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Past Fed Chair Paul Volker has been invoked in countless discussions surrounding monetary policy these days. Many are wondering if current Chair Jerome Powell will have the resolve to exact the Volcker-style rate hikes necessary to combat inflation.

Macroeconomic expert Luke Gromen believes that this is more about math than Powell’s resolve. 

With federal debt-to-GDP at 125% and US tax receipts, which are highly correlated with overall stock market, set to fall considerably, this is a matter of the US government’s solvency – not the sitting Fed Chair.

Volcker lived in a different time. 

Debt-to-GDP was 30% when he began his tightening cycle. The federal deficit was around $60 billion per year (1.5% of GDP at the time). Today it is over 46x that amount at $2.8 trillion (over 10% of today’s GDP)! 

According to Gromen, the US government simply cannot fund its almost $600 billion in interest payments, the roughly $3.5 trillion in entitlement spending, and the $800 billion for national defense, without defaulting or revamping QE. In the face of historically high inflation, neither of these options bode well for the bond market.

Default, especially when it comes to domestic entitlements, is not a politically palatable position. Therefore, Gromen believes QE will return and inflation will not subside, bringing us into unprecedented territory.

Which assets will perform well under this regime? Gromen believes commodities will experience a secular tailwind and that even Bitcoin may catch a bid. To hear all his insights, listen to the full interview at the top of the page.

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