THE BIG RESET, imminent? And inflation to peak or not to peak?

Inflation is everywhere…

When was the last time you spoke to anyone that didn’t complain about rising prices?

Inflation is a problem, not only in the US but basically everywhere around the world. The UK received an unprecedented public backlash from the IMF and The Netherlands hit the highest numbers (17% YoY) in decades…

Is inflation about to peak? Given the unstable geopolitical situation and the global demand and supply issues, how likely is the inflation to be on its return?

Even though the inflation did not start with the war in Ukraine, it certainly sped things up massively. There are three important principles that contributed to the low inflation world, pre-war and pre-pandemic:

1) cheap immigrant labor, keeping the service sector affordable

2) cheap goods from China, raising the living standards

3) cheap gas from Russia, powering the EU.

This way U.S. consumers had access to all the cheap things the world has to offer, with the rich buying high-end product from Europe that was produced with cheap Russian gas and the lower income households buying their products from China. For decades this has been going well.

Today’s complex war disrupted this. Central banks are trying to clean up the consequences of the economic was, but the price level of goods and services is inflating much faster than the target. And the risk of the inflation staying higher for a longer time is present, potentially resulting into stagflation.

^{Shortages and wages}

Another problem that is not helping the situation is the tight labor market. This is a result of immigration policies (in the UK’s case, this would be Brexit), early retirements and the lesser global labor mobility caused by the pandemic. When basic necessities like food and energy prices rise, workers will ask for higher wages.

Wages are under pressure, globally: Government workers in Australia recently got a 5% increase, oil rig workers in Norway went on a strike when they got a 5% raise instead of the wanted 10%, longshoremen at the port of LA, secured a 10% increase in wages and in the US and Germany, early retired pilots are being offered 50% more salary if they return to their jobs to solve shortage of pilots.

These examples are in line with growth of wages in the US: 5% or multiples of that.

Comments from different corporate CEOs indicate that price pressure will continue for the foreseeable future and that inflation on core services and core goods will remain a problem.

The US treasury and former central bank president Janet Jellen after all said it was “transitory”. All bull**** as they would say on the street…

Is there hope on the horizon?

The most important question: how and when are we going to recover from the inflation? Recessions can help but it might not be enough. We might be headed for stagflation: an environment where inflation is persistent regardless of the economic growth .And if we’re talking about recessions, how deep should that recession be? And when can the economy come back up again without driving inflation?

A whole new world – RESET?

The race to the bottom (zero interest rates), in combination with unprecedented levels of debt raise the following question. How can one get out of this situation? How are sovereign countries able to pay off their debt? Imagine Turkey, Sri Lanka, Argentina, in situations where in the foreseeable future a scenario is likely where interest rates on debt are higher than tax income? Yes, those country will default, on mass.

Credit Suisse and Deutsche bank performance (market value in stock markets are pricing them in to be insolvent soon) are bad. Really bad. If one falls, given these are “systemic risk banks”, they will most likely be “bailed out”. Adding more debt on tax payers.

As said, the problems are real, realistic and growing by the day. Sooner than later this is likely to cause a domino effect.

Theoretically speaking all (global) debt, worldwide, can be wiped out at any time. We could start from scratch. Even (all) mortgages could be written off, nationalize all real estate and create a new system where rent is paid to the state (as an example). In reality, a black and white solution like this is not to be expected but will more likely be a shade of grey. Only part of the debts will be canceled and only some parts of the current financial system will be nationalized.

But one way or another the current global financial system will have to find a different anchor. We do not see any way out of the current situation. A situation like we are in today calls for a BIG RESET of the system and even the need for a completely new global financial system.

And most probably this will happen within the next decade. All parties involved have too much to lose if they wait too long to make the necessary changes. And since the US has the most to lose, given its position in the world and the dollar being the world currency, its most likely up to the US to initiate the reset, whilst the “East” (Russia, China etc) are building already a separate monetary system (outside control of USD).

A lot of questions remain at this point and we’re very curious to see it all develop. Is inflation about to peak? Can the US withdraw the liquidity shortage quickly enough to prevent turning into hyperinflation? Is a new monetary system really happening and what will it look like?

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