Last week, the IMF pleased us with the news that the global debt in 2020 reached a record $ 226 trillion, but even more remarkable that it is 256% of world GDP. At the same time, it grew at the fastest pace since the Second World War – “against the background of the global epidemiological crisis and deep recession,” the increase was 28 percentage points at once. Moreover, against the backdrop of accelerating inflation. “Debts were high even before the crisis, but now states have to cope with record high debt burdens in both the public and private sectors, with new mutations of the coronavirus and increased inflation,” the fund said.
There is no doubt that, in 2021, the growth of debt, although it will slow down somewhat, will still remain at a very high level. But inflation continues to grow at a very long time unprecedented rates around the world, including developed countries, primarily the United States.
Officials of Western financial institutions in their comments have long blamed the pandemic and the “mismatch between supply and demand” for both problems (both the insane growth of debt and the rapidly accelerating inflation) in their comments. At the same time, they seem to overlook the barbaric actions of the world’s leading central banks (and above all the US Federal Reserve System) to pump up the world financial system with unsecured liquidity. Once again, the mantra about the discrepancy between supply and demand was repeated by the Fed and following the meeting held this week.
But this, of course, does not mean that they do not understand where the root of evil is and how deep the problems are. Both the IMF and the FRS until recently, with a blue eye, argued that the rise in inflation is a temporary phenomenon. Almost short-term. In the latest communique of the American agency, the phrase that inflation is a temporary phenomenon has disappeared. So the rise in prices is serious and for a long time.
It would seem that the recipe for dealing with these problems is obvious: an end to the printing of unsecured money, plus an increase in base rates by leading central banks. By the way, similar advice was given this week by the former US Treasury Secretary Lawrence Summers.: He called on the Fed to immediately stop buying mortgage-backed securities and Treasury debt, and at the same time to quadruple the base rate.
But at the same time, he said about the risk of “spontaneous deflation of financial markets”, about the excessive euphoria of private investors who “chase income, taking additional risk” and that “it will be very difficult for the Fed to arrange a soft landing.” “Every disinflationary effort that the Fed has historically made, when it was clearly established that inflation was too high, ended in a recession,” Summers said. At the same time, he did not say anything about the scale of the impending recession. And it would be worth it: after all, such a debt overhang and such a bubble in the stock market has never been observed before.
And Summers is far from the only major financier trying to predict where the current unhealthy situation will lead. Experts’ scenarios for the development of events vary, but everyone agrees that unprecedented problems are coming.
However, the Fed did not make any breakthrough decisions following the meeting…. In particular, he left the base rate at the level of 0-0.25%, also indicating that “financial conditions remain favorable.” The only measure that can somehow be interpreted as aimed at combating inflation was the reduction in January asset buybacks by $ 30 billion: US Treasuries – by 20 billion, mortgage bonds – by ten. That is, the infusion of unsecured dollars into the world financial system will continue, it will simply decrease somewhat. Well, they also hinted that the base rate would still rise next year.
And this is at a record for the United States for 40 years, official consumer inflation of 6.8% and close to 10% of production. Moreover, few people believe in such a low size of these indicators: there is an opinion that these values need to be multiplied by two.
By the way, the European Central Bank, which met next, also left the base rate at zero percent. And only the Bank of England, unexpectedly for most experts, raised the base rate from 0.1 to 0.25 percent due to official inflation, which reached 4.2%. But at the same time, he left unchanged the volume of the asset repurchase program, that is, the same pumping of the market with unsecured pounds sterling.
That is, the reaction of the leading Central Banks of the West to the situation in world finances is best described by the words of the song “Everything is fine, beautiful marquise.”
Why is that? Because their opportunities in the financial system pumped up by themselves with unsecured money are very limited.
A significant increase in the rate, coupled with the termination of the so-called asset repurchase, is a sign of a stock market collapse, massive bankruptcies and the inability of these states to finance their expenses (including paying off debts), because, for example, most of the treasury securities in the United States have long been bought out by the FRS itself… And all this together will lead to the collapse of the world financial system.
The Fed is still hoping to loot, using the old scheme: by raising rates, attract capital from other countries, thereby forcing the rest of the world to pay to get out of the crisis. This has been done more than once. This time, a bonus can also be a decrease in the real size of the public debt of the United States and other leading countries due to inflation, as well as a real reduction in the amount of savings for those who have them. But right now, the trick may not work. Record bubbles, record debt overhang, and a gradual loss of confidence in the United States and the American dollar could become an explosive mixture that will crush the American economy and destroy the dollar-based global financial system.
It is hardly worth rejoicing at the realization of such a scenario: it will not seem a little to anyone. A dramatic drop in living standards will be seen around the world.
As now all over the world, prices are rising due to the actions of the Fed. This must be understood. But under this scenario, there is also cautiously optimistic news: perhaps what emerges in its place will be less unfair in terms of resource allocation and consumption. Indeed, under the current system, the center of the world financial system, represented by the United States, consumes many times more than it produces.
However, the collapse of the financial system, of course, is not the only possible scenario. But without exception, all scenarios say that the world economy and most of the world’s population will face difficult times.