A Chinese Reserve Currency And Gold, Continued Massive Inflation And The End Of Cheap Money

With major changes around the world happening in what feels like the speed of light, here is a look at Chinese reserve currency ad gold, continued massive inflation and the end of cheap money.

November 21 (King World News) – John Ing:  This month a cooling CPI number sparked a mammoth rally on Wall Street on hopes that the Federal Reserve may be ready for a pivot (aka capitulation) in its battle against inflation. The gains are premature and won’t change the trajectory of the economy. Global inflation soared to 40-year highs from the monetary excesses of the past as governments unleashed trillions of dollars of additional spending, stoking the inflationary fires. Yet, despite the concern over rate increases, the global economy remains resilient. US households and companies are flush with cash from pandemic support packages. US capacity utilization are at 14-year highs. Q3 GDP grew 2.6%. Unemployment is back to pre-pandemic lows. Wages are up 8.2% fueling demand. Consequently with inflation so broadly based, investors’ hopes of a reprieve from rate increases will probably prove unfounded and yet another head fake or false dawn.

Also feeding inflation are wars. Wars cost money. They have substantial costs and have bankrupted nations. The US war efforts in Afghanistan, Iraq and Vietnam were debt financed, and those war debts and free spending governments produced more inflation, made worse by the pandemic stimulus. The decades of unfunded deficits, quantitative easing, and trillions of public spending created a faux sense of prosperity made possible by artificially low interest rates and cheap credit. At the same time central banks led by the Fed kept rates near zero using experimental techniques to revive inflation. It worked. But the corresponding boost to debt and consumption also created the biggest stock market bubble in history.

The Fed’s free money sent a behavioral incentive to markets that not only money was free, but risk too was free. The FTX crypto pyramid implosion could put a $10-50 billion hole in the market. However, the mirage vanished when Biden’s colossal spending, the war and state intervention let inflation get out of hand forcing the Fed to crank up interest rates to tame inflation. And now investors must deal with both a raging war, soaring prices and skyrocketing interest rates deepening the financial hole between government expenditures and revenues. However deficits financed by new borrowings cannot go on forever as the UK discovered when they announced tax cuts, triggering a near collapse of their pension funds.

The problem is that consecutive budget deficits of 10% plus of GDP financed when money was cheap allowed governments to spend without repercussions. And governments kept on spending, funded by the central banks’ purchases of government debt leading to the inflation of today. First, the pandemic and now the Ukraine war. Tomorrow might be the need for more spending to boost an economic recovery to offset the soaring cost of scarce energy, food and credit…….more here

Click here for reuse options!
Copyright 2022 Hiram's 1555 Blog