The year is just getting started and the US fiscal deficit already reached another record, now at its worst level in 70 years. The Fed is facing its worst predicament yet. The current fiscal spending path will lead to record Treasury issuance this year. Foreign investors are unlikely to be the ones funding this operation. With 2020 as a guide, there are no buyers of any size for those securities outside of US banks and the Fed. Major foreign holders of US debt only bought about 5.2% of all Treasuries issued last year. In the face of this enormous new government debt issuance, the Fed faces the impossible task of continuing to prop up already historic asset bubbles while also preventing inflation. The current extreme fiscal imbalances put the central bank on a crash course to fail at both.
For many reasons, the path of least resistance at this stage in the economic cycle is indeed the inflationary one. After years of underinvestment in the basic resources of the “old economy”, the world is facing commodity supply shortages. When combined with the fiscal stimulus driven boost in demand, hard assets are already starting to catch fire. A commodity boom is contributing to reflexive macro inflationary pressures, including investment demand for inflation protection, as well as rising industrial demand in a fiscal stimulus driven economy attempting to both recover from Covid and transition to a cleaner, greener economy. Rising inflation starts with rising basic materials, energy, and agriculture prices. The recent 12-year breakout in commodities is rock solid.
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