Methods to combat the "coronary crisis" in the U.S. could lead to uncontrollable price increases. Why is inflation in the U.S. not just a domestic problem and how will it affect us? Let's answer the main questions.
There has been too much money. This year was a record year in U.S. history for the amount of financial aid to businesses and the public. The cumulative amount of all stimulus measures is nearly 30 percent of GDP, Bank of America estimated.
"Since the beginning of the "coronary crisis" Donald Trump signed a package of measures for almost 3 trillion dollars, which included additional funding for health care, business support, direct payments to Americans, as well as a temporary increase in unemployment benefits," General Invest private wealth management director Yegor Izhvarin lists. - The U.S. Congress is now discussing a new economic support package of at least $1 trillion, which may come into effect in September and includes direct payments of $1,200 per American with an income of up to $75,000 a year. In addition, the package would include various funding measures for businesses as well.
And it may not stop there. The U.S. economy is experiencing its steepest drop since the Great Depression: U.S. GDP fell 33% in the second quarter of this year. "The Fed promises to use the full range of funds at its disposal to prop up the economy, from bond buybacks, including low credit quality, to direct money handouts and tax cuts for corporations and the public."
Among the measures the Fed has already taken are a rate cut to 0-0.25% and a promise to keep it at that level through the end of 2022. And also the unprecedented issuance of money as part of the next quantitative easing. Never before has the Fed's "printing press" worked with such a load.
The M2 monetary aggregate (cash in circulation and deposits) has grown by 20% since the beginning of 2020. By comparison, annual M2 growth has not exceeded 15% at any time since 1981, when the Fed began publishing such data. "It would be fair to say that we've never seen money supply growth as high as it is today," Morgan Stanley's chief U.S. equity market strategist Mike Wilson said the other day.
As a result, the U.S. economy has developed a so-called inflationary overhang, where the money supply grows faster than GDP. Sooner or later this canopy is in danger of collapsing, causing the dollar to weaken even more and inflation to rise. Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia, estimates that the dollar could lose as much as 30 percent by the end of the year. And the fact that the Fed will be able to control price growth if the "inflation canopy" collapses is questioned by a growing number of economists.
The money is being spent on the wrong things.
The fact is that so far the "printed" money has gone either to the stock exchange or to deposits, and it has not yet reached the real economy.
"The money of issue always first gets to the financial markets, where you can get a return without having to develop any business. "The clearest example is the U.S. stock market, which, despite the record drop in the American economy, the massive epidemic and the lockout of businesses, continues to grow steadily. This means that investors see more benefit from investing in stocks than they do from investing in capital goods.
As for the money that was handed out to the public in the form of unemployment benefits and various subsidies, it went either to buy basic necessities or to "pile up" for an even rainy day. Now the savings rate in the U.S. is 19% of disposable income, which is very high. People have tightened their belts and demand is at a very low level.
"Normal and stable growth of consumption will begin only when the economy gets off the subsidy needle and begins to develop on its own, when there is an organic, steady decline in unemployment. It is difficult to say exactly when, it is a very complex, multifactorial model. According to my estimates, in 8-10 months. Probably a little later. Obviously, after the start of mass vaccination in most of the leading economies of the world.
The huge money supply coming into the stock market has already led to the formation of new "bubbles" on the stock market. Any "bubbles" carry the threat of loss for the investor. But the situation is much more dangerous if this money ends up in the food market and starts pushing up the prices not for gold, but for the things on which the daily lives of ordinary people depend.
Prices have started to rise.
This summer, after four months of deflation, U.S. consumer prices began to rise. In June, month-over-month inflation was 0.6%, the highest since 2012. The main item pushing the consumer price index up was gasoline, with prices rising 12%.
In July, fuel continued to rise in price (+5.3%), which, combined with rising food prices, resulted in a similar 0.6% increase in consumer prices. This was twice as much as economists predicted. As a result, the core consumer price index, cleared of fuel and food prices, showed the highest increase since January 1991. On an annualized basis, the core CPI was 1.6%, still below the Fed's target of 2%.
If inflation starts to rise sharply, who stands to benefit?
The list is pretty long.
For example, metals. First of all, of course, gold: it has already gained more than a third since the beginning of the year, before giving up a little. U.S. dollar inflation makes it profitable to buy other metals, such as silver, platinum, and palladium. When the dollar is inflationary, oil prices tend to rise too.
Increase in commodity prices can have a positive impact on the growth of developing countries markets with the large part of their economies formed by commodities.
Conservative investors will shift to stable currencies that are recognized as safe havens. First and foremost is the Swiss franc.
Those whose production is located in the U.S. and whose customers are outside the country will benefit from a weaker dollar because the cost of their goods will fall relative to the products of competitors from other nations.
When store prices begin to rise, consumers gradually give up durable goods to be able to buy the necessities of life.
The coronavirus pandemic and the ensuing economic crisis have created a great strain on people's health (including psychological), so the demand for various kinds of medicines will increase.
Recent history has shown that when there are economic problems in America, suddenly the situation escalates in a hot spot. The beneficiaries are known: the U.S. defense sector and again, oil.
And who stands to lose from high inflation?
Yes, they can be on both lists of losers and winners. Yes, rising commodity prices will support them. But a weakening dollar, for example, could lead to a strengthening of developing country currencies, which would have a negative impact on their economies. Just look at China and the measures that country is taking to avoid strengthening its currency.
In addition, the U.S. can "export" inflation to other, especially developing countries, as we will discuss below. And military conflicts that would support the U.S. defense industry could negatively affect the economies of those countries (usually developing countries) on whose territory they took place.
Any crisis hits the weakest first. Inflation can lead not only to a drop in living standards, but also to an increase in social tensions and cause various social conflicts.
If the dollar begins to weaken, the cost of chips, microchips and other components manufactured outside the United States will rise. Non-US manufacturing companies will have to either lose margins or move production to a cheaper country, which is also fraught with costs.
The entertainment industry, already badly wounded by the pandemic, will continue to suffer losses if inflation rises. It is one of the first items on the list of spending that consumers check off if prices rise.