Markets of debt and the Food Inflation shock.

Without being to absorbed by political or social aspects, particularly in the dialogue of a globlized world that we are all participating in, more so its interlinked digital networks – if it can be looked at philosophically, our society now, as a collective, despite the gaps in inequality and widening disposition between the wealthy and the poor, there is another defining aspect inserted into a world that was sold as the idealisms of entrepreneurial and ambition, it is of the extremely indebted.  Not just citizens of countries, but the actual economic systems that guide and finance a population.  There can be a difficulty when trying to understand economics within the semantics of finance and at times, probably unnecessary, the over analyzing and to the extent intellectualizing the current capitalist system that we all prescribed to.  But, something alarming has occurred over the course of thirty years of monetary policy, is the extraordinary debt burden facing the financial system at the end of 2019, before the COVID-19 pandemic swept throughout the world.  Global debt to Gross Domestic Product grew to $255 trillion in 2019, but the more daunting aspect is the amount of debt generated by the two biggest economies, China and America.  Pre the viral contagion, both countries were already leading the world in accumulating debt, sharing 60% of the overall global debt to GDP in 2019.  

What is interesting when studying this recent phenomenon of Governments and everybody else piling on more debt, is the sovereign expansion of Central Banks balance sheets, to which the the four main Central Banks in question, Bank of Japan, European Central Bank, Bank of England and the US Federal Reserve have ballooned their asset purchases, since the 2008 finance crisis, from under 5 trillion in purchases of government debt and loans to commercial banks to over twenty trillion, collectively in a period of just twelve years. What is known as Quantitative Easing, central banks monetized government and commercial debt and printed money, allowing liquidity to flow back as an exchange and since 1980s the Federal Reserve, in a period of thirty years, as slashed the fund rate to banks from 20% to what it is today between 0% and 0.25%.  In March 2020, at the peak of the COVID-19 epidemic, the 10 Year Treasury note dipped below 1%, touching .91%.  This plunge in the rate of the ten year treasury, which mortgagee rates in the US use as a measure when issuing loans to house buyers, was an unprecedented event.  

The significance of yields on government debt plunging to historic lows, has been reflected as less of a trading opportunity for the institutional investor, whose main purpose is to not lose money in the markets, but it became more of an observation.  A curiosity that could be a hallmark of widespread instability within the bond markets.  Yet, with trillions of dollars flowing in and out of bonds and stocks on a daily basis, the collapse in rates indicates only one culprit, global Central Banks.  And he lies the deeper problem, as the financial markets ars now completely  reliant on central bank interventions, the impact can be seen as a loss of confidence in the value of cash, to which interest rates maintain the appeal of holding money.  The Federal Reserve like other central banks feverish  buying of government debt, corporate debt, junk bonds and in some cases offering to buy securities through hedge funds – the insatiability  of the bond markets could reverberate back to its institutional holder, the Central Bank.  They may not ever become bankrupt, but the loss of control and overall confidence in the central banker system, could undo the whole financial world.  Until that moment, markets in the meantime have become less fearful and in turn are exasperating further risk taking, with what could be deemed as free money, as the private sector paying back the rate to the central bank lender is close to 0%.  Rampant speculation has devalued the one asset we all use; cash.  

This institutionalization of capital markets could be traced back to when the Federal Reserve began to rewrite the rule book, with its 1998 bailout of the infamous Long-Term Capital Management firm, a once darling of Wall Street, that Fed started to orchestrate directly into insuring the private sector.  In 2008 when the first financial crisis hit the world, the Federal Reserve's direct underwriting of Wall Street was unprecedented, short from directly buying into the open market, which under the mandates of Central Banks is only to bolster any collapse in liquidity – not directly assisting companies.  When the Crononavirus fear froze the bond markets early in 2020, liquidity dried up as investors started holding cash whilst driving funds out of stocks into safe havens, the US dollar rose as did traditional havens such as gold and government debt.  But it was the corporate bond market that collapsed, more so the 'junk bonds', risky companies that have become saddled with debt and are essentially insolvent.  The Federal Reserve for the first time in its history began buying Junk Bonds. 

 In financial speak, this is considered a Moral Hazard, to which in variants of economic theory, state that intervention by both central banks and governments lead to further risk taking,  with companies and households continuing to accumulate further debt.  A greater bubble is formed while insolvent business are kept alive by credit lines.  It is at its core of economic theory that the idealism of bailouts and the suppression of interest rates is a necessary to offset deflation, by allowing in theory, in the last twenty years of Central bank interventions, an extreme supply of money spilling over into the banking system was to keep it afloat.  However this constant flow of cash into banks and governments in exchange for their debt has as also set alight a greater problem that the many technocrats from all sides of financial academia have dismissed as a concern – inflation.  This is one of the major issues that can be felt now, from any layman perspective, away from charts, statistics and modeling.  What is edging up to become a major crisis is not just widespread inflation, but the common necessities to live, which ironically are not included in Central Bank metrics of creating their monetary policy, such as food and energy.  If the Covid-19 pandemic is a measure of how much blunder and fumbling there has been globally in response by governments, so can also the excessive and of Central Banks in flooding the financial world with cash.  With vaccinations now on the horizon, which has proved to be already a logistical issue, due to the temperature requirements for some of the more reliable vaccines.  It will also be the costs for the Covid-19 inoculations, in ensuring that there is over ninety percent of immunity to the virus, requires a follow up dose.  To vaccinate the majority of the global population, the overall bill at the end of the day will be phenomenal and it is the Governments that will foot the bill, with or without Central Banks pumping money via their debt exchange.  The Cronovirus may end up bankrupting the world.  

Yet, one cannot entirely blame the financial system for outright monetarism, yes, central banks are of the main offender, but they are also guided by commercial and investment banks and large hedge funds.  Who issue credit as a demand from the masses, so it is to their requirement that a central bank system exists, even with the academics at the helm, we could assess them as delusional to what their monetary cause and effect is on street level.  They are seldom swayed, stuck in a idealism of balancing markets and avoiding a price collapse.  Nevertheless, statistically, we, as consumers, are the ones that mostly borrow for consumption.  That is undeniable, living under a credit expansive world, that so far is rudderless – that offers no conspiracy or planned reasoning.  It is the choices that are made, when shifting back and forth from being a pragmatical  consumer to luxury consumer.

We know the markets are inherently corrupt, Wall Street and other financial icons around the world are infamous for attaching themselves to the greed of financial excesses within the banking system.  But, there maybe a point an inflation shock could hit hard, driven mostly, as mentioned, by food and the production of food stocks and this shock may very well be on the horizon.