(Kitco News) - The U.S. economy is entering a dangerous economic phase as debt levels continue to rise and inflation remains stubbornly high. In an interview with Jeremy Szafron, Anchor at Kitco News, Daniel Lacalle, Chief Economist at Tressis, warned that the U.S. national debt, which has now surpassed $35 trillion with a debt-to-GDP ratio of 122%, poses a significant risk to long-term economic stability. Tressis, a leading Spanish financial advisory firm, specializes in wealth management, financial planning, and investment strategy, providing Lacalle with a comprehensive understanding of the global economic environment.
"The first signal that it is not sustainable is the fact that the United States, having the world reserve currency and record level of oil production, has persistent and elevated inflation," Lacalle stated. He pointed out that inflation is evidence of the destruction of purchasing power, a clear sign that the current debt levels are unsustainable.
Recent economic data supports Lacalle’s concerns. The Producer Price Index (PPI) for July 2024 increased by just 0.1%, lower than the expected 0.2%. However, the year-over-year increase stood at 2.2%, reflecting persistent inflationary pressures. This comes as the U.S. Federal Reserve remains cautious, with markets fully pricing in an interest rate cut at the next meeting. "Disinflation is taking a lot longer to happen. The levels of inflation, particularly core inflation, remain elevated," Lacalle noted, emphasizing the ongoing challenge of curbing inflation.
Lacalle also criticized the Federal Reserve's approach, suggesting that relying on backward-looking data like GDP and employment figures may lead to further economic instability. "The Fed is caught between a rock and a hard place," he said. "GDP, jobs figures are past figures. They don't say anything about the future. Actually, they tend not to look at leading indicators." He warned that the Fed’s focus on these lagging indicators might not be enough to stabilize the economy in the long term.
Globally, concerns are also growing over China’s economic outlook. Recent data shows that China’s growth is slowing significantly, with industrial output and retail sales missing expectations. Lacalle stressed the importance of China’s economic decisions on the global stage: "The only way for China to recover the levels of growth that it had before is to open back to the West. It's impossible to offset the consumption and investment of the United States or the Euro area with the BRIC nations."
These issues contribute to a challenging environment for policymakers and investors alike. Lacalle advised caution, emphasizing the importance of focusing on risk-off assets like gold and U.S. Treasury bonds. "In the current environment, being underweight risk assets and overweight risk-off assets like gold and U.S. Treasury long bonds is prudent," he said, noting that these assets provide stability in times of economic uncertainty.
For a more in-depth analysis and to hear the full conversation, watch the complete interview with Daniel Lacalle on Kitco News above.