What if the war in Ukraine has nothing to do with NATO, democracy vs. dictatorship, freedoms vs. tyranny? What if it is all about the Fed and ECB creating trillions in pixel currencies out of thin air, inducing the world’s largest producer(s) of non-renewable resources, who have to sell them priced in exactly those currencies, to decide “the hell with this, I’m raising prices in any way possible, including war”?
First, some charts:
- The price of the US dollar in barrels of oil (1/WTI oil price), longer term and more recently for better scaling. Back in 1945 the dollar was worth almost 1 barrel of crude oil, today its value has evaporated to less than 0.01 barrel. That’s a 100-fold dollar devaluation against a real product/asset.
- Next, the amount of dollars created in the same time (M3). Notice how the slope of the curve, ie the rate at which dollars are being pixelated, keeps getting steeper over ime, culminating in a near vertical rise during the pandemic.
- Ditto for the euro, albeit at a somewhat less rapid rate. The inflation-weary Bundesbank is still influential within the ECB, after all.
- Here’s a chart of both them together, the sum of dollar plus euro M3.
To summarize: in the last 20 years there have been 28 trillion more dollars and euros created vs. zero more barrels of oil and bcf of natural gas. You are Putin and you are forced to sell your constantly diminishing assets in ever expanding dollar and euro pixels. What do you do? Hint: he’s demanding payment in roubles.
what if interest rates go up but inflation stays up? ... feel wise,... it seems a possible (likely?) case... there is so much money sloshing around....
ReplyDeleteRaising interest rates is not enough, the Fed has to drain liquidity by directly selling Treasuries in the open market from its portfolio, ie shrink its balance sheet. That’s QT.
Deletethey can QT a bit... but enough to remove the 6x increase in monetary base?... =)
DeleteThe entire world has been hooked for years (decades..) on the "drugs" of an ever expanding monetary base. Even a moderate QT (say... 50 billion/month) for a year or two will have a veeeeeery chilling effect. For moi, 100 billion/mo would be better, but it's not likely to happen. They're way too scared, and maybe rightly so.
Deletelets say we do 100 billion QT a month... think it is possible that stocks come down but inflation goes up?
DeleteMilton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Self evident, of course..
DeleteSo, less money (QT) = less inflation. And, short term at least, less earnings, lower P/Es and lower stock prices.
I would say that is exactly the problem... the created money supply is so large that inflation has not caught up with it yet... if total inflation equal money supply, the fed could qt half of the money supply away and still see 300% inflation...
DeleteSee today's post :)
DeleteThere's also the possibility that Putin is just a paranoid, territory-grabbing, neofascist war criminal... He's hardly proven to be a strategist at all. Aside from his disinformation campaigns across the West, he's pretty much a terrible strategist.
ReplyDeleteOne doesn’t preclude the other… I believe he is a cynical, calculating and evil dictator. As such, I put nothing beyond him.
Delete