The US economy is in disarray. There is no other way to put it.

It will not matter if this is the last Fed rate hike. Too much damage is already flowing through the system.

Post the historic leap in the fiscal deficit for Covid, the Biden administration has actually expanded spending further even when there is no health crisis.

An attitude of money printing carte blanche pervades Washington. Which is why the USA may actually default on its debt. The risks are growing despite the Democrats’ attempts to find a way around the debate in the form of a technical administrative process.

Even this effort to keep government running may not get past the post. The fact the Administration is seeking means to go around the debate, instead of negotiating, just goes to show how desperately far apart the two parties both are.

 

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All this is happening as manufacturing dives ever deeper into contraction. Property prices are falling. There is risk of a commercial property meltdown later this year and even Blackstone may be defaulting on a group of 11 prestigious apartment buildings in New York.

The banking crisis just had a quantum shift in the wrong direction. Another two large regional banks may now be teetering. There are many more we do not know about, yet.

This is very much the result of Treasury Secretary Janet Yellen, the FDIC and the Federal Reserve. Who all decided in a rush to institute a policy off the cuff of all your deposits being protected, but only if you are with one of the too big to fail banks.

The end of small and medium sized banks as they will continue to be gobbled up by the big banks. As their depositors react to this new state of affairs.

There appears no backing away from this forlorn policy, or way out. It will continue to snowball like a giant wrecking ball through middle America. Having the added weight of a slowing economy with large scale corporate lay-offs accelerating.

The great concern should not be that they are badly misreading their own economic situation, but that this means there is no policy response even being considered for the economy as yet. When it does eventuate, it will be about as late as the Fed was in recognising inflation.

The only true policy initiative taken has come from the regulators regarding the banking crisis, and their supposed remedy has only made things worse.

What will be next, because the debt disaster, banking crisis, manufacturing crunch and falling property prices are not going away?

Can the Fed still hike in such circumstances regardless? They ignored the initial phases of the banking crisis and continued to hike previously.

There is a chance it is just getting all too scary even for their ivory tower, but they probably will hike. One has to wonder if this next rate hike could be the straw that breaks the camel’s back.

 

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities