Unfortunately for many, headline figures will support a hawkish Federal Reserve, and the latest comments from Jerome Powell suggest rate cuts may not come as fast as bond investors would like.For the Federal Reserve, the headline macro figures show a strong economy, solid job creation, a low unemployment rate, stronger GDP growth, and persistent inflation. The real economy shows a weaker picture.The latest job report is not as strong as it looks. According to the Bureau of Labor Statistics, the labor force participation rate, at 62.5 percent,

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Why Americans Do Not See a Strong Economy

27 days ago

The euphoria with the fourth quarter Gross Domestic Product (GDP) figure makes no sense. The headline champions say that real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023, according to the Bureau of Economic Statistics (BES). An increase in real GDP of $1.5 trillion with an increase in public debt of more than $2 trillion is not a strong economy. It is a bloated economy. Furthermore, there is nothing positive in consumption when personal saving as a percentage of disposable personal income was only 3.7% in December and disposable personal income in 2017 has basically stagnated. American consumers are buying fewer things with their salary.
We cannot forget that one of the biggest drivers of the fourth quarter increase in real GDP was an

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Massive Money Printing Will Accelerate as Debt Soars

28 days ago

The U.S. federal government published a December deficit of $129 billion, up 52% from the previous year. The private sector recession is clear as expenses continue to rise while tax receipts decline. If we look at the period between October and December 2023, the deficit ballooned to a staggering $510 billion.
You may remember that the Biden administration expected a significant deficit reduction from its tax increases and the expected benefits of its Inflation Reduction Act.
What Americans got was a massive deficit and persistent inflation. According to Moody’s chief economist, Mark Zandi, the entire disinflation process seen in the past years comes from exogenous factors such as “fading fallout from the global pandemic on global supply chains and labor markets,

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Expect More Currency Destruction and Weak Economies in 2024

January 13, 2024

Markets closed 2023 with the strongest rally for equities, bonds, gold, and cryptocurrencies in years. The level of complacency was obvious, registering an “extreme greed” level in the Greed and Fear Index.
2023 was also an unbelievably bad year for commodities, particularly oil and natural gas, something that very few would have predicted in the middle of two wars with relevant geopolitical impact and significant OPEC+ supply cuts. It was also a poor year for Chinese equities, despite slower-than-expected but strong economic growth and robust earnings in the large components of the Hang Seng index.
Markets rallied due to a combination of optimistic expectations for inflation and aggressive rate cuts from central banks. The question now is, what can we expect in

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Central Banks Brought Inflation. Now they Bring Stagnation.

December 30, 2023

Although the Federal Reserve and the European Central Bank’s message regarding interest rate cuts seems clear, reiterating their commitment to reducing inflation, the market is expecting between five and six interest rate cuts, between 125 and 150 basis points, in the next twelve months.
This shows us the bubble bias of many investors. We live in a world where two generations of market participants have only seen rate cuts and massive liquidity injections. Central banks have created huge perverse incentives in markets that should have been prevented if they truly followed their mandate of stable prices. On top of it, the ECB faces another risk. It must avoid following the siren calls of interventionists if it wants the euro project to survive.
The euro is the

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Why the Falling Money Supply Hasn’t Yet Created Big Job Losses

December 16, 2023

The year is ending with a significant level of optimism among investors, focusing on an expected string of rate cuts from the Fed and an estimated economic soft landing.
However, a soft landing is a very rare event. Since 1975, there have been nine rate hike cycles, and seven of them ended in a recession.
Why? We must understand that the concept of “landing” that the Federal Reserve repeats constantly is exactly that: a recession. A soft landing is a significant decline in the aggregate money supply, which entails lower credit and access to capital for families and businesses. There is no other way to lower price inflation, which the extraordinary and unnecessary increase in the money supply in 2020 caused.
Why did we have no price inflation between 2008 and

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Can Milei Really Shut Down Argentina’s Central Bank?

