Fed Chair Powell got one thing right: He observed that the current situation was outside historical norms. Well, duh. This is the largest, most extreme financial bubble in history, so throw away any analysis that depends on history.
During the last two or three decades, China took over as the workshop of the world and flooded the rest of the world with cheap goods, largely suppressing inflation while destroying the goods-producing cores of western economies. Governments and central banks did “whatever it takes” to support employment by lowering interest rates and monetizing government debt. But, as in California’s forests, fuel built up as fires were suppressed, in this case piles of cash instead of dry underbrush. We do know that government deficit spending is the primary cause of inflation. As China’s growth sagged and supply chains reached their limits of capacity, government deficit spending accelerated… and here we are.
Where do we go from here? No-one knows, we are in uncharted territory. Governments continue to spend like drunken sailors, but at least the Fed has stopped monetizing the debt with its balance sheet around 36% of GDP (against a historical norm of around 6%). Japan continues to lead the monetizers, with the BoJ balance sheet now around 135% of GDP, forcing the Japanese government to intervene in forex markets to prop up the yen this morning, for the first time in 24 years. This observer would welcome to a return to more peaceful times, where the world did not revolve around central bankers roiling markets and economies while attempting the impossible. Pass the peanuts.
Financial Reality 