A Week to Remember
This will be a remarkable week because it will be remembered as the week that inflation spiralled out of control due to increasing oil prices. The easiest way to avoid increasing energy prices is for global economic development to slow down. Fortunately, China’s share of global GDP has stabilised at 15.66 percent in 2021, and is only expected to rise to 16.47 percent in 2022. Imports of European vehicles have already stalled due to China’s rapid GDP contraction in the aftermath of the Evergrande debt crisis.
Fortunately, global GDP did not slow too much in the fourth quarter due to solid U.S. economic growth. Unfortunately, according to the Atlanta Fed, U.S. economic development has hit a snag this year, as they are only forecasting 0.1 percent annual GDP growth in the first quarter, a dramatic slowdown from 6.9 percent annual GDP growth in the fourth quarter. There is little doubt that rising gasoline prices, as well as rising food prices, have shocked American consumers.
It’s worth noting that crude oil prices normally climb every spring as demand grows due to the fact that the Northern Hemisphere has more people than the Southern Hemisphere. Geopolitical concerns, of course, are also putting upward pressure on crude oil prices. Since capturing the Crimean Peninsula, Russia has attempted to “sanction-proof” its economy, and is now being financially rewarded for assembling soldiers on the Ukrainian border. I hate to tell it, but $100 per barrel crude oil is likely in the coming months due to increased seasonal demand.
Expectations that aren’t realistic
Although the European Central Bank (ECB) stated that it is “unanimously concerned” about inflation, ECB President Christine Lagarde stated at a press conference that the Governing Council expects inflation to return to its target of 2%. Christine Lagarde, in my opinion, is insane. Geopolitical tensions with Russia/Ukraine were noted by both Lagarde and the ECB as one of the reasons for the ECB’s decision to keep key interest rates at 0%.
The issue is that market interest rates are currently rising in both Europe and the United States, implying that market forces are instructing central bankers. On his Monday Zoom session with his customers, my favourite economist, Ed Yardeni, claimed that if he were in charge of the Fed, he would simply hike the federal funds rate to 1% and declare “this is it for the year.”
Naturally, the underlying issue that both Europe and the United States face is that their government debt as a percentage of GDP is too high (with the exception of Germany), therefore central banks are hesitant to raise their main interest rates. For example, the federal government’s overall debt in the United States currently exceeds $30 trillion, with a hefty yearly interest load that exceeds the Defense Department’s annual budget. In fact, if the federal government taxed everyone equally, the federal budget deficit would still be above $10 trillion, demonstrating that we cannot tax our way out of our fiscal issue.