The US Federal Reserve is grappling with how to reduce inflation, which at 8.2% is running about four times the Fed's 2% target, without causing a recession or pushing unemployment higher by lifting interest rates too much.The Fed has two options when it comes to interest rate increases designed to tackle the highest US inflation in 40 years.
Bloomberg reported that US manufacturing neared stagnation in October as orders contracted for the fourth time in five months. The Institute for Supply Management's gauge of factory activity fell 0.7 of a point to 50.2, the lowest since May 2020, according to data released on Tuesday, Nov. 1. Any reading below 50% indicates a contraction in activity.
The yield curve has inverted 28 times since 1900, and in 22 of those times, a recession followed. For the last six recessions, a recession began six to 36 months after the curve inverted. One commentary says the Fed has already"booby-trapped" markets, meaning that a trapdoor could fall out from under this market regardless of what the Fed says or does today. QTR's Fringe Finance argues that markets have yet to digest the 325 basis points"baked into the economic cake".
Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by end 2022 should be regarded as the baseline scenario.
According to the FRED chart below, the US debt to GDP ratio in the ‘70s was around 35%. Today it is three and a half times higher, at 125%. Now let's bring in what Roubini says about the stagflationary debt crisis. First, he argues that debt ratios in advanced economies and most emerging markets were much lower in the 1970s, compared to today.
As inflation continues to soar, central banks will face a dilemma: if they keep raising rates, they risk triggering a massive debt crisis and a severe recession. But if they loosen monetary policy , they risk double-digit inflation. "It [World War III] is already happening.The U.S. has just passed new regulations banning the export of semiconductors to Chinese companies for AI or quantum computing or military use. Europeans would like to continue doing business with the U.S. and China, but it won't be possible because of national security issues."
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