Inflation fears continue to be a concern in the markets. They are now materializing in the real economy. Speaking to Sputnik, Fabrice Drouin Ristori, founder of Goldbroker.com, says that monetary policies are putting the value of currencies-especially the dollar-at risk.
After a complicated week, the New York Stock Exchange restarted with a more- than-tepid session on May 17. The Dow Jones ended down 0.16% at 34,327.79 points. Not any better for the flagship index of technology stocks: the NASDAQ; it gave up 0.38% to 13,379.05 points while the broader S&P 500 index dropped 0.25% to 4,163.29 points.
You know where I stand on the Fed & Powell & their denials on exacerbating wealth inequality & the danger of the insane asset bubble they have created.— Sven Henrich (@NorthmanTrader) May 15, 2021
Well, here's Druckenmiller dropping truth bombs on Powell & the Fed on the very same subjects. pic.twitter.com/3PThE2I5B2
How can we explain the fact that the US markets, which have been used to record highs for months, are going through a rough patch? The main reason is to be found in fears of a generalized rise in prices. The U.S. Federal Reserve (Fed) has "continued to minimize the risk of inflation," as Peter Cardillo of Spartan Capital Securities pointed out. But that's not enough to take away from recent data that has the markets concerned.
"THE COVID-19 CRISIS HAS CHANGED THE GAME"
Inflation accelerated significantly in April in the United States (+0.8%). Over one year, the price increase reached 4.2%. This has not been seen for thirteen years. The 1.9 trillion dollars released by Joe Biden as part of his stimulus plan (added to the more than 2 trillion dollars he wants to put on the table to update the country's infrastructure) do not explain on their own this price increase. Many economists blame massive monetary injections on central banks and their ultra-accommodating policies, with rates close to zero. A choice that has obviously been made by the Fed.
#Fed expanded its balance sheet by 0.3% to a record $7.83tn in the past week as Powell keeps the printing press rumbling despite rising inflation. Fed's total assets now equal to 35.5% of US's GDP vs ECB's 76% BoJ's 130.4%, BoE's 38% pic.twitter.com/LDeOWqOcO4— Holger Zschaepitz (@Schuldensuehner) May 13, 2021
"Until recently, the inflationary effect of central banks' monetary policies was not directly apparent in the real economy. It has been contained, because this new money has mainly benefited members of the circles of power, especially monetary and political, who have invested in financial assets," Fabrice Drouin Ristori, founder of Goldbroker.com, explains to Sputnik.
“Such a pattern had been in place since the 2008 crisis, but Covid-19 changed the game," he continues.
Outside of Uncle Sam, signs of inflationary pressures are popping up everywhere. Production costs rose again in April in China. They are at a four-year high, according to La Tribune. Even Europe is concerned. The prices went up in April in France (1.2%) and Germany (2%). Of course, these figures are not alarming; they can be explained in part by rising energy costs. Nevertheless, a very real trend is emerging.
SIGNS OF INFLATIONARY PRESSURE
The rise in the price of raw materials is worrying economic players. According to Le Figaro, prices "are approaching those of 2008". Metals such as copper, but also wood, or even cereals such as wheat, have seen their prices soar for several weeks. As for the price of crude oil, it has increased by about 30% in the last year.
With Covid-19, money was also distributed directly to individuals and businesses at the same time that global supply chains came to a halt, reducing supply. This put initial pressure on the prices of finished products. This was reflected in the price of raw materials," analyzes Fabrice Drouin Ristori.
The reopening of the global economy and its hopes for recovery come at a time when supply chains are still disrupted. High demand is driving up the price of raw materials or semiconductors, which are in short supply. The shortage of computer chips is jeopardizing the manufacture of many electronic devices and automobiles. The production of semiconductors, which are mainly manufactured in Taiwan, has also suffered from the climatic disruptions that have recently hit the island.
Global Inflation rates... pic.twitter.com/tnbrDWxxFX— Charlie Bilello (@charliebilello) May 13, 2021
For Fabrice Drouin Ristori, the unlimited money printing policies of central banks and the disruption of supply chains "explain the surge in commodity prices". This is bound to have an impact on retail prices.
For the moment, inflation remains under control in most countries. But the sharp rise in the United States raises questions. If prices rise too much, central banks would have no choice but to tighten the screws. And the consequences could be dramatic.
"The most severe would be the jump in interest rates and thus the increase in the cost of debt repayment for all governments. Let's remember that the central banks finance the majority of governments by buying the Treasury bonds they issue. This artificially keeps interest rates low," says Fabrice Drouin Ristori.
Faced with the Covid-19 crisis, central banks, led by the Fed and the European Central Bank (ECB), have massively purchased public and private debt through asset buyback programs. This has led to an explosion of their balance sheets. The Fed's balance sheet exceeds one third of US GDP, while the ECB's balance sheet is worse: more than two thirds of the GDP of the eurozone.
"DILUTE THE COLOSSAL AMOUNT OF DEBT"
A rise in interest rates would be dramatic for the financing of many economies. But Fabrice Drouin Ristori does not believe in this, at least not in the near future:
"The objective of governments and central banks is rather to dilute the colossal amount of public debt by diluting the value of currencies. Historically, this is very often what happens in a context of colossal debt: the currency is sacrificed."
The expert interviewed by Sputnik invites us to take a closer look at the evolution of the price of gold in recent years. The price of gold has risen by about 188% in fifteen years. At 3:53 p.m. on May 18, it peaked at $1,868.02. But, for Fabrice Drouin Ristori, "the price of gold is not increasing in real terms. It is the purchasing power of the currency that is decreasing".
"The prices of goods, services, and raw materials rise, because the value of money declines. The purchasing power of currencies decreases. Inflation is a consequence of lax monetary policies, certainly accentuated, since the Covid crisis, by a supply shock."
According to the founder of Goldbroker.com, the awareness of this phenomenon is recent for some. Effectively, inflation is now affecting the real economy and therefore directly the world's populations.
“I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one,” investing magnate Stanley Druckenmiller says. https://t.co/u6G2gU6tdZ pic.twitter.com/Fgpz7gFNXq— CNBC (@CNBC) May 11, 2021
According to Fabrice Drouin Ristori, its effects are far from over:
"The consequences will be severe for the dollar. A global reserve currency is supposed to play its role as a... store of value. If the dollar no longer maintains its value, dollar holders will sell their greenbacks and seek refuge in other more stable assets, such as physical gold or tangible assets".
The expert assures that this has already been the case for "more than ten years". He recalls the "de-dollarization" policy implemented by several countries, including Russia. This process underlines "that the dollar cannot remain indefinitely the world's reserve currency while the Fed is engaged in a monetary policy of destroying its value to lighten the burden of the American debt".