Expect higher inflation, excessive government spending and cracks in the U.S. dollar’s dominance
“ It is naïve to assume that the largest credit-fueled bubble in half a century can continue indefinitely or be deflated without pain. ”
First, on the demand side, strong employment will support consumption. Government deficits, currently around 5% and projected to grow, will add to demand. The energy transition, subsidies for strategic manufacturing, semiconductors and war-footing defense spending, will continue to boost spending. Manufactured goods prices may fall due to excess Chinese capacity but services, which are a large portion of advanced economies, will reflect rising labor costs. Moreover, an aging population and skills shortages will drive higher salaries, in nominal but not real terms, generating a wage-price feedback loop.
Second, public finances. Government spending, which will be affected by wars, is not being matched by higher tax revenues, leading to larger deficits and increased borrowing. U.S. government debt, for example, is forecast to rise to 107% of GDP by 2029 from its current 97%, exceeding the 1946 post-World War II historical peak of 106%.Third, de-dollarization. Geopolitical conflict will divide the world, driving a shift away from the U.S. dollar DX00, -0.
In addition, problems in commercial real estate and funds unable to navigate choppy trading conditions may foretell troubles ahead.
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