Deflation, disinflation, inflation and hyperinflation continue to prove to be some of the topics dominating discussions in the financial markets these days. BlackRock CEO Larry Fink dashed the hopes of all those who cling to the belief in “transitory” inflation, warning that the U.S. is facing a massive inflation shock. Will Fed Chairman Jay Powell have listened and listened at least this once?
Above all, it is once again career economists who allow themselves to be fobbed off with a “temporary inflation” verbally promised by the Federal Reserve Bank and who seem to believe in this story without reservation or criticism.
Fink: Investors should not be blinded by merely temporary inflation
One of the most important protagonists on New York’s Wall Street is not bothered by all this, warning that the United States is facing an “inflation shock. Speaking at a virtual conference held by Deutsche Bank AG, Larry Fink, chairman of capital manager BlackRock, dashed all hopes of “temporary inflation.”
Larry Fink, whose financial management firm now manages more than nine trillion U.S. dollars – more than the Federal Reserve Bank – said investors should not be blinded by hopes that inflation is merely “temporary.
In many places, the potential for a sharp rise in inflation is largely underestimated or simply ignored. After all, most players in the financial markets are not looking ahead to a forty-year career or even beyond, says Larry Fink.
And for that reason, most of the participants active in the financial markets over the course of the last thirty years or more have also only operated in an environment where inflation has been declining. And so it is hardly surprising that even warnings from BlackRock and Larry Fink seem to be falling on mostly deaf ears these days.
Debt continues to grow – monetary policy on the verge of a turnaround?
When the American consumer price index had shot up to almost fifteen percent between the years 1976 and 1980, Larry Fink already saw himself active in the service of the First Boston Corporation during this time. Inflationary trends at the time had forced Paul Volcker, the Fed Chairman at the time, to raise the Federal Reserve’s benchmark interest rate to as high as twenty percent.
According to Larry Fink, central banks around the world may soon be forced to rethink and question their monetary policy. This will be the case if general price increases lead to concerns about monetary stability.
Once again, it should be noted at this point how it is becoming increasingly clear which corner central banks have backed themselves into in view of the money printing programs (aka quantitative easing) they have been pursuing for more than ten years now. From today’s perspective, the global debt tower could hardly be higher, so rising interest rates could trigger a deflationary crash unparalleled in history.
So what else can central banks and Fed Chairman Jerome Powell do but try to keep a majority of market players in line by means of manipulative statements?
Flight from fiat and paper assets as a harbinger – look to emerging markets.
As an alternative to a deflationary crash, if electronic money generation persists beyond a certain point, not only will there likely be an accelerating rise on the price front, but there will be features to watch for that would indicate the beginning of a flight from fiat and paper currencies.
Look to emerging markets, first and foremost Turkey, Argentina, Colombia, Chile, Venezuela, Ecuador, Bolivia, etc., where not only lockdown policies but also, in some cases, skyrocketing prices are making life hell for the average person.
In some emerging markets, hyperinflations (Venezuela), galloping inflation (Argentina or Turkey), threatening scenarios regarding the possible outbreak of civil wars (Colombia) or a sinking of governments that had been in political power until then (Chile), which can be observed by means of elections, have long since occurred.
Instead of finally turning the right screws to curb a speculation on the financial markets that is getting completely out of hand, the Federal Reserve Bank and other central banks are doing nothing but keeping interest rates at historically low levels for as long as possible.
Raising interest rates vs. new massive fiscal stimulus by the U.S. government
Returning to Larry Fink, the BlackRock chief says that such measures – first and foremost a timely hike in interest rates – would be incompatible, however, with an imposition of massive and hitherto unseen fiscal packages by the U.S. government.
U.S. President Joe Biden and U.S. Treasury Secretary Janet Yellen (“Go Big”!), who seem to know no tomorrow when it comes to massive increases in government spending in the United States (see also: Co-founder of Palantir takes a hard line with Fed), virtually urged the Federal Reserve Bank, according to Larry Fink, to stick to the money-printing policy it has been pursuing for more than a decade.
Without zero interest rates, it would simply not be possible to finance these massive fiscal stimulus packages in the United States. Instead, Larry Fink warns of an unusual scenario that could see interest rates rise while the U.S. government’s fiscal stimulus packages get completely out of hand.
Instead of direct criticism of the Washington government and the Federal Reserve Bank, Larry Fink, on the other hand, tried to wriggle out of a dicey situation for him in explanatory answers along the lines of “…prices will probably have to go up, too, because many companies are adapting to climate change…”.
Finally, in March 2020, BlackRock was designated by the Board of the Federal Reserve Bank to purchase, on behalf of and at the behest of the Fed, non-performing loans and securities of all types in the domestic financial markets. Allowing for credit leverage, BlackRock has had financial firepower of up to $4.54 trillion since that time.
