The chart below shows what is behind the US exceptionalism narrative. For 50 years, the U.S. government spending has followed a trend that Congress, the ultimate party responsible for maintaining fiscal discipline, was able to keep steady. Covid, however, disrupted everything, and spending skyrocketed and has so far been unable to come back to the historical trend. That is the reason why inflation picked up in 2021, the reason why liquidity in the markets has been abundant, allowing for exceptional performance (in absolute and relative terms), but it’s also the reason why the Fed has been unable to reach the 2% inflation target by rising interest rates 525 bps. The fiscal dominance regime we are operating under in the U.S. has dwarfed any Fed actions in terms of monetary policy. What happens going forward? the Trump administration is trying to control and reduce spending, and if successful, will drain liquidity from the system, which is the right thing to do to reduce the budget deficit and inflation, but it will not be free. Austerity means that economic growth will no longer be fueled by debt, and we may reach a point where the economy will not have sufficient gas to run, and provoke a recession. Coordinated efforts are key.
Want to know more? join Fund@mental here https://www.myfundamental.net
#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning
Comments