"Next Stage of the Fed’s Hyperinflation"

"Next Stage of the Fed’s Hyperinflation"

By Tom Dyson

DRIGGS, IDAHO – They’re accelerating bond purchases… Between July 8, 2020 and January 13, 2021, the Federal Reserve grew its balance sheet at a pace of $15.3 billion per week. (A period of 27 weeks.) From January 13, 2021 until today – a period of nine weeks – the Fed has grown its balance sheet at a pace of $39.9 billion per week. It could be nothing. Or it could be the next stage of the balance sheet hyperinflation starting…

Gargantuan Demand for Dollars: For two years we’ve argued that there aren’t enough lenders to satisfy the Treasury’s gargantuan demand for borrowing dollars at the current low interest rates. By suppressing interest rates while the government runs $3 trillion annual deficits, we predicted the Fed would end up inviting large portions of the government bond market onto its balance sheet. We also predicted that inflation would further exacerbate this imbalance. And that’s exactly what’s happening…

Of the $4.4 trillion in net new debt the Treasury issued in 2020, the Fed purchased 54% of it, according to Tavi Costa of Crescat Capital. (Foreigners purchased 5.2% and U.S. banks bought 17%.) With the $1.9 trillion American Rescue Plan just signed into law this month and a big infrastructure bill slated for later this year, the Treasury’s gargantuan demand for borrowing dollars will only increase.

Meanwhile, inflation is soaring. The bond market expects the Consumer Price Index (CPI) to increase by 2.5% per year for the next five years, judging by the difference in yields between the 5-year Treasury and the 5-year inflation protected Treasury (TIPS). That’s a 12-year high.

The Wall Street Journal reports: "Prices are surging for the raw materials used to build American homes. Lumber, one of the biggest costs in home-building after land and labor, has never been more expensive and is more than twice the typical price for this time of year. Crude oil, a starting point for paint, drain pipe, roof shingles and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout houses, costs about a third more than it did in the autumn. Prices for granite, insulation, concrete blocks and common brick have all pushed to records in 2021… Drywall and ceramic tiles are short of records but have also climbed."

Final Stages of the Greatest Financial Experiment: Inflation further reduces demand for government bonds, all else being equal. Last June, the Fed pledged to buy Treasury bonds at a pace of $80 billion per month… or about $17.5 billion per week. We've known this wouldn’t be enough… and we’ve been waiting for them to increase their bond buying. It looks like that time is now…

The Fed’s balance sheet is currently at $7.7 trillion. If we’re right, the Fed’s balance sheet could be about to inflate to $10 trillion… $15 trillion… even $25 trillion… much faster than anyone expects.

Powell says they have the tools to control inflation, should it keep rising (which I think it will). By tools, he means “tighter credit conditions.” But wait a minute. The last time the Fed started tightening credit conditions (in 2016), the stock market ended up having a 20% meltdown in the fourth quarter of 2018. (It probably would have gone down even more, but Powell relented on the tightening.)

Today, the economy is 22% more leveraged (on a debt-to-GDP basis) than it was at the end of 2018… the stock market is 24% more overvalued (per the S&P’s CAPE ratio, a common valuation measure)… and the unemployment rate is 59% higher (per the Bureau of Labor Statistics). Even if inflation keeps rising, there’s no way Powell will have the courage to tighten credit… and crash the stock market.

Our stance remains the same. We’re in the final stages of the greatest financial experiment in history. And it’s not going to end well."

- rogueeconomics.com