Inflation isn’t a temporary challenge—it’s the result of systemic government overspending and central bank missteps, says Daniel Lacalle. In this insightful interview, Wealthion’s Andrew Brill sits down with the renowned economist to explain why inflation remains persistent, how excessive government spending is driving economic imbalances, and the Federal Reserve’s missteps in shaping a challenging 2025. Daniel also shares why energy independence and mining are critical to economic growth and shows actionable strategies to protect your wealth in an inflationary world. Don’t let inflation erode your financial future—watch now!
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Daniel Lacalle 0:00
Cutting rates by 50 basis points in September was a big mistake, because they were giving the message to the market that the war against inflation was over. You may remember when Jerome Powell was saying that we had to be getting used to hire for longer. Well, how far longer lasted? Less than 17 months. It’s a very short, long time.
Andrew Brill 0:31
I’d like to welcome back Daniel lacaye to wealthion. Daniel has a PhD in economics. He’s the chief economist at tresses and an author of many books talking about how the economy really works. Daniel, welcome back to wealthion. Always a pleasure to have
Daniel Lacalle 0:44
you. Thank you so much. Always a pleasure to be here. So
Andrew Brill 0:48
I have to ask you, as we sit here today, what is your impression of the economy right now?
Daniel Lacalle 0:54
Well, I think that what we’re living right now is the hangover of the aggressive government spending of 2024 No, in 2024 we had more than 70 nations in an election year, which means more than 70 nations with governments spending like drunken sailors. No. So ultimately, what happens is that is twofold. Number one, the disinflation process that had already started basically stopped, and we have seen no real disinflation since, I would say, September, October, when central banks decided to cut rates. Second is that what we have witnessed is a slump in sovereign bonds and in sovereign currencies all over the world relative to the US dollar, precisely because of the fears of persistent inflation and therefore lower lower interest rate cuts. So I think that the market and the economy was very geared to an economy that was going to come back to the 2019 levels of no inflation and stable growth way too quickly with with basically no real information to support the evidence that that was the case. It was basically like it was more a desire coming from market participants and from economists to see 2025 as a year of stable growth, no inflation, back to 2018 2019, type of situations, and obviously it’s very, very different. Now we have the maturity wall of emerging markets, a stronger dollar, persistent inflation, and a scenario in which we may actually end the year with a lot less rate cuts than what market participants and economists were expecting, and therefore a slower a slower recovery. So
Andrew Brill 3:04
I want to ask you, and we’ll get there was a lot there to unpack spending, especially with the new administration coming in, but we’ll get to that. I want to ask you about the CPI number that has recently come out, about 2.9% core is about 3.3 2.9 not exactly where the Fed wants it to be 3.3 a 10th of a percent lower than they expected. So the market goes crazy. Everybody’s thinking, Oh, instead of one rate cut, we’ll get two. And all of a sudden, there’s jubilation. Is there really jubilation? I
Daniel Lacalle 3:37
don’t think there is. I think that we need to be. We need to understand economics, and it’s something that in this decade and a half of constant central bank intervention, people have stopped understanding that inflationary processes take quite a few years to come back to normal, that the that you cannot get a real disinflation process while having increased government spending, there’s too much expectation out there that every single malinvestment, every single expensive decision from market participants is going to be bailed out by Central Bank liquidity injections and rate cuts. So I understand the nervousness, but it’s simply because the narrative that central banks can sort of engineer the kind of Goldilocks growth that people would love to see has been so engraved that it’s very, very difficult to to explain to people that the logics of economics are completely different, and that no matter how much liquidity injections you you implement, you. Not going to get an easy way out of the imbalances created in 2020, 2021,
Andrew Brill 5:06
so do you think the Fed acted too soon? Was the was inflation not low enough before they acted? Or do you think you know what that 1% at that one point of rate cut was okay? And now let’s see where things happen.
