Two things have been debated recently. One is whether commodity prices have peaked.

The other is whether the Fed will start to tighten in this position, pricking the global asset price bubble.

With regard to these two issues, our views are as follows:

First, the position of commodities is only the shock after the end of the first wave of price increases, which will continue to reach new highs after the shock.

Second, the Fed will not tighten from here. You'll even seeThe Fed continues to release water here to push up inflation and commodity prices.

In this article, we will talk about why we have different views and logic.

01 Keynesianism

If we want to explain this logic clearly, we should start with Keynesianism, which is familiar to all of us.

When we wrote this article "inflation followed by debt collapse", we talked about the context of Keynesianism.

Since 1929, the Great Depression occurred in the United States, which became an economic crisis affecting the whole capitalist world.

This crisis ended nearly a century of dominance of classical economics initiated by Adam Smith and gave way to Keynesianism.

The classical economics initiated by Adam Smith is also called classical liberalism. According to this theory, the state can only use the invisible hand of the market to regulate the economy.

The result of complete marketization is that the strong are always strong, the small companies fall down one by one, and the big companies gradually form monopoly organizations.

Social wealth is also constantly concentrated to a small number of people, and the final result is that the gap between the rich and the poor in the whole society is widening, with 10% of the people accounting for 45% of the social wealth.

10% of people in history have taken away more than 45% of social wealth, and the results are not very good.

The first time was the Great Depression of 1929, followed by World War II.

The second time was in 2007, when there was a subprime crisis in 2008. The third time is now.

It was against this background that Keynesianism came to the stage.

Keynes abandoned classical economics and used the invisible hand of the market to regulate the economy.

Advocate no longer laissez-faire free market, the government takes the initiative to carry out large-scale economic intervention.

The familiar Roosevelt New deal is the product of Keynesian theory.

We know that the capitalist economic crisis is due to the sharp gap between the rich and the poor.

As a result of the loss of purchasing power of the poor and the lack of money to buy things, resulting in relative overproduction.

So Keynes' idea to solve the problem is to give them money to buy things through the way that the government is in debt to build infrastructure.

Create demand without demand, provide jobs by creating demand, and pay workers to increase their purchasing power.

In the old liberal capitalism, capitalists produced things worth 2 yuan and paid wages of 1 yuan. As a result, in the end, the poor people had no money and could not sell things.

The Keynesian solution is that capitalists produce things worth 2 yuan and pay a wage of 1 yuan.

Well, let's let the government pay out another one yuan in debt to fill the gap in purchasing power. Capitalists can also earn an extra 1 yuan for 2 yuan of products on the market.

Why is it temporary? Because of the scissors difference in labor productivity, the public's money will sooner or later be returned to the capitalists in the form of profits, so Keynes's system can only delay the crisis.

In fact, Keynesianism did not reduce the profits of capitalists. It is just that the money earned by the capitalists has been turned into an interest-bearing debt of the government.

The government itself has no money. It only borrows money from capitalists to raise taxes to create demand and to increase the purchasing power of the poor by paying wages.

In order to pursue immediate employment and balance, the government has pushed back the current problem through debt.

Borrowing is to be repaid, and the government can only count on economic growth to bring more tax growth, otherwise it can only borrow new debt to repay old debt.

The national debt quadrupled throughout the 1930s, and Roosevelt had made the best use of national debt lending and currency devaluation, and the borrowing game was finally over.

Because Roosevelt's Keynesian infrastructure projects did not generate more tax revenue and growth.

It only depends on the government borrowing more debt and giving money to the people through infrastructure construction to maintain economic stability.

In 1938, the United States and Germany fell into a full-scale depression because of another economic crisis. After that, Germany could not survive World War II and saved the United States.

Because Hitler of Germany also maintained the economy with Keynesianism. It's just that he borrowed money to create jobs, and all he built was airplanes and cannons.

Weapons and equipment cannot be used by the common people, nor can they be used to pay off the debts of the capitalists.

If you don't do something, the country will go bankrupt, and launching a war to go out and rob money became the only choice for Germany at that time.

At the beginning of World War II in 1939, all countries began to enter full employment, and the blue line of unemployment that plummeted was brought about by World War II.

Here we can see that it was not Roosevelt's New deal that pulled the United States out of the economic quagmire.

Instead, World War II destroyed excess capacity in Europe, and huge orders and profits began to pour into the United States.

The development of Keynesianism did not stagnate after World War II. The later presidents of the United States continued to carry it forward.

Before the 1970s, radical fiscal policy combined with loose monetary policy, large-scale deficit finance and high national debt were recurrent policies.

The continued expansion of monetary and fiscal stimulus also laid the groundwork for the continued rise in inflation in the future and the restoration of neoliberalism in the Reagan era.