December 2, 2023

The monumental fiscal and monetary hole that Peronists Massa and Fernández have left for Javier Milei is difficult to replicate. Ex-president Mauricio Macri himself explained that the inheritance Milei receives is “worse” than the one he found from Cristina Fernández de Kirchner. Peronism leaves a country in ruins and with a massive time bomb for the next administration.
The enormous economic problems of Argentina start with a primary fiscal deficit of 3% of GDP and a total deficit (including interest expenses) exceeding 5% of GDP. Moreover, it is a structural deficit that cannot be reduced unless public spending is slashed. Public expenditure already accounts for 40% of GDP and has doubled in the era of Kirchnerism. If we analyze Argentina’s budget, up to 20% is

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Fed Rate Cuts Will Not Save The Economy

November 25, 2023

Market implied Fed Funds rate discount a string of cuts starting in January 2024 and culminating in a 4.492 percent in January 2025. These expectations are based on the perception that the Federal Reserve will achieve a soft landing and that inflation will drop rapidly. However, market participants who assume rate cuts will be bullish may be taking too much risk for the wrong reasons.
The messages from the Federal Reserve contradict the previously mentioned estimates. Powell continues to repeat that there is more likelihood of rate hikes than cuts and that the battle against inflation is not over.
Markets are not following monetary aggregates, and what they show is not good for the economy. According to the Federal Reserve, between September 2022 and September

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The Eurozone Disaster: Between Stagnation and Stagflation

November 11, 2023

The eurozone economy is more than weak. It is in deep contraction, and the data is staggering.
The eurozone manufacturing purchasing managers’ index (PMI), compiled by S&P Global, fell to a three-month low of 43.1 in October, the sixteenth consecutive month of contraction. However, European analysts tend to ignore the manufacturing decline using the excuse that the services sector is larger and stronger than expected, but it is not. The eurozone Composite PMI is also in deep contraction at 46.5, a thirty-five-month low, and the services sector plummeted to recession territory at 47.8, a thirty-two-month low.
Some analysts blame the energy crisis and the European Central Bank (ECB) rate hikes, but this makes no sense. The eurozone should be outperforming the United

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Mounting Deficits Mark the US’s Road to Ruin

October 28, 2023

According to the U.S. Treasury, year-end data from September 2023 show that the deficit for the full year 2023 was $1.7 trillion, $320 billion higher than the prior year’s deficit. As a percentage of GDP, the deficit was 6.3%, an increase from 5.4% in FY 2022. This means that the United States will likely post the worst GDP growth excluding debt increases since 1929, or, in other words, that the country is in a recession disguised by bloated deficit spending.
This disastrous result shows that the Keynesian science fiction of the public sector multiplier does not work. The Biden administration increased taxes, but revenues declined. Governmental receipts totaled $4.4 trillion in FY 2023 (16.5 percent of GDP), 9.3% lower than in 2022 and below the budget

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Israel War Adds to Global Turmoil

October 14, 2023

The surprise terrorist attack on Israel by Hamas has created a new geopolitical crisis with many unexpected implications. We cannot forget the hundreds of people that have been killed in this attack—a terrible loss of innocent lives. In markets, the Key Tel Aviv share indices declined around 7% and sovereign bonds slumped by 3% after the bloodiest attack on Israel in many years.
Investors should not worry because this war has very significant ramifications. Iran has supported Hamas in their attack, and this could lead to new tensions with the United States. Furthermore, this war against Israel may create an even larger division between the two largest military and economic powers, the U.S. and China. It is very difficult to think that China will support Hamas and

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The Dangerous Myth of a “Soft Landing”

September 27, 2023

If we search the news from 2007, we can find plenty of headlines with the IMF and the Federal Reserve predicting a soft landing. No one seemed to worry about rising imbalances. The main reason is that market participants and economists like to believe that the central bank will manage the economy as if it were a car. The current optimism about the U.S. economy reminds us of the same sentiment in 2007.
Many readers will argue that this time is different, and we will not see a 2008-style crisis, and they are right. No crisis is the same as the previous one. However, the main pushback I get when discussing the risks of a recession is that the Fed will inject all the liquidity that may be needed. Quantitative easing is seen as the antidote that will prevent a crisis.

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Will the BRICS Dethrone the U.S. Dollar?

