Everyone knows what the world is doing in 2020, and the only thing that is being done is printing money at a rapid pace. The Federal Reserve’s balance sheet has risen rapidly from less than $4 trillion before September 2019 to more than $7 trillion now, an increase of actually 75%, and other central banks are doing the same thing as the Fed. With the rapid expansion of central bank balance sheets, the debt ratios of governments have soared, and there is no need to repeat the numbers about global and world debt; all governments are already in debt and deep in the mud.
As the epidemic has dealt a serious blow to the global economy, some countries have imposed a social lockdown in order to fight the epidemic, Germany, the UK and Japan are still in lockdown, which has allowed the debt rates of the corporate and household sectors to soar rapidly.
The soaring debt rates of the entire society were a serious consequence of the global pandemic of the plague.
During the epidemic, the Brazilian government provided subsidies to 60 million unemployed people to keep the population afloat at R$1,200 per month for the first few months, which was halved from October to December last year, which inevitably led to an increase in the government’s debt burden. According to EFE on January 5, Brazilian President Bossonaro directly told the media that Brazil is bankrupt and there is nothing he can do about it. Since the Brazilian government no longer has the ability to continue subsidizing the population, and the plague pandemic is still getting worse, the financial situation of the business and household sectors is rapidly deteriorating and rapidly going bankrupt.
Brazil is an example of the predicament faced by most countries around the world, by most governments, businesses and households around the world.
By this point people must be saying that the idea that central banks can just hold interest rates down to zero and keep these debt-ridden entities muddling along under low interest rate conditions is typical of the dreaming mode.
The global pandemic of the plague has caused severe damage to productive activities around the world, and while material production is not growing or even shrinking global central banks are printing money indiscriminately at an accelerated rate, and then trying to keep interest rates near zero, is that possible?
Central banks have been in the driver’s seat for the past many years, and people may have forgotten that the real control of interest rates is not in the hands of the central bank, but in the hands of the market. When market interest rates rise, it is time to wake up from the dream.
Production activity has been severely disrupted by the plague pandemic, and the indiscriminate printing of money by central banks can only lead to one result: higher commodity prices, which is why they have risen sharply in recent months.
Not only have these mainstream commodities risen like wildfire, but iron ore, coal, etc. have risen even more wildly, the inevitable result of the continued disruption of production and the indiscriminate printing of money during the pandemic! Moreover, agricultural commodities are now rising at a steep rate, a scenario not seen in the past, which could well trigger a famine. Fossil energy (oil, coal, natural gas, etc.) and animal and plant energy (grains, meat, etc.) prices are the most basic prices, and when they kick into gear they will drive up inflation across the board, and in the future, prices of essential, non-essential goods and services will all rise across the board.
China’s domestic commodity prices are actually one step ahead, with futures prices for some commodities such as coke and iron ore already hitting record highs and the bull market already in full swing. 2021 is expected to see most basic commodity prices, with international agricultural and energy at the core, easily hitting record highs and the fire of inflation burning brightly.
Inflationary pressures have also been reflected in the interest rate market, and while the Federal Reserve still maintains its benchmark interest rate at 0-0.25%, the U.S. 10-year Treasury yield has turned on a rally back above 1%.
It is still in the early stages of inflation, which favors asset prices in some pro-cyclical sectors, but as interest rates continue to rise, the cost of capital rises and liquidity becomes more and more depleted, it will start to depress asset prices, so asset prices in 2021 will be on a high-then-low trend.
Today, the world is already facing two problems.
First, what about highly indebted governments, businesses, and households?
This is typical of stagflation, where economic growth is low and government tax revenue growth is low or even negative, but interest on debt is rising, which worsens government deficits and threatens bankruptcy. At this point, the government has several options: raise tariffs; raise taxes domestically; and have the central bank purchase government debt directly, i.e., monetize the fiscal deficit. But either way, it will continue to stimulate prices and let inflation continue to worsen.
Only when inflation worsens to the point of social unrest will the central bank be able to raise interest rates, which is still early.
Second, stagflationary periods, corporate household income is difficult to grow, while the debt burden continues to grow, it can only go into default, which is the direct pressure on asset prices.
When the default of enterprises and households continue to default, it will lead to major financial institutions bankruptcy collapse, it will trigger an economic crisis.
The era of stagflation is an era of disaster for paper money and financial products (most typically bonds). In the future, risk aversion will become a common trend worldwide in order to avoid impoverishment.
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