National

The federal government's budget deficit is expected to shrink this year before skyrocketing in the years ahead, the Congressional Budget Office (CBO) said Wednesday.

Why it matters: America's reprieve from climbing deficits is only temporary as coronavirus-related government spending wanes and tax revenues increase.

By the numbers: The CBO projects the budget deficit will shrink to $1 trillion this year, down from $2.8 trillion in 2021. It's expected to rise to more than $2 trillion in 2032, reaching 6.1% of GDP, up from a projected 4.2% this year.

Federal debt held by the public is estimated to dip from 100% of GDP at the end of this year to 96% in 2023, reflecting rapid inflation that is causing GDP to expand more rapidly. It's expected to reach 110% of GDP — the highest ever recorded — by the end of the decade.

Details: The CBO is now expecting higher interest rates over the coming years than it did in the last forecast, as the Federal Reserve acts to try to contain inflation. Higher interest rates would strain the nation's fiscal position further.

Last July, for example, the CBO projected that the 10-year Treasury yield would average 2% in 2023; now that projection is 2.9%.

In the CBO projections, interest costs alone will pass $1 trillion in 2030, nearly doubling as a share of the economy to 3% of GDP, from 1.6% last year.

In its economic projections, both growth and inflation decelerate rapidly in the coming years. GDP slows from 5.5% last year to 1.5% in 2024, while inflation for personal consumption expenditures falls from 5.5% to 2.1%.

Those numbers are consistent with the economy coming in for a soft landing, not falling into recession, as many commentators fear is becoming more likely.

The CBO forecasts have the unemployment rate rising only slightly from its current ultra-low level in the next couple of years.

The caveat: The CBO projections are based on current law, which is certain to change, and on economic forecasts, which are highly uncertain. The actual pathway for the economy, deficits and debt remains uncertain.

The bottom line: Higher rates mean that deficits may act as a constraint on lawmakers in a way they haven't over the last decade.

CBO: Deficits are falling now, are set to soar later

The CBO projects the budget deficit will shrink to $1 trillion this year.

President Biden speaking about inflation and the economy earlier this month. (Photo by Drew Angerer/Getty Images)

Economy

Stock market

Joe Biden

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

It's not just the cost of borrowing to buy a home that's getting more expensive. Pricier credit card debt is also putting a squeeze on consumers who are relying more on plastic amid the worst inflation shock in decades.

Why it matters: For those carrying a balance, that debt is expected to get even costlier to pay off, as the Federal Reserve continues an aggressive interest rate hike campaign to tamp down red-hot price growth. 

"The prime rate may end the year at 6%. Add in credit card companies' average margin and that could push the average credit card rate a little over 19% — the highest we have on record," says Ted Rossman, a senior industry analyst at Bankrate.

Credit card rates — unlike mortgage rates — move with a lag in response to Fed policy.

By the numbers: Consumers have opened a record number of new credit card accounts so far this year — 11.5 million, according to Equifax. 

And in a sharp shift from a pandemic-era trend, credit card balances are growing again. Balances jumped consecutively in the final three quarters of 2021, before backing off slightly last quarter, according to the Fed's latest household debt and credit report.

Balances are still about 10% below the pre-pandemic peak. 

The bottom line: Amid the booming job market, delinquency rates remain at rock-bottom levels, though there's been a slight uptick in borrowers with lower credit scores starting to fall behind on payments.

Latest borrower squeeze: Credit card rates climb

It comes as some consumers rely more on plastic amid the worst price shock in decades.

Credit cards

Retail

Jobs

Axios Markets

Some are warning that the Federal Reserve's effort to slow inflation could potentially return the U.S. economy to the unusual condition it found itself in during the 1970s and early 1980s: Stagflation. 

The big picture: Despite high inflation, the U.S. economy is humming along — with unemployment at 3.6% in April —near the low levels that last prevailed in the late 1960s. 

Stagflation describes a highly unusual economic state of affairs when the economy is weak or stagnating — with high or rising unemployment — yet inflation is also elevated.

This is the opposite of what usually happens. 

High inflation tends to break out when economic growth is really roaring. 

Periods of weak economic growth, and rising joblessness, are typically accompanied by slow price increases, or even falling prices.

While the annual pace of price increases have surged to 40-year highs in recent months, unemployment is incredibly low.  This is an inflationary environment, not stagflation.  

When's the last time we had stagflation? 

