They have seen it all

I get on Twitter, Farcaster and occasionally Lens and find people doom posting about the US Economy. "The Economy is in shambles and it will never recover." "Why is anyone still talking about a soft landing."

Lately, I've noticed a disturbing trend among financial influencers: they're analyzing market conditions with a flawed perspective that I've dubbed 'Myopic Hindsight.' When I ask them about their research, I often wonder: what have they studied? What have they read?

To understand Myopic Hindsight, let's break it down. Myopia is a common vision condition where close objects appear clear, but distant objects are blurry. Similarly, hindsight is often said to be 20/20, implying that we can look back and see what we could have done differently. However, when these two concepts combine, they create a distorted perspective fueled by groupthink and confirmation bias.

This phenomenon is particularly prevalent in the digital asset industry, which emerged from a niche community of libertarians and like-minded individuals who subscribe to the dollar hyperinflation theory. This theory predicts that the US dollar will suffer a catastrophic collapse, similar to Weimar Germany's. However, influencers in this space often operate in echo chambers, rarely revising their opinions or considering alternative viewpoints.

But here's the thing: history suggests that world reserve currencies don't collapse due to hyperinflation alone. Instead, they decline when a nation's productivity falters and kleptocrats exploit the system from within. Does this mean the dollar is immune to inflation? Absolutely not. In fact, I expect the USD to experience significant inflation – possibly even 100% – but not a complete collapse.

The Clear Vision

Myopia, or nearsightedness, is a condition where the shape of the eye causes close objects to appear clear, while distant objects are blurry. So, why do I accuse some analysts of having myopic hindsight? It's because they tend to focus on the past through a narrow lens, failing to consider the broader context.

Specifically, I've noticed that many posts analyzing the US economy view it through the lens of the 1970s to 1990s. This Great Moderation, spanning from the 1980s to 2007, was marked by remarkable economic stability, with low unemployment, moderate inflation, and steady growth. However, this era was also characterized by a unique set of circumstances that no longer exist today.

During the Great Moderation, American culture and democracy were more homogeneous, and the world was dominated by a single superpower. The workforce was dense, with baby boomers in their prime working years, and social safety nets were well-funded. Additionally, 401(k)s were robust, providing a sense of security for many Americans.

However, this period of relative calm was shattered by the Great Financial Crisis, which marked the beginning of a new era: the Great Uncertainty. This era, which I believe we are still navigating, is characterized by increased complexity, uncertainty, and instability. By failing to account for these changes, analysts with myopic hindsight risk misinterpreting the past and misunderstanding the present.

The Blurred Distance

American Exceptionalism emerged in the aftermath of World War II, and it's easy to see why. The US had just demonstrated its military might by defeating Germany twice in 30 years, and its industrial prowess by inventing and deploying atomic bombs. As the world rebuilt, America was the only major factory nation with a workforce capable of meeting global demand.

However, this exceptional period began to erode with the US's failure to decisively win the Korean War and its subsequent defeat in Vietnam. Meanwhile, Japan and Europe began to rebuild and compete with American ingenuity, chipping away at the US's market share in several industries. The US's abandonment of the gold standard and the subsequent revaluation of the dollar on the open market also contributed to the inflation of the 1970s and 1980s.

During this time, American worker productivity began to decline, from exceptional levels in the 1950s and 1960s to merely noticeable levels in the 1970s and 1980s. But the real challenges to American Exceptionalism were only just beginning. The rise of China and its integration into the global capitalist market added millions of workers to the global labor pool every year, driving down prices and making it harder for US businesses to compete. This had two devastating effects: US businesses were priced out of the market, and jobs shifted to China.

However, China is not the biggest threat to American jobs. The real culprit is technology, which has revolutionized labor and dramatically increased worker productivity. This has resulted in fewer employees being needed to perform the same tasks. While the media often blames China for the decline of American jobs, the real culprit is technological progress.

Meanwhile, the social safety net is facing a crisis as the baby boomer generation retires. Soon, there will be more people receiving Social Security benefits than the system can handle, forcing the US Treasury and Federal Reserve to resort to fiscal gimmickry.

