A "soft landing" is impossible unless the government cuts both taxes and government spending at the same time interest rates are rising. This won’t happen, so get ready for a hard landing. 

Original Article: "Crowding Out: The Fed May Be Killing the Private Sector to Save the Government"

The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.
Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.
The current situation is the worst possible. The Fed’s balance sheet is not falling as fast as it should; government spending has not even been scratched, but the money supply is falling at the fastest pace since the

Federal Reserve data shows $98 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as the Bloomberg data shows that assets in this class rose by $121 billion in the same period. The data shows the challenges of the banking system in the middle of a confidence crisis.
However, as many analysts point out, this is not necessarily the main factor that dictates the risk of a credit crunch. Deposit flight is certainly an important risk. Many regional banks will have to cut lending to families and businesses as deposits shrink, but in the United States bank loans are less than 19 percent of corporate credit according to the IMF, while in the euro area it is more than 80 percent. What will generate a credit

Former US President Donald Trump has expressed concern that China could displace the US dollar as the global reserve currency. The warning follows reports of agreements between various nations to use the yuan in commodity transactions.
For years, rumors have circulated about the demise of the US dollar as a global reserve currency, but the greenback continues to be the most traded and extensively used currency in the fiat world.
The US dollar is by far the most traded currency on the foreign exchange market, according to the Bank for International Settlements. In 2022, the US dollar “remained the preeminent vehicle currency in the globe.” In April 2022, it was on one side of 88% of all transactions, unchanged from the previous survey.
The euro, the Japanese yen, and the pound sterling

At the end of February 2023, the price of oil (WTI and Brent), Henry Hub and ICE natural gas, aluminum, copper, steel, corn, wheat, and the Baltic Dry Index are below the February 2022 levels.
The Supply Chain Index and the global supply-demand balance, published by Morgan Stanley, have declined to September 2022 levels. However, the latest inflation readings are hugely concerning.
Considering the previously mentioned prices of commodities and freight, if price inflation were a “cost-push” phenomenon, it would have collapsed to 2 percent levels already. However, both headline and core inflation measures, from the Consumer Price Index (CPI) to Personal Consumer Expenditure Prices (PCE) show extremely elevated levels and rising core inflationary pressures.
We have mentioned numerous times

When we read about the US economy, we often get wage growth as a signal of a strong labor market. It is hardly a strong market when the labor participation rate and the employment to population ratio are both below the February 2020 level and have been stagnant for months.
Additionally, the headline figure of 4.6 percent annualized wage growth is misleading, as it shows a nominal and average figure that disguises a much tougher environment. According to the Bureau of Labor Statistics, from December 2021 to December 2022, real average hourly earnings decreased 1.1 percent, seasonally adjusted.
When we look at wage growth by sector, the picture is even worse. According to JP Morgan, no sector in the US economy has seen a rise in wages that covers inflation. Only two sectors in the US

The incredible growth and success of SVB could not have happened without negative rates, ultra-loose monetary policy, and the tech bubble that burst in 2022.

Original Article: "How Easy Money Killed Silicon Valley Bank"
This Audio Mises Wire is generously sponsored by Christopher Condon.

There are many excuses often used to explain inflation. However, the fact is that there is no such thing as “cost push inflation” or “commodity inflation.” Inflation is not an increase in prices, it is the destruction of the purchasing power of the currency.
Cost-push inflation is more units of currency going to relatively scarce real assets. The same can be said about all other, from commodities to demand and my favorite, “supply chain disruption.” More units of currency going to the same goods and services.
The monster inflation we have endured these years first arrived through asset inflation and then through consumer prices. Now, governments and statistical bodies are tweaking the calculation of CPI to disguise the loss of purchasing power of the currency and central banks had to hike

The second-largest collapse of a bank in recent history after Lehman Brothers could have been prevented. Now the impact is too large, and the contagion risk is difficult to measure.
The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealized losses and the financial hole in the bank’s accounts would not have existed if not for ultra-loose monetary policy. Let me explain why.
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits, according to their public accounts. Their top shareholders are Vanguard Group (11.3 percent), BlackRock (8.1 percent), StateStreet (5.2 percent) and the Swedish pension

Every time the United States reaches its debt limit, we read that it is important to reach an agreement to lift it. The narrative is that the debt ceiling must be raised, or the US economy will suffer a severe contraction. There is even an episode of a TV series, “Designated Survivor”, where the character played by Kiefer Sutherland places lifting the debt ceiling as the priority to get the U.S. economy on track. The debt ceiling is viewed as an evil and anachronistic burden on growth. It is not.
Analysts all over the world consider the debt ceiling a non-event because Congress always agrees to increase it. As such, markets do not even care. Congress has raised the debt ceiling on time on over eighty occasions since 1960, according to S&P Global. The rating agency points out that Congress

The latest jobs report in the United States shows strengths and weaknesses. Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate fell to 3.5 percent. However, the United States job market continues to show negative real wage growth, the employment-to-population ratio is 60.1 percent, and the force participation rate is 62.3 percent.

