Ominous signs for 2022
Now, on the eve of New Year 2022, it may be useful to look around and notice some key emerging trends and trajectories globally.
Powder kegs in international relations
All key hot spots in international relations have been studied in various articles of 2021 on this website: Ukraine, Taiwan, Iran/JCPOA & Israel, other Middle East and Turkey’s endeavors as well as Afghanistan and Central Asia as examples.
Now it seems that those three first-mentioned (Ukraine, Taiwan, Iran/JCPOA) are turning into acute crisis nests in the near future, which may even ignite a real conflagration.
Money supply tsunami, since 2009 finance crisis
In April 2012, economist Robert Wenzel was invited to speak at the Federal Reserve Bank of New York. On the occasion, he told the central bankers that “vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.” Mr. Wenzel was right and after an attempted quantitative “tapering” and a 20% market crash in Q4 2018, the Fed capitulated and resumed money printing.
That Fed program has sharply accelerated in last few years. M2 money supply is perhaps the most important early indicator of price inflation. In 2020, the Fed added almost $3.5 trillion to the aggregate, this year even more. The relationship between money supply and price inflation is not linear; price inflation tends to move with some inertia. Inflation will inevitably emerge but with a delay.
Coming inflation tsunami, in the US and Europe
Over the last two years in the US, there have been a number of articles warning investors about the risks of inflation and that this should be the top concern because inflation is the most powerful and indiscriminate wealth-destroying force. However, most people have been dismissive: inflation was nowhere to be seen, so what’s the alarm?
QE has been ongoing since 2009 finance crisis and since it had no impact on inflation, it means Central Banks have it under control. Then the whole pandemic phenomenon happened and in the autumn 2020 it began to look like an acceleration of inflation but the response was almost as nonchalant as before, very few were impressed. A bit over a year later, inflation can no longer be ignored.
Many countries are reporting their highest rates of inflation in decades: 6.2% in the United States, 4.2% in the United Kingdom, 5.2% in Germany, and above 4% in the eurozone. Some insist that it is a temporary phenomenon; others fear that we must brace ourselves for an extended period of significant price increases driven by expansionary monetary policies and rising public debts. The danger now is that this price inflation, combined with a large expansion of the money supply, will spread to consumer prices, which are also affected by the sharp rise in public debt.
The US economy grew at year-level of just 2.0% in the third quarter, down from 6.7% in the prior period. This deceleration of growth seems to continue into next year, despite a brief reversal of this trend in the current quarter.
In Europe, there is particular “domestic-made” problem of rising energy prices, which risk not only high inflation and economic recession but human catastrophe in cold wintertime.
The onset of inflation is almost impossible to predict but this should not have come as a surprise. Warren Buffett has warned that for a debtor nation, inflation is the economic equivalent of the hydrogen bomb. It is the most formidable destroyer of wealth.
What could trigger price inflation and when?
Although we cannot predict inflation’s timing or severity, history suggests that significant changes in inflation almost always come as a surprise. Ordinarily, three key factors act as economic tools that absorb price inflation pressures:
- Asset price inflation: by initially absorbing most of the newly created money, financial assets deflect the pressure on prices of goods and services.
- Current account deficit has enabled the US to export its excess dollars to other nations (most notably China) and obtain cheap goods, keeping consumer prices low.
- Human psychology is slow to change inflation expectations, keeping money velocity low for a time.
Unforeseen changes in either of these elements could trigger a phase change in price inflation. Even a moderate increase in interest rates could burst the asset price bubble; economic protectionism and a breakdown in international trade could close the current account deficit and a rise in commodity prices could boost inflation expectations and the money velocity. As to the US position, massive amounts of offshore dollars create another risk factor.
Economic imbalances that caused the 1970s inflation were mild compared to today’s conditions. Today, the trade imbalance, worsening fiscal deficits, skyrocketing public and private debts, as well as massive money supply growth are much larger than they have ever been. Even through the inflationary 1970s, the money supply growth remained below 14%, this time over 26%.
American mainstream versus alternative economists
These competing camps are trying to hide/disclose the incoming economic collapse, the latter focusing onthe continued devaluation of the dollar and the forced dependence on globalism that has outsourced and eliminated most US manufacturing.
The problems of devaluation and stagflation have been debated for decades but the true impetus for a currency collapse and the destruction of American buying power began in 2007-2008 when the finance crisis was used as an excuse to allow the Fed to create trillions upon trillions in stimulus dollars for well over a decade.
The mainstream media’s claim has always been that the Fed “saved” the US from imminent collapse and after all, stock markets have mostly skyrocketed since quantitative easing (QE) was introduced during the credit crash and stock markets are a measure of economic health. However, the reality is quite different, the US economy being extremely vulnerable now is not just the stock market. Money created from thin air by the Fed was used to support failing banks and corporations, not just in America but around the world.
Because the dollar has been the world reserve currency for the past century, the Fed has been able to print cash with massive amounts and mostly avoid inflationary consequences. This was especially true in the decade after the derivatives crunch of 2008. Why? The dollar’s global reserve status means dollars are likely to be held overseas in foreign banks and corporate coffers to be used in global trade.
If the dollar is devalued much enough, whether by endless printing of new money or by relentless inflationary pressures at home, all those overseas dollars will come flooding back into the US The result is an inflationary avalanche, a massive injection of liquidity exactly when it will cause the most trouble. We are now close to this point of no return.
