The counter of the monetary issue by the Federal Reserve of the United States is measured by the expansion of its balance sheet. During the 2008/2014 period, the expansion was in the approximate order of $ 3.5 trillion which was always considered a historical and beastly increase that was executed “quietly” over six long years in the three rounds of quantitative easing, QEI, QEII and QEIII, which fueled the financial asset bubble we lived in until February this year when the pandemic led the world to a new bear market. Nowadays, since March 2020, the expansion of the balance has already been of the order of US $ 3 trillion, that is, “in just three months” the Fed it issued everything acted in the previous crisis, which denotes that the magnitude and speed of the current monetary stimulus is absolutely biblical and worthy of a Guinness. The paradoxical perspective of this “QEIV” leaves almost all the monetary expansion carried out during the previous crisis which was ironically considered as irrelevant. “A lot” and even “irresponsible”. To this we could also add the expansion of the balance of the European Central Bank, which in these three months is in the order of 1 Trillion dollars and that of the Central Bank of Japan, which is close to 0.7 Trillion dollars. I ignore for simplicity, issued by Canada, Australia, Switzerland, New Zealand and China.
In this context, the monetary image of the pandemic is very clear: emission at the speed of light as humanity has never seen before. In this way, common sense would tell us that with this monumental and extremely rapid monetary expansion, inflation expectations in the USA would be flying. However, this is not the case, the 10yr breakeven that measures expected inflation on average at 10 years is only 1.12% annually and the 30yr breakeven that measures expected inflation at 30 years is close to 1.47% annually. Clearly, no one on the entire planet expects a hyperinflationary leap in the US as it should be in light of such emission and speed. I insist, not only is the size relevant, but also the meteoric speed with which the Fed has been issuing since March.
And it is here where there is a notable difference between the emission capacity of the G3 countries (USA, Europe and Japan) versus the emerging nations. In the first group and especially for the dollar, said currency is used as Value reserve and savings unit while no emerging currency has such an advantage.
In this way, the USA can charge “senioraje” or in Creole, “inflationary tax” to the rest of the world, while emerging nations only issue to lubricate as little as they can in light of the pandemic and pending inevitable inflationary outbreaks of extremely significant. In this way, as the dollar is a “savings unit”, the Federal Reserve issuance does not end up “consuming” traditional assets such as an alfajor or a pair of slippers, assets that would mark a jump in “Traditional inflation”. On the contrary, said issue is channeled into the purchase of financial assets that use the dollar as the “denomination currency and savings”, generating an almost permanent rise and totally removed from fundamentals that we usually call “reflation”, a “very technical” way. of hiding the nominal bubble in which we have been living since 2009.
For emerging countries even, this situation will become worse in a year when the commodities begin to recover from the pandemic and also begin to reflate. As happened during the previous crisis, especially during the 2010/2011 period when commodities had a very considerable rally, many emerging nations received massive inflows of dollars as a result of more expensive commodities and to avoid a nominal appreciation of their exchange rate they went out defend a certain level via issuance against the purchase of dollars. Over time, this dynamic generated an appreciation of the real exchange rate via local inflation, in the face of a relatively fixed nominal exchange rate that we wanted to defend so as not to lose “competitiveness”. This is yet another example of the fact that it is impossible to stand up to the Federal Reserve even more so when in three months it issued everything done in the previous five years that generated the following “inflation rates” since March 2009:
1) Nasdaq 750%,
2) S&P 350%,
3) Dow 260%
4) EEM (ETF that replicates emerging equity) 75%.
Ironically, the main beneficiaries of the mega-issue of the previous crisis have been US assets and those with the worst relative performance have been emerging assets. The Fed go back to feed back a nominal mega-bubble that began to grow exponentially since March 2009 and this bubble will be stable and permanent until the world accepts the dollar as reserva value and savings unit that is, for a very long time. The problems of the USA are always paid by someone else, those are the benefits of having a fiscal and monetary policy perceived as orderly and credible, even though this is more like a “Ponzi” than a normal monetary policy scheme. Therefore, unfortunately, the “where” and the “when” of inflation will be emerging and we are seeing it right now.