02 stagflation is coming

Under the guidance of Keynesian theory, the government needs to borrow heavily to maintain the economy and employment.

As a result of the heavy debt burden, the government always wants to reduce the financial pressure caused by the debt through the devaluation of printing money.

So the Achilles' heel of Keynesianism is its innate tendency towards inflation.

The sudden oil crisis of the 1970s pushed up inflation, making it impossible to play the game of borrowing and printing money.

It is clear from the chart below that inflation in the United States rose sharply during the oil crisis of the 1970s.

According to Keynes, unemployment will only exist during an economic downturn, when production stagnates and interest rates fall.

Inflation occurs during the peak period of the economy, when production develops and interest rates rise.So unemployment and inflation will not coexist.

In 1979, high inflation and high unemployment appeared at the same time in the United States.The Fed, accustomed to raising interest rates to control inflation and cutting interest rates to control unemployment, has lost its way.

Inflation and unemployment suddenly rise at the same time, which is what we often call stagflation.

Stagflation means stagnant inflation. It refers to the stagnation of the economy, while unemployment and inflation continue to rise.

Monetary policy cannot solve the problem of economic stagnation, but it is not a big problem to control inflation.

The monetary school founded by Friedman describes inflation as "too much money pursues too few commodities".

So how to overcome inflation? The answer of the monetary school is that problems such as inflation are caused by printing too much money.Then turning off the faucet of the money supply and reducing the money supply can curb inflation.

On this basis, Friedman also proposed his most famous simple rule.

According to the statistics of the United States for nearly 100 years, the average annual growth rate of output is 3%, and the average annual growth rate of labor force is 1-2%.

So as long as the money supply is guaranteed to grow at an annual rate of 4-5%, the economy as a whole can grow steadily without inflation and crisis.

This is Friedman's secret recipe for the so-called monetarism to cure all diseases.

With the support of monetary theory, the new Federal Reserve Chairman Volcker abandoned Keynesianism and began to strictly control the money supply.

Finally, through monetary tightening, it tamed for three consecutive years and maintained double-digit hyperinflation.

Core CPI in the US fell from a peak of 13.6 per cent in June 1980 to 6.2 per cent in 1981 and to 3.2 per cent in 1982.

Although Volcker controlled inflationBut tight monetary policy also led to a sharp recession in the US economy between 1980 and 1983.

Real GDP growth in the United States fell from 3.2% in 1979 to-0.2% in 1980, 2.6% in 1981 and-1.9% in 1982.

The after-tax profits of American companies also fell sharply between 1980 and 1982.

Compared with 1979, corporate profits in the United States fell by 7%, 9% and 21% respectively during the period of monetary contraction.

The decline in real economic growth has also led to the closure of a large number of enterprises. The unemployment rate in the United States reached 10.8% in December 1982.

This is the highest unemployment rate in the United States in the 50 years since the Great Depression.Even the subprime crisis in 2008 did not exceed this figure.

Of course, the solution to economic stagnation depends not on monetary policy, but on externally harvested profits.

I have to say that the luck of the old United States was really good at that time, with the first harvest of the Latin American crisis in the 1980s and another harvest in the 1990s when the Soviet Union disintegrated.

After that, it successfully suppressed the Japanese manufacturing industry, punctured the bubble and harvested another wave, and the Asian financial crisis harvested another wave.

Coupled with the technological breakthroughs brought about by the information technology revolution, China's accession to the WTO and the United States are tied to the factory of the world.

This series of God-helped good luck has continuously injected profits into the US economy and pulled the US economy out of the quagmire of stagnation.

The inflection point of 03 large cycle

The success of taming hyperinflation has won a great reputation for the Federal Reserve and Volcker himself.

It has also laid a monetary foundation for the continued improvement of the US economy and the 20-year bull market of the US stock market.

Volcker has pulled the interest rate to 19.1%, which is high enough.

This naturally gives the subsequent Fed chairman plenty of room for monetary policy.

For 40 years after Volcker, the federal funds rate in the United States has been in a continuous downward channel of interest rate reduction.This is one of the bases on which the US stock market can grow bulls.

Because the level of interest rates is one of the most critical factors in determining asset prices.

1981 was the inflection point of a large cycle in the United States, before which inflation and interest rates rose alternately.

At one point, inflation in the United States rose to a staggering 14.75%, and the federal funds rate rose to 19.1%.

It was finally able to curb inflation, coupled with the subsequent external harvest and profit injection, to put an end to the stagflation of the US economy.

After this inflection point, inflation and interest rates in the United States have fallen step by step. Interest rates have fallen from a high of 19.1% in 1981 to nearly zero now.

