The U.S. Economy In 2023: Walking The Tightrope To Avoid Stagflation.
In the past, two years back I titled my annual forecast of economic conditions “We Are All Super-Keynesians Now.” The previous year, it was “All Eyes On Inflation.” This year’s main focus is on the costs of adjustment of decreasing the rate of inflation.
The order of titles is based on economic logic and philosophies in that the government spends too much, is able to pay for its expenditure through printing money or debt monetization, prices increase and in the event that you do not want to become like Argentina then you must change course.
From 2018 to 2020 overall government spending in the U.S. grew from just around 35% to nearly 48 percent of GDP. In 2022, it fell to 42 percent. From the end of 2018 until the beginning of 2022 the quantity of money, measured by M2, increased from nearly $14 trillion to $21.5 trillion.
It continued to increase until the end of March, when it was at $21.7 trillion. Then, it began to decrease slowly, dropping to $21.65 trillion by the end of August. Today, it is $21.35 trillion, just 1 percent lower than at the start of the calendar year.
The growth in the amount of money available led to an increase in inflation around 2022. If we are seeing an increase in the rate of increase of inflation, it’s to do with the contraction in the supply of money.
It is not related to “Inflation Reduction Act, “Inflation Reduction Act,” which is more focused on spending goals rather than reducing deficit. Two effective ways to cut down on inflation are to cease printing money to fund government expenditures and to open up the economy in order to increase the amount of goods that are available in relation to the supply.
In addition, interest rates have risen up. In the long and medium term, interest rates include three elements that are: Pure interest, Risk and the inflationary premium. Pure interest is determined by time-preference. Most people prefer having some amount now rather than in the near future.
Risk can also impact the cost: the more secure the debtors, the lower the interest rate. If inflation increases the rate of interest, rates respond to the changes in the market. The lenders aren’t able to recover their loans in the event of repayment with dollars that are devalued.
The mortgage rates have increased by a third since the start of the current year. Average rates are 6.60 percent and 5.28 percent for 15 and 30-year loans as well as the expectation for the Fed will not stop tightening its belts and easing. The real estate market will continue to struggle.
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Intentionally low interest rates such as those that were prevalent until recently, spur investment decisions that only make sense with those low rates. If interest rates rise to their normal level, the less profitable ventures are no longer sustainable. Wasteful projects that are not completed create waste.
The process of reallocating resources can take time, and some of the capital goes away to the better. This time of adjustment may result in a slowdown or recession. The extent of the recession will be determined by the amount of investment losses to the overall economy. I agree with those who think the Fed will keep its tighter monetary policy as well as believe that it is likely that the U.S. economy will grow by a small amount in 2023.
The future of the U.S. economy depends primarily on domestic variables. It is true that the U.S. has one of the lowest ratios of trade to GDP anywhere in the world. It’s only 25%, however supply chains depend on trade.
Commerce with foreign countries and the economic strength of the people who purchase U.S. products are also important to businesses that focus on exports. This is among the major reasons behind the importance of China in current economic discussions. China as well as America U.S. are by far the two most powerful economies on the planet.
The events that take place in China have an impact on almost every region of the world. U.S. trade with Chinese producers is comparable to the amount in trade between Canada and Mexico less than $700 billion.
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I don’t view trading deficits in a negative way on their own, but some particularly those in the political realm and industries that compete in the same way as Chinese producers, are concerned. The trade imbalance between China and China is greater than the deficit in trade between Canada in addition to Mexico.
Finding accurate growth figures from China is difficult and I don’t have any insight into the Chinese economy which is why I will use the lower range of estimates that are consensus. But, China will likely grow more quickly than the global economy, ranging between 4 and 5% , compared to 2-3% for the global economy.
The shift in China’s policy regarding limiting Covid and avoiding costly general lockdowns, is a good thing for the global economy. Daniel Lacalle, a respected European analyst, believes that China’s opening could be particularly beneficial to German as well as French exporters.
Lacalle says that a return to fast growth rates in China could be “probably the biggest stimulus on the global economy that we can expect in a very challenging year.” However, in the long term particularly with regard to Europe, Lacalle expects a decade of very weak growth at below 1% “very subdued levels of growth but not a crisis.”
