If you're curious about the potential outcome of the current fiscal and asset bubble in the US, Bernard Connolly's insights are worth noting.
Connolly, a respected advisor to hedge funds and central bankers worldwide for over 25 years, suggests that the situation will not end smoothly or with a period of accelerating economic growth.
Instead, the Federal Reserve faces a challenging decision: either allow a severe economic downturn or aggressively cut rates before inflation reaches target levels.
However, the latter option could lead to a sharp decline in the dollar and destabilize the global financial system, which heavily relies on the dollar.
Connolly is known for accurately predicting both the Great Recession and the eurozone sovereign debt crisis, not vaguely but with precise reasoning.
His latest book, "You Always Hurt the One You Love: Central Banks and the Murder of Capitalism," explores the Faustian Pact made by central bankers in the 1990s when they became addicted to bubbles and began robbing future prosperity.
Despite his critiques, top officials at the Fed, Bank of Japan, and Bank of England have sought Connolly's advice during times of trouble.
He now warns that a US recession is likely unless the Fed acts decisively and quickly.
He believes that the Fed will initially hesitate to cut rates, citing concerns about inflation, but will eventually do so, albeit too late and too cautiously.
Connolly suggests that the next steps will be highly political, especially with fears of a second Trump presidency.
Biden has appointed allies to the Fed, possibly to engineer his re-election by justifying rate cuts as necessary for economic stability.
The true strength of the US economy is questionable, with indicators like gross domestic income (GDI) showing weaker growth than GDP figures.
A Fed study suggests that GDI is more accurate in predicting recessions, indicating a possible economic downturn.
Connolly's overarching theme is that central banks have created a misalignment in western economies by allowing asset bubbles to grow unchecked and delaying the necessary corrections during downturns.
This strategy, according to him, threatens both capitalism and democracy.
As Biden's fiscal stimulus fades, it will become apparent that the US economy cannot sustain current interest rates.
The West may find itself on a path towards lower real interest rates, requiring drastic measures to stimulate the economy.
In conclusion, Connolly's analysis, along with theories on a savings glut, suggests a significant shift in the global economic landscape, potentially leading to a collapse in the natural rate of interest and undermining the western free market system.
The central banks' current models and strategies may prove inadequate, as seen in their failure to predict the 2007-2008 financial crisis.