The best-known stagflationary episodes hit the U.S. in the 1970s and early 1980s, when a series of oil shocks — especially the 1973 embargo that Arab members of OPEC placed on the United States in response for military support of Israel — sent fuel costs and inflation surging, as unemployment simultaneously shot higher. 

The combination of energy shocks and stagflationary conditions lasted on and off  into the early years of the Reagan administration. As late as 1982, unemployment was hovering around 10% and prices were rising as much as 6% annually. 

A number of economic policy bigwigs — former Federal Reserve chairman Ben Bernanke, current Fed chair Jerome Powell and Treasury secretary Janet Yellen (who also led the Fed) — have recently either implicitly or explicitly suggested that as the Fed tries to bring down inflation, unemployment will likely rise. 

That will likely mean we'll have an economy that is sort of stagflationary, at least for some period of time. In other words, growth will be weakening, but inflation will still be high.

Treasury Secretary Janet Yellen on Wednesday: "The economic outlook globally is challenging, and uncertain, and higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world."

Bernanke in a New York Times article published this week: ''Even under the benign scenario, we should have a slowing economy ... And inflation's still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high,'' he predicted. ''So you could call that stagflation."

Powell told the Wall Street Journal this week: "I would say there could be some pain involved in restoring price stability."

What can Biden do about stagflation if it actually occurs?

Not much that wouldn't be politically unpalatable. 

Biden could propose a sharp reduction in federal deficit spending. That could help reduce inflation, but it would likely hurt growth and raise unemployment. 

He could attempt the kind of wage and price controls that President Nixon imposed in 1971, though that seems extremely unlikely and not particularly effective. 

He could basically let the Fed deal with it. That's essentially the path Jimmy Carter took in the late 1970s. The soaring Fed rate hikes and the deep recession that followed contributed mightily to his annihilation in the 1980 presidential election.  

The bottom line: Like we said above, we don't yet have stagflation. It's possible that the Fed is able to thread the needle so perfectly that inflation comes down easily and unemployment raises ever so slightly and nobody notices. 

But stagflation is a possibility, and an unappealing one for practically everyone. 

What stagflation means and what Biden could do about it

High inflation tends to break out when economic growth is really roaring.

Illustration of a dollar sign covered in cracks with pieces of tape over the cracks.

Stagflation

Market sell-off won't stop Fed's interest rate hike campaign

"Financial conditions have tightened significantly. That's what we need."

Fed chairman Jerome Powell speaks onstage at a conference

Federal Reserve Board Chair Jerome Powell. (Photo: Samuel Corum/Getty Images)

Federal Reserve

Allianz Global Investors will pay $1 billion to settle what regulators charged was a "massive fraudulent scheme" that involved over 100 institutional investors, including public pension funds.

In a statement on Tuesday, the Securities and Exchange Commission said the complex investment strategy, which began as early as January 2016, came undone after the brutal COVID-19 bear market of March 2020 resulted in billions in losses. 

Three portfolio managers were named in the complaint, with two pleading guilty to criminal charges.

Allianz's parent company will also cough up over $5 billion in restitution to the victims. 

Why it matters: Germany-based Allianz is one of the biggest names in the financial world, with well over $2 trillion in assets under management. The scheme ultimately manipulating investors to sink $11 billion into a strategy called "Structured Alpha" that netted the firm around $550 million in fees. And a billion-dollar SEC settlement is a lot of money.

What they're saying: In recent days, the SEC has moved to reassert itself as the sheriff of Wall Street, and the downturn in markets is providing them with lots of fresh opportunities.

"Allianz Global Investors admitted to defrauding investors over multiple years, concealing losses and downside risks of a complex strategy, and failing to implement key risk controls," said SEC Chair Gary Gensler. 

"The victims of this misconduct include teachers, clergy, bus drivers, and engineers, whose pensions are invested in institutional funds to support their retirement. 

Thought bubble: A bull market can cover a multitude of sins — but when things get turbulent, malfeasance and criminality get exposed. That's when the "bezzle" comes to a screeching halt, and the crackdowns begin as Axios' Felix Salmon noted last week.

Allianz settles charges with SEC for $1 billion

Illustration of Benjamin Franklin wearing a burglar's mask

Wall Street

Consumers continued to spend in April, with retail sales jumping 0.9% from the prior month, according to government data released on Tuesday.

Why it matters: Shoppers aren't pulling back on spending even as prices soar at the fastest pace in 40 years. This is a good sign for the American economy amid fears of a coming recession as inflation rages.

