The American economy is heading towards deflation and an unprecedented crisis!

Tesla and SpaceX CEO Elon Musk has issued a warning for the US economy. Musk warns that another major Federal Reserve hike will lead to deflation. Musk’s warning comes as the Fed is expected to make another massive interest rate hike at the September FOMC meeting.

Elon Musk is not the main personality to present a pessimistic scenario for the American economy. Famed investor and Scion Asset Management founder Michael Burry predicted a 2008-style economic crisis in the United States.

For his part, the economist Peter Schiff warns against hyperinflation. He thinks the Fed will quickly shift to quantitative easing, which will cause runaway inflation in the economy.

Analysis of Elon Musk’s deflation warning

Elon Musk thinks another interest rate hike by the Fed will lead to deflation. Deflation is the decrease in the price of goods and services. Deflation can be caused by a multitude of factors such as increased productivity, less demand, or a contraction in a country’s money supply.

According to Elon Musk, the current risk of deflation comes from the contraction of the money supply, the Fed having engaged in a qualitative tightening to fight against galloping inflation. Fed Chairman Jerome Powell has already promised to hurt households and businesses. He also revealed that the Fed will try to increase the strength of the dollar to help consumers fight inflation.

Deflation can be good news for consumers, who now have more purchasing power with the same amount of money. However, if the phenomenon continues for a long period, it can lead to a shrinking of the economy and a deep crisis of the economy.

The next Fed interest rate hike

The next Fed interest rate hike will be decided on September 21, 2022. Currently, the CME fed Watch tool indicates a 91% probability of a 75 basis point hike. Goldman Sachs also changed its prediction from a 50 basis point hike to a 75 basis point hike.

CPI data from September 13 will also have a major impact on the decision.

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