Inflatable Nation

Even a Recession Might Not Tame Inflation

Is it really that bad? Nah, it's worse. It's that "slowly, slowly all at once" problem.

Dealing with US inflation needs to account for the foreign entities that hold so many dollars for purposes that don't often align with our own (our declared enemies have a lot of it). Basically, the dollars will be used in a mercantilist manner to further the interest of these rulers -- often at the expense of the average American worker.

For the moment the dollar won't be replaced in international trade because it's backed by US real estate. We don't like the CCP buying American farmland in "State of Rode Island" sized batches, but the possibility of doing that in a pinch is a big attraction for the dollar (and land is an excellent inflation hedge). If we say, "No more of that, you'll have to buy Fords instead," then their dollars will flood back into the US to buy land and other assets while they still can. At this point, the world will stop trading its goods for our debt.

As international trade collapses, there's less need for US debt as "good" collateral for trade among third-party nations. With foreigners less willing to swap their goods for our debt, the supply of goods drys up just as more dollars race into the domestic market, sparking more asset inflation but not job creation. This likely results in high-interest rates to encourage foreigners to hold onto their bonds. Meanwhile, the Fed funds the government through the printing press and further fuels inflation.

Inflation could be used to lower the burden of the $31 trillion National Debt -- if we balanced the budget. But why do that if you can sell more and more debt at near-zero rates with foreigners willing to buy a lot of it? Well, things that can't go on forever, won't -- and we are heading for a wall of won't (so prepare a bolthole in New Zealand).

Does Credit Expansion lead to Waist Expansion or Waste Expansion?

Jeff Snider at EuroDollar Univesity discusses the Chinese Stimulant that ain't fentanyl -- increased availability of Bank Credit.

Back in the 1980's I read that the Soviet Union had the highest rate of capital investment in the world and on the whole (or rather, "hole"), that investment produced a negative return -- requiring more investment. I read that and thought, "Gee, that can't be good." I had the picture of being on a treadmill and running to stay in place but the treadmill speeds up so, in the end, you're running so you'll fall behind slower. In such a scenario, collapsing from exhaustion seems the logical outcome.

In "The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities," Mancur Olson didn't discuss the credit markets so much as the "credit to" markets. In his view, the growth of self-dealing special interest groups in an otherwise growing economy produces economic sclerosis that leads to failure. The CCP is a collection of self-dealing special interest groups. Its near collapse during Mao's Cultural Revolution allowed a multi-decade spurt in economic development. Its reemergence as society's "guiding force" will likely herald its decline.

We face a similar danger in the good ol' USA. It's not the dealings of the Fed that will determine our economic future so much as the self-dealing of a web of special interests and influence peddlers I call "The Crony Class." Are they anti-climate change or pro their control of the nation's resources -- and do they see a difference? Crony class interests require a lot of lying-and-believing at the same time. ESG, anyone?

International Money Monkey Business

Jeff Snider has a YouTube video where he explains international money flows.

For a long time, just to keep it simple, I've told people that the U.S.A. imports air conditioners and other stuff and exports debt -- mostly government debt -- as well as land (not the dirt, but the ownership of the dirt) and other assets. Wall Street likes this because they market the debt and manage the assets and Washington DC politicians like this because they can spend an extra trillion in the run-up to an election without having to raise taxes (to think they will curb that habit before it's too late is, perhaps, asking too much). Foreign financiers use the dollar in dealings with other nations. They also consider the U.S. a safe haven (even when they are ideologically committed to destroying the U.S. -- see the Chinese Politburo).

I don't think there is a shortage of Eurodollars so much as an increase in moral hazard. In the 1990s there was a belief that China would bolster the world financial system. Unfortunately, that would require the CCP to give up control of their national economy (and they do see it as theirs). It's become apparent the communists will not let that happen and are quite willing to stiff investors -- especially foreign investors -- to keep control. The killing of the Chinese capitalist chicken has scared the Eurodollar money-monkies and caused a tightening of lending standards while increasing the "safe-haven" appeal of the dollar.

Then there's Putin punishing the world and the world punishing Putin...

Is the dollar sluggish or thuggish?