Government Stimulus

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

2023: The Year of Stagflation

This year, only a few countries are anticipated to reduce debt

fter more than $20 trillionin 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 sheets by $8 trillion. The result was disappointing and with long-lasting negative effects: a weak recovery, record debt, and elevated inflation.

Of course, governments all over the world blamed the Russian invasion of Ukraine on the nonexistent multiplier effect of the stimulus plans, but the excuse made no sense. Commodity prices rose from February 2022 to June 2022 and have corrected since. Even considering the negative effect of rising commodity prices in developed economies, we must acknowledge that those are positives for emerging economies and—even with that boost—the disappointing recovery led to constant downgrades of estimates.

If Keynesian multipliers existed, most developed economies would be growing strongly even discounting the Ukraine invasion impact, considering the unprecedented amount of stimulus plans approved.

Now, we face 2023 with even more disappointing estimates. According to Bloomberg Economics, global growth will decline to a worrying 2.4 percent in 2023 from an already poor 3.2 percent in 2022, significantly below the pre-COVID-19 trend but with higher global debt. Total global debt rose by $3.3 trillion in Q1 2022 to a new record of over $305 trillion, mostly due to China and the United States, according to the Institute of International Finance.

However, consensus estimates show an even worse outlook. Global growth should stall at 1.8 percent, with the euro area at zero growth and the United States at just 0.3 percent, with inflation reaching 6 percent globally, 6.1 percent in the euro area, and 4.1 percent in the United States.

Only a handful of countries are expected to reduce debt in 2023, with most nations continuing to finance bloated government spending with elevated deficits and tax hikes. A world where governments are constantly eroding the purchasing power of currencies and slashing the disposable income of taxpayers with rising taxes is likely to show weaker growth trends and worsening imbalances.

The narrative all over the world is to try to convince us that past-peak but elevated inflation is “falling prices” and that everything is good when debt increases, growth stalls, and the purchasing power of salaries and savings are wiped out slowly.

There’s no success in stagflation. It’s a process of impoverishment that hurts the middle classes immensely, while excessive government spending is never curbed.

The year 2023 is expected to be the year of stagflation. Of course, most strategists are betting on inflation falling rapidly in the second part of the year, but that seems inconsistent with their estimates of deficit spending and growth.

There seems to be no incentive to reduce the fiscal and monetary imbalances built over two decades, and therefore the result will be weaker growth and impoverishment.

No government wants to acknowledge the risk of central banks reducing their balance sheets. Even the most aggressive strategist fails to dare to estimate a $3 trillion quantitative tightening because they all know that the effects could be devastating.

The reason why everyone expects 2023 to be divided into two parts, a first half of poor data and a second where growth picks up and inflation plummets, is because market participants need to create a narrative that shows a quick fix to the above-mentioned disaster. However, there’s no quick fix, there’s no soft landing, and there isn’t a chance of solving the problem by keeping elevated deficits, massive central bank balance sheets, and real negative rates.

If we want to look at the options, there are only two: fixing the problem created in 2020—which means a global recession but probably not a financial crisis—or not fixing it—which means elevated inflation, weaker growth, and another bad year for risky assets, which can lead to a financial crisis.

Unfortunately, when governments all over the world decided to “spend now and deal with the consequences later” in 2020, they also created the seeds of a 2008-style problem.

No government wants to acknowledge the risk of central banks reducing their balance sheets.