Friday, March 10, 2023

We're Not In Kansas Anymore - It's A Brave New World (?)

Today I'm using two well known "blurbs", one from The Wizard of Oz and the other a famous book title. I will connect the two below.

We're certainly not in Kansas anymore.  The financial world has come topsy turvy on the heels of massive monetary injections which, predictably, caused rampant speculation and massive inflation.  The days of near zero inflation and negative interest rates are gone, and the sooner we realize and assimilate this into our models, the better.  

Furthermore, because of crushing debt loads we need to have a serious political debate about the future of fiscal policy in the US, EU and Japan.  We will have to make really tough decisions, and the choices are few and very unpleasant. The reason is simple, as in this blog's name: Sudden Debt.  The West has encumbered itself with enormous debt amassed over several decades in order to achieve a standard of living that could not be otherwise sustained.  

To put it simply, we borrowed our prosperity.  With zero interest rates this could arguably be ok - to a degree -  but with rates now spiking debt is becoming an ever heavier millstone around our necks.  How long before our necks break and Sudden Debt causes Sudden Death? Judging from Mr. Powell's recent conversion to inflation fighting, it won't be too long - because he also has to take into account the rabidly anti-tax Republicans and the significant possibility of failure in debt limit negotiations. 

In other words, the Fed HAS to bring down inflation and interest rates as soon as possible, before they bring down the whole show, Pax Americana included.

Is it a Brave New World? Maybe. Maybe Mr. Powell will not flinch and could even double down on his inflation fighting. Perhaps he will even go as far as increase the amounts of QT, something he should have down a long time ago.  But, I'm not holding my breath, because he really does not want to be blamed for bringing down Wall Street, something that must be done if financial conditions are to tighten enough to kill inflation for real.

So, yes, we're not in Kansas anymore - but we're not yet in a brave new world.

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