Retail sales rose 8.2% from a year ago, a period when inflation jumped by 8.3%.

Stripping out spending on gasoline, retail sales were even stronger, rising 1.3% from the prior month.

Details: Consumers upped spending at restaurants and bars, and spent more on clothing, furniture and cars.

Spending on gas fell 2.7% compared to March, when gas prices rose as Russia invaded Ukraine.

The bottom line: Economists are keeping a close eye on consumer spending for signs of how they are grappling with soaring prices. So far, activity remains robust.

What to watch: Walmart, the nation's biggest retailer, says it sees some signs that cash-strapped consumers are adjusting their behavior because of higher prices.

CFO Brett Biggs told CNBC on Tuesday that the company is seeing more sales of half-gallons of milk and its private brand of lunch meat. The company expects inflation to continue to crimp its business this year.

Editor's note: This story has been updated with additional details from the report.

Retail sales jump as prices soar at fastest pace in 40 years

Retail sales rose 0.9% last month — a good sign for the economy.

People shopping in the meat aisle in a grocery store 

People shop at a grocery store this month in New York City. Photo: Spencer Platt/Getty Images

Consumers

The roots of the great market crack-up of 2022  — in which a dramatic fire sale is engulfing stocks, bonds, cryptocurrencies and nearly everything in between — have been evident for a while.

The big picture: Workers who watched with awe as their 401Ks soared are now facing the harsh reality that stimulus from Uncle Sam couldn't last forever, and that it came at a cost —namely, soaring inflation.

Details:  Fiscal stimulus and loose monetary policy from the Fed helped grease the wheels of the market’s breathtaking recovery in 2021. As the central bank moves to tighten that up, the party has come crashing to a halt.

Meanwhile, overly bullish buyers drove an ultimately unsustainable bubble in cryptocurrencies, culminating in last year’s record highs. Those chickens are also now coming home to roost, as Axios’ Brady Dale explained on Thursday, with selling and margin calls aplenty.

What they're saying: “There is one thing [the Fed] had tremendous success with," veteran Wall Street watcher and implacable Fed critic Peter Boockvar wrote Thursday.  "They get an A+ for creating asset price inflation over the many years and are now doing a bang up job with stoking asset price deflation.”

Jay Hatfield, chief investment officer Infrastructure Capital Management in New York, said this week that the market pandemonium is “primarily driven …by the unprecedented explosion of Fed liquidity that drove high risk technology investments into a bubble” that’s now being pierced.

The withdrawal of excess Fed liquidity is also weighing on bitcoin, which Hatfield thinks will sink as low as $20,000 by year’s end.

Our thought bubble: Just as markets display “irrational exuberance” on the upswing, they can display excessive pessimism on the downside. 

There are tentative hopes prices are coming off the boil. And, as some have argued, the current fire sale is a buying opportunity for longer-term investors. 

If the Fed is able to stick the landing with tighter policy without cratering the economy, the current tumult will fade into memory.

The market collapse was easy to see coming

Illustration of a cracked dollar bill with water leaking out

Axios Closer

This week’s crash in crypto markets has revealed just how much some on Wall Street have come to rely on the "fifth asset class."

Why it matters: “Even those that are vocally outspoken against it are in the back room … figuring out ways they can make money from it,” Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, tells Axios.

Catch up quick: Famed fund manager Bill Miller told CNBC today: "I have sold stuff to meet margin calls" as broader markets have fallen.

Michael Saylor, CEO of MicroStrategy — the largest public holder of bitcoin — tried to defuse fears that his company will face a huge margin call on his positions.

By the numbers: Cryptocurrency markets have lost $200 billion in value, or about 17%, in a single day.

Bitcoin has fallen below $30,000, which is less than half of its most recent all-time high.

Shares of companies like Coinbase and MicroStrategy that have been built to facilitate crypto trades, or have pivoted to invest in crypto, have been dragged down in this week’s slide.

What they’re saying: “The longer that cryptocurrency has been around and the more acceptance it has gained, the more the big, truly wealthy people who move markets — the hedge fund guys — have started to accept it,” says Frederick.

“I don't think most of them are over-leveraged in it, but they're almost all dabbling in it to some extent.”

