Thursday, June 10, 2021

Inflation? Naaah.. This Time It’s Different, No?

 One chart today.  Core CPI inflation (monthly, annualized - blue line) and the effective Fed funds rate.(red line).

For decades the Fed mostly kept its interest rates higher than or in line with inflation, since price stability (ie safeguarding the value of the US dollar)  was its primary mission. The red line was almost always above the blue line.

All that changed when the Great Debt Bubble burst and the Fed/Treasury stepped in to save the banks, brokers, and the US credit-dependent economy from collapse.  Things were so bad that the Fed had to keep rates at zero for a long time (yellow circle).  (Aside: 99% of the people still think this was due to the US sub prime mortgages only… false: it was a global Debt/Asset Bubble in everything: mortgages, corporates, sovereigns, real estate, stocks, derivatives, insurance, credit ratings... it was a huge mess.  And, in fact, it hasn't really gone away.}

So, when the COVID crisis hit what did the Fed/Treasury do? More of the same, but this time ALOT more.  The global economy is now so completely awash with dollars and euros that they are channeled to ridiculous “assets” like NFT “art”, meme stocks, dubious cryptos and all kinds of commodities. Naturally, inflation has surged to 40-year highs. For the time being, anyway. 

What is the Fed’s exit strategy from unprecedented QE? It is best described as a wish and a prayer: they wish inflation goes away soon, and pray to Modern Monetary Theory that it does so.

And this is the best short description for MMT: Inflation? Naaaahhhhh… this time it’s different.

Curiously, there is another country and its leader who, broadly speaking, think (wish, pray) along the same voodoo monetary policy lines. Turkey’s Mr. Erdogan believes that low interest rates reduce inflation(!!). Results so far? Inflation is over 20% and the Turkish lira has lost 30% against the dollar in just one year.  Aaahhh … but the US isn’t Turkey.  IS IT? No it isn't - unless and until China makes a move and wipes out the US dollar in one fell swoop.

More on China, the yuan/dollar situation and history's lessons in another post.

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