Key Facts
- CPI readings below 2% in last 10 years
- Only two occasions: 1.8% (2019) and 1.2% (2020)
- Average CPI over last 10 years
- Well above 3%
- US M2 money supply growth (2008-2020)
- From $7 trillion to $20 trillion
- Fed balance sheet growth (2008-2020)
- From less than $1 trillion to nearly $8 trillion
- National debt growth (2008-2020)
- From less than $10 trillion to nearly $30 trillion
- CRB Index decline over a decade
- Nearly 75%
Background
In recent months, Federal Reserve Chair Warsh has repeatedly stated his intention to control price inflation, targeting a rate below 2.0%. However, according to an analysis by economist Shanmuganathan N. (Shan), published on Dollarcollapse.com and republished by Zero Hedge, consumer prices remain elevated despite his rhetoric.
The analysis notes that over the past decade, CPI readings below 2% occurred only twice: 1.8% in 2019 and 1.2% in 2020. The average for the last 10 years has been well above 3%, indicating what the author describes as 'lax' monetary policy over an extended period.
Shan acknowledges Warsh's admission that he lacks a 'magic wand,' but argues the Fed chair faces a stark choice between two economic outcomes, both of which are unpalatable. The author asserts that inflation is a choice, and Warsh is likely to choose the more politically expedient but less palatable option.
Current Situation
The analysis outlines two possible scenarios. The first, 'GFC 2.0,' would occur if Warsh follows through on his hawkish talk and implements a Volcker-style tightening to control inflation. This would repeat the 2008 Global Financial Crisis, but with far more devastating consequences due to the larger size and nature of today's bubbles.
The second scenario, 'GCC 1.0,' would occur if Warsh's inflation control remains mostly rhetorical—'speaking tough and doing nothing.' This would lead to a Global Currency Crisis, with the US dollar losing at least 50% of its purchasing power as measured by the DXY. Gold would see massive reserve-asset buying, with prices reaching five digits where the first digit is unlikely to be '1'.
Shan argues there is no middle ground between these options. A crisis is certain in either scenario, with a recession likely to rival the Great Depression of 1929-1946. The only choice, he says, is whether Warsh can protect the purchasing power of the dollar, at least in part.
| Indicator | 2008 | 2020 |
|---|---|---|
| US M2 Money Supply | $7 trillion | $20 trillion |
| Fed Balance Sheet | less than $1 trillion | nearly $8 trillion |
| National Debt | less than $10 trillion | nearly $30 trillion |
Impacts
The analysis highlights the 'Cantillon Effects' to explain why a currency crisis may be imminent. Between 2008 and 2020, US M2 money supply grew from $7 trillion to $20 trillion, the Fed balance sheet expanded from less than $1 trillion to nearly $8 trillion, and national debt rose from less than $10 trillion to nearly $30 trillion. During this period, stocks, housing, and bonds surged, but the CRB Index of commodities declined nearly 75% over a decade.
Shan identifies 2022 as the turning point when commodity prices began to catch up with monetary inflation. He warns of a decade of high price inflation ahead due to past deficit spending and artificially low interest rates, which could escalate into hyperinflation depending on Warsh's actions.
The 'moment of truth' will come when asset bubbles burst—this time involving multiple classes: the AI Bubble, Housing Bubble, and Private Credit Bubble. Each is larger than the 2008 housing bubble. The resulting recession would be worse than the post-Lehman crash, and pressures to resume ZIRP and QE would be immense.
Future Outlook
Scenario analysis: The possibilities below are not certain predictions.
If Warsh chooses to raise interest rates, continue quantitative tightening, and push the government toward balancing the budget, the outcome could be a severe but potentially corrective recession (GFC 2.0). However, Shan assesses the probability of such decisive action as 'abysmally low,' perhaps almost zero.
If Warsh instead continues with rhetoric without substantive action, the dollar could lose significant purchasing power, leading to a currency crisis (GCC 1.0). This scenario would likely see massive gold buying and five-digit gold prices.
Given the current evidence, Shan notes that the probability of Warsh taking the necessary steps is zero so far, but it is still early days. The analysis remains speculative, and the actual path depends on Warsh's policy decisions in the coming months.
Source: zerohedge.com
