Unopposed Spending

Macro Perspectives: Thu 12 Aug 2021

We should expect Biden’s $3.5 trillion spending plan to happen. After all, with an aligned Congress, they've yet to get pushback on anything. Overall, it has been a good bet that they will do whatever they want to do. Why stop at $1 trillion when you can do $2 trillion or $3.5 trillion?

So, they're doing $3.5 trillion, but not really. Because somehow they convinced Republicans to vote for a separate bill on infrastructure, for another $1.2 trillion.

Now, with the above said, it does appear that a voice of reason has infiltrated the Democrat Senate.

Remember, as we discussed last month, the great macro trader and dot- connector, Stanley Druckenmiller, met with Senators to warn them against pouring more fiscal gas onto the economic fire.  He said, if he wanted to destroy the U.S. economy, this $3.5 trillion spend, into an already hot economy, is exactly what he would do.

It's a recipe for bubbles and hot inflation - both of which historically (ultimately) lead to large economic declines. He added, "every dollar we spend now that we don't need to, won't be available in a future crisis."

He seems to have gotten at least one Democrat Senator. Yesterday, Joe Manchin, the Senator from West Virginia, was singing the same tune. He says "given the current state of the economic recovery, it's simply irresponsible to continue spending at levels more suited to response to a Great Depression or Great Recession, not an economy that is on the verge of overheating." He said it would "put at risk our nation's ability to respond to the unforeseen crises our country could face."

That's a pretty damning public acknowledgement of the effects of a policy vote. Somehow, though, it's safe to assume he will find a way to justify a "yes" vote.

When that happens, the last leg of the asset price boom will ensue and inflation will soar. And then the Fed will start the inflation chase and they will likely have to gap interest rates higher to get it under control (and kill the economy in the process).