Go deeper: What's behind the ugly crypto wipeout 

Market rout reveals crypto's growing role

Famed fund manager Bill Miller has sold bitcoin to meet margin calls as broader markets have fallen.

illustration of gold digital coins around Ben Franklin face

Cryptocurrencies

Axios Media Trends

Disney vs. <span style="color:#E50914">Netflix</span> streaming subscriber growth

Data: Company filings; Chart: Jared Whalen/Axios

Disney's stock slipped 2% Thursday, despite reporting streaming subscriber gains the day prior, as investors begin to weigh whether the company's massive investment in content is sustainable. 

Why it matters: Disney's streaming division still isn't profitable and its losses widened last quarter. Wall Street is worried about whether the company's long-term streaming strategy is most lucrative to investors. 

By the numbers: Disney's streaming division, which includes Disney+, Hulu and ESPN+, lost $887 million last quarter, up from $290 million a year ago. 

Executives blamed those losses on rising production costs for original content on Disney+ and Hulu and higher sports rights costs at ESPN+. 

"I'm not sure that's the best use of their capital," senior media analyst Michael Nathanson told CNBC. "I kind of wonder if they set targets themselves that are not achievable or will be too expensive to get there."

Nathanson said the company's push to scale its streaming services broadly will impact its ability to make more money from hyper-loyal users and fans. 

Stat of play:  Disney on Wednesday said it now has over 200 million paid subscribers across all of its services globally, bringing it a big step closer towards closing in on Netflix's longtime streaming lead. 

The company attributed continued subscriber growth on its investments in content, which it says will total around $32 billion this year, down just slightly from initial projections of $33 billion. 

Be smart: Disney's stock typically trades on its streaming value proposition, even though the company makes most of its money on parks and resorts and its broadcast and cable networks. 

Although the company showed continued growth in its domestic parks operations and cable networks, investors were looking for a signal that Disney's streaming momentum will continue. 

Executives said they believe they're still track to reach its long-term subscriber goal of 230 million to 260 million total subscribers by 2024, and that subscriber additions in the next two quarters will likely exceed the last two. 

But they noted that because the last two quarters came in better than expected, subscriber adds for the next two quarters won't be as pronounced comparatively to the last six months. 

The big picture: Netflix's massive selloff last month underscored Wall Street's expectation that streaming services begin to drive profit. 

Netflix's slowed subscriber growth shows how much the company's business model is dependent on spending big on original content, which makes it harder to grow profits. 

What to watch: The next frontier for growth for Netflix and Disney is introducing an ad-supported tier. Ad-supported tiers can increase subscriber numbers, as well as the average revenue per user. 

Netflix initially said it was weighing offering a cheaper, ad-supported subscription plan over "the next year or two," but it told employees this week that they could come as soon as the end of the year, per The New York Times.  

While Disney neglected to share more details about pricing and timing, Chapek did reiterate his confidence in Disney's ability build a strong advertising operation for Disney+, given its success and technical resources building ad-supported tiers for ESPN+ and Hulu.

Disney stock slides despite streaming gains

Disney+ still isn't profitable and its losses widened last quarter.

Disney

Media

Axios Capital

A stablecoin called TerraUSD (UST) imploded this week, causing billions of dollars in losses and raising the question of why any cryptocurrency — or even a government-issued fiat currency, for that matter — would ever want to have its value pegged to some other currency. 

Why it matters: Nowadays, most currencies float freely against each other. Historically, however, that's something of an anomaly. Indeed, as recently as 1971, even the U.S. was part of the Bretton Woods system that pegged all currencies to a gold standard.

The big picture: Pegs get introduced when market forces generate a level of volatility that makes planning and industry needlessly difficult. 

Countries implement pegs to ensure stable prices, both for their citizens and for any industries that export or import goods. Certainty and predictability are good things. 

Then, if the peg ends up too far from fundamentals, it can become harmful and brittle, and eventually break. In the case of UST, there were no fundamentals, so it was prone to break at any time. In the end, UST lasted less than 20 months. 

A peg that's stood the test of time: The Hong Kong dollar weakened dramatically in the summer of 1983, causing panic selling of the currency, and panic buying of supermarket goods. 

The solution: The local currency was pegged to the U.S. dollar at a rate of 7.8 to 1 on Oct. 13 of that year. It's stayed at that level ever since — more than 14,000 days and counting. (Since 2005, the exchange rate has been allowed to fluctuate within a narrow band, from 7.75 to 7.85.)

