'..Global inflation has not morphed into “disinflation;” the Fed and central bankers are not off the hook; bond yields are surging..''Lost in all the discussion of monetary policy, market forecasts and economic prospects is that Credit continues to expand excessively. Annualizing the New York Fed’s Q4 household borrowing data, Credit card debt expanded at a 26% pace and total debt at a 9.5% rate during the quarter. The big story so far is how little impact the Fed’s aggressive tightening cycle has had on incessantly loose financial conditions. And with inflationary biases percolating throughout the economy (and globally), reining in excessive Credit growth will require tighter financial conditions. In short, the Credit boom must end, and the transition to new Credit dynamics will be anything but pain free.
American households are borrowing more to pay for higher priced goods, food, automobiles, services and such. Our spendthrift government borrows more to pay for rising costs on expenditures, including debt service. Corporations borrow more to finance rising cost structures, along with investment booms directly and indirectly associated with new cycle inflationary pressures (including “de-globalization,” renewable energy and climate change).
Importantly, previous cycle inflationary dynamics - where Credit and liquidity excess would bypass traditional inflationary channels as it gravitated to inflating asset Bubbles – are transitioning. Credit and monetary inflations now bolster consumer and producer price inflation. And unprecedented monetary and fiscal pandemic stimulus not only supercharged spending and inflation dynamics, but also left a residual of huge cash balances (household and corporate). These new cycle dynamics are in the process of creating significant challenges for central bankers and highly speculative financial markets.
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Don’t misconstrue economic resilience for system soundness. Loose conditions are extending the Credit cycle – rather than circumventing it. A serious inflation fight will require higher rates sufficient to restrain Credit growth. And prospects for the downside of this historic Credit cycle are troubling, to say the least. “No landing” exuberance will have a short half-life.
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..Global inflation has not morphed into “disinflation;” the Fed and central bankers are not off the hook; bond yields are surging; and dollar strength is reemerging..
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February 14 – Reuters (Jamie McGeever): “The explanation for the whoosh higher in risk assets this year may be as simple as it is surprising: eye-popping liquidity from central banks. Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its 'yield curve control' policy intact, and stimulus from the People's Bank of China (PBOC), aggregate liquidity from the official sector has surged in recent months. Apollo Global Management's Torsten Slok reckons the BOJ bought $291 billion of bonds in January - a monthly record which contributed to G4 central banks' first net injection of liquidity into the global financial system since last April.”I don’t believe we can at this point overstate the importance of BOJ policy and Japanese liquidity. The weak yen and ongoing negative rates were a boon for global leveraged speculation last year, partially mitigating the forces of de-risking/deleveraging. Over recent months, BOJ monetization has been instrumental in offsetting QT effects from the Fed and others - global liquidity support likely instrumental during the big squeeze and reemergence of “risk on” liquidity abundance.'
- Doug Noland,
Ueda and No Landings, February 17, 2023
Context(Global Stagflation) - '..inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades.'(Global Stagflation) - '..Food Inflation Still Stalking the World'(Global Stagflation)(Cost-of-living crisis) - '..high input costs as their top concern..''..inflationary forces have been unleashed..''Inflation hits a staggering 99% in Argentina..'(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'