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Credit Bubble Bulletin—Noland Comment: “Be careful not to exit too early” is a “lesson of the global crisis”? You can’t be serious? The Fed doubled its balance sheet to $4.5 TN between 2011 and 2014 in a non-crisis environment. This was after formally communicating an “exit strategy” in 2011. Between 2008 and 2014, Fed holdings surged from $860 billion to $4.5 TN. At that point reducing assets to $3.72 TN doesn’t qualify as either “early” or an “exit,” especially when the Fed quickly reversed course in 2019.
At this point, I doubt an “exit” will ever be possible. Count me skeptical of the nice scenario of the “very transparent” Fed clearly communicating an approaching taper to a calm and rational marketplace. We’re so beyond that. The Federal Reserve’s life is about to turn much more complicated and challenging.
Inflation risk is the highest it’s been in years. The 10-year Treasury “breakeven” inflation rate added a couple more basis points this week to 2.09%, the high since October 2018. Commodity prices continue to rally, with the Bloomberg Commodities Index closing Friday near one-year highs. Services and manufacturing surveys indicate heightened price pressures. Yet my main point is different.
The world is awash in liquidity. Moreover, the dollar has weakened, and the central bank overseeing the world’s reserve currency is trapped in reckless monetary inflation. This backdrop has granted nations around the world the flexibility to recklessly inflate their money and Credit. I would argue global “money” and Credit are unhinged like never before. And it’s no longer hypothetical. Global central bank “money” is solidly on a trajectory that ensures intractable Acute Global Monetary Disorder.
Does this ensure accelerating general price inflation? Not necessarily. There remains the possibility for the bursting Bubble scenario with collapsing asset prices, de-leveraging, illiquidity and resulting deflationary pressures. But especially after what was experienced in 2020, we must assume global central banks would respond in concert with multi-Trillions of additional monetary inflation.
We’ve reached the point where a particularly problematic circumstance would appear a relatively high probability scenario: central banks being forced by synchronized global de-risking/deleveraging to move early and aggressively to flood the system with liquidity. Central banks, for the first time, would be inundating a system with liquidity despite increasingly entrenched inflationary pressures and biases. General price inflation could, finally, really catch fire.