Chapter 1: Understanding the Economic Landscape

Recent indicators suggest that economic growth may soon turn negative while inflation continues to rise.

The Bureau of Economic Analysis recently reported that real GDP growth for the first quarter of this year has slowed to 1.6%. This marks a decline from the 3.4% growth seen in the fourth quarter of the previous year and a further drop from the 5% growth recorded in the third quarter. At the same time, consumer prices are on the rise, raising concerns about a potential shift toward stagflation, a topic I addressed in a previous column from February.

In that earlier piece, I diverged from prevailing views by predicting an uptick in inflation rather than a decrease for this year. I also indicated that economic activity might decelerate and could potentially turn negative by summer. Current data seem to validate that prediction.

Economic growth has been largely driven over the last two years by significant deficit spending from the federal government, along with substantial wage increases that have further fueled this growth. However, this year, wage inflation is contributing to the rise in consumer prices.

Congress must tackle the issue of deficit spending, as the national debt has now exceeded $34.5 trillion. There currently exists no framework to systematically repay this debt. When bonds mature after ten or twenty years, the government simply rolls over the debt by issuing new bonds.

This cycle means that, without a budget surplus—which has only occurred four times in the past 63 years—the public debt will remain unrepayable. Bonds maturing today have interest rates below 2%, but refinancing them will likely involve rates exceeding 4%. This shift could double the government’s interest payments, pushing costs beyond even the defense budget this year.

Given the staggering debt levels, it will be nearly impossible for the federal government to increase spending to stimulate the economy or stave off a recession.

After neglecting the inflation stabilization objective of the Federal Reserve while inflation surged from January 2021 to June 2022, the Fed began implementing aggressive rate hikes from mid-2022 to late 2023. However, they paused rate increases in September 2023, a decision that may have allowed inflation to persist and even escalate this year.

Now, the Fed is in a position where it must maintain current interest rates. If inflation deteriorates in the coming months—likely due to rising energy prices—the Fed may be compelled to raise rates again, potentially as soon as this summer. This situation implies that the Fed cannot utilize monetary policy to stimulate economic growth.

If the economy continues to decelerate, growth could turn negative, and neither fiscal nor monetary policies would be available to spur recovery, potentially leading to a recession.

Wage inflation remains a significant factor driving prices upwards. As corporations experience inflationary profit growth, labor has been demanding higher wages. For instance, last year, many organized labor groups, including auto and healthcare workers, secured substantial annual wage increases under multi-year contracts. These higher costs for corporations contribute to upward price pressures, further fueling inflation.

In summary, the likely scenario is one where economic growth continues to slow, while the government lacks the tools to stimulate recovery through either monetary or fiscal measures. Concurrently, inflation is expected to rise due to escalating energy costs and wage inflation, pushing the economy toward stagflation.

This predicament presents a complex challenge. Efforts to stimulate growth tend to increase inflation, while measures aimed at curbing inflation usually dampen economic expansion.

The most viable solution appears to lie in adopting supply-side economic policies, which can boost output and foster economic growth. Enhancing production helps alleviate price pressures. These policies focus on increasing capital formation to catalyze growth.

However, the current administration seems reluctant to pursue these strategies, viewing them merely as "tax cuts for the wealthy."

In 1980, amidst a severe stagflation crisis, supply-side economic policies effectively reduced inflation and significantly spurred economic growth. By 1984, the annual growth rate had surpassed 7% as inflation rates fell. This approach may be essential for addressing our current economic challenges.

Chapter 2: The Path Forward

The first video discusses the current state of stagflation, highlighting how U.S. Treasuries are losing value, and explores the Federal Reserve's stance on inflation as the economy heads toward a downturn.

The second video delves into potential changes on the horizon, examining the looming threat of stagflation and its implications for the economy.