Inflation expected to pick up significantly due to shift to green technologies
And so then, once again, climate change – rather than the Federal Reserve’s electronic money generation – is made the main culprit for the projected rise in inflation. Larry Fink conceded in this context that inflation in the United States will still pick up very significantly if the economy is to be completely converted to green-alternative technologies.
One reason for this, he said, is that the country currently lacks at least some of the technologies needed to achieve such a goal. And so, according to Larry Fink, the question will soon arise in the USA as to whether the country’s inhabitants will be prepared to accept rising inflation with the aim of transforming the domestic economy.
It should be left to the readers themselves to make up their own minds about these statements. As was reported in Focus magazine a few days ago, gasoline in Germany may soon cost two euros at the pump. Well, for this it needs only an attentive following of the crude oil prices together with the constantly on the table put suggestions to tax increases in this sector on the part of the policy.
Perhaps we are simply doing a roll backwards in our development, so that we will soon be traveling from town to town by stagecoach again, even if such an idea may certainly seem a bit exaggerated.
Fund Manager Leber: The Worst Devaluation of Money Since 1992 Looms
At least the German economist and fund manager Hendrik Leber has recently had the courage to publicly announce that savers and citizens are threatened by the worst devaluation of money since 1992. All right, so everything just has to go on as before, with central banks administering more of their toxic medicine – because there is no alternative to everything else.
As I said, the alternative would be a historic deflationary crash, so observers can now choose what they would prefer in the face of now increasing inflation.
It should be noted that demonetization has the potential to topple entire systems, because at some point large sections of the population will no longer be able to afford anything financially and will then vote with their feet in line with the motto “I have nothing left to lose anyway.
Despite the recent rise in purchasing managers’ indices (manufacturing as well as services) in the United States to record highs (both ISM and Markit), analysts and observers were cautious and only marginally impressed by this published data.
Rising costs likely to be passed on to domestic customers soon
One of the main reasons for this caution seems to be the fact that a strongly increasing number of companies, referring to the current surveys, have plans to pass on rising costs to domestic customers and consumers. Translated, this means that products and services in the USA will become more expensive.
This circumstance could already be inferred over the course of the past few weeks, after data from both the United States and the People’s Republic of China provided an indication that producer prices in both nations have recently increased significantly.
The Markit survey said the inflation index had climbed at the fastest pace since data records began. From the perspective of U.S. consumers, whose consumption accounts for about seventy percent of domestic GDP, this will likely be anything but good news.
In the latest Markit survey, many of the companies surveyed also said that they would probably find it easier to pass on their own cost increases to their own customers and consumers due to very high demand for a wide range of products. At the moment, this may be the case, but what will things look like in six months or a year if nothing changes in the underlying situation in the meantime?
Stagflation Risks and Declining Job Creation in the Manufacturing Sector
The current data also prove to be quite confusing in part, as the latest ISM report explicitly highlighted stagflation risks in the US. In the manufacturing sector in particular, order backlogs that had not yet been processed were now piling up, which can be understood by looking at the situation in the U.S. ports on the West Coast, among other things.
At the same time, as the ISM report went on to say, there would be declining job creation in the country’s manufacturing sector. Could this situation perhaps also be attributed to the lavish government payments that the unemployed in the United States are enjoying these days?
People are simply sitting on their couches at home because they will receive the same or even more money from the government over the next few months than they would if they were working and doing a job. So, have we arrived in that brave new world where capitalist principles are now being turned completely on their head to fully embrace the path of socialism?
First characteristics like rising prices, product shortages in many areas & Co. can already be observed sufficiently. Welcome to the GDR! And so the latest ISM report on this subject goes on to say that not only material shortages in many sectors, but also a shortage of qualified workers could slow economic growth in the U.S. over the next few months.
Almost in all major sectors, companies reported cost-driven inflation in the month of May along with substantial product shortages and supply bottlenecks. The fact that inflation expectations have climbed to new record highs in the process doesn’t really seem to bother anyone at the Federal Reserve Bank and the U.S. Treasury, apparently.
DepthTrade Outlook
Let’s hope that this development will indeed only “temporarily” work its mischief. It is not clear to me, however, how and in what way Fed Chairman Jerome Powell intends to make future forecasts with regard to inflation developments in the United States? No one knows the future, not even the Fed Chairman. Developments of this kind depend on so many different (and as yet unknown) variables that it seems almost frivolous to stand in front of a microphone with a full tone of conviction and describe the current development as “temporary. If all else fails and the players on the financial markets vote with their feet at some point, the associated results can then be blamed on “climate change” and a resulting (more expensive) transformation of the economy, instead of ever blaming one’s own monetary policy and the hopelessly reckless printing of money for the unsightly effects of this policy. Self-criticism is certainly not a strength of the Federal Reserve, but rather one of its most glaring weaknesses!