On the other hand, in addition to economic policy There is a concern over the possibility of an invasion by Taiwan. At the time of this point, one of my favorite Russian specialists, Andrey Illarionov, predicted that Putin did not intend to attack Ukraine. Illarionov is not a novice analyst.
In fact, he served as one of the president’s top economic advisers from 2000 until 2005. Illarionov’s reasoning was based on the insufficient forces that were accumulated by Russia to achieve success. It was proved correct on this point but was wrong in the first.
The impact on the global economy is and will continue to be enormous. Although it may affect less countries in direct ways like the invasion of Ukraine however, the threat of a Chinese attack on Taiwan could also be devastating to the world economy.
It is likely that the U.S. economy will not receive much boost from Europe. The Eurozone will likely see more inflation, slower growth, and higher jobless than the U.S. They’re adjusting to the changes more slowly. The risks and uncertainty of conflict in Ukraine have a negative impact on Europe significantly more than other parts around the globe. The outlook for Germany, the biggest Eurozone economic power, looks similar to that of the average.
The second-largest European economy is that of the United Kingdom. The current “conservative” government might not be in a position to stop Brexit but it is directing the country in an European direction, and is putting more faith in the taxman rather than the free-market elements that are the free economy.
Although they are further from the conflict in Ukraine and the war in Ukraine, the prospects for Latin America are not much better. Its economies Brazil and Mexico comprise about two-thirds of regional economic activity and both anticipate moderate growth of around 1 percent.
However, despite its promise Mexico is stuck with an ideology of left-wing with varying kinds of populism. This, combined with the power of drug cartels and powerful crony capitalists and a weak political opposition suggests that the economy of Mexico will continue to be a disappointment.
They’ll be walking the tightrope of a different kind in Brazil which is the largest economies within Latin America and one of the biggest in the world. The most difficult yet remarkable terms for an economic minister are coming to an end.
Paulo Guedes served from January 1st, 2019 until today. In a government that saw only a handful of ministers finish the entire period, Guedes was able to navigate the turbulent waters with the same ease as very few ministers in the history of.
Guedes was able to hold his own with the rudder of economic policies and principles which, despite their failure they have brought prosperity. Guedes was forced to adjust to the storms that were coming his way, which were caused through institutional weakness and corporatist power.
In an earlier article I wrote about Guedes’s efforts to decentralize. Local free-market economists have been praising Guedes for the transfer of economic activities from the overburdened government sector into the private sector, and for making a significant improvement to the health and financial condition of businesses that were still in the state’s control.
Brazil had record-breaking results in trade with foreign countries, and Guedes’s policies could have pushed the country into a prosperous era. But a significant percentage of Brazilian electors and an active Supreme Court helped liberate Lula from jail and elected Lula as president.
Lula will likely change economic policies and restore Brazil to its former status as a long-term commitment. Brazil’s significance to Latin America is such that it is worthy of an entire article, rather than just these two paragraphs.
I am sure that in this publication , as well as in other outlets focused on business in 2023, economists will debate whether the Fed’s policies are either too loose or too tight. It is impossible to say without certainty. For goods offered through the market in regions that have little government intervention, such as the production of tomatoes, we rarely ask “what is the right amount of tomatoes?” If there’s too much supply in comparison to demand, then the price falls; if there is not enough and the demand is not enough, then the price rises.
With the money supply, we are able to ask these questions frequently. In the present, when money is an instrument for governments and not just of market needs, we also have political demands as well as two mandates for central banks to keep unemployment and inflation at a minimum. It is difficult to determine beforehand if one is operating too slowly or too quickly.
This is why noted economists such as Milton Friedman or John Taylor have proposed regulations to provide more clear guidelines to markets. F.A. Hayek went on to propose an increased reliance on markets , by decreasing the nationalization of money and increasing the level of competition between banks.
I was born and raised in Argentina. beginning during his time in Argentina, the country that was destroyed by the rise of inflation, I am happy that the majority of economists in the United States seem to shun the tried and failed solution of price control.
Inflation is a problem, but tackling it by imposing price controls causes greater issues. The rate of inflation is much higher than it was in the days when President Nixon implemented price and wage controls However, political leaders and economists are still reminiscing about the mistakes he made with his policies and are not able to replicate the mistakes.
To succeed when walking on a tightrope one must take it slow. The odds are that we’ll end up with a stagnantand slow-growing economy, however I don’t see any other choice given the current economic and political situation.