Take a trip with Jim Rickards — part four

Wednesday, 8 February 2023 — Albert Park

[6 min read]

Dear Reader,

Investors should understand that the inflation and high interest rate dilemmas discussed in previous articles aren’t confined to major developed economies or developing giants such as China. The problem of inflation is global and is even more acute in important developing economies, as shown in the chart below from Steve Hanke of Johns Hopkins University.

Among economists, Hanke is the leading expert and tracker of inflation and hyperinflation in the world:

Perhaps seeing Zimbabwe at the top of the list, with 377% annual inflation, comes as no surprise. What may be surprising is the high inflation in several developing economies that are significant in overall global rankings.

Turkey is the 23rd largest economy in the world (US$692 billion GDP) and has 118% inflation. Argentina is the 26th largest economy in the world (US$564 billion GDP) and has 46% inflation. Nigeria is the 31st largest economy in the world (US$510 billion GDP) and has 32% inflation. Other relatively large economies that make this high inflation list include Egypt, Venezuela, and Pakistan.

More to the point, the combined population of these high-inflation countries is more than one billion people or 12.5% of the total population of the planet. Their ability to withstand high interest rates and economic recession to fight inflation is extremely limited. As these high rate, lower-growth policies roll out around the world, the potential for humanitarian crises, including mass starvation and social unrest, cannot be overstated.

The domino effect of a worldwide slowdown

This survey has considered the US, UK, the EU (especially Germany), China, and Japan. Those are the five-largest economies in the world and have a combined GDP of US$70 trillion, which comprises 75% of global GDP.

Clearly, there are other important economies in the world including India, Canada, Brazil, and Russia. And clearly there are other powerful factors driving the global economy; including supply chain dysfunction, the war in Ukraine, the economic war that has emerged from the Western response to the invasion, and the role of Russia as a supplier of critical commodities including oil, natural gas, coal, wheat, and strategic metals.

Also, investors shouldn’t overlook the extensive efforts to get out from under dollar hegemony through the creation of new payment channels and new reserve currencies including those currently underway by the BRICS (Brazil, Russia, India, China, and South Africa), the Shanghai Cooperation Organisation, and large buyers of gold, including Russia, China, Turkey, and Iran.

Still, our sample is more than enough to identify the key trends and connections affecting global growth. Those trends break into three cases: The first case consists of the majority of developed economies (US, EU, UK, Australia, Canada, and others) that are experiencing high inflation and higher interest rates imposed in an effort to destroy demand and subdue inflation. The likely outcome for this case will be a recession, not a soft landing.

Inflation will come down by next year, but so will the valuations of stocks and other asset bubbles. A recession is the best outcome. A severe recession combined with a financial and liquidity crisis is a distinct possibility.

The second case only has one member — Japan. Its inflationary trends will persist because monetary ease will persist at least until 2023. A recession cannot be ruled out, even with monetary ease, because recessions are more the norm than the exception in Japan — and because Japan is highly dependent on growth in other developed economies that are slowing down. The main impact for investors will be a rapidly depreciating yen. The USD/JPY cross rate will sink to 140 or lower in the months ahead.

The final case also has one member — China. Its economic slowdown has already occurred and will get worse. The policy response is monetary ease and a weakening of the yuan against the dollar. China will continue to wreck its own economy with its ‘Dynamic Zero’ COVID policy. These adverse conditions will persist at least until the 20th National Party Congress in November 2022, which will appoint Chairman Xi to an unprecedented third term as president and elevate him to the status of Mao Zedong.

Whether China will try to change course after November is unknown — but it’ll be too late in any case. By then, the collapse will be embedded and recession in the rest of the world will ensure China gets no help from external demand.

[Note: This was originally punished in July 2022.]

National economies and economic groups such as the EU have idiosyncrasies and indigenous factors that drive economic performance. Still, the global interconnections tend to be more powerful because of exchange rate and interest rate channels. Events really are interconnected in the end. That’s what we’ve tried to convey to you, the reader, with this global survey.

We’re on a global roller coaster going from inflation and high rates to deflation and recession in record time. Only the nimble investor will be able to enjoy the ride.

Diversification is key as markets can turn quickly. Remember — cash, bonds, and hard assets like gold should be part of any portfolio during these volatile times.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

Dear Reader,

In theaters now. Two plays. Two endings. Both pathetic.

In one, the Republicans and Democrats pretend to battle it out over the federal budget. To bring you fully into the picture, the feds owe US$31 trillion…give or take a trillion. They can’t pay it. And if interest rates are headed into ‘normal’ territory (2% or 3% above inflation), they can’t keep up with the interest payments. At 7% interest, the entire federal debt would cost more than US$2 trillion per year in debt service. The feds don’t have that kind of money.