Daniel Lacalle 5:21
I have a sort of challenging relationship with the way in which in which the Fed has acted. First is that the Fed panicked already in June. So remember that the Fed announced that it would delay the normalization of the balance sheet already in June, which was a huge mistake because it coincided with a period of extremely loose financial conditions, no risks to the market environment, etc. So that was already a bad decision. Cutting rates by 50 basis points in September was a big mistake, because they were giving the message to the market that the war against inflation was over. You may remember when Jerome Powell was saying that we had to be getting used to hire for longer. Well, hire for longer lasted less than 17 months. It’s a very short, long time? No. So my problem with the with the Fed’s decisions is the following, the entire burden of monetary normalization has fallen on the shoulders of families and businesses because it’s all been about rate hikes. However, at the same time, the Fed has been extremely accommodative and hugely loose in terms of liquidity injections and in terms of maintaining the incredible amount of issuances of the Treasury afloat. Therefore, what we have had is the worst type of solution to inflation, which is to make it fall entirely on the private sector. And because of that, I think that what the Fed should have done would have been the following, to really reduce the balance sheet and really allow government bond yields to go wherever they had to go, instead of panicking and cutting rates a little bit slower, so in order so that families and businesses would start to get some kind of relief, but the government would, at the same time, need to pay attention to the increasing imbalances, what the Fed did was the opposite. The Fed prioritized the government’s insane pace of treasury issuing to the improvement of the of the real economy, and that therefore has baked in the cake quite a challenging environment for 2025
Andrew Brill 8:05
thanks so much for watching our discussion here on wealthion. If you would like help with your wealth efforts, please head over to wealthion.com/free for free, portfolio review. So I want to ask you about food and energy. Now. They take that out of the CPI figure, they give you a core figure, they give you regular food. The food and energy are up now to me, those are staples in life. You need food to survive, and you need energy to keep the lights on, to get to work, to do all these things, but those things are not coming down in price. So how do we get those things to come down in price? Because those are staples that we actually need. Well,
Daniel Lacalle 8:46
if you think about it, the only real disinflation item that we have seen in the past couple of years has been the energy component, and that has been because the Fed started to hike rates and to reduce the balance sheet, ie, commodities stopped going up. In fact, they round tripped entirely from the hike of the of the Ukraine war. Commodities completely slumped immediately after the Fed started to normalize policy. Why less units of currency going to relatively scarce assets, ie commodities? Commodities are not causes of inflation, but consequences of inflation. No inflation is the loss of purchasing power of the currency commodities are paid and traded in units of currency that are depreciated. So you’re pointing to something that is very important, is this fallacy of looking at Core CPI as what dictates the the policy of the. Of of the Federal Reserve or any other central bank first, because it’s not like there’s somebody out there that can say, hey, if I exclude the things that I pay every day, the rest is going down. Now. It’s ridiculous. No, I you very well. Those are staples. There are those are not things that you that you basically can say, hey, I’m not going to use the car this week, or I’m not going to eat or drink this week, aren’t you? No so. So core CPI is a way for central banks to, let’s say, justify the narrative of a much looser policy than what they actually should implement. They’re basically trying to tell you the following, food and energy price fluctuations have nothing to do with central bank policy. Let’s concentrate on these things that allegedly would be impacted by rate hikes, rate cuts, money supply growth, money supply decline. Well, that is a fallacy, because food prices go up because you destroy the purchasing power, the currency and energy as well. So it’s, it’s, it’s, it’s a way using constantly, course, core PCE, etc, are ways of, sort of making it less evident for the central bank to take measures that would really, really reduce inflation, and what would have really reduced inflation and at the same time, allowed the economy to continue to strengthen, would have been if the Fed had done what they initially said that they would do, which is bring the balance sheet down by three and a half $4 trillion and cut rates gradually. Okay. What that would have achieved would be a significantly more responsible government, because bond yields absolutely would have soared and at the same time, people that have to borrow for their business, people that have to borrow to invest or to or to purchase a home or for their day to day groceries, would have not felt the double pinch of high rates plus persistent inflation. So
Andrew Brill 12:16
do you think that you know, obviously one of the tricks to this is to spend less, is for the government to spend less. Obviously the GDP will come down, because government spending is part of GDP. But I suppose that’s okay. But do you think that the incoming administration’s Department of Government deficiency is going to be able to get there, or do you think that there’s going to still be uncontrollable spending?
