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US economy is headed toward deflation, according to Elon Musk

11 Sep 2022 By: Shailja Joshi
US economy is headed

Elon Musk, the CEO of Tesla and SpaceX, has a gloomy forecast for the US economy.

Musk fears that a further significant increase in interest rates will lead to deflation. The Fed is anticipated to proceed with yet another large interest rate hike at the September FOMC meeting, prompting Musk's warning. Musk is hardly the most prominent person to paint a bleak picture of the US economy. Michael Burry, a well-known investor and the founder of Scion Asset Management, foresaw a US economic crisis comparable to the one that occurred in 2008.

Peter Schiff, an economist, has issued a warning about hyperinflation. He thinks the Fed will swiftly switch to quantitative easing, which would result in extremely high inflation.

Elon Musk's Deflation Warning: An Analysis

Elon Musk thinks that the Fed will experience deflation if it raises interest rates again. The term "deflation" refers to a drop in the cost of goods and services. Numerous causes, such as increased productivity, decreased demand, or a reduction in the money supply of a country, can lead to deflation.

Musk contends that the current risk of deflation stems from the reduction in the money supply as a result of the Fed's qualitative tightening in an effort to combat the inflationary crisis. Jerome Powell, the head of the Fed, has already made pain promises to individuals and companies. He also disclosed that the Fed would work to strengthen the dollar in an effort to support consumers in their fight against inflation.

Consumers who now have more purchasing power with the same amount of money can benefit from deflation. However, if the situation persists for a longer period of time, the economy may contract as a result.

The Fed's Upcoming Rate Increase

On September 21, 2022, the Fed will decide whether to raise interest rates again. The CME Fed Watch tool currently indicates a 91% probability of a 75 basis point raise. Additionally, Goldman Sachs revised its forecast from a 50 bps increase to a 75 bps increase.

The decision will also be greatly influenced by the CPI statistics that will be released on September 13th.