Over the past 40 years, water has been released whenever the economy is in trouble. Friedman's monetary school theory has been brought into full play.

Although there have been seven rounds of interest rate cuts and six rounds of interest rate increases. But usually the extent of interest rate cuts is always greater than that of interest rate increases.

The highs of interest rate hikes are also getting lower and lower, leading to lower real interest rates and higher asset prices in the United States.

During the 2008 financial crisis, the Fed cut the federal funds rate directly to zero, the first time the Fed ran out of bullets.

In order to make room for interest rate cuts in the next crisis, the Federal Reserve began the process of raising interest rates in 2015 when the US economy improved slightly.

It took three years to raise interest rates eight times from December 2015 to September 2018, barely raising the federal funds rate to 2.25%.

Because at this time, the U. S. government, businesses and individuals are so heavily burdened with debt that they simply cannot afford to raise interest rates properly.

Even the interest rate of 2.25% was unbearable to President Donald Trump at that time.

That's why we saw that Trump kept cursing Powell on Twitter at that time.

Because the rise in interest rates will put tremendous pressure on the US stock market, which is already at a high level.

At that time, US stocks, which happened to be one of the most important bargaining chips in Trump's campaign, could not go wrong.

Looking back at the history at the end of 2018, you will see how much impact interest rates have on high US stocks.

In September 2018, the Fed vowed to raise interest rates three more times in 2019.

Us stocks directly performed the drama of death for it, and the red box on the left is the sharp trend of S & P after the interest rate hike was announced at that time.

After the slump, the Fed immediately announced that it would suspend interest rate increases in early 2019, and the contraction would end at the end of the year.

On August 1, 2019, the Fed cut interest rates by 25 basis points for the first time in a decade.

At that time, Federal Reserve Chairman Colin Powell made a meaningful remark.

This is not the beginning of a long cycle of interest rate cuts, but it is likely to cut rates again.

Many people think that the chairman of the Federal Reserve is out of his mind and how contradictory he is.

In fact, this interest rate cut is a last resort. If interest rates are not cut here, the collapse of US stocks may bring the family out of the financial crisis.

Later, with the fluctuation of the trend of US stocks, the intensity of the Fed's release of water and the amount of drugs are increasing day by day.

In May 2019, the US stock market correction immediately told everyone not only not to raise interest rates, but also to cut interest rates.

In August 2019, I will tell you that it is not enough to cut interest rates once, and there will be two more interest rate cuts later.

In October 2019, tell everyone that interest rates will be cut at least three times and will stop shrinking the table.

By March 15, 2020, US stocks went out of the trend of circuit breakers one after another under the influence of the COVID-19 epidemic.

To save the crashing stock market, the Fed was forced to cut interest rates directly to zero.

At this time, the Federal Reserve once again shot out all the bullets in its hands.

04 Why can't the Fed raise interest rates now?

There is a specific historical background why Volcker was able to raise interest rates to such a high position.

On the one hand, in the 1970s, when American economic stagflation was at its worst, easy money pushed up prices and inflation.

But at that time, there was not a huge bubble in the capital market, as it is now.

We can also see this clearly from the trend chart of the Dow Jones index.

Between 1966 and 1982, the US stock market fluctuated in a large box.

Over the past 16 years, the Dow has barely risen. There is no bubble in the capital markets, so that when Volcker tightens, there is one less thing to worry about.

On the other hand, although the United States experienced severe economic stagflation from 1979 to 1981, the debt situation of the United States at that time was very healthy.

As can be seen from the chart below, the ratio of US federal debt to GDP was stable throughout the 1970s and 1980s.

Even in the late 1970s, when inflation was at its worst, federal debt as a share of GDP was only 30 per cent.

In this case, even if Volcker raises interest rates to a very high level, the interest burden on the United States will not be very heavy.

Under such favorable conditions, Volcker, then chairman of the Federal Reserve, was able to tighten unswervingly.

The biggest difference between now and then is that neither the capital market bubble nor the level of US debt supports Fed tightening.

On the one hand, the capital market of the United States has been rising since the financial crisis in 2008.

Since the 2008 financial crisis, the Dow has risen sixfold and the NASDAQ has risen 11-fold.

At present, the US stock market is at an all-time high, at the height of the bubble.

In this position, a tightening of the Federal Reserve is likely to lead to a collapse of the US stock market and a superimposed financial crisis.

It is important to know that at present, the household assets and pensions of most Americans are basically allocated in the capital market.

The bursting of the bubble in this position means that many people have lost their pensions, which Americans cannot afford.

On the other hand, the US national debt has reached 28.4 trillion US dollars, which is equivalent to 130% of the US GDP.

Even at current interest rates, this level of debt makes the interest payment on US Treasuries as high as $600 billion a year.

