For many years, the American government turned on the money printing machine relentlessly, spending far more than it generates.
This is not a minor situation: companies that spend more than they take in go bankrupt. A family that spends its income badly usually ends up getting into debt and little by little falls into bankruptcy. Governments do not escape this problem in the long run and Jerome Powell, chairman of the Federal Reserve (FED), refuses to be clear on the issue.
Of course, the United States is not a small economy, and it has the great benefit of the dollar, which allows it to make up for the country’s deficit at the cost of being one of the most quoted currencies on the international market due to its stability. Oh, wait! Stability, that’s the key word! Haven’t you wondered recently about the current rate of inflation?
Jerome Powell, in his testimony before Congress, said that it might take three years for inflation to reach the FED’s 2% target. Really?
According to an article from ZeroHedge, a blog specializing in economics, you have to “keep in mind that inflation, today, right now, is well above that. Yields on inflation-traded bonds have doubled since August.”
“Gasoline prices are up over 70% since November. Lumber prices are up 52 % in the same period. Copper is up 33%. And the entire commodity complex, as measured by the Commodity Research Bureau index, is up 26%,” the article explains.
At the moment, the stock market is also rising, driven by the huge and out-of-control money supply. On top of that, there is $10.5 trillion of corporate debt in the market and the FEDhas become the biggest buyer. An interest rate hike could increase the cost of debt for thousands of companies, resulting in massive corporate bankruptcies.
An alarming situation
What is being said is worrisome. That is, the FED would be expecting a “controlled inflation” of 2% that will contain itself with the long awaited economic recovery at national and international level. This recovery, in turn, depends on many factors, such as the effectiveness of the vaccines, the danger posed by the new strains of the virus, and how the states and the federal government itself deal with the pandemic.
The FED is hoping for a miracle, one similar to the Goldman Sachs report that says the economy will recover by 8% (what is needed to relatively control 2% inflation). Not even the FED itself has such encouraging predictions in its economic rebounds, which barely reach 6.5%.
The outlook, in fact, is bleak for the FED, which is between the abyss and the sword of raising interest rates to contain inflation and provoke a massive sale of securities in the market, increasing the country’s debt even more, or doing what it announced: keeping interest rates at 0%, generating clear signs of a bubble.
Edgar Fernandez, an investment banker at Liceo Capital Advisors and professor of finance, commented that there are clear signs of a bubble in the financial markets. These are occurring, in large part, because central banks around the world do not know how to deal with the economic crisis generated by the pandemic.
“We are in a scenario with savings rates at record highs, stock markets and markets at record highs, and with economies crippled by Covid-19. What will happen when the Covid-19 restrictions end and people start consuming what they have saved this year? We’ll see rising prices.
Inflation will come from the tremendous increase in the money supply that has taken place over the years. That money has been going into the financial markets, but what we see now is that it is finally affecting the real economy.
This possible pickup in inflation will affect the financial markets, especially fixed income, i.e., government and corporate bonds.
States are at peak levels of indebtedness, a rise in interest rates can be lethal for some economies, and this suggests that central banks will prefer to control the solvency of states rather than inflation.”Edgar Fernandez
Powell warned that there will be possible “upward pressure” on prices as the country’s economy continues to rebound, but he does not expect it to have a significant effect on inflation.
Is Jerome Powell speaking from wishful thinking or fact? The FED is trying not to raise interest rates “to control inflation,” but this is an almost desperate measure, trying to mitigate the damage. The reality is that, if when the impending inflation arrives, banks are not able to significantly reduce the money in circulation, inflation can get much higher than expected and it would be necessary to raise rates causing the bubble to burst even faster without being able to control it. That would also be serious.
In addition to all of the above, and what should also be taken into account, is that the federal government is not taking measures to help the economic recovery. Examples? Checks are being sent out of control all over the world and the country is still not opening up. The signs are clear and the markets even more so: the value of Bitcoin, gold and silver continues to rise; the value of the dollar, on the other hand, is falling.
This is not only worrisome because of the pandemic, the Federal Government, in fact, has been taking in much more tax money since 2009, but since 2001 the Government has not been spending less than it takes in. In other words, the government has been losing money for 20 years. There is a notorious mismanagement.
Don’t get me wrong. The situation where Jerome Powell is is extremely difficult. Even so, it is unforgivable that, in the face of such a critical scenario, he is looking at the Americans with a silly face instead of explaining what the FED’s plan would be if inflation gets out of control.