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Daniel Lacalle

Daniel Lacalle

Articles by Daniel Lacalle

Fed Rate Cuts Will Not Save The Economy

11 days ago

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

25 days ago

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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Why Central Banks Will Choose Recession Over Inflation

December 20, 2022

While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023.
Even though December is here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.
In the context of governments deficits that are hardly declining and, in some cases, increasing, investors must take into account the danger of a significant reduction in the balance sheets of central banks. Both the quantitative tightening of central banks and the refinancing of government deficits, albeit at higher costs, will drain liquidity

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Keynesian Policies Gave Us High Debt, Inflation, and Weak Growth

December 17, 2022

The evidence from the last thirty years is clear. Keynesian policies leave a massive trail of debt, weaker growth and falling real wages. Furthermore, once we look at each so-called stimulus plan, reality shows that the so-called multiplier effect of government spending is virtually nonexistent and has long-term negative implications for the health of the economy. Stimulus plans have bloated government size, which in turn requires more dollars from the real economy to finance its activity.
As Daniel J. Mitchell points out, there is evidence of a displacement cost, as rising government spending displaces private-sector activity and means higher taxes or rising inflation in the future, or both. Higher government spending simply cannot be financed with much larger

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Global Rate Hikes Hit the Wall of Debt Maturity

December 16, 2022

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.
Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.
The most challenging obstacle is also the accumulation of debt.
The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the

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Tax Cuts Do Not Cause Inflation. Printing Does.

December 14, 2022

The narrative to attack any tax cut and defend any increase in government size is reaching feverish levels. However, we must continue to remind citizens that constantly bloating government spending and increasing the size of monetary interventions are some of the causes of the widespread impoverishment of the middle class. Constantly increasing taxes and diminishing the purchasing power of the currency is wiping out the middle class in most developed nations.
Currency printing is not neutral, and it never is. It disproportionately benefits government and massively hurts real salaries and deposit savings. It is a massive transfer of wealth from savers to the indebted.
Readers may say that what needs to happen is to tax the rich and corporations and all will be

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The G7 Cap on Russian Oil Is a Subsidy to China

December 10, 2022

There are many mistakes in the G7 agreement to put a cap on Russian oil. The first one is that it does not hurt Russia at all. The agreed cap, at $60 a barrel, is higher than the current Urals price, above the five-year average of the quoted price and higher than Rosneft’s average netback price.
According to Reuters, “the G7 price cap will allow non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance, and re-insurance companies from handling cargoes of Russian crude around the globe, unless it is sold for less than the price cap”. This means that China will be able to purchase more Russian oil at a large discount while the Russian state-owned oil giant will continue to make a very healthy 16% return on average

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The Recession in the Productive Sector Is Here

October 24, 2022

Governments and central banks have become the lender of first resort instead of the last resort, and this is immensely dangerous. Global debt soars, inflation creeps in, and many of the so-called supply chain disruptions are the result of zombification after years of subsidizing low productivity and penalizing high productivity with increased taxes.
There are many reasons why nations should not “spend now and deal with the consequences later.” First, the spending is made by politicians that will not be held accountable for the malinvestment and unwise outlay decisions. Furthermore, the cost will always be paid by taxpayers and businesses.
Think about the irony of promoting an “Inflation Reduction Act” that means spending more and monetizing more debt. But it is

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“Spend Now, and Deal with the Consequences Later” Is the Worst Policy

October 24, 2022

Quantitative easing was designed as a tool to provide time for governments to implement structural reforms, boost growth, and strengthen the economy. However, it has become a tool to increase the size of government and take increasingly riskier levels of debt.
The United States economy has not strengthened in the period of enormous fiscal and monetary stimuli, as the latest data shows. It needs increasing units of debt to generate a new unit of gross domestic product (GDP), productivity is extremely poor and leading indicators are negative.
The main problem of loose monetary policy is that it massively increases the size of government on the way in, through debt and deficit spending monetization, but it also expands government on the way out as rate hikes and

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Europe’s Energy Crisis Was Created by Political Intervention

October 20, 2022

An energy policy that bans investment in some technologies based on ideological views and ignores security of supply is doomed to a strepitous failure.
The energy crisis in the European Union was not created by market failures or lack of alternatives. It was created by political nudging and imposition.
Renewable energies are a positive force within a balanced energy mix, not on their own, due to the volatile and intermittent nature of the technology. Politicians have imposed an unstable energy mix banning base technologies that work almost 100% of the time and this has made prices soar for consumers and threatened security of supply.
This week, Ursula Von Der Leyen, President of the European Commission, gave two messages that have grabbed many headlines. First,

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How Money Printing Destroyed Argentina and Can Destroy Others

July 3, 2022

Inflation in Argentina is far worse than neighboring countries. It has only one cause: an extractive and confiscatory monetary policy—printing pesos without control and without demand.

Original Article: “How Money Printing Destroyed Argentina and Can Destroy Others”

The most dangerous words in monetary policy and economics are “this time is different.” Argentine politicians’ big mistake is to believe that inflation is multicausal and that everything is solved with increasing doses of interventionism.
The consumer price index in Argentina experienced a year-on-year rise of 58 percent in April 2022, which means 2.9 percentage points above the variation registered last March. A real catastrophe. Inflation in Argentina is more than six times higher than in

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US Household Saving Rate Vanishes, Credit Card Debt Soars

June 25, 2022

The United States consumption figure seems robust. An 0.9 percent rise in personal spending in April looks good on paper, especially considering the challenges that the economy faces. This apparently strong figure is supporting an average consensus estimate for the second-quarter gross domestic product (GDP) of 3 percent, according to Blue Chip Financial Forecasts.
However, the Atlanta Fed GDP nowcast for the second quarter stands at a very low 1.9 percent. If this is confirmed, the United States economy may have delivered no growth in the first half of 2022 after the decline in the first quarter, narrowly avoiding a technical recession.
The evidence of the slowdown is not just from temporary and external factors. Consumer and business confidence indicators

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