How it works: The Hong Kong Monetary Authority (HKMA) has a $466 billion Exchange Fund, which it uses to buy unlimited Hong Kong dollars at the 7.85 level. Conversely, the HKMA will sell unlimited Hong Kong dollars at 7.75. 

The dollar peg means that the HKMA can't set its own monetary policy. Whatever interest rate the Fed sets is perforce the overnight interest rate in Hong Kong, too. 

The bottom line: It's highly improbable that financial speculators could break the Hong Kong peg. China's leadership, on the other hand, could do so at any time, if Sino-American relations deteriorate further. 

Why currency pegs crack

The case of TerraUSD raises the question of why any cryptocurrency would want to have its value pegged to some other currency.

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Data: YCharts; Reproduced from Razum Capital; Chart: Axios Visuals

Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year. 

Why it matters: Anyone searching for evidence that the stock market and the real economy are not the same thing, should look no further.

Tesla’s frenzied ride in the capital markets culminated on Monday in the company being the largest entrant ever be included in the S&P 500, the main benchmark stock index.  

Tesla’s true believers are not paying for actual performance, but they are betting on Elon Musk as a visionary and the potential upside in the still nascent electric vehicle market.

The merits of that investment thesis diverge greatly from the current state of affairs in the automotive industry, and the broader economy. 

Reality check: The overall equity market’s meteoric rise in the face of a U.S. economy that will end 2020 3% smaller than it started the year, is just the latest example of the economic reality decoupling from stocks.

The equity market backdrop is a simple case of buyers needing to “invest in the market you have, and not the one that you want,” says  Quincy Krosby, chief market strategist for Prudential Financial. 

“It is a market that has been engineered by the liquidity of central banks. ... It is surprising how far we've come, and that includes Tesla," Krosby says.

Driving the news: While Tesla mania was once limited just to those who back Musk, after today anyone invested in an S&P index fund is essentially being forced along for the ride.  

After months of anticipation and active buying, technical pressure pushed the stock down about 6% after its S&P 500 debut.

That's happening alongside a broader market decline tied to a new wave of coronavirus concerns in the UK.

What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note. 

In the past two years, Tesla’s shares have risen more than 800% as analysts have increased average 12-month price targets more than fourfold and simultaneously lowered earnings per share estimates annually through 2024, Brinkman notes. 

Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities.  

Ives estimates that EV sales will grow from 3% of overall auto sales to 10% by 2025. "Many of the naysayers are probably the same individuals that thought LeBron wasn't going to be a good basketball player 15 years ago.” 

Tesla mania vs. economic reality

Evidence that the stock market and the real economy are not the same thing.

Business

If Trump's presidency is about to end, an unprecedented golden era for big businesses could end with it.

Why it matters: Thanks to support from the president, Congress, the Supreme Court and the Federal Reserve reaching levels not seen in recent history — if ever — large companies have done a lot of winning.

What we're hearing: Trump's policies have "created a favorable business environment," U.S. Chamber of Commerce president Suzanne Clark tells Axios in an email. 

"We’ve seen some promising economic and fiscal policy developments over the last few years." 

Between the lines: Businesses have benefited most from the people Trump put in charge. 

The Fed: The success of big corporations is perhaps best evidenced by the stratospheric level of U.S. companies' stock value relative to GDP, and that's been thanks in large part to Trump's handpicked Federal Reserve chairman Jerome Powell.

The market capitalization of U.S. publicly traded companies has grown from around 200% of U.S. GDP in 2016 to a record high 266% of GDP this year — meaning corporations are worth roughly two-and-a-half times the value of everything produced and consumed by the U.S. in a year.

In 1995, the number was about 80% of GDP.

"Big businesses are outperforming the broader economy," Julia Coronado, president of MacroPolicy Perspectives, tells Axios. 

"One of the things that's interesting is that market capitalization didn't get knocked on its ass in the current recession. It's at an all-time high." 

The Supreme Court: With Trump's first Supreme Court nominee, Neil Gorsuch, in place the Chamber of Commerce went 9-1 in cases where it supported business interests in the 2017-2018 term, its most lopsided record in six years. 

With Brett Kavanaugh on the Court in the 2018-2019 and 2019-2020 terms, the Chamber's victory rate declined to around 65% but included a historically high number of cases involving big business and many more where businesses had lost in the lower court.

"Only twice did the Court agree  to review decisions favoring business interests—and in both cases the  Court affirmed those pro-business rulings," notes the Constitutional Accountability Center, in reference to the 2018-2019 period. 

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