Daniel Lacalle: An Economic Warning America & The World Can’t Ignore!

When economists claim citizens' negative perception of the economy is due to disinformation, they are wrong—citizens actually suffer day-to-day from inflation, and their perception reflects genuine economic pain, not false information.

“it's logical but when I read from economists that uh there is that the reason why citizens perceive that the economy is not doing well when figures are so positive is because of disinformation no it's not of because this disinformation is because they feel it they see it they they are actually suffering on a day-to-day basis”

The United States is currently in a debt crisis, but it is being disguised through the slow impoverishment of people rather than manifesting as a sudden market crisis like in the eurozone in 2011-2012.

“we are in a dead crisis aren't we we are in a dead crisis it's just disguised by making people poorer”

Cutting interest rates and printing money as tools to help governments leverage is illogical, comparable to saying that being surrounded by burgers and sweets is an incentive for someone to lose weight.

“it's logical the idea that cutting interest rates and printing money are tools to help governments leverage makes no sense it's like saying that if I had in front of me a display of burgers and sweets that is an incentive for me to lose weight no it's not no it's not”

The Fed and other central banks don't pay attention to monetary aggregates, instead attributing inflation decline to supply chain and geopolitical factors rather than recognizing that money supply and velocity changes drive inflation.

“the fed and European Central Bank or the bank of Japan or the bank of England they don't pay attention to monetary Aggregates do you think that inflation is declining because of some magic uh thing supply chain disruptions and the Ukraine war Etc instead of thinking you know money supply up and uh money velocity up is inflation up”

The argument that deficit spending and public debt are reserves for the private sector is completely untrue, as reserves only function when both the purchasing power of the currency and the government debt level remain sustainable.

“a lot of these neans say that deficit spending and public debt are reserves for the private sector that is completely untrue...it stops being a reserve when you see that both the purchasing power of the currency and the uh and the level of debt of the of the of the government simply become unsustainable”

European voters are increasingly rejecting government promises of entitlements and subsidies because they understand that inflation-fueled benefits are paid for through loss of purchasing power in lower wages and lower savings capacity.

“I see it a lot in many elections in Europe and in many other is that they they hear the government telling them oh we understand your problems we understand that inflation is way too high don't worry we will give you more entitlements spending and people say no no cuz I know what's where where that money is coming from I'm already paying for it in lower wages in lower real wages”

The last time the Federal Reserve cut rates by 50 basis points in 2001-2007 it was the beginning of a recession and large increases in unemployment, suggesting the current 50bp cut may similarly precede recession.

“the last time that the Federal Reserve cut rates by 50 basis points 2001 2007 it was uh it was the beginning of a recession and large increases in unemployment”

Rate hikes suppress commodity prices because they increase the cost of buying, storing, and financing commodities and margin calls, making long positions expensive.

“rate hikes are not good for Commodities it's more expensive to Lo to buy uh commodities is more expensive to store them it's more expensive to uh Finance margin calls it's more expensive to finance long positions”

To solve the problem of excess government spending and debt, you need a really independent central bank that doesn't just raise rates but stops purchasing government bonds, and ultimately when the government faces a debt crisis it will have to react by cutting spending.

“the only way in which you can actually curve uh government uh from taking more debt and increasing the deficit is precisely by having a really independent Central Bank that doesn't just increase rates because you also have to pay attention to the the private sector no but it but more importantly is that it stops purchasing government bonds and ultimately when the government finds itself in a debt crisis then it will have to react”

The United States government spending over 1 trillion dollars per year on interest expenses is a staggering warning sign that contradicts the argument that debt doesn't matter as long as interest rates are low, particularly when Japan with low interest rates must spend almost 25% of its budget on interest expenses.

“the interest expense of the United States economy is particularly staggering because you have to remember that the United States is the world Reserve currency the US dollar and and that the US Treasury is supposed to be the lowest risk asset in the Eon in in the global economy so the fact that the uh government is already spending in the budget more than a trillion dollars more than uh it's going to surpass the expense in defense”

Market participants know that fiscal insanity is so large that central banks will be almost inevitably accommodative in coming years, so markets continue rising despite economic weakness because they're discounting currency debasement.

“what Market participants what investors know is that the level of fiscal insanity is so huge That central banks will be almost uh inevitably accommodative in the next years”

Central banks claim to be restrictive but remain hugely accommodative: the Federal Reserve increased its balance sheet by about 20 trillion with barely any reduction, panicked in June to reduce the pace of reduction, injected trillions to save regional banks, and reduced normalization when government bond yields rose, meaning policy remains loose across all major central banks including the ECB and Bank of Japan.

“everybody says that central banks are very hawkish and that they and policy is restrictive policy is too restrictive I read everywhere how is it too restrictive no the central banks increased uh the the balance sheet of uh by about 20 trillion and they have barely touch those balance sheets very small reduction in the balance sheet um if we look at the FED it already panicked in June in June it already started to uh announce that it would reduce the pace of reduction in the balance sheet that means basically losing policy”

A soft landing as the Fed defines it is diplomatically telling you the economy will be 'slow roasted'—inflation will gradually decline to 2% over three years, meaning 9% additional accumulated depreciation on top of the 20% already experienced.

