Geopolitical expert Pippa Malmgren says the Fed’s 2% inflation target is effectively a promise to default. The rest of the world sees it coming and wants to get out of the way.
Speaking at the Mauldin Economics Strategic Investment Conference in Dallas, Malmgren said geopolitics begins with monetary policy. Central bank actions drive all kinds of decisions. That’s especially true when talking about the world’s largest and most important central bank, the Federal Reserve.
Inflation is a Kind of Default
The US government is so deep in debt that even if it taxed 100% of the population 100% of its income for years, it wouldn’t be enough. We need a different plan, and Malmgren thinks a stealth default via inflation is the way we will do it.
To those outside the US who own Treasury debt, the Fed’s 2% inflation target is effectively the promise of a 2% haircut. Worse, they don’t think the US will stop at 2%. Inflation has been below target for so many long, they assume we will overshoot the target for years.
Bottom line: Emerging market nations and especially China are exiting the US Treasury market. They believe they can better use their capital in other ways.
China Changes Plans
Faced with skyrocketing food prices, China is working hard to open trade routes to Europe and the Middle East with its “One Belt, One Road” project. Beijing is directing its export revenue into railroad, ports, pipelines, and infrastructure that will let it bypass the US Navy.
So who will buy our government debt? For now, US banks will pick up the slack. Regulators want them to avoid risk. Holding your reserves in Treasury bonds is as conservative as it gets.
The other side of that, of course, is that banks aren’t loaning money to small businesses and consumers who can stimulate growth. So the US economy stays stagnant even as rent, food, health care, and other staples get more expensive. Not a pretty picture.
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As reported by Business Insider