Daniel Lacalle 12:43
I think that the new administration is very different from the first Trump administration in the fact that they understand that if the administration decides to do what the Biden administration did, which was the Biden administration decided to increase government spending, increase debt and increase money supply in order to pump headline GDP, and by increasing government jobs, pump also employment, so that the overall headline GDP and unemployment figures would look very good. However, people are not stupid, and they don’t pay so much attention, so much attention to GDP or the unemployment rate as to how many contracts, how many jobs do I have to work in in order to get to the end of the month? And if I can get to the end of the month with this kind of inflation, inflation is the most important thing that this government has to pay attention to. If this government decides that among a quarter of contraction because of reduced government spending is not possible and they continue with the with the already elevated trend, we’re talking about 10% year on year, growth in government spending last year fiscal year. If they do that, then they’re going to be blamed for the accumulative inflation, and they’re going to be and they’re not going to be rewarded by level of GDP growth, that is going to show that it comes mostly from government spending. So talk about
Andrew Brill 14:29
the inflation and the average person. The average person seems to be making more dollars but buying a lot less. And look, you know, the top one 10% isn’t really affected all that much, but the average American is really getting hurt by this inflation. And you know, a lot of that is the goods we talked about, the food, the energy, these things are really hurting people, and there’s obviously less money to spend after the. Essentials?
Daniel Lacalle 15:00
Yeah, absolutely, inflation is is the tax on the poor, and it disproportionately hurts the people in the middle to lower income brackets. The Neo Keynesian socialist, however you want to call it narrative, says that inflation is actually good because it hurts owners of assets and hurts the rich and it doesn’t affect the poor. It is actually the opposite, if you own assets, if you have equity, and if you have you have ways of escaping inflation. And obviously you benefit from the rising the price of the asset in nominal terms, and from the rise in the price of equities, bonds, you name it. But if you’re poor and you’re even worse, if you’re the middle class, you suffer in your real wages. You suffer in your deposit savings. The middle class mostly has their savings and deposits, and it makes it much more difficult to climb up the ladder, because on top of that, as inflation rises, rates rise as well, so it’s even more difficult. No. So inflation is is always disproportionately negatively impacting the poorest and and the middle classes, particularly the middle class, because the poor do get some entitlements, but those entitlements are in a depreciated currency, so they also get some subsidies that are going to be worth less when they go out there. I was reading somewhere that some people were very, very angry about the fact that food stamps were not paying what they used to, of course. So I think it’s very important to that’s the reason why we have to always remain remind citizens that the number one policy needs to be to end inflation, because there is no such thing as positive inflation, which is something that we have been told by some academics over and over.
Andrew Brill 17:07
So I want to ask you about the bond market and the bond bonds. You know, once the CPI announcement came out, bond rates came down slightly, but they’re still elevated, and we have to service this tremendous amount of debt which isn’t going away, are we at some point going to see a crisis where we will never get to the point where we can’t pay the debt, because the government can print money, but it’s costing us a ton of money, and that’s inflationary,
Daniel Lacalle 17:38
Absolutely, absolutely. It’s a it’s a catch 22 situation that can only be stopped by really reducing government spending and really raining on public finances. Any other option is going to be either very inflationary or stagflationary, which is even worse, because the United States had inflation with economic growth, but the euro area had stagflation, had no economic growth and persistent inflation. So I think that it’s very, very important to understand that the only way in which you stop this downward spiral is precisely by cutting government spending. Because if now, for example, we say, what government spending is not going to be cut, imagine, no, we say, Okay, fair enough, no, it’s not going to be cut. So those imbalances continue to rise. And everybody says, well, the government can always print more money, but you already have exceeded the economic the fiscal and the inflationary limit. The economic limit is when more units of public debt generate less units of GDP growth of productive uh, product and productivity therefore starts to decline or grow or have no growth in productivity. The second is the fiscal limit is that despite low rates and enormous liquidity injections from the Central Bank, the cost of borrowing, the interest expense in the budget, takes such an enormous weight that it becomes the second. In some countries, it’s already the set, the first, the most important part of the budget. And then you have the inflationary limit, which is that regardless of all the policies of the central bank, there is persistent inflation, therefore weakening of the purchasing power of the currency. So all those are warning signs are like alert signals that tell you what inflation is really about, which is a de facto default. It’s showing that the the everything in the economy is telling you that the. The private sector and the markets, both in the bond and the equity side, are seeing that the government’s insolvency is a real issue, and that manifests in a weaker currency and in weaker bonds now, so will we see an abrupt crisis like the one in 2008 probably not. But the offset to that is that what we get is a slow impoverishment process like the one that we have seen in the in the past four years.
