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The Sinking US Economy Means A Weaker Dollar

Photo by Alexander Mils / Unsplash

By Daniel Lacalle, The Mises Institute | March 19, 2024

The manufacturing and consumer confidence weaknesses of the United States are deeply concerning, particularly considering that all those allegedly infallible Keynesian policies are being applied intensely.

Considering the insanity of deficit spending driven by entitlement programs, the decline in the headline University of Michigan consumer sentiment index in March to 76.5 from 76.9 is even worse than expected. Let us remember that this index was at 101 in 2019 and has not recovered the brief bounce shown by the re-opening effect in March 2021. Consumer confidence is still incredibly low, and a decline in the expectations index fully explains the most recent decline. Persistent inflation, high gas prices, and declining real wages may explain the poor expectations of the average citizen. Furthermore, this poor consumer confidence reading comes after poor control group retail sales last month.

No, this is not a strong economy. The consumer confidence index, labor participation, and unemployment-to-population ratios, as well as real wage growth, remain massively below the pre-pandemic level, and this after $6.3 trillion in new public debt that will likely reach $8 trillion by the end of 2024.

The manufacturing weakness of the United States is also a problem because this should be a period of high growth, considering the opportunities generated all over the world. Industrial output bounced 0.8% in February, but the January figure was revised to a larger 1.1% slump. If we factor in the decline in the Empire State survey to -20.9 in March, it looks like the manufacturing decline will persist.

The shape of the United States economy also reflects the impossibility of the soft-landing narrative. Inflation remains well above target, and bond yields are reflecting the reality of persistent inflation. Furthermore, money supply growth stopped declining months ago.

If the money supply rises and government spending continues to rise, the Fed will be unable to cut rates, and the impoverishment of citizens will continue.

This is the result of insane fiscal policy that increases spending and taxes. Weak growth, manufacturing decline, and worsening consumer confidence.

Demand-side policies and Keynesian experiments are leaving a once-strong economy on the same path as the euro area: stagflation. A warning sign should be the fact that the increase in public debt completely justifies the gross domestic product recovery.

This is the problem of extraordinary monetary and fiscal experiments. Governments embrace massive spending and debt monetization under the premise that they will implement control policies if the warning signs appear, but when they do, they never stop spending. Economists close to the government said that the administration would reconsider and adjust its budget if inflation rose, and alarm bells rang. Now we have heard all the alarm bells, and the administration continues as if nothing happened. The Inflation Reduction Act became the Inflation Perpetuation Act; the rise in government borrowing is now evident in the ten- and 30-year curve; and the private sector is in an obvious contraction.

Trusting governments to moderate spending after an expenditure binge is simply a very dangerous bet that always ends with worse conditions for citizens. Once they start, they cannot stop, and the inevitable end is higher taxes, weaker growth, lower real wages, and a decline in the purchasing power of the dollar. All the figures in the US economy scream “buy gold” because the government will always prefer to destroy the currency than to moderate the budget deficit and government size in the economy.

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat​ (2015), and Life in the Financial Markets (2014). He is a professor of global economy at IE Business School in Madrid.

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