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The apparent bad news for the day is that March 2022 prices in the United States are 8.5 percent higher than March 2021.
The situation that is not so obvious This information says that the US economy is really in a state of imbalance.
That means the economy is in a mess.
A lot is happening at the moment that is helping to create this imbalance.
The Covid-19 pandemic is still affecting the economy, labor markets and supply chains.
There is the growing unrest in Ukraine, with Russia now moving to ramp up the costs of the “small” war it started.
And there are the trillions of dollars that the Federal Reserve has pumped into the economy in recent years.
In addition, there is the Federal Reserve’s move to raise interest rates and possibly reduce the size of the Fed’s securities portfolio.
Then there is the US budget, which was designed for a calmer and more peaceful time, but is really out of place in today’s world.
Obviously there are other things that are adding to the disorder in the world right now, and they are only adding to the radical insecurity that is in the world right now.
China is one of the larger parts in this picture, contributing to the unknown future.
All in all, the world is a mess and the current radical uncertainty means that politicians really only have a very vague picture of what could possibly happen in the future.
And the economic models that are currently in use were constructed in a different world, a world vastly different from the world we are moving through now.
inflation
Experts are talking about what’s currently causing inflation, and the talk all seems nice.
But if you’re really trying to put things together, you just get a little bit of this and a little bit of that, and something isn’t happening now, but other things are happening as well.
The image is one of disorder, and there doesn’t seem to be a common thread running through the whole conversation.
There is the thing with Covid-19. And then there is the Russian invasion of Ukraine.
There is the supply chain problem. And then there’s concern about what will happen to workers who are retiring, not commuting and changing careers.
Wages rise sharply.
Then, according to the New York Times, housing costs continued to rise relatively quickly, although the rental index for primary residences slowed somewhat.
“These costs are likely to be an important factor in determining the trajectory of inflation over the coming months.”
What?
Used car prices are rising! Energy prices rising? And what about other commodity prices?
The financial markets are facing major problems
Then there are the discontinuities associated with financial markets.
Just last week, several articles surfaced informing us that there are some real problems in the bond markets.
One of the most prominent is the market for “Blank Check Companies” or “Special Purpose Acquisition Companies” ((SPACs)).
I recently wrote an article about the situation in this room, but the picture here is not good. Lots and lots of money has been pumped into SPACs over the last two years and now the future is catching up with everything that has been done here.
But there are other areas that have benefited from the Federal Reserve’s generosity over the past two years.
Take the cryptocurrency market for example.
Riding the crest of the money wave created by the Federal Reserve, bitcoin reached a historically high price of over $67,000 on November 9, 2021.
On January 27, 2022, the closing price was below $36,000.
Tuesday April 12th closed just above $39,000.
Bond markets appear to be preparing to be tested as the Federal Reserve works to raise interest rates and reduce the size of its securities portfolio.
But the Fed has a big fight ahead.
As of April 1, 2022, the commercial banking system has over $3.8 trillion in excess reserves on its books.
Also, with an inflation rate of 8.5 percent and a nominal interest rate on the 10-year Treasury at around 2.75 percent, you have a negative “real” interest rate that is far from being “restrictive” in an economic sense.
Policymakers are talking about raising the Fed’s interest rate by 50 basis points four or five times this year, but that will leave the nominal rate nowhere near the rate of inflation.
Talk about an example of imbalance!
What if the Fed really tightens?
The economy and the financial markets are in a mess.
And what happens when the Fed really tightens and raises interest rates and tries to reduce excess reserves in the banking system?
Well, the stock market could see a significant drop.
It finally seems like investors believe the Fed will tighten for a while, even though it took several weeks before they really believed the Fed would actually change anything.
But if stock prices fall, what will happen to SPACs? What will happen to the price of Bitcoin, a price that now has a high correlation coefficient with the Standard & Poor’s 500 Stock Index?
These stock prices are going down, and the price of bitcoin will go down as well. Bitcoin at $15,000?
And these moves could be followed by other debt markets.
The problem here is bigger than just inflation.
There are many markets that are out of balance.
There is radical uncertainty. We don’t know what all possible outcomes could be. And make sure you include the Ukrainian situation.
Mr. Jerome Powell, Fed Chairman, and the Federal Reserve have a real dilemma about their future. Well, so does Mr. Biden.
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