The International Monetary Fund (IMF) has warned about the optimistic estimates for 2023, stating that it will likely be a much more difficult year than 2022. Why would that be? Most strategists and commentators are cheering the recent decline in price inflation as a good signal of recovery.

After more than $20 trillion in stimulus plans since 2020, the economy is going into stagnation with elevated inflation. Global governments announced more than $12 trillion in stimulus measures in 2020 alone, and central banks bloated their balance sheet by $8 trillion.

The latest estimates from consensus for the main Latin American economies show a continent facing a lost decade. The region GDP growth has been downgraded yet again to a modest 1.1% for 2023, with rising inflation and weakening gross fixed investment. Considering that the region was already recovering at a slower pace than other emerging markets, the outlook is exceedingly worrying.
The poor growth and high inflation expectations are even worse when we consider that consensus estimates still consider a tailwind coming from rising commodity prices and more exports due to the China re-opening.
How can a region with such high potential as Latin America be condemned to stagflation? The answer is simple. The rise of populist governments in Colombia, Chile and Brazil have increased the concerns

While many market participants are concerned about rate increases, they appear to be ignoring the largest risk: the potential for a massive liquidity drain in 2023. Even though December is here, central banks’ balance sheets have hardly, if at all, decreased. Rather than real sales, a weaker currency and the price of the accumulated bonds account for the majority of the fall in the balance sheets of the major central banks.

The evidence from the last thirty years is clear. Keynesian policies leave a massive trail of debt, weaker growth and falling real wages. Furthermore, once we look at each so-called stimulus plan, reality shows that the so-called multiplier effect of government spending is virtually nonexistent and has long-term negative implications for the health of the economy.

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

The narrative to attack any tax cut and defend any increase in government size is reaching feverish levels. However, we must continue to remind citizens that constantly bloating government spending and increasing the size of monetary interventions are some of the causes of the widespread impoverishment of the middle class.

There are many mistakes in the G7 agreement to put a cap on Russian oil. The first one is that it does not hurt Russia at all. The agreed cap, at $60 a barrel, is higher than the current Urals price, above the five-year average of the quoted price and higher than Rosneft’s average netback price.

Governments and central banks have become the lender of first resort instead of the last resort, and this is immensely dangerous. Global debt soars, inflation creeps in, and many of the so-called supply chain disruptions are the result of zombification after years of subsidizing low productivity and penalizing high productivity with increased taxes.

Quantitative easing was designed as a tool to provide time for governments to implement structural reforms, boost growth, and strengthen the economy. However, it has become a tool to increase the size of government and take increasingly riskier levels of debt.

An energy policy that bans investment in some technologies based on ideological views and ignores security of supply is doomed to a strepitous failure. The energy crisis in the European Union was not created by market failures or lack of alternatives. It was created by political nudging and imposition.

Inflation in Argentina is far worse than neighboring countries. It has only one cause: an extractive and confiscatory monetary policy—printing pesos without control and without demand.

In an interview with the Wall Street Journal, Treasury secretary Janet Yellen admitted that the chain of stimulus plans implemented by the US administration helped create the problem of inflation.

The United States consumption figure seems robust. An 0.9 percent rise in personal spending in April looks good on paper, especially considering the challenges that the economy faces. This apparently strong figure is supporting an average consensus estimate for the second-quarter gross domestic product (GDP) of 3 percent, according to Blue Chip Financial Forecasts.

The most dangerous words in monetary policy and economics are “this time is different.” Argentine politicians’ big mistake is to believe that inflation is multicausal and that everything is solved with increasing doses of interventionism.

After more than a decade of chained stimulus packages and extremely low rates, with trillions of dollars of monetary stimulus fueling elevated asset valuations and incentivizing an enormous leveraged bet on risk, the idea of a controlled explosion or a “soft landing” is impossible.

The most recent macroeconomic figures show that the Chinese slowdown is much more severe than expected and not only attributable to the covid-19 lockdowns. The lockdowns have an enormous impact. Twenty-six of 31 China mainland provinces have rising covid cases and the fear of a Shanghai-style lockdown is enormous.

The invasion of Ukraine, the spike in inflation and the risks of supply shortages have made some politicians dust off some of the worst economic ideas in history: autarky and protectionism. Some believe that if our nation produced everything we needed we would all be better off because we would not depend on others. The idea comes from a deep lack of understanding of economics.

Europe is not going to achieve a competitive energy transition with the current interventionist policies. Europe does not depend on Russian gas due to a coincidence, but because of a chain of mistaken policies: banning nuclear in Germany, prohibiting the development of domestic natural gas resources throughout the European Union, added to a massive and expensive renewable rollout without building a reliable backup.

There are numerous articles mentioning that Saudi Arabia may use the yuan, China’s domestic currency, for its oil exports. How much does Saudi Arabia export to China? According to the Organisation of Economic Co-operation and Development, the kingdom’s main exports are to China ($45.8B), India ($25.1B), Japan ($24.5B), South Korea ($19.5B), and the United States ($12.2B). Exports of crude oil reached $145 billion in total.

