Gold 1756,685
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EURUSD 1,1792
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DJIA 35331,50
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OIL.WTI 67,705
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DAX 15978,50
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In last Thursday’s newsletter we promised to explain why the US government benefits from high inflation. The main reason is the inability to do anything about the huge rising national debt.
S&P 500
The fight against the coronavirus pandemic has cost the US economy huge amounts of unbudgeted money. Fortunately for the authorities, these sums can easily be borrowed on the open market. Today, the US national debt is close to $28.5 trillion. This is more than the annual GDP. Yet spending continues to rise. And US President Joe Biden is about to raise the national debt ceiling once again. Republicans in Congress continue to haggle, demanding lower spending. But it is clear to everyone that the debt ceiling will once again be raised.
What are the risks to the US economy? In a low-interest-rate environment, almost nothing. But rates will rise at some point in time. And that would be a real disaster for the government. Suppose the interest rate rises to the current rate of inflation of 5.5% per year. This would lead to the fact that there would simply be nothing left to repay the interest. Of course, more money could be printed, but it would be a vicious circle. The new money would accelerate inflation even more. The interest rate will go even higher. And we will have to pay even more on our debts.
Fortunately for the American government, interest rates have not risen yet. Inflation, on the other hand, is continuing to accelerate. The only solution to the national debt problem (although no one is saying it openly) is to raise inflation even higher.
Why? It’s simple. If prices go up, then so do companies’ profits, their expenses and the income of citizens. And that means that taxes on those amounts go into the budget. At the same time, the American government is paying for its old debts with actually old, already severely devalued money. And the longer this situation lasts (low interest rate on trades + high inflation), the easier it will be to pay off the national debt.
Since the Fed and the US government are interested in accelerating inflation, they will watch closely to ensure that stock markets rise further. What to do about it? It is up to everyone to decide.
01.50 Japan’s Q2 GDP
04.00 China Retail Sales in July
14.30 New York Fed manufacturing activity index for August
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