Andrew Brill 20:35
So in a few days, we get a new administration. Obviously not. Nothing’s going to change immediately, although there will be some executive orders, what are you expecting from the new administration to combat a inflation, government spending and try and make things better for the American people? I think
Daniel Lacalle 20:53
that first, the new administration needs to be drastic if it doesn’t do the things that I’m going to say now, and that in many cases, President Trump and his aides have have mentioned, if it doesn’t do that in the first 100 days, it’s going to be virtually impossible to do it. Okay? So number one is a drastic cut in discretionary spending. That is easy, because the only thing that they need to do is to let the inflation Reduction Act, which was actually the inflation perpetuation act, die down. Died. There are a number of programs that basically they just need to let them die, and that immediately takes away, literally, between 300 300 billion to $350 billion out of the out of the out of the budget, which is not small. The other thing that they need to do is to really implement a program to improve the spending in the mandatory spending side without reducing services. No Medicare, Medicaid, all of those, and obviously defense as well, all of those elements have tremendous amounts of opportunities of reducing costs without increase, without hurting the service. No higher competition, all of that. That’s that takes some time. That’s why you have to do it very, very quickly. No, but if they do, if they bring the deficit of 2025, from 6% or something to two, then the pass is much faster than what it immediately looks like. No,
Andrew Brill 22:44
won’t there be a big backlash if they try and improve mandatory spending? And right now, our mandatory spending is pretty much equal to the tax dollar, so whatever they’re taking in is spent, everything else is extra that we have to borrow. Yeah, those are social programs, Medicare, Medicaid, Social Security. Won’t there be a bad, big backlash we American people, we
Daniel Lacalle 23:09
always hear in every country that has gone through this process, we always hear that’s impossible, because there will be a huge backlash of the American people, or the American people, or the Argentine citizens, or whatever. And when it’s done, you find that there’s no backlash, because people understand that if what they want is that Medicare is sustainable, Medicare needs to be sustainable, the concept of mandatory spending to start with is ridiculous. Imagine that I go to my bank and I say no with my credit card and say, no, no, I cannot touch this, this, this and this, they say, What the hell are you talking about? You’re going to cut press. What we call mandatory spending is actually what you have to address first. But what’s important is to is there needs to be a process in which there’s constant education of what is being done is to say to people, we’re not reducing services. We’re cutting on red tape. We’re cutting on the enormous amount of expenditure that has absolutely nothing to do with the service that is embedded in that expenditure? No. And obviously, once you explain it, people understand it. I was shocked when I was in Buenos Aires recently with when they told me, Oh, we have to be a bit earlier, because there’s going to be, there’s going to be a demonstration against the government budget cuts. And I said, wow, there’s going to be a demonstration. And when I arrived, there were, and I counted them, 17 people. What does that mean? Is that when people, and I think that the American citizen understands that right now, when people understand that, if that the reason why you why in a. Country in which you produce 14 million barrels a day, gas prices are through the roof that in a country that has the top technology giants of the world, which is disinflationary, you are paying such high prices in so many areas, etc. Is not because of evil cooperation or evil shops or stupidities like that. But because of the constant issuing of a currency that is losing its purchasing power, then people understand that you that, if you explain it properly, that those cuts are going to be positive for the future. I would call them the sustainability program. Is a sustainability program at the end of the day. So it’s,
Andrew Brill 25:43
can you explain to us how Argentina did it? Because they were in a terror. You yourself said you were in Buenos Aires, and we just heard that they turned that whole country. I should say the president turned that whole country around with some drastic measures. So we can take a page out of their book and say, hey, look, it can be done.
