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Markets  Signal A Collapse In Central Bank Inflation Credibility

Markets  Signal a Collapse in Central Bank Inflation Credibility

We may look back on this week as the week that central banks stepped away from a very strict inflation target to a much broader concept,”


 “The majority of Fed board members project that thru the end of ’25:

– Growth remains above potential.

– Unemployment remains at secular lows.

– Core PCE remains above mandate (for the 5th year)

– The Fed cuts 175bps or more.

 One of these is not like the others.”


 “Despite inflationary pressures pervasive in the economy, we are witnessing what might be described as the most undisciplined monetary and fiscal environment in history.”

Crescat Capital


In previous notes, I have shown that inflation was bottoming and the risk from continued reckless policy has been  that inflation would again be a problem. After last week’s central bank statements and actions, the market is now clearly sending that message.

The one-year breakeven inflation rate is going vertical to a new two year high at more than twice the Fed’s target rate.

The Fed is losing credibility fast, policy is missing its target and is NOT even tight overall.

Money supply is rising again.

 The debt trap danger and it’s link to growth and inflation is just beginning to be understood.

“The fact that investors and policy makers can even talk about “fighting inflation” when the US federal debt is spiraling out of control says a lot about the national frame of mind in 2024.”

Chris Whalen

Inflation and the debt trap are tied together. Once debt levels reach a certain stage, the debt burden imposes significant constraints on growth. The chart below describes the relationship between growth and country debt levels across the globe on OECD data.

Broadly speaking there are no exceptions to this premise.

“Nothing stops this train” Breaking Bad Season 5…. but sooner or later the train comes off the rails.

 Once deficit spending becomes bipartisan and entrenched, debt will likely explode higher, and last weekend’s US Omnibus Bill was clear evidence of that if any were needed –  Congressional Omnibus is Like a Bad Hollywood Movie Sequel.

Even leaving aside this continued pattern of behavior, the deficit can reach a point where the challenge of returning to sobriety can go beyond reach.

Global Governments have done a great job of testing the limits of their “Keynesian” dogma.

Global government debt is a record $82 trillion:

up $20 trillion since Covid

up $50 trillion since Lehman

 … and up 7x this century in under 25 years!

Tying this back to inflation, let’s look at the worst and most advanced case of debt and inflation – Japan.

The debt to growth position is the worst of all in the chart above. Last week the Bank Of Japan finally abandoned it’s negative interest rates. Nevertheless, wages are growing over 5%, so inflation in Japan risks becoming entrenched.

“Before 2022 annual inflation had been above 2% for only 12 of the previous 120 months; today it has been above that level for 22 consecutive months.” And… “For most of this century it has looked as if the world’s #economy was turning Japanese, with low growth, below-target #inflation and rock-bottom interest rates. Today the question is how much Japan will come to look like the rest of the world.”


The problem for Japan is that zero interest rates still don’t seem anywhere close to high enough to constrain inflation. The immense scale of the debt and the ongoing weak growth means that raising interest rates by even a small amount puts at risk not just growth but also an impossible economic burden in cost of debt. Furthermore, the Bank of Japan’s balance sheet could blow up. Policy options are very limited, and confidence in the currency is becoming fragile.

This makes Japan somewhat a hostage to fortune on the inflation front. With low and negative real interest rates investors have little incentive to buy Japanese bonds at such low interest rates, and no real clarity or confidence  on how inflation will subside.

The Yen is sitting at record lows.

In an advanced debt trap it becomes increasingly challenging to manage inflation, the currency, and the economy.

The US is getting to that situation quickly.

Issuances of US Treasuries are now at pandemic levels: We saw nearly $7 trillion in gross issuances of US Treasures in just 3 months during 2023. For the entire year of 2023, a whopping $23 TRILLION in US Treasuries were issued. US federal debt is rising by $1 trillion every 90 days right now. US government spending as a percentage of GDP is at World War 2 levels.

The US has entered the third phase of a sovereign debt crisis.

Policy makers have lost credibility in their inflation fighting narrative. These two videos go deeper into what this means for the markets.

Precious Metals and Political Chaos: Gold, Silver and a Changing World Order

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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