The Great Deflation Of 2022

Of course, a part of this miserable reading on consumer confidence has to do with falling real wages. But I believe the lion’s share of their dour view is based on the elimination of government forbearance measures on mortgages, along with the termination of helicopter money drops from the government. All told, this amounted to $6 trillion worth of bread and circuses handed out to consumers over the past 18 months. This massive government lifeline (equal to 25% of GDP) will be pared down to just 2% of GDP in ’22.

Indeed, this function is already showing up in consumer spending. Retail sales for the month of July fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline. The reduced consumption was a direct result of a lack of new stimulus checks handed out from D.C. Keep in mind that retail sales are reported as s a nominal figure--they are not adjusted for inflation. Hence, since nominal retail sales are falling sharply—at least for the month-over-month period--the economy must now be sputtering because we know that prices have yet to recede. 

This notion is being backed up by applications to purchase a new home, which are down nearly 20% from last year. That doesn’t fit Wall Street’s narrative of a reopening economy that is experiencing strong economic growth. 

On top of all this, you can add the following to the deflation and slow-growth condition: Federal pandemic-related stimulus caused a huge spike in the number of Americans that owed no federal income tax. According to the Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million in 2019. So, multiple millions more Americans should now have to resume paying Federal income taxes this year because last year’s tax holiday has now expired. 

Oh, and by the way, the erstwhile engine of global economic growth (China) is now blown. China’s huge stimulus package in the wake of the Great Recession helped pull the global economy out of its malaise. This debt-disabled nation is now unable to repeat that same trick again. 

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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