Elon Musk Makes a Dire Prediction About the Economy

Inflation is by far the word of the year 2022. 

Soaring prices of goods and services are at their highest in 40 years, which considerably affects the purchasing power of households. 

To relieve consumers, the Federal Reserve has embarked on an aggressive monetary policy, marked by a sharp rise in interest rates. Economists warn that this monetary policy, also observed in other regions of the world, particularly in Europe with the European Central Bank, risks causing a so-called "hard landing" for the U.S economy. Basically, if the Fed continues to be so aggressive in its monetary tightening, it risks causing a recession. 

While many companies have passed on their rising costs to consumers by raising the prices of their products, there are also many firms that have started to lay off workers. Alphabet  (GOOGL) - Get Free Report, the parent company of internet giant Google, has just warned that the company is likely to make layoffs in the near future to be 20% more efficient than it is today.

"The more we try to understand the macroeconomy, we feel very uncertain about it," said CEO Sundar Pichai at the 2022 annual Code Conference in Los Angeles on Sept. 6. "The macroeconomic performance is correlated to ad spend, consumer spend and so on."

Fed Might Cause Deflation

But despite the warnings the Fed has decided to continue its fight against inflation. During his last public remarks before the Sept. 21 policy meeting, Fed Chairman Jerome Powell essentially cemented the case for a third consecutive 75 basis point rate hike.

"We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done," Powell said on Sept. 8. "The Fed has and accepts responsibility for price stability."

The CME Group's FedWatch is pricing in an 86% chance of a 75 basis point rate hike, the third in succession, as investors look for a so-called 'terminal' Fed Funds rate that is north of 4% before Powell signals a paused in the monetary tightening.

Elon Musk, the richest man in the world, believes that if the Fed proceeds, as now expected by the markets, with a jumbo interest rate hike, the institution will cause deflation. In short, most goods and services will be ridiculously cheap.

"A major Fed rate hike risks deflation," said the CEO of EV manufacturer Tesla  (TSLA) - Get Free Report on Twitter on Sept. 9.

He did not give further details.

Musk's tweet provoked many reactions, including that of Europac Chief Economist and Global Strategist Peter Schiff. The latter does not agree with the serial entrepreneur and rather believes that it will be the opposite. For Schiff, a major rate hike by the Fed could cause "hyperinflation" and a "severe recession." He added that it could "produce a worse financial crisis than 2008."

"It risks #hyperinflation. Higher debt service costs, a severe #recession, exploding Federal budget deficits, and collapsing asset prices will produce a worse financial crisis than 2008. The #Fed will respond with massive QE [quantitative easing], tanking the dollar and sending consumer prices soaring," Schiff said.

Musk and Deflation

Deflation is defined as the opposite of inflation. It is characterized by a continuous fall in the general level of prices. It can encourage households to postpone their purchasing decisions while waiting for further price falls and, above all, cause a deterioration in the financial situation of borrowers, economists say.

The consequences can be devastating for the economy because the regular fall in prices encourages households to postpone their purchasing decisions while waiting for further price falls. This behavior can lead to a drop in overall consumption and an increase in the stocks of companies that can no longer sell their products. In response, they reduce their production and their investments.

Deflation can be caused by greater productivity or lesser demand.

Instances of deflation are rare in rich countries. There are only two examples of this over the past century: the deflation of the 1930s, which affected the U.S. and then Europe, and that which affected the Japanese economy at the end of the 1990s.

This isn't the first time Musk has predicted the era of lower prices. Last April, the billionaire had already predicted that we would soon enter a "world of abundance" during which most things will cost nothing. But this deflation would not be due to a monetary decision but rather due to major progress in artificial intelligence and robotics which will be increasingly used in our daily lives.

"This really will be a world of abundance. Any goods and services will be available to anyone who wants them. It will be so cheap to have goods and services, it will be ridiculous," the billionaire said during an interview with Chris Anderson, head of Ted Talks, on April 17.

He added that: "It will be a world of abundance. The only scarcity that will exist in the future is that which we decide to create as humans."