Daniel Lacalle 26:03
Absolutely it can be done, not only Argentina, but for example. You know, I’m in Spain right now. In Spain in 2011 the government changed, and the new government came with a promise of cutting everything, and that’s what was already in there, in the in the manifesto. The other thing is that they didn’t do it. But this is what’s why it’s important. So people understand that you need to cut spending. People understand if you cut spending, where they know that you are not maintaining the bloated government administration and the bloated crony expenditures and hurting their services, when people see as they have in Argentina, as they did in the past in the United States and the UK and so many in Germany and so many other countries, when people see that what you’re doing is cutting on political spending that you’re cutting on red tape that you’re cutting on the things that really are unnecessary, then people understand it perfectly. And that’s what happened in Argentina, is unnegotiable cuts on the part of political spending, because it’s very easy. Now, when you look at a budget, a lot of economists do it very quick, very, very often they look at the budget and they say it’s impossible to cut anything because Medicare, Medicaid, defense and interest expenses take almost two thirds of the of the budget. Oh, really. Well, let’s see how much of Medicare is political spending, how much in Medicare has has been bloated through endless red tape. By the way, anyone I lived in the United States, you guys, knows that the level of administration in everything has gone through the roof. No so when you when you show to people like millet did in Argentina, we are cutting first. You say we are cutting, and it’s going to be at first, it’s going to hurt, but then we’re going to go back very, very quickly. When you show those two things, and you show where you’re cutting, and at the same time that things are getting better, people immediately react positive, positively the moment that they start to see prices coming down. And that is very, very, very, very big lesson. The lesson is the following, gradual changes never work. Radical changes always work.
Andrew Brill 28:35
So one of the radical changes that we’re going to embark upon is drilling for more oil, natural gas. Can you explain how energy plays such a big role in our economy? Obviously, President Trump is going to want to export some of these natural resources and become a huge supplier of these things around the world. How big of an impact can that play on our economy? You may remember
Daniel Lacalle 29:01
the the miracle of 2009 2011 of the recovery of the United States. A lot of people say, wow, it’s incredible how quickly the United States started to grow, started to create jobs, started to really turn, turn back the economy and rise faster than anybody else. Where did that come from? The fracking revolution? There is no industry that generates more jobs, more tangent jobs, because and more gross capital formation than the I’m going to add all of the mining industry. Okay, so when you understand that there’s two ways in which you can easily create jobs and blow and increase GDP construction, which is also an important. Hard but the biggest one is the mining sector. It creates an enormous amount of jobs and high paid jobs in the sector itself, but it also creates an enormous amount of growth and jobs and investment in hospitality, in healthcare, in legal services, in financial services, etc, etc. The multiplier effect of the mining industry is brutal. I just made a study of what one lithium mine would generate in Serbia. And I took the I took all the analysis and all the and with very, very conservative estimates, you would create more jobs than almost the entire tourist industry today, direct and indirect. So that’s the reason why it’s so important to it’s not just because we want to drill or we want to generate more, which is also positive obviously being energy independent, much cheaper and more competitive energy prices. All of those are positives, but also we need to understand that we’re in the middle of the largest revolution in history, and that the United States cannot simply think about oil and gas, which it should. But it needs to think about lithium. It needs to think about cobalt. It needs to think about copper. It needs to think about rare earths. A lot of people are talking about the rare earth premium that China has. There’s no reason for it. There’s plenty of rare earth in the United States to to address all of the all of the challenges of the next few years. So that’s the reason why it has to be done. The reason why it has to be done is that there is no other sector that generates more productive and sustainable level of growth in investment, jobs and wages than the energy and mining sector, and that includes, by the way, the renewable sector, no doubt about it, as well.
Andrew Brill 32:06
One of the things the Fed looks at is unemployment and jobs. And obviously, mining will create more jobs. That will help inflation as well. I guess people will have more money to if we create jobs. And right now, the job, the unemployment number, is very low, so the Fed is waiting for that to creep up before they even, you know, think about cutting some more is in terms of the rate. But if we create more jobs, things will continue to look on the bright side, won’t it?