Furthermore, wealth inequality in the US has grown significantly, with no signs of abating. The youth, who are typically the biggest spenders, are being overshadowed by older, more affluent Americans who already own homes and are taking more vacations than ever.

Finally, the US has allowed monopolies to dominate its economy. Companies like Apple, Google, Microsoft, JP Morgan, and Bank of America have become so powerful that they can dictate prices and stifle competition. To restore innovation and competition to the American economy, these monopolies will need to be checked in the coming years.

Frames and Lenses

So if you combine all these things, the US is in a very precarious situation.

• One where a generation lives in perpetual crisis and the other in nirvana

• One where there are not enough young people

• One where we have volatile geopolitics and macroeconomics

• One where debt growth outpaces GDP Growth

Now why would this matter? I am glad that you asked.

• Unemployment of the youth can tick upwards and consumption can continue as the older generation leans on their acquired wealth to continue their consumption. So when reading unemployment, ask, "Who is unemployed?"

• The 10Y2Y can invert in the bond market without a recession following because their is so much debt in the system. Frankly, I cannot understand this one yet, but I know the measure isn't as heavy as it used to be.

• Inflation can remain persistent when energy costs remain stable, which is generally unheard of.

When a crisis hits, the financial media often looks to the Federal Reserve to calm the waters. Recently, a surge in Japan's Yen threatened the US stock market, prompting calls for the Fed to cut interest rates to ease market stress. I was among those calling for this move, but I had to step back and ask myself why I thought it was a good idea.

The US economy is driven by two main engines: consumption and finance. The bulk of the nation's spending power is concentrated among individuals between 36 and 60 years old. These individuals hold a significant portion of the country's financial assets, and a downturn could erode their net worth and confidence in the market.

As a result, they would likely reduce their spending on services and goods, with a disproportionate impact on young people who rely on these jobs for their livelihood. In other words, a Japan carry trade could have a ripple effect that leads to job losses among young people.

However, what's notable is that the economy seems unfazed by the inverted yield curve, a phenomenon that has traditionally been a harbinger of recession. This raises questions about the yield curve's predictive power in economies like the US, which have high debt-to-GDP ratios and strong overseas demand for their currency.

In such economies, artificial demand for government bonds from central banks and foreign investors can distort the yield curve, making inversions less meaningful. Moreover, the traditional mechanisms of monetary policy may be impaired, and recession triggers may be different, such as debt crises or a loss of confidence in the currency. With policymakers having limited room to respond to a recession, other indicators like credit spreads, asset prices, and economic fundamentals become increasingly important for assessing the economy's prospects.

The Soft Landing

I'll be the first to admit that I've changed my mind about the possibility of a soft landing. In 2022, I was skeptical, but in 2023, I saw conditions improve and began to see the potential for a soft landing. Now, in 2024, I believe the chances of a soft landing remain at or above 50%, but that's because the definition of a recession has shifted in the US.

To understand the economy, we need to read it as it is, not as it was or as we think it should be. In my view, the US is in a state of perpetual crisis, driven by the exploitation of younger generations by older ones. The declining birth rate and failed experiment with immigration have led to a more heterogeneous society, which threatens the foundations of democracy. Meanwhile, non-discretionary spending is on the rise as more citizens retire and collect benefits.

The economy is also plagued by monopolies that have captured the state. Companies are colluding to set artificial rent floors, private equity firms are buying up homes, and young people are being priced out of the market. The lack of competition has led to stagnation, with tech companies repackaging the same products every year, and the health and finance industries engaging in rent-seeking behaviors. The competition that once drove American greatness has been suffocated by the pursuit of profit.

So, why do I think a soft landing is possible? Because the term 'soft landing' doesn't imply that everyone ends up in the same place. It simply means that everyone lands, albeit softly. The Federal Reserve's goal is to slow price growth, not to reverse prices to their original levels. This means that a soft landing would leave many Americans, excluding those who already own assets, in a worse position than they were before the pandemic. And, ironically, this would be considered a success for the Federal Reserve.

For My Doomers

Visit your nearest optometrist and improve your life with some new lenses. If your opinions fail to change, you aren't in the game. Real economists are wrong and recognize that being wrong is normal.