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Debating the R-Word – by Stephanie Kelton

Happy holiday!

I have been working on an important project and hope to share this news with you soon.

In the meantime, I have a lot to say about the macro environment, the looming debt ceiling fight, the ongoing (and changing) debate about the most effective way to tackle inflation, and more. So you can expect a steady stream of content now that the big project is over.

On the subject of the macro environment, the R-Word remains a serious, albeit considerable, concern evidence that consumer spending remains strong even with a fast and aggressive backdrop fiscal i monetary squeeze

It depends who you ask. Some CEOs claim to see no sign of weakness, so the r-word isn’t even in their vocabulary.

Others, like Charles Schwab’s chief investment strategist, Liz Ann’s Specials, you see troubling signs that a recession is on the way (if it’s not already underway). In his visionsome segments of the economy, “notably housing, various goods-oriented segments of the economy, consumer confidence and CEO confidence,” are flashing 2022 recession signals in bright red, while other indicators, like the inverted yield curve, point firmly. to recession in 2023.

So far, strong household balance sheets and a relatively strong labor market have helped consumers weather fiscal and monetary headwinds.but special just wait this to change:

Unfortunately, consumers have also reduced a significant amount of their savings and reached the debt window to an increasing degree (even among the highest income levels). In fact, according to Ned Davis Research, apart from households in the top income quintile, the share of outstanding consumer credit exceeds the share of demand deposits. Default risk is rising, and if the labor market weakens significantly and banks continue to tighten lending standards, consumer sentiment and spending habits are likely to shift to a decidedly more cautious stance.

Your bottom line? “We believe it will only be a matter of time until … the cracks in the labor market widen.”

Other experts, including former Fed economist Claudia Sahm, remain relatively optimistic about the prospects of avoiding a recession altogether. She’s one to see the path to a “soft landing” narrow but still within reach. If you’re not reading it subpile, I highly recommend it. He sees the Fed slowing the pace of rate hikes potentially in time to avoid a “hard landing” scenario that drives the economy into recession. He doesn’t exaggerate, but argues that a combination of factors such as monetary tightening and slackening supply chains have already put us on a path of slowing inflation and that we can return to 2 percent without crushing it. the labor market.

While technically still in the “reduced but within reach” camp, Mohamed El-Erian, Allianz’s chief economic adviser, seems increasingly convinced that inflation will not come down again anytime soon. You should check out this recent one podcast chat with Ezra Klein to hear him articulate his thinking.

Anyway, they’re all really smart people with divergent views on the economic outlook. By the way, that was my opinion about the June question.

I will continue to share my own opinions with you here at the lens. And I’ll share with you some of the materials I’m preparing for an upcoming talk I’ll be giving for the FPA of Greater Kansas City. I last spoke to the group in November 2019. That talk was provocatively titled, “The Recession is Coming: Are We Up a Stream Without a Paar?” Maybe I’ll use the same title again next month.

Enjoy the weekend!


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