This is a really good interview to get an first understanding of the fiscal deficit currently being stimulative.
Lyn Alden (and Luke too) imo has been 1 of the few pointing this out even before everyone was talking about this.
This is also similar to Ray Dalio’s thesis of the long-term debt cycle, where the US is closer to entering a debt spiral cycle where they can’t get out of it without default or money printing.
And IMO we could be starting to see some of the effects of the deficits being so high outside a recession in inflation, the economy, and risk assets.
And the FED is even talking about slowing QT because they are afraid of liquidity issues due to the high level of debt that needs to be absorbed by the markets.
I also think if the US avoids a recession completely, it is mainly because of this reason. I admit I don’t understand in great depth the consequences on the economy having permanently high fiscal spending and deficits. And it could be something I have maybe underestimated.
I will need to put more research into this.
Just a few points of their opinions:
- The current inflationary period is not the same as 1970, but as the one from 1940. It is being driven by fiscal deficits and not bank lending creation. (charts showing her point)
It is easier to restrict the economy when private lending in the force behind that when fiscal spending is. - In this environment, When debt to GDP gets over 100%, interest rate hikes become less restrictive and can even become stimulative due to higher interest payments.
- Currently, fiscal deficits are not completely overshadowing private sector restrictions, but it is offsetting to a somewhat equal degree
- 1 of the problems for the US it is a very financialized economy compared to others, it has a higher level of wealth tied to assets, and a higher % of tax receipts are also tied to assets. This means that trying any level of fiscal austerity could tank the economy and tax receipts, leaving the deficits equal.
- Since 2019 the US has been flirting more and more with fiscal dominance, with the fiscal side becoming ever more important, especially with rising rates environment. There is not as much runway for this problem as it was before, and some markets (eg. gold) are behaving in ways that this is starting to matter more.
- Only a miracle in productivity at the right time (eg AI, energy), or fiscal austerity (very low or zero probability happening) could get this issue to go away without much consequences.
This is the gold chart they reference in the video, where it’s breaking the usual relationship with rates.
