Pro Perspectives 1/31/23

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January 31, 2023
The Fed will decide on rates tomorrow.  The Bank of England and the European Central Bank will follow with rate decisions on Thursday morning. 
By Thursday afternoon, U.S. benchmark rates will be 4.75%, the UK will be at 4% and the euro zone will be at 3%.
Now, as we discussed last Thursday, this level of interest rates in the U.S. has already resulted in more than a quarter of a trillion dollars in additional interest payments on U.S. sovereign debt.  
This will be funded by more deficit spending, which compounds an already massive, and unsustainable, government debt-load.
What does unsustainable look like?  See the UK and Europe.  They've already had a run on their vulnerable sovereign debt markets, in the second half of last year.  And both respective central banks were forced to (once again) become the buyer of last resort, to prop up their government bond markets, to avert a spiral toward default.
As we discussed last week, this unsustainable debt problem is precisely why the world needs inflation.  Governments need to inflate away the value of debt.  But it only works if, simultaneously, we have hot growth.  And it only works if wages reset/adjust to maintain the standard of living.
The good news:  Though with a healthy mix of government intervention along the way, the major central banks of the world (excluding Japan) have somewhat normalized interest rates, without killing the job market and the consumer.
With the fundamentals in place for continued solid consumption, and with China re-opening and the Western world rate cycle coming to an end, we are positioned to see some hot economic growth.   That would align with a persistently higher inflation environment, but one that can inflate away debt problems.  To regain, and maintain, standard of living, wages need to reset higher.