The View From 1776
Inflation and the Burgeoning Deficit
How will the Fed handle it?
- There are several troubling things going on that appear may come to a head in 2009-2010.
1. Fed may close lending window which would force banks all at the same time to take back what they have been using to borrow from the Fed. That is mostly junk.
2. UAE (United Arab Emirates) as said that in June of 2009 they will start moving away from the dollar and to a basket of currencies for valuing their currency.
3. China has bid 200% higher than India for an oil contract in Africa. Russia bid $225-295 for $140 per 1,000 cubic ft. of gas from Turkmen for a 2009 to 2028 long term contract. Why would these nations pay so much if they don't think things will go up.
In the case of Russia, the article said
Curiously, the agreements reached in Ashgabat on Friday are unlikely to enable Gazprom to make revenue from reselling Turkmen gas. Quite possibly, Gazprom may now have to concede similar terms to Kazakhstan and Uzbekistan, the two other major gas producing countries in Central Asia. In other words, plain money-making was not the motivation for Gazprom. The Kremlin has a grand strategy.
4. We may have a $1 trillion deficit next year or 2010 regardless of who is elected. We will be entering a pick up in boomer retirements, payroll taxes will increasingly have a more difficult time keeping up. Since we borrow any surplus, that will speed up the need for foreign loans at the same time they want to stop lending us so much.
5. Inflation due to population growth in the world and 3 billion people eating more and more often and the huge infrastructure building boom will mean we get little if any relief from higher prices for imports and raw materials. That will put more of a burden on Congress and the new President.
6. Interest rates may start rising next year and cause the economy to get worse just as we are starting to see some relief from this down turn. Whether the Fed raises rates or not, the fear is that the world market for lending will demand higher rates from individuals and cities and states and corporations for loans.
7. Consumers may be already increasing their saving and decreasing spending. In a consumption based society that can turn a recession into a depression. Cities and States are now feeling the impact of lower tax revenues and starting to cut spending and even lay off government workers and that trend may have to continue for years if this cycle continues. 44% of national income comes from government spending.
8. More stimulus spending may be in the works from Congress. That will hurt the next President as more interest will need to be taken from tax revenues. Already, 1/6 of the budget is interest on national debt but, when all debt, personal, city, state and corporate is included debt to GDP is 370%
9. The dollar is growing increasingly risky. As the world tries to end the dollar as the world's reserve currency, any mistake in a "slow departure," could at some point trigger panic selling and the collapse which would bring on hype-inflation. Russia and China may end up having a lot to say about the fate of the dollar.Posted by JanPBurr on 08/01 at 11:09 AM