Prospects for hyperinflation0

This article from the New York Times today “Europe’s Pandemic Debt Is Dizzying. Who Will Pay?” by Liz Alderman is a good survey of the way the EU central bank has financed some $850B in COVID 19 damage relief, and the threat posed for currency inflation such as the 120% Debt/GDP ratio France has racked up. The USA has increased its currency by $2.7T or 66% February 1 year over year. Some call this a currency “debasing”. The US Debt/GDP ratio as of Sept. 2020 was at about 127.28%. It didn’t break 70% until 2008 and the long term average, including the rapid increases since 2008 is about 60%. By comparison, the World Bank’s policy on lending to countries is that a Debt/GDP ratio of over 50% is not favorable. Pres. Biden’s “American Rescue Plan” is poised to cost another $1.9T. This is to be financed by more US Treasury bonds that the Federal Reserve will buy. This will add to the current almost $28T national debt.

Prospects for near-term economic growth in the USA is almost wholly dependent upon the course of the pandemic. Americans are now at 4.7% fully vaccinated and 12% with one shot. We’re giving an average of 1.7M shots per day. Wednesday we hit 40.3M with at least one shot; and 15.5M who’ve gotten both shots. As the number of vaccinated rises, activity ramps up.

There is a lot of pent up consumer demand, especially in the leisure and hospitality sector. People are going to be booking flights, dining out, and hanging around in nightclubs. If the pandemic aid has the intended outcome, workers in these depressed industries will be ready to return to work and ramp up production to meet the surge in demand. While we have some 14M on extended unemployment, we also have almost 40% of the labor force not participating. That is another enormous labor pool if the demand surge exhausts our current excess productive capacity of about 25%. A Federal $15 minimum wage will help spur the non-participants back to work. The April plunge of excess capacity to 36% was the lowest by far since at least 1967 when it was just over 10%.

Meeting the debt obligation means the USA and other deeply indebted countries must ramp up production. The “new normal” of 2.5% GDP we were seeing pre-pandemic will not cut it. Economic growth forecasts for 2021 of 5% will have to become the new normal if the debt service is to be sustained. This will keep prices low and prices are what is measured when inflation is considered. It could be very, very, rosy.

The Coronavirus that broke the camel’s back

COVID 19

This article from Research Affiliates gives us four big reasons to expect the financial markets to continue to downgrade asset pricing. Written in March of 2020, it warned of a severe selloff. Little did they know the Dow was about to take a 10,500 point tumble. It is true that the Dow did, with some fits and starts end the year up about 7.5% but, without knowing the devastating impact of the Coronavirus on the US economy, he was prescient.