This week, the Federal Reserve gave the most dovish “hawkish” statement ever, an apparent aggressive tapering that, in reality, means maintaining very low rates and massive repurchases for longer.Inflation has skyrocketed and aggressive monetary policy is the key factor in understanding it. I already explained it in my article “The Myth of Cost-Push Inflation.” 

What is the worst thing a government can do when there is high inflation and supply shortages? Multiply spending on energy and material-intensive areas. This is exactly what the US infrastructure plan is doing and—even worse—what other developed nations have decided to copy.

No government looking to massively expand its size in the economy and monetize a soaring deficit is going to act against rising prices, despite claiming the opposite. One of the things that surprises citizens in Argentina or Turkey is that their populist governments always talk about the middle classes and helping the poor, yet inflation still soars, making everyone poorer.

Historically, meetings of the largest economies in the world have been essential to reach essential agreements that would incentivize prosperity and growth. This was not the case this time. The G7 meeting agreements were light on detailed economic decisions, except on the most damaging of them all. A minimum global corporate tax

The University of Michigan consumer confidence index fell to 82.8 in May, from 88.3 in April. More importantly, the current conditions index slumped to 90.8, from 97.2 and the expectations index declined to 77.6, from 82.7. Hard data also questions the strength of the recovery.

How can a small rise in bond yields scare policymakers so much? Ned Davis Research estimates that a 2% yield in the US 10-year bond could lead the Nasdaq to fall 20%, and with it the entire stock market globally. A 2% yield can cause such disruption? How did we get to such a situation?

United States jobless claims have picked up, since the elections and the second wave of coronavirus have slowed down the economic recovery. Uncertainty about tax increases and changes in labor laws, including an increase in the minimum wage, add to the fear of new lockdowns, as employers see the devastating effects of these lockdowns in European employment.

The best social policy is one that supports job creation and rising wages. Entitlements do not make a society more prosperous, and ultimately drive it to stagnation.

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "If the US Adopts Eurozone Policies, the Jobs Recovery Will Suffer​".

The employment recovery in the United States is as impressive as the collapse due to the lockdowns. In April I wrote a column stating that “The U.S. Labor Market Can Heal Quickly,” and the improvement has been positive. Very few would have expected the unemployment rate to be at 8.4 percent in August after soaring to almost 15 percent in the middle of the pandemic.

The US Dollar Index has lost 10 percent from its March highs and many press comments have started to speculate about the likely collapse of the US dollar as world reserve currency due to this weakness. These wild speculations need to be debunked.

Misguided lockdowns have destroyed the global economy and the impact is likely to last for years. The fallacy of the “lives or the economy” argument is evident now that we see that countries like Taiwan, South Korea, Austria, Sweden, and Holland have been able to preserve the business fabric and the economy while doing a much better job managing the pandemic than countries with severe lockdowns.

The United States added 1.76 million Jobs in July 2020, compared to a consensus estimate of 1.48 million. Unemployment fell to 10.2 percent versus the 10.6 percent expected.

According to the International Monetary Fund (IMF), global fiscal support in response to the crisis will be more than $9 trillion, approximately 12 percent of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way which we have not seen since World War II.

Despite massive government and central bank stimuli, the global economy is seeing a concerning rise in defaults and delinquencies. The main central banks’ balance sheets (those of the Federal Reserve, Bank of Japan, European Central Bank, Bank of England, and People’s Bank Of China) have soared to a combined $20 trillion, while the fiscal easing announcements in the major economies exceed 7 percent of the world’s GDP according to Fitch Ratings.

The €750 billion stimulus plan announced by the European Commission has been greeted by many macroeconomic analysts and investment banks with euphoria. However, we must be cautious. Why? Many would argue that a swift and decisive response to the crisis with an injection of liquidity that avoids a financial collapse and a strong fiscal impulse that cements the recovery are overwhelmingly positive measures.

Despite the unprecedented increase in the European Central Bank’s asset purchase program, the spread of southern European sovereign bonds versus German ones is rising.

The eurozone economy is expected to collapse in 2020. In countries such as Spain and Italy, the decline, more than 9 percent, will likely be much larger than in emerging market economies. However, the key is to understand how and when the eurozone economies will recover.

All over the world, governments and central banks are addressing the pandemic crisis with three main sets of measures: Massive liquidity injections and rate cuts to support markets and credit.Unprecedented fiscal programs aimed at providing loans and grants for the real economy.Large public spending programs, fundamentally in current spending and relief measures.

The Johns Hopkins University Coronavirus Global Cases Monitor shows that the mortality rate of the epidemic is very low. At the writing of this article,1 there have been 92,818 cases, 3,195 deaths, and 48,201 recoveries. It is normal for the media to focus on the first two figures, but I think that it is important to remember the last one. The recovered figure is more than ten times the deceased one.