September 9, 2023

The summit of the so-called BRICS (Brazil, Russia, India, China, and South Africa) has closed with an invitation to join the group extended to the Emirates, Egypt, Iran, Saudi Arabia, Argentina, and Ethiopia.
The summit has generated a lot of headlines about the impact of this widespread group of nations, including speculation about the end of the U.S. dollar as a global reserve currency if this group is perceived as a threat to the United States or even the International Monetary Fund.
Several things need to be clarified.
Many political analysts believe that China lends, invests, or supports in return for nothing. China is a major economic power, but it has no interest in being a global reserve currency. Its currency is currently used in only 5% of global

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US Consumers Are Suffering in a Less than “Robust” Economy

July 18, 2023

Keynesian policies are damaging what they were intended to support. No example is more evident than the United States. A few years ago, in 2021, I had a conversation with Judy Shelton where she said that the recovery would be much stronger without the stimulus package, and she was right. Massive government spending and currency printing have left a much weaker labor market and poorer citizens.
In June, nonfarm payrolls increased by 209,000, the smallest advance since the end of 2020, after two consecutive downward revisions in the prior months, according to the Bureau of Labor Statistics (BLS). If we look at employment statistics beyond the headline unemployment rate, we can see that the labor force participation rate was 62.6 percent for the fourth consecutive

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More Federal Debt Means More Taxes, Less Growth, and Weaker Real Wages

June 19, 2023

Since 1960, Congress has raised the debt ceiling 78 times, according to Bloomberg. The process of increasing the debt limit has become so regular that markets barely worry about it. Furthermore, as the 2011 debt ceiling crisis showed, the impact on asset prices happened mostly in emerging economies. In 2011, Turkish and Indian debt were the most negatively impacted, while Treasuries rose.
Politicians believe that raising the debt ceiling is a social policy and that debt does not matter. Until it does. United States debt to GDP is now 123.4% and the risk of losing confidence on U.S. treasuries as the lowest risk asset is exceedingly high.
The problem in the United States budget is evident in mandatory and discretionary spending. Focusing all the attention on

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Commodity Prices Debunk the “Blame Ukraine” Excuse for Inflation

June 10, 2023

Most politicians have used the “Ukraine invasion card” to justify the massive inflationary burst in 2021-2023.
It does not matter if inflation was already elevated prior to the war. Supply chain disruptions, demand recovery, wage growth… Many excuses were used to justify inflation, except the only one that can make aggregate prices rise in unison, which is the creation of more units of currency well above demand.
Inflationists will blame inflation on anything and everything except the only thing that makes all prices, which are measured in monetary units, rise at the same: Money supply growth rising faster than real economic output.
Supply chain disruption and commodity inflation are caused by monetary expansion: More units of currency going to relatively scarce

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Crowding Out: The Fed May Be Killing the Private Sector to Save the Government

May 20, 2023

The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.
Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.
The current situation is the worst possible. The Fed’s balance sheet is not falling as fast as it should; government spending has not even been scratched, but the money supply is falling at the

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A Credit Crunch Is Inevitable

May 6, 2023

Federal Reserve data shows $98 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as the Bloomberg data shows that assets in this class rose by $121 billion in the same period. The data shows the challenges of the banking system in the middle of a confidence crisis.
However, as many analysts point out, this is not necessarily the main factor that dictates the risk of a credit crunch. Deposit flight is certainly an important risk. Many regional banks will have to cut lending to families and businesses as deposits shrink, but in the United States bank loans are less than 19 percent of corporate credit according to the IMF, while in the euro area it is more than 80 percent.

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Why the Chinese Yuan Won’t Kill the Dollar

April 26, 2023

Former US President Donald Trump has expressed concern that China could displace the US dollar as the global reserve currency. The warning follows reports of agreements between various nations to use the yuan in commodity transactions.
For years, rumors have circulated about the demise of the US dollar as a global reserve currency, but the greenback continues to be the most traded and extensively used currency in the fiat world.
The US dollar is by far the most traded currency on the foreign exchange market, according to the Bank for International Settlements. In 2022, the US dollar “remained the preeminent vehicle currency in the globe.” In April 2022, it was on one side of 88% of all transactions, unchanged from the previous survey.
The euro, the Japanese yen,

