Since 2020, there have been more than $20 trillion in stimulus programs, but the economy is now entering a period of stagnation with high inflation.
In 2020 alone, global governments planned stimulus measures totaling more than $12 trillion, and central banks increased their balance sheets by $8 trillion.
The outcome was unsatisfactory and had detrimental long-term implications. record debt, a slow recovery, and high inflation. Naturally, governments from all over the world attributed the invasion of Ukraine to the fictitious multiplier impact of the stimulus initiatives, but the justification was absurd.
From February to June 2022, commodity prices increased; they have since reversed. Even while higher commodity prices in established economies have a negative impact, we must admit that they are helpful for developing economies. However, even with this boost, the weak recovery has resulted in ongoing estimate revisions.
Given the enormous number of stimulus programs approved, Keynesian multipliers would predict that most developed economies would be seeing rapid growth even after discounting the impact of the invasion of Ukraine.
Now that 2023 is here, the predictions are considerably worse. Bloomberg Economics predicts that, despite increasing global debt, global growth will be well below the pre-covid-19 average, falling from a dismal 3.2 percent in 2022 to a concerning 2.4 percent in 2023. According to the Institute of International Finance, China and the US are mostly to blame for the $3.3 trillion increase in Q1 2022 that brought total world debt to a new record high of over $305 trillion.
However, the picture is significantly worse according to mainstream projections. With inflation expected to hit 6% globally, 6.1% in the euro area, and 4.1% in the US, global growth is expected to halt at +1.8%, with the euro region seeing zero growth and the US experiencing just 0.3%.
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In 2023, only a small number of countries are anticipated to lower their debt levels, with the majority of countries continuing to support their large public deficits and tax increases. A society where governments are continuously devaluing currencies and reducing citizens’ disposable income with higher taxes is likely to have weaker growth trends and deteriorating imbalances.
Everywhere in the world, there is an attempt to persuade us that past-peak but rising inflation is “falling prices” and that everything is wonderful even as debt rises, GDP stagnates, and the purchasing power of wages and savings is gradually destroyed.
Stagflation is an ineffective strategy. While excessive government expenditure is never reined in, it is a process of poverty that severely harms the middle classes.
The current monetary theory’s science-fiction fallacy was destroyed in the year 22. (MMT). The belief that mounting deficits and debt would never result in serious issues led to unparalleled turbulence in countries with monetary sovereignty, such as Japan or the UK. A few rate increases were all that was necessary to shatter the myth that endless money printing would solve all of humanity’s problems.
Twenty Twenty-two also disproved the myth that large deficits act as reserves to support the economy. Even though the country was energy independent and benefited from exporting natural gas and oil to other countries, the United States saw the worst inflationary blow in thirty years. The United States shouldn’t have faced any inflationary pressure if the absurd MMT thesis were true.
Stagflation is predicted to occur in the year 2023. Although the majority of strategists are, of course, relying on inflation to decrease sharply in the second half of the year, this seems to be at odds with their projections for deficit spending and growth.
The unsettling truth is that by stretching the boundaries of demand-side policies and government involvement, nations have induced a long-lasting decline.
Many people applauded the choice to utilize governments and central banks as lenders of last resort rather than the first choice, but the result has been a dilemma with challenging solutions.
Weaker growth and poverty will arise from the fiscal and monetary imbalances that have grown over the past two decades because there doesn’t seem to be any incentive to do so.
No administration wants to admit that there is a chance that central banks will shrink their balance sheet. The repercussions of a three trillion US dollar quantitative tightening are so dire that not even the most aggressive strategist will estimate it. However, central banks should shrink their balance sheet by at least $5 trillion USD in order to genuinely stabilize. A steady three trillion tightening is feared by governments and investment institutions because it may produce a financial disaster. These same market participants are aware that a tightening of $5 trillion would surely cause a financial crisis.
Everyone anticipates that 2023 will be split into two distinct periods, with the first featuring weak data and the second featuring strong growth and low inflation. This expectation arises from market participants’ need to present a narrative that demonstrates a quick solution to the aforementioned catastrophe. However, maintaining huge deficits, sizable central bank balance sheets, and truly negative interest rates will not provide a quick cure, a soft landing, or a chance to resolve the issue. There are only two options if we want to consider them: either fixing the issue from 2020, which would likely result in a global recession rather than a financial crisis, or not fixing it, which would result in higher inflation, weaker growth, and another bad year for risky assets, which could result in a financial crisis.
Unfortunately, governments all around the world planted the seeds for a catastrophe akin to 2008 when they decided to “invest now and deal with the consequences later” in 2020.