“soft Landing means that gradually inflation will get to 2% great inflation is accumulative so how many years you want to get it to 2% oh three years okay that means 9% you know...the problem of the soft Landing is that it's basically uh sort of diplomatic way of telling you slow roast”

Current annualized inflation of 3% means 20% accumulated inflation in four years, and if inflation stays above 2.5-2.7% there is risk of reaching 23% accumulated inflation in the next year.

“if annualized inflation is now 3% that means 20% accumulated inflation in four years we could go to 23% accumulator inflation next year”

The United States has experienced 20% accumulated inflation over the last four years during a period of economic growth and despite becoming the largest oil producer and having disinflationary technology giants, indicating unprecedented currency destruction and beginning of confidence loss.

“you've had 20% accumulated inflation in the United States in the last four years in the in a period of growth and in a period in which the United States became the largest oil producer in the world over Saudi Arabia and Russia no so that should be this inflationary and the technology Giants are North American which is also disinflationary”

Holdings of US treasuries by foreign investors and central banks have virtually unchanged from five years ago despite national debt rising to 35 trillion, showing that people abroad are no longer buying treasuries and government debt is no longer a reserve asset.

“the national debt has risen to 35 trillion and the holding of central banks and foreign investors of treasuries as reserves has actually virtually unchanged from where it was 5 years ago so people are not buying people abroad outside of the United States are not buying more treasuries”

Three factors support a commodity recovery: first, China is in a money velocity down / money supply down period and is now announcing a large stimulus package meaning money velocity up and supply up; second, rate cuts make financing cheaper; third, massive prior underinvestment in commodities creates supply tightness.

“I think that it's probable that we can see some sort of uh sort of recovery in Commodities from three factors no number one China was in a money velocity down money supply down period and is now mentioning a very large stimulus package...number two is the rate cuts...and number three is the fact that throughout this period um a lot of the investments in uh in the commodity Spectrum have been cut to the Bone the level of disinvestment...is staggering”

The government cannot tax its way out of the deficit because mandatory spending (Medicare, pensions) consumes the vast majority of revenue, so tax increases would further burden the private sector while not addressing the core deficit.

“mandatory spending is the problem in the United States and you cannot tax it uh to bring down the deficit let alone to uh to completely reduce the deficit to zero and start bringing down debt”

Inflation is sticky because the government continues to print way too much money—specifically, running a 2 trillion dollar deficit in a growth economy with record tax receipts is completely insane and unsustainable.

“inflation is so sticky because because the government continues to print way too much money it's as simple as saying a two trillion deficit in a growth economy it's insane it is completely insane to have a government that with record receipts is uh increasing its annual debt pile up by $2 trillion”

The mistake of saying 'we cannot cut Medicare or pensions, therefore we cannot cut anything' is logically flawed—by examining government budgets item by item at granular levels ($110,000 here, $20,000 there), significant cuts are achievable.

“the problem is that the numbers are so huge that people say ah and what are you going to cut well there's Tre there's a tremendous thousands hundreds of thousands of items in which you could cut uh $110,000 here $20,000 there $100,000 here you know little by little”

The 50 basis point rate cut was unnecessary unless the goal was to disguise unsustainable levels of public deficit and debt by keeping interest costs manageable for the government.

“I don't think it was necessary at all unless what you wanted to do was what you rightly said before which is to try to disguise the uh unsustainable levels of of of public deficit and and debt”

The 2020 stimulus handouts were not that problematic, but the problem emerged in 2021 when the government doubled down with Build Back Better and additional entitlement programs, continuing to print more money instead of withdrawing it.

“the problem did not happen in 2020 that was insane but if the government in 2021 had put the brakes...the problem is that in 2021 after that the government decided to double down the government decided to increase further the build back better build back better more printing the uh all of the entitlement programs”

If the government had stepped back and reduced spending in 2021 when the economy was already recovering very fast from the reopening, instead of adding fuel to the fire with more spending, inflation would have already been reduced to 2%.

“2021 the economy is recovering fast obviously because of the of the reopening the government should have stepped back instead of adding fuel to the fire no and what it did in 2021 was actually to increase government spending from where it was H and increase deficit spending...if the government in 2021 had put the brakes reduce government spending washed that money out of the system in one year we would have reduced inflation”

A 50 basis point rate cut may cause commodities to bounce if more money flows to relatively scarce assets, but the risk is a reversal of disinflation if government spending continues and central banks don't monitor monetary aggregates.

“Commodities may bounce with a 50 basis point rate cut if you get more money going to relatively scarce assets the problem then is that we may get a reversal which is what you said before remember we're mentioning you may get a reversal of the disinflation process”

China is currently trying to manage 5% growth with prudent monetary and fiscal policy after understanding that real estate overcapacity came from previous aggressive stimulus programs.

“China was reasonably logical in understanding that their challenges in the real estate sector overc capacity all these things came from very aggressive uh stimulous programs no and therefore was trying to sort of uh manage or navigate a 5% growth with uh with uh prudent monetary policy and fiscal policy”

Pro-growth policies should focus 100% on making it easier for small businesses, families, and large companies to invest in the United States and for foreigners to invest domestically, rather than trying to solve problems through entitlement spending and increased debt.

“it's basically progrowth policies that are focused 100% on making it easier for small family small businesses and families to thrive and for large companies to invest more in the United States for foreigners to invest more in the United States”