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Governments Can’t Blame Inflation on Energy and Putin Anymore

March 29, 2023

At the end of February 2023, the price of oil (WTI and Brent), Henry Hub and ICE natural gas, aluminum, copper, steel, corn, wheat, and the Baltic Dry Index are below the February 2022 levels.
The Supply Chain Index and the global supply-demand balance, published by Morgan Stanley, have declined to September 2022 levels. However, the latest inflation readings are hugely concerning.
Considering the previously mentioned prices of commodities and freight, if price inflation were a “cost-push” phenomenon, it would have collapsed to 2 percent levels already. However, both headline and core inflation measures, from the Consumer Price Index (CPI) to Personal Consumer Expenditure Prices (PCE) show extremely elevated levels and rising core inflationary pressures.
We have

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Statism Is Destroying Real Wages

March 23, 2023

When we read about the US economy, we often get wage growth as a signal of a strong labor market. It is hardly a strong market when the labor participation rate and the employment to population ratio are both below the February 2020 level and have been stagnant for months.
Additionally, the headline figure of 4.6 percent annualized wage growth is misleading, as it shows a nominal and average figure that disguises a much tougher environment. According to the Bureau of Labor Statistics, from December 2021 to December 2022, real average hourly earnings decreased 1.1 percent, seasonally adjusted.
When we look at wage growth by sector, the picture is even worse. According to JP Morgan, no sector in the US economy has seen a rise in wages that covers inflation. Only two

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Central Bank Digital Currencies Would Bring Hyperinflation

March 18, 2023

There are many excuses often used to explain inflation. However, the fact is that there is no such thing as “cost push inflation” or “commodity inflation.” Inflation is not an increase in prices, it is the destruction of the purchasing power of the currency.
Cost-push inflation is more units of currency going to relatively scarce real assets. The same can be said about all other, from commodities to demand and my favorite, “supply chain disruption.” More units of currency going to the same goods and services.
The monster inflation we have endured these years first arrived through asset inflation and then through consumer prices. Now, governments and statistical bodies are tweaking the calculation of CPI to disguise the loss of purchasing power of the currency and

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How Easy Money Killed Silicon Valley Bank

March 13, 2023

The second-largest collapse of a bank in recent history after Lehman Brothers could have been prevented. Now the impact is too large, and the contagion risk is difficult to measure.
The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealized losses and the financial hole in the bank’s accounts would not have existed if not for ultra-loose monetary policy. Let me explain why.
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits, according to their public accounts. Their top shareholders are Vanguard Group (11.3 percent), BlackRock (8.1 percent), StateStreet (5.2 percent)

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Governments Will Make You Poorer Again

January 23, 2023

The International Monetary Fund (IMF) has warned about the optimistic estimates for 2023, stating that it will likely be a much more difficult year than 2022.
Why would that be? Most strategists and commentators are cheering the recent decline in price inflation as a good signal of recovery. However, there is much more to the outlook than just a moderate decline in price inflation rates.
Price inflation is accumulative, and the estimates for 2023 and 2024 still show a very elevated level of core and headline inflation in most economies. The longer it remains this way, the worse the economic outcome. Citizens have been living on savings and borrowing to maintain current levels of real spending. But this cannot last for many years.
Politicians all over the world are

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2023: You Wanted Endless Stimulus, You Got Stagflation.

January 5, 2023

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 sheet by $8 trillion.
The result was disappointing and with long-lasting negative effects. 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

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Latin America’s Descent into Interventionism Continues

December 30, 2022

The latest estimates from consensus for the main Latin American economies show a continent facing a lost decade. The region GDP growth has been downgraded yet again to a modest 1.1% for 2023, with rising inflation and weakening gross fixed investment. Considering that the region was already recovering at a slower pace than other emerging markets, the outlook is exceedingly worrying.
The poor growth and high inflation expectations are even worse when we consider that consensus estimates still consider a tailwind coming from rising commodity prices and more exports due to the China re-opening.
How can a region with such high potential as Latin America be condemned to stagflation? The answer is simple. The rise of populist governments in Colombia, Chile and Brazil

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