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Monday, May 11, 2020

Inflation and the price of commodity futures

The Fed started unlimited QE and money printing sicne earily March to stimulate the economy due to COVID-19. The below graph is the balance sheet of the Fed since Feb 2020. Before March, the asset of the Fed was around 4.25 Trillon dollars and by now it is close to 6.75 Trillon dollars or a 58.8% increase.

The use of money and the creditbility of USD

US dollars are a major currency because of its credibility. However, once the Fed started to print money to buy junk bonds, the creditbility of USD is questionable. If you ever heard of the digital money initiative in China, you may understand why it is a good time for Chinese government to implement it now. This is not the first time that USD ruins its creditbility, in 1971, USD unlinked from Gold and basically became the same thing as your toilet paper (not even close, your hole will not like it). Today, the Fed is using its money to purchase junk bond. Now you understand why Chinese government is introducing digital money. Paper money is BS, and given that all the western coutries are under 0 or negative real interest rate. Digital money is just fine (no interest rate).

Inflation, pricing of assets and government deficits

Do you think that government deficit is a big problem? No, under inflation, debt is nothing. US can pay off its debt easily as debt is always nominal. When USD is worthless, the assets priced with USD will be assigned higher prices. Your 500K mortgage may only worth 2 gold bars. So what I am trying to say here is, volumn of debt is not a problem, the realy problem comes from the velocity of the debt. Or, the second derivate of the debts. Commodity market will be the opportunity for next half of 2020 and 2021 as we entering the era of inflation. 

About Myself:

Finance Mojo from MBA Finance Club.

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