The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.
Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.
Continue reading Crowding-Out. The Fed May be Killing the Private Sector to Save Government. →
Inflation in assets inevitably leads to a burst of bubbles. In the period when central banks were glad to see limited consumer price increases despite large increases in the money supply, they created massive inflation in assets. Throughout the quantitative easing era, bond prices spiked, equity valuations soared, house prices increased significantly above affordability levels, and multiples in private equity and venture capital rose to all-time highs. Asset inflation preceded consumer price inflation, and it may be a major source of financial instability.
The U.S. Bloomberg House Price Index has slumped 20% since the beginning of monetary contraction, and the evidence of the burst of housing price inflation is a clear signal of capital destruction. Monetary contraction leads to a decline in asset prices that subsequently creates a re-evaluation of the asset base in financial firms, from banks to venture capital firms.
Continue reading Destruction of Capital and Central Banks →
The world is facing a precarious moment in the oil market. The recent decision by OPEC to extend production cuts has raised concerns about the potential impact on the global economy. While the move may benefit oil producers in the short term, it may be a misguided action that could also have unintended consequences that could harm the broader economy and oil demand with it.
OPEC should remember that after a burst in oil prices due to unnecessary cuts comes a massive slump due to a recession.
Why did OPEC announce a surprise 1.16 million barrels per day (bpd) production cut?
Continue reading OPEC cuts may lead to a world crisis. →
Can China Kill The US Dollar?
Former US President Donald Trump has expressed concern that China could displace the US dollar as the global reserve currency. The warning follows reports of agreements between various nations to use the yuan in commodity transactions.
For years, rumors have circulated about the demise of the US dollar as a global reserve currency, but the greenback continues to be the most traded and extensively used currency in the fiat world.
The US dollar is by far the most traded currency on the foreign exchange market, according to the Bank for International Settlements. In 2022, the US dollar “remained the preeminent vehicle currency in the globe.” In April 2022, it was on one side of 88% of all transactions, unchanged from the previous survey.
Continue reading China Is No Threat to the US Dollar But the US Government Policy May Hurt. →