The Inflationists’ Narrative Is Crumbling

Authored by Daniel Lacalle,

The United States 10-year government bond yield reached a low of 3.6% in September but has rapidly creeped up to 4.2%, erasing all the rate cut impact. The primary cause is the out-of-control public spending and the lack of confidence among bond investors in the government’s ability to manage its public finances. Therefore, it is logical that investors fear an inflation bounce.

The United States’ government is obsessed with doping GDP with government spending and bloating job figures with public sector hires. This is the road to ruin or stagflation.

U.S. debt has exploded by more than $850 billion in just three months, but the government has accelerated the insane borrowing, and almost half of that figure was an increase in borrowing in the past three weeks.

Of course, the third quarter GDP will show a respectable figure, and government jobs will mask the jobs data, but all of that is paving the way for a future catastrophe.

This government will leave an almost insurmountable legacy for the next administration. Under the best circumstances, the Congress Budget Office (CBO) forecasts an unsustainable $2 trillion deficit and $16 trillion in new debt over the next ten years, which will result in ongoing inflation from unchecked public spending and currency printing.

It is no wonder that investors do not believe the Fed and continue to demand higher yields for U.S. Treasury securities. Should Kamala Harris emerge victorious, she will accelerate the current inflationist policies. Her plan would increase debt by another $2.25 trillion, according to the CBO. Trump plans to cut taxes and reduce the deficit with higher tariffs for importers. However, tariffs are a questionable way to balance the budget, and while the tax relief impact on growth may be positive, it is difficult to see a significant reduction in the current deficit, especially considering that mandatory spending, which makes up 64% of the federal budget, will increase by one trillion dollars over the next four years. Let’s be realistic. The U.S. needs pro-growth strategies and tax cuts, but no administration will be able to offset a $1 trillion increase in mandatory spending with higher tax revenues. The U.S. needs a drastic approach to reduce discretionary spending and boost growth with an attractive taxation.

Tax cuts are not inflationary. It is the same quantity of money, only in the pockets of those who earn it. Rising expenditure is inflationary because it is literally printing a currency that has diminishing demand relative to issuance. The government has surpassed the economic, fiscal, and inflationary limits of currency printing. However, their strategy is clear. Financial and fiscal repression and try to ban any alternative to a declining value currency.

The bond market sees this. More spending and the risk of higher inflation as printing goes out of control and demand for Treasury bonds declines globally.

The first scare may arrive soon.

Bloomberg Economics expect US headline and core PCE price indexes to rise 0.2% and 0.3%, respectively, in September, accelerating since August. This means that annual core inflation may rise to 2.7%, and service inflation will rise above 3.8% even with shelter declining modestly.

The U.S. government’s fiscal irresponsibility has been staggering, and the insanity has accelerated as the election process turned out to be less favourable to the incumbent vice president than polls suggested.

The inflationist era of 2021-2024 was not a fatality. It was a policy.

Inflationism is the ideology that wins among economists close to the current administration as well as policymakers. The narrative is to tell you that inflation is low, that the battle is over and that everything is fine while you see your real wages and deposit savings disappear. The government wants inflation because it will alleviate the financial commitments of the future in real terms at the expense of your wealth and wages. Furthermore, the government can present itself as the solution to the inflation they create and blame businesses and corporations.