Very good analysis again, YCC does look to be a distinct possibility in US if fed is unable to cut rate due to persistent high inflation but what if the rate hike cycle is able to bring down core inflation to 2-3 pc by year end and fed is able to start cutting rate ? Also what if fed increases the inflation target to say 4 pc and starts cutting early, so that high nominal GDP growth increases the tax revenue collection . All possible imagined scenarios.
Thanks! My motive for today's newsletter was that the fiscal mess is highly ignored by most of the people. Though inflation might come down but any rate cut (especially premature) will lead to flare up in inflation due to the flare up of inflation.
Secondly, don't think inflation target will be increased as the breakeven rates remain well anchored at 2%. Raising the target at this point when disinflation process has started and the breakeven remains well anchored will be catastrophic.
The only case for rate cuts which will will initially not lead to rebound in inflation is the hard landing scenario due to a credit event.
Whats the probability that due to a financial shock markets crash and a hard landing happens....leading to debasement of USD and high inflation as well as higher interest rates?
Well, probability of a financial shock in the public markets is low. However, an event such as the US default can be catastrophic. Though I have written that significant risks persist in the private markets (still uncertain about its impact on public markets)
Don’t think that a hard landing will lead to debasement of USD. We have already seen that even after $8 trillion of $$$ printing by the Fed since the GFC has resulted into in fact strengthening of the USD against EM currencies (even DXY is significantly up).
Debasement of USD is not an overnight process, it’s a slow moving gradual process which will take a very long time.
As I mentioned, inflation induced by fiscal mess means that higher inflation is a structural issue now (though might fall once before rebounding again)
I appreciate your argument. However, the higher interest would be paid by US govt only on new borrowings. The market estimate for new borrowing this year is around $1.5 trillion , budget deficit plus debt rollover..This is a small amount compared to total us govt debt of 30 trillion.
Thanks, but if you see that a lot of debt will be rolled over in the next 18 months; which will significantly increase the interest burden (Though I don't have the exact figures with me now).
Very good analysis again, YCC does look to be a distinct possibility in US if fed is unable to cut rate due to persistent high inflation but what if the rate hike cycle is able to bring down core inflation to 2-3 pc by year end and fed is able to start cutting rate ? Also what if fed increases the inflation target to say 4 pc and starts cutting early, so that high nominal GDP growth increases the tax revenue collection . All possible imagined scenarios.
Thanks! My motive for today's newsletter was that the fiscal mess is highly ignored by most of the people. Though inflation might come down but any rate cut (especially premature) will lead to flare up in inflation due to the flare up of inflation.
Secondly, don't think inflation target will be increased as the breakeven rates remain well anchored at 2%. Raising the target at this point when disinflation process has started and the breakeven remains well anchored will be catastrophic.
The only case for rate cuts which will will initially not lead to rebound in inflation is the hard landing scenario due to a credit event.
Wow! Love your analysis. Congratulation…you are doing very well!!
Thanks a lot! Appreciate it!
Whats the probability that due to a financial shock markets crash and a hard landing happens....leading to debasement of USD and high inflation as well as higher interest rates?
Well, probability of a financial shock in the public markets is low. However, an event such as the US default can be catastrophic. Though I have written that significant risks persist in the private markets (still uncertain about its impact on public markets)
Don’t think that a hard landing will lead to debasement of USD. We have already seen that even after $8 trillion of $$$ printing by the Fed since the GFC has resulted into in fact strengthening of the USD against EM currencies (even DXY is significantly up).
Debasement of USD is not an overnight process, it’s a slow moving gradual process which will take a very long time.
As I mentioned, inflation induced by fiscal mess means that higher inflation is a structural issue now (though might fall once before rebounding again)
I appreciate your argument. However, the higher interest would be paid by US govt only on new borrowings. The market estimate for new borrowing this year is around $1.5 trillion , budget deficit plus debt rollover..This is a small amount compared to total us govt debt of 30 trillion.
Thanks, but if you see that a lot of debt will be rolled over in the next 18 months; which will significantly increase the interest burden (Though I don't have the exact figures with me now).