The New CS Board

[jumanji0881]

Lacalle: Powell's "Soft Landing" Is Impossible : https://www.zerohedge.com/economics/lacalle-powells-soft-landing-impossible

My Comment: Something is going to break. Thirty five years of Fed (and other CBs) induced speculation and bubble creation cannot be resolved without a lot of pain. A soft landing is not viable. It's all about the debt. Watch China.

Excerpts:
The first problem of a soft landing is the evidence of the weak economic data.

The second problem of believing in a soft landing is underestimating the chain reaction impact of even allegedly small corrections in markets. With global debt at all-time highs and margin debt in the US alone at $773 billion, expectations of a controlled explosion where markets and the indebted sectors will absorb the rate hikes without a significant damage to the economy are simply too optimistic. Margin debt remains more than $170 billion above the 2019 level, which was an all-time high at the time.

However, the biggest problem is that the Federal Reserve wants to curb inflation while at the same time the Federal government is unwilling to reduce spending.

The Federal Reserve cannot expect a soft landing when the economy did not even take off, it was bloated with a chain of newly printed stimulus packages that have made the debt soar and created the perverse incentive to monetize all that the Federal government overspends

The idea of a gradual cooling down of the economy is also negated by the reality of emerging markets and European banks. The relative strength of the US dollar is already creating enormous financial holes in the assets of a financial system that has built the largest carry trade against the dollar in decades. It is almost impossible to calculate the nominal and real losses in pension funds and the negative result of financial institutions in the most aggressively priced assets, from socially responsible investment and technology to infrastructure and private equity. We can see that markets have lost more than $7 trillion in capitalization in the year so far with a very modest move from the Federal Reserve. The impact of these losses is not evident yet in financial institutions, but the write-downs are likely to be significant into the second half of 2022, leading to a credit crunch exacerbated by rate hikes.

There is no easy solution. There is no possible painless normalization path. After a massive monetary binge there is no soft hangover. The only thing that the Federal Reserve should have learnt is that the enormous stimulus plans of 2020 created the worst outcome: stubbornly high core inflation with weakening economic growth. There are only two possibilities: To truly tackle inflation and risk a financial crisis led by the US dollar vacuum effect or to forget about inflation, make citizens poorer and maintain the so-called bubble of everything.


One day someone may finally understand that supply shocks are addressed with supply-side policies, not with demand ones. Now it is too late. Powell will have to choose between the risk of a global financial meltdown or prolonged inflation.