Inflation May Derail World Economy

Alchemist

Administrator
Staff member
#1
Most of us have taken for granted that the US Federal Reserve will cut rates and avoid any sharp slowdown in the US.

Central banks around the world are expected to cut rates to propel their respective economies.

However, the speed at which commodity prices (food and energy) are rising, it will become very difficult to lower rates.

Every time rates are cut, liquidity in the system increases and pushes commodity prices further up.

Here are charts of some of the important commodities. The prices are the US prices, but situation around the world is similar.

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Crude Oil:



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Natural Gas:



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Bean Oil:



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Wheat:



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See next post.
 

Alchemist

Administrator
Staff member
#2
Corn:



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Soybeans:



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In spite of slowing growth, RBI isn't giving any sign of softening interest rates.

I wonder, till what extent can US cuts its rates?

Even if it does cut rates, will the cuts really benefit the economy?

If the prices of commodities keep rising sharply, what's the use of having that 0.1% or 0.2% GDP growth?

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The same question may arise for other economies too.

More the world develops, more are its food and energy requirements.

Does the world have the resources to sustain such fast rate of development?
 

Alchemist

Administrator
Staff member
#4
Yes.

When commodity prices rise due to demand-supply mismatches, the inflation is more manageable and less widespread.

However, what we are going to witness is something different.

The risk of inflation that the world faces now arises from the irresponsible fiscal policies of governments.

"First, borrowing a lot of money and then printing money to repay the debt" - this is what governments of most major economies are going to do in next few years.

The result will be not just higher commodity prices, but higher prices across all assets....including stocks, commodities, real estate etc.

Governments will have to sharply increase interest rates to tame down inflation.

Higher interest rates will kill growth.....there isn't much left in the world any way...:D.

Cash and government bonds will be go out of favor.

Already governments are facing problems selling new bonds.

The 2003-2008 bull market was fueled by high liquidity. This liquidity came from low interest rates, high leverage used by investors and high risk appetite.

The current situation is slightly different. The liquidity getting created now has a much bigger contribution from inflationary policies of governments.

Money is getting thrown here, there and everywhere in the name of bailouts, aid, stimulus packages....whatever you call it.

This money is then finding its way into different assets.

The world may be creating another bubble....a bubbled fueled not by investment bankers, hedge funds or speculators, but by governments.

A bubble that might be even bigger than the earlier one.....God knows where we are headed...:D.
 
#5
The 2003-2008 bull market was fueled by high liquidity. This liquidity came from low interest rates, high leverage used by investors and high risk appetite.

The current situation is slightly different. The liquidity getting created now has a much bigger contribution from inflationary policies of governments.

Money is getting thrown here, there and everywhere in the name of bailouts, aid, stimulus packages....whatever you call it.
Very nicely put Alchemist, good read for me.

The risk of inflation that the world faces now arises from the irresponsible fiscal policies of governments.

"First, borrowing a lot of money and then printing money to repay the debt" - this is what governments of most major economies are going to do in next few years.
This reminded me of an article that I read sometime back which compared few country's debt position by comparing their gross external debt to their GDP.

I was almost shocked to see the debt position of the countries here when compared to our favourite US of A, specially nordic countries which I thought were the safest economy.

Countries External debt (as % of GDP): -- Just to compare the two...
US - 95%
United Kingdom - 336% !

CNBC-The World's Biggest Debtor Nations

Also Note: External debt is a measure of a nation's foreign liabilities, capital plus interest that a country must eventually pay. This number not only includes government debt, but also debt owed by the private sector and individuals.
 
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