The butterfly effects that I track right now are $US, Germany, and Deflation [see photo].
The "dollar milkshake theory" [Brent Johnson] suggests that the $US will increase in value relative to other currencies because it is used to transact trade around the world. This is a paradox because the Federal Reserve refuses to raise interest rates even in the face of the current global supply-side infused inflation [rising prices on imports]. This paradox is further strengthened by the fact that the US Treasury has a fiscal charter to spend, spend, and spend. Against that domestic policy is the fact the $US is not weakening as it might be expected to do given the loose monetary and fiscal policy setting in Washington. Add to the mix this contemporary idea of Modern Monetary Theory [MMT] which posits that there is no limit to government spending [digital money printing] given that a sovereign currency does not tie its value to any other. When we acknowledge all the moving elements that surround this global currency any "butterfly effects" that occur will be critical to all our lives.
Germany is in transition from "the Merkel era" to who knows what. Merkel was credited as the saviour of the European Union [EU] when the Greece debt crisis struck; at the time, it threatened to derail the Euro and the whole EU project. Back then the EU was a weak coalition of economies which were in very different phases of success and all of them relied upon the economic strength of a stable Germany. Fast forward to 2021 and the issues are not so much about finances as raw politics within the Union. For example, the recent election in Czech Republic proved to be another victory for the political tactics that the EU leaders use to consolidate the current "State of the Union". However, the focus will now return to finances. EU borrowings are a new thing; debt raising in 2020 came to fruition with a new 750 billion Euro fund for Covid related projects. With the advent of a lever for EU debt raising; the new German leader will soon be tested on the future of the Euro, current immigration policies, existing business regulations, and European unity. The pressing "butterfly effect" comes from a contemporary need for nimbleness and vitality as the dead-hand is removed.
Deflation is not expected by most commentators; however, I think it is the most logical outcome of the monetary policy settings in the US and around the world at present. The focus is on the impact of pandemic induced price inflation. But the real issue that lies under the headlines is the news about shortages which will grip the whole world. Today, in China, there are electricity outages because there is a shortage of coal supplies which results from the CCP bans on Australian exports. These types of shortages, and prices rises, should tend to ease over the next couple of years; and so, the expectation of sustained price inflation is one that I expect to be short lived. Meanwhile the impact of Deflation is a hidden threat. We see this when we note that the US banking system is placing up to $US1.3 Trillion in reverse repo payments [taking liquidity out of the economy] via short-term placements [including overnight] with the Federal Reserve. The banking system is bloated with trillions of dollars of uncommitted funds and this fact will tend to balance the pressures on asset inflation in the US and around the world. Also, the switch from fossil fuels to green energy will repurpose existing capital flows and so traditional asset inflation prompts will be reset. The "build back better" movement [sponsored by the Davos group] is an unknown element in the 2021 business cycle and so it is difficult to predict the real impact of this "butterfly effect".
Richard.
コメント