Below is a very off the cuff mish-mash of thoughts.. I would be very grateful to get perspectives on the ideas as I am just as confused as everyone else.
There are four major risks being dealt with by the US
- US Corporate and Household debt burden relative to future GDP is unsustainable - meaning that USD demand will not keep pace with supply internally without intervention from Government
- Pension Funding Crisis is looming as liabilities become due, in a global deflationary downturn many funds could become insolvent
- Ascendancy of China has created a threat to US Hegemony (National security). The indication is that the US will move away from running large foreign deficits and redesign supply chains, this follows;
- Need for structural change in US Labor market due to low productivity.
Strategic objectives of Central bank and US Treasury/Government
- Encourage an asset price bubbles to fund pension liabilities this is short term inflation across specific sectors such as stocks, real estate and rich people assets. Large number of Pensioners will begin claims soon especially as companies move to retire employees in face of lower demand. This may be a way in which inflation transmits to the economy.
- Rising International Commodity prices suppresses global growth in developed markets and improves condition in developing markets which benefit from such prices as exporters of commodities and improves the ability of these debtors to pay debts back to US Banks
- Buying Mortgage-backed Securities in anticipation of Real-estate rents being in a fragile position given wages may not return after pandemic ends, and real-estate asset bubble may crumble fast in the face of liquidation by property owners. As this insolvency peaks the Central bank will increasingly expects to hold non-performing loans
- Devalue the currency (long term) which will allow for the following impacts
- to bring back manufacturing (American made)
- Reduce debt burden in household sector and support debt rollover for large cap business sector, through stimulus and narrowing credit spreads via central bank intervention
- Unleash government spending, rapid government spending on nation building projects. This may drive inflation if necessary, expecting to control it with Taxation
- Inflation has a benefit of reducing government debt burdens and spread the impact to foreign central banks and wealth funds. Further, inflation acts as a pseudo tax on imports driving internal GDP growth
- Reduce reliance on Chinese supply chains through tariffs and tax incentives for US companies
- Inflation devalues Chinese investments made in USD held by the PBOC using the trade imbalances with the US.
- QE and possibly YCC will Insulate the US economy from Interest rate volatility from Foreign bond trades and remove threats to USD appreciating with such exogenous shocks (debatable given the actual control the Fed has on the Eurodollar market)
- Make US companies onshore their activities by creating local tax and subsidy incentives while at the same time reducing their offshore buying power. Making investment in the US look more attractive than investment offshore in USD terms.
A final idea is an attack on Gold. The US and developed markets may be positioning away from Gold as a reserve asset. It is interesting to see how Gold inventories held by Central banks is changing over time. As the world moves closer to a digital currency and in the age of central bank supremacy. Do Central banks have to care about the value of gold, if they don't hold it. Given the US has signalled a new era of "every one for themselves" it makes sense to dump gold inventories first. As monetary debasement heats up the Fed will likely sell gold as too will those countries who can attract capital without having reserves of gold. This will debase the Gold price and again hit the Assets of the PBOC and Russia who have large Gold reserves.
Trade ideas: Short USD, Long Emerging Markets supporting US sectors of productivity e.g Robotics in Japan, Long Global infrastructure in Energy and US sectors receiving government spending.