Last week brought ‘good’ news from the economy. Jobs are apparently plentiful. And that’s ‘bad’ news for investors because it means the Fed has to keep nudging interest rates upward. Otherwise, workers might actually get a raise…driving up prices for everything.

So higher rates are coming down the pike. And now, if the federal government borrows more money, it drives up interest rates even more, brings on recession, depresses federal tax receipts, and makes the deficits even bigger.

But one way or another, the federal government must finance its spending. Apart from borrowing, the only other choices are to cut spending…or ‘print’ the money. These are the subjects of the two dramas now on the big stage.

Same old script

The curtain goes up on the first one as the newly Republican House of Representatives brings out a cannon: the debt ceiling. They say they’re going to fire it if spending…some spending…on projects they don’t care for…is not cut.

And so, the dramatis personae are in place. The battle begins. Alvaro Vargas Llosa explains what happens next:

‘Here we go again. Treasury Secretary Janet Yellen warns that the federal government’s borrowing limit has been reached. Even with Treasury taking “extraordinary measures,” the government’s ability to meet payments will be exhausted in a few months.

‘Leaders of the Republican-controlled House of Representatives say the House won’t vote to raise the debt ceiling, which would allow further borrowing, without spending cuts. But the White House and Democratic leaders reject that proposition.

‘Soon the bond markets will be roiled. Fear mongers will raise the alarm that the United States will default on its bond obligations and will no longer be able to make Social Security and Medicare payments.

‘The White House will bet that the standoff hurts the opposition, which it will, and then a deal will be reached that, in essence, involves the GOP-led House caving in while the White House and the Democrats agree to meaningless budget reductions (in reality, reductions in planned increases, not real cuts) that, if they ever materialize, will change little in the grand scheme of things.

‘All this as the U.S. balance sheet continues its descent into banana republic unviability.

‘We’ve been here before. Nothing indicates that the current fight between the Republican House and the Democratic White House over the debt ceiling won’t follow a similar script.’

Mock showdown

Of course, it’ll follow the same script. The debt ceiling threatened to block federal spending 78 times in the last 63 years. And each time, the politicos voted to raise it. If there’s one thing Republicans and Democrats agree on, it’s this: nothing can be allowed to interfere with the money machine. And the real role — for members of both parties — is the same…to keep the machine well-oiled and well-fuelled, taking money from the public — via taxing, borrowing, or inflation — and transferring it to the groups favored by the elite.

While the politicians are preparing a mock showdown over the budget, the Fed is putting on a spectacle of its own. It’s pretending to ‘hold the line’…firmly and resolutely promising to fight inflation until inflation has no fight left in it. 2% is the limit. No more. No less. (Where that comes from, who knows?) And the Fed will continue to raise interest rates, perhaps only by ‘baby steps’, until inflation bows down, bends its neck, and offers its sword to the Federal Open Market Committee.

That, at least, is the official script. Mr Powell, et al, are supposed to keep up the fight until he can announce ‘mission accomplished’.

But here again…the show is a fake. The outcome is a foregone conclusion. The Powell Fed — like the McCarthy House — will cave as soon as it faces a worthy enemy. The script may call for it to stick to its post, like the 300 Spartans. But in 1988…2000…2007…2020 — every time the Fed has faced a real enemy…a stock crash, recession, even a germ — it cut rates sharply, dropped its weapons, fled the field, and claimed not only victory, but moral ascendance.

Disgraced again

At the end of the ‘90s, Alan Greenspan, Robert Rubin, and Larry Summers graced the cover of TIME magazine as the Committee to Save the World. What did they do to earn such fame and glory? They made more credit (and debt) available to troubled borrowers.

Then, following the mortgage finance crisis on Wall Street, Ben Bernanke did the same thing. He cut short the correction by making more credit available. He then had the cheek to claim he had not been routed in panic. He said he had the ‘Courage to Act’.

Most recently, the Fed could’ve fought a last-ditch battle in 2020, forcing the feds to come to terms with their own overspending. The politicians gave away trillions in stimmies, PPP loans, and other boondoggles. Where did they get the money? From the Fed. Instead of holding the line, the Fed disgraced itself once again. It shamelessly turned tail...and ran through the bushes where the rabbits couldn’t go, ‘printing’ an unprecedented US$4.5 trillion.

Will either of today’s performances turn out differently? Under real pressure both Congress and the Fed will do what they are paid to do; they’ll keep the money coming to themselves…and the elite who support them.

Stay tuned.

Regards,

Bill Bonner,
For The Daily Reckoning Australia