Fed’s tricky game
In November 2021, the tapering measures were announced by the Fed. Since then, inflation prints have evidently surprised the Fed and Chair Powell is asserting that price stability is now the path to full employment.Inflation is soaring in the US and the Fed has signaled that it is shifting its focus from growth (employment) to inflation. This means the Fed will be tapering QE and hiking interest rates sooner than expected.
There is just one small problem. There is over $30 trillion more in debt trading at yields lower than 2% than there was the last time the Fed attempted to raise rates. So, when the Fed raises rates, all debt, including that $30+ trillion must adjust accordingly. This means those bond prices FALL and their yields RISE. And if they rise enough, the investors begin to default. Put another way, this time around, there is a $30 trillion+ ticking bomb sitting there and the Fed is going to start playing with matches right next to it… hoping the fuse does not light by mistake.
Given that Fed’s attempt in dealing with the Tech Bubble and the Housing Bubble resulted in full-scale crises…what are the odds the Fed can successfully deflate this current Everything Bubble… which is exponentially larger than the first two? It is highly likely that the next bloodbath is coming to the markets. It’s quite possible the markets will be entering a prolonged bear market … a time in which stocks lose 50% or more over the course of months. The coming bust is going to be life-changing for many people, most will lose much if not everything.
Fed’s choices, stagflation or deflationary depression
Two years after the pandemic started and the Fed has pumped out approximately $6 trillion more in stimulus (officially) and helicopter money through PPP loans and Covid checks. On top of that, Biden is ready to drop another $1 trillion in the span of the next couple years through his recently passed infrastructure bill.
Production of fiat money is not the same as real production within the economy. Trillions of dollars in public works programs might create more jobs but it will also inflate prices as the dollar goes into decline. So, unless wages are adjusted constantly according to price increases, people will have jobs but still won’t be able to afford a comfortable standard of living. This leads to stagflation, in which prices continue to rise while wages and consumption stagnate.
Another case to consider is that if inflation becomes rampant, the Federal Reserve may be compelled (or claim they are compelled) to raise interest rates significantly in a short span of time. This means an immediate slowdown in the flow of overnight loans to major banks, an immediate slowdown in loans to large and small businesses, an immediate crash in credit options for consumers, and an overall crash in consumer spending. This as the recipe that created the 1981-1982 recession, the third-worst in the 20th century.
It would appear that the Fed has chosen stagflation. The US economy now reached the stage of the game in which stagflation is becoming a household term and it is only going to get worse from here on. Stagflation is undermining the US economy and that poses also a huge problem for Mr. Powell and his merry band of money printers. Inflation is running at a pace that is just about 3x faster than real GDP growth–a figure the Fed can no longer ignore.
What will happen?
According to the old saying there are “Lies, damned lies and statistics”. The official US consumer price index (CPI) calculations and Fed data are now witnessing the largest inflation surge in over 30 years, over 6%, but the real story is much more concerning (over 10%). CPI numbers are manipulated and have been such since the 1990’s when calculation methods were changed and certain unsavory factors were removed. When looking at inflation according to the original way of calculation, it is actually double that reported by the government.
Biden’s infrastructure bill and the pandemic stimulus are not the only culprits behind the stagflation event. This has been a long time coming; it is the culmination of many years of central bank stimulus sabotage and multiple presidents supporting multiple dollar devaluation schemes. Biden simply appears to be the president to put the final nail in the coffin of the US economy.
“Catastrophe” is not too strong a word to describe the situation but most US alternative economists are calling the situation by the name “stagflationary collapse”. The World Economic Forum calls it “The Great Reset”. Maybe a stagflationary collapse will accomplish what Covid has not? Accelerated price spikes in necessities including housing and food will generate mass poverty and homelessness. There is no chance that wages will keep up with costs. The government might step in with more stimulus to help major corporations and businesses increase wages but it would only cause more dollar devaluation and more inflation.
Insiders are dumping stocks at the fastest pace in history
In the beginning of December 2021, US CEOs and corporate insiders have sold 69 billion dollars’ worth of stock so far this year. That is a new all-time record and it is a whopping 30 percent higher than last year… sales by insiders are up 30% from 2020 to $69 billion, and up 79% versus a 10-year average (according to CNBC and InsiderScore/Verity).
Interestingly, this fire sale has come to a crescendo just as the US economy has reached a critical turning point. The US economy seems to be in the midst of the worst supply chain crisis, inflation has reached levels not seen since the 1970s and the rising violence in the streets is depressing economic activity in many of largest urban areas.
Over the past two years, the federal government has borrowed and spent trillions of dollars that America could not afford to spend. During that same period, the Federal Reserve has pumped trillions upon trillions of fresh dollars into the financial system. They took these measures in a desperate attempt to revive the economy but now there are all sorts of signs that the economy is starting to slow down once again.
Why are insiders selling their stocks at a far faster rate than never before?
If stock prices are going to continue soaring into the stratosphere like many in the mainstream media are suggesting, these insiders that are dumping stocks like there is no tomorrow will miss out on some absolutely enormous profits. On the other hand, if a colossal market crash is coming in 2022, then 2021 was absolutely the perfect time to get out. As generally known, you only make money in the stock market if you get out in time. Could it be possible that many of the richest people in the world have picked the absolutely perfect moment to pull the trigger?