Global Trade In 2021

So long as the fiat-based monetary system continues with accelerated money-printing, the US trade deficit will continue to widen. This is due to the lack of a propensity among Americans to save printed dollars, now credited directly into their bank accounts. This will almost certainly lead to demands for further import controls with disruptive consequences for prices.

The continuing deferral of a dollar collapse seems increasingly difficult to achieve, given current and prospective accelerations of monetary inflation. This is coupled with an exceptionally high level of market mispricing, based on current underassessments of price inflation, and heavily suppressed interest rates. While these two distortions have been ignored in the foreign exchanges so far, an increasingly obvious hyperinflation of the dollar will almost certainly lead to markets wresting control of prices from the state in both financial and non-financial elements of the US economy.

Before coming to its conclusions, this article looks closely at the numbers involved, recasting them to last March, when the Fed went all-in on quantitative easing. International trade will be hampered by the progression of a fiat currency collapse, adding to product shortages in America and elsewhere while at the same time consumers will become increasingly desperate rid themselves from excess dollars.

Introduction

With covid lockdowns continuing into the spring and increasingly likely beyond, the economic damage worsens. People everywhere are simply not getting out to spend their money, and businesses which can only plan for their survival under normal trade conditions are pushed back and have lost commercial momentum. Faced with increasing lending risks, their bankers do what they always do in times of trouble — they work to repossess their loans, and any business applying for loan extensions is routinely refused.

Governments have attempted to forestall these problems with special schemes and loan guarantees. In order to save private sector actors from their follies, they are incurring massive debts themselves. The advantage a government has is it can borrow when others cannot, and with its monopoly over the production of money it can create funds through monetary debasement. But even governments have bitten off more than they can chew.

It had become inevitable. When a socializing government takes on cradle-to-grave responsibilities for its citizens it creates a moral responsibility for itself which comes with unlimited cost. Politically, in the choice between protecting the economy and protecting its own system of delivering public services, there can only be one outcome. To protect the government’s administration and bureaucracy, people must give up their freedom to facilitate the government’s crisis management. And oh boy, do we have a crisis!

Navigating and financing their way through it, governments are creating numerous economic distortions, which are bound to be unwound by markets at some point. Through quantitative easing financial markets are now awash with money, inflating asset values. And rocketing government deficits have begun to flood money into non-financial markets at an increased pace, while whole industrial sectors are being wiped out by shutdowns. In the US, we can identify budget deficits and ongoing obligations in excess of tax revenue of least $8.36 trillion for the period between March 2020 and today, which is being funded by bond sales. The make-up of these deficits is shown in Figure 1 below.

These deficits are approximately 360% of total on-budget revenues of $2,330bn, all the excess is to be raised in debt markets, almost entirely through quantitative easing by the Fed.

Screen Shot 2021 01 28 at 3.46.05 PM

In other words, as fiscal 2021 progresses, it will become increasingly clear the largest economy on earth is in the grip of a hyperinflation of its money supply.

It’s not just the US. All socializing governments, which is more or less all the G20 membership, excepting perhaps China and Russia, are doing the same thing — deliberately creating enormous financial deficits while locking down their economies. What started as a one-off support bridging from a pre-covid normal to a post-covid resumption of normality, the covid crisis is turning out to be an infinite and escalating commitment with an uncertain ending. It is not something that governments can abandon easily because of those cradle-to-grave welfare commitments.

We have not yet started the Keynesian stimulus to rescue the global economy from a seemingly inevitable slump, and the promised spending on pet projects such as green energy. Even the IMF is exhorting all governments to throw all caution to the winds and to spend, spend, and spend again.

The slide into this hyperinflationary condition started last March, when European countries, including the UK, first went into lockdowns. America was only a short step behind, and the Fed was forced into an inevitable response by cutting its funds rate to zero and instituting monthly QE of at least $120bn. Consequently, the US Treasury’s account at the Fed has accumulated a balance of unspent funds totaling $1.6 trillion to be offset against future spending, and therefore future funding requirements.[i]

Even allowing for this reserve, financial markets will now need to find $325bn every month to invest in Treasury bonds to cover the remaining unfunded budget deficit to the end of the current fiscal year. Any of this funding that is not obtained through QE will divert funds from the private sector, crowding it out of financial markets and collapsing much of production in the highly indebted non-financial economy. That cannot be permitted, so we can assume the entire burden of government deficit funding will fall directly or indirectly on the Fed’s shoulders. And together with monthly QE for agency debt, this means that QE is likely to rise to a monthly average of over $360bn from now on until the fiscal year-end.

Goodness only knows the scale of funding required after that. The Keynesians hope that additional monetary stimulus (not yet factored into these figures — they are just to rescue Americans from covid lockdowns) will turn the US economy round and encourage investment inflows. They fail to allow for the fact that rapidly accelerating monetary inflation is a debilitating wealth transfer from the productive economy to generally unproductive government spending. Instead of stimulating the economy, debauching the currency bankrupts it. And no foreigner will contemplate investing in a currency which is being so obviously debased against the commodities they are accustomed to purchase with it for their production. If anything, they will reduce their holdings of dollars for something that to them is needed and better retains its value.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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