The Greatest Threat to the U.S. Economy

Well, you can certainly point to some positive data, Owen.

There was a slight uptick in inflation — not that much, mind you… but people made a great deal out of it.

Job creation continues to be strong. Christmas sales were good.

On the other hand, we’ve seen some weak numbers recently in retail sales, industrial production, net export — all these things are headwinds for the economy.

Recent stock market volatility, like the drawdown we saw in early February, could reduce confidence a little bit, and I don’t think that has gone away.

But the biggest single threat to the U.S. economy today is the Federal Reserve.

Everyone understands that the Fed is in a tightening cycle right now — but they’re actually giving the economy a double dose of tightening.

First, they’re raising interest rates. They’re on track to raise interest rates 25 basis points in March and then again throughout the year, in June, September and December.

In addition, they’re reducing their balance sheet. Between 2008 and 2014, they expanded their balance sheet from about $800 billion to $4.2 trillion. For three years, they were able to maintain it at that level but now they’re reducing it again.

When the Fed reduces its balance sheet, they don’t dump Treasury securities on the market. They just wait for existing Treasury securities to mature and then don’t reinvest the proceeds in new securities. When the Fed gets money from the Treasury, the money just disappears. It’s the opposite of printing money. This is like burning money!

Expanding the balance pumped up asset prices, stocks and real estate. And somehow we’re supposed to believe that reducing the balance won’t have the opposite effect. That seems doubtful.

In my estimation, they are overtightening.

In fact, the Fed has no experience doing this. Everything I’ve just described has never happened before on this scale in the entire history of the Fed since 1913. We are guinea pigs in a monetary experiment.

We’re only starting to see the economy slow as a result of the tightening they did in 2016 and 2017, because monetary policy acts with a lag.

But now they are double tightening, which will slow it even further.

I’m not forecasting a recession right now… but a recession would not surprise me.

At a minimum, we’re going to see strong disinflation, and this is all because the Fed basically does not know what they’re doing.

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