The poison cup of the Federal Reserve Chairman’s work

Will this be the ultimate poisonous cup in currency history?Joe Biden’s decision this week to grant Jay Powell a second term at the Federal Reserve seemed wise from the government’s point of view, but challenge The Richter scale facing the chair is close to 10.

Not only inflation is accelerating, consumer prices are rising 6.2% In the year to October, the Fed’s preferred measure of inflation-personal consumption expenditure stand up It was 4.1% over the same period, the highest level in 30 years.

When President Joe Biden’s stimulus plan drives demand at an insane speed relative to supply and the economy is troubled by bottlenecks, Powell must ensure that monetary policy is normalized after the pandemic.

this, according to For former Treasury Secretary Larry Summers, this was “a corresponding macroeconomic policy error.” It has the smell of the earlier fiscal overexpansion surrounding the Vietnam War and Reagan Economics, both of which ended in disastrous defeat. Today’s absolute deficit figures are much larger, as are debt levels.

Congressional Budget Office project Federal debt held by the public will rise from 103% of GDP at the end of 2021 to 106% in 2031. In contrast, this proportion was less than 40% during the financial crisis.

Therefore, it is difficult for the Fed to raise interest rates in response to inflationary pressures without causing market collapse and accelerating recession. Currency tightening may lead to a permanent cycle of financial instability, followed by more quantitative easing policies to support the market and support the economy.

Two problems arise. Is standardization a chimera? In the context of currency instability and fiscal surplus, can the role of the US dollar as the world’s main reserve currency continue to exist, while the US’s share of global GDP continues to decline?

The proximate cause of the surge in inflation has to do with supply. This highlights a strange asymmetry in the relationship between central bank officials and the supply side.

On the one hand, Andrew Bailey, the governor of the Bank of England, is right Say Monetary policy cannot provide more gasoline, more computer chips, and more truck drivers. On the other hand, ultra-loose monetary policy is indeed capable of creating bubbles, leading to mispricing of risks and improper capital allocation. This inhibits productivity growth, which makes the task of debt reduction more difficult.

When US debt last reached 106% of GDP in 1946, it was dragged down by a combination of growth and inflation. Today, it is clear that the potential trend growth rate of the U.S. economy is at a low level, well below the level of the post-war period. This increases the possibility that inflation will have to do more debt reduction work this time, which is a strange normalization.

The necessary inflation will be achieved through what economists call a second-round effect, especially in terms of labor market tightening. This is already obvious, and as the workforce around the world begins to shrink and thus regain bargaining power, the demographic structure will exacerbate this situation.

U.S. Treasuries are disturbed by the prospect that inflation may not be temporary and generate negative real income after inflation. Therefore, the debt crisis clearly has some way to go. The same is true for any potential decline in the role of the dollar as a reserve currency.

Due to the global savings surplus and the never-ending demand for so-called safe assets, the United States is currently creating huge amounts of outstanding debt. Therefore, 60% of the central bank’s foreign exchange reserves are still in USD assets, and the Eurozone only followed up with 20%.

as a New article Ethan Ilzetzki, Carmen Reinhart, and Kenneth Rogoff pointed out that changes in the world’s dominant currencies are rare. When they do happen, there is usually a long transition. Since the 1500s, only the currencies of Spain, the Netherlands, the United Kingdom, and the United States have achieved dominance.

Nonetheless, the author points out that although the demand for safe assets denominated in US dollars has surged, the tax base supporting these assets is declining. They stated that the demand for safe assets could eventually overwhelm the US government’s financial ability to support them, adding that there is no guarantee that the insatiable demand for such assets will continue.

In this debate, the eternal question is, what is the alternative to the dollar? As China prepares to surpass the US economy, the yuan, which accounts for only 2% of global reserves, is clearly a competitor. However, many people question whether a totalitarian country with weak institutions, weak property rights, and interventionist approaches to the market can do the job.

In practice, if China successfully transforms into a more consumer-oriented economy, Powell will face greater challenges, which will lead to a decline in the global savings rate and an increase in real interest rates. This is another reason why the market wakes up and realizes that the US government’s IOU is a very unsafe asset.

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