Daniel Lacalle 32:39
Absolutely the idea that the idea that low unemployment and higher real wages are going to be negative for the economy is something to be fairly honest, shocks me. No, it can only come from a European bureaucrat. So don’t listen to but absolutely, absolutely it the obviously producing. The United States currently is the largest oil and gas producer in the world. No 14 million barrels a day, or Russia is about 10. Saudi Arabia is about 10, taking the United States from 14 to 18 million, which is perfectly achievable, means that you will have complete full employment in some of the states that are more exposed to that. And we saw that in 2090 1011 you remember when we saw real wage growth of 789, percent in the states that were subject to the fracking and the renewable revolutions. And the key thing there is to look at energy and from the from a holistic perspective, which I think is the way in which the Trump administration is looking at it from a perspective of absolutely, go for renewables, go for hydro, go for nuclear, go for everything. And at the same time, that helps disinflation on the energy side, on the energy price side, and helps also improve real wage growth while reducing the pricing pressures in the in in the areas where there are bottlenecks of production, because the the productive growth and industrial production improves. You
Andrew Brill 34:33
said something very interesting is that just because President Trump says I want to drill for more natural gas. I want to drill for more oil. Doesn’t mean that he wants to get rid of the all the renewable energies. It’s just, you know, it’s just another source to make America energy independent, absolutely.
Daniel Lacalle 34:53
And I think that the, you know, China and the United States need to on. Stand that sort of giving some kind of ideological element to energy technology is such a ludicrous thing that any engineer would laugh about it. But, but unfortunately, we’re run by politicians, not by engineers. So the but what President Trump is looking at is saying, Look, we need to be we want to be energy independent. And what energy independence means is a lot more things. It’s not just producing more oil and gas or being more competitive in terms of energy prices. It means more industrial production. It means better financial services. Means more competition in technology. It means more and higher paid jobs, higher paid jobs, also in the you go to South Dakota, and what was it 2030, years ago? What is it today. So I think that what’s important there is to understand that it’s looking at energy from from from a logical perspective, which is that energy fuels the economy and fuels productive growth and that and that what you need to do is to continue to be a global leader in renewables, which the United States will be, be a global leader in oil and gas, and also be a global leader in lithium, in cobalt, in Copper, in rare earths. I think that the rare earth and the data center revolution is going to explode also in the United States in the next few years.
Andrew Brill 36:44
So I know you don’t have a crystal ball, but I’m going to ask you, what is your outlook for 2025 and how are people making money?
Daniel Lacalle 36:53
I think that the way to make money in 2025 is to stop expecting the government to give you real economic returns. So element number one, persistent inflation is not a fatality. Is a policy. Therefore government bond yields are not sufficiently positive in order to guarantee you a real economic return, therefore there will be volatility in 2025 but you need to continue to invest in equities, continue to invest in gold. I always call investing like having having a football team. You need to have all the elements that are going to defend an attack. Defense has to come from gold. Has to come from more exposure to the US dollar, more exposure to gold. And using commodities for a trading perspective, don’t think of commodities on a long term basis. Think of them from seasonality, trading opportunities that may generate good, solid returns and continue to be invested more in equities, and if you want to invest in bonds, more in high yield or investment grade bonds than in sovereigns.
Andrew Brill 38:14
So Daniel, thanks so much for joining me. This was a great conversation. Where can we find you and your research? Or, you know, are you on social media? I know you’re on social media because I follow you both in Spanish and in English. So where can we find you?
Daniel Lacalle 38:30
Okay, I always say that it’s easier to find me than to avoid me. So it’s very easy. You go to Google and you put Daniel la calle and you have my x account in English, it’s the like I underscore i A you have my website in English. It’s the LA, calle.com/en, and you have my books, my youtube channel in English. It’s easy, it’s easy to find me. But if you if what you find first on Google or in any of your favorite search engines is the Spanish the Spanish website or the Spanish channel, whatever, always be aware that there is an English one.
Andrew Brill 39:17
I will get those links up on the screen so our viewers can find you and and follow along with you. I appreciate Daniel, thank you so much for joining me. I really appreciate it
Daniel Lacalle 39:25
a real pleasure. Thank you so much and happy new year to everyone. Thank
Andrew Brill 39:30
you. Thanks so much for watching our discussion here on wealthion. If you would like help with your wealth efforts, please head over to wealthion.com/free for free. Portfolio review before you go, please like and subscribe to the channel. Don’t forget to hit the notification bell so you hear about new videos and follow wealthion on social media. All the links are below in the description. And if you like this content and are looking for more ways to achieve long term wealth, watch this video next.