A hasty increase in interest rates will lead to the current level of US government revenue, making it difficult to afford this interest expense.

In addition to national debt, U. S. corporate debt and household sector debt levels are also very high.

According to public information from the Federal Reserve, the total outstanding credit market debt (TCMDO) of all sectors in the United States reached 84.5 trillion as of the first quarter of 2021.

Commercial lending rates are at an all-time low because the benchmark interest rate in the United States is zero. Therefore, although the level of debt is very high, there is little pressure to repay the debt.

But if overall interest rates in the US rise by 2 per cent, that would mean paying an extra $1.69 trillion a year in interest costs.

This interest cost, equivalent to more than half of the one-year net profit of all U. S. companies, is unaffordable for residents and businesses.

The high level of debt makes it difficult for the national, corporate and residential sectors of the United States to withstand higher interest rates.

Under the current circumstances, it is very difficult for the Fed to raise interest rates and tighten.

05 pushing up inflation is the Fed's manoeuvre

The experience of monetary easing over the past 40 years has repeatedly proved:Ever since the dollar became a world currency, there has been no crisis that the Fed cannot solve by releasing water.

Because after the crisis, the Fed can print money to support the economy, while printing money can also dilute its debt.

What is different this time is that asset price bubbles and debt are just too big.

A hasty rate hike could lead to a default by the US government and corporate sector, as well as the bursting of a bubble in the capital markets.

At present, the United States is in an unprecedented gap between the rich and the poor. The financial crisis caused by the bursting of the bubble could plunge the US economy directly into the Great Depression.

This is what we talked about in "Why the next crisis may enter the Great Depression".

Therefore, at present, under the background of the big bubble in the capital market and the high debt of the country as a whole, the Fed must be cautious and cautious in raising interest rates.

We will not act until everything is ready and all kinds of conditions are in place, otherwise the consequences are likely to get out of hand.

Under the current circumstances, we believe that a Fed rate hike is only possible in two situations.

One is to wait for scientific and technological breakthroughs to improve labor productivity and corporate profits.

At this time, enterprises are profitable and can afford to bear higher interest rates at the current debt level.

The other is that the Fed promotes a moderate rise in inflation by continuously releasing water. With the gradual increase in corporate profits after inflation, they will not be able to afford to raise interest rates.

The Fed obviously can't wait for a technological breakthrough, releasing water to push up inflation moderately, and the Fed can still try.

After inflation rises, enterprises can bear the cost of raising interest rates as long as the rate of increase does not exceed the increase in prices.

That's why we see that Americans are pushing for moderate inflation.Because of mild inflation, it is good for Americans with high debt.

On the one hand, releasing water can keep the current asset price bubble from bursting, and on the other hand, the huge government debt can be diluted by inflation to see if it can last until other people's bubbles burst first.

For residents and enterprises, the asset-liability ratio = total liabilities / total assets. Releasing water to push up asset prices will significantly reduce the debtor's asset-liability ratio.

Of course, after inflation continues for a period of time, it will trigger a rise in food and consumer goods.

The rise in consumer goods, especially food, is beyond the reach of governments. Something will happen if the grassroots cannot afford to eat.

So the central bank will have to start raising interest rates later. After a few interest rate hikes accumulate, it will lead to a debt collapse.

At that time, we will see the arrival of the Great Falls of American stocks, which should be in 2022.

06 the Fed has no way out

Many people wonder why the worse the US economy or the worse the epidemic, the better the stock market.

That's because both of them can support the Fed to continue to release water and support US stocks to continue to rise.

But it also further inflated the U. S. stock bubble, leaving the U. S. stock bubble at an all-time high.

You know, the U. S. government, businesses and individuals are already heavily in debt.

This unprecedented scale of debt makes it impossible for governments, businesses or residents to bear the consequences of raising interest rates.

Under such circumstances, if interest rates are raised rashly, the stock market, the housing market, the bond market, the government, enterprises and individuals will all die to show it to the Federal Reserve.

Against this backdrop, the possibility of the Fed cutting short-term easing (Taper) has been blocked.

Before inflation becomes unbearable, all the Fed can do is tighten with its mouth and scare the market from time to time.

To maintain the current economic recovery and asset price bubbles, the Fed may even continue to release water loosely.

If you don't believe it, you can look at the Fed's balance sheet. Can you see the slightest sign of want to tighten from this picture?

The reason for continuing to release water is also simple: the foundation of the US economic recovery is not solid, and the domestic asset price bubble is unprecedented.

Not only are U. S. stocks at record highs, but even U. S. real estate prices are now at all-time highs.

At this time, if the Fed starts to tighten, it will prick the bubble in its own stock market and property market, and only Americans will be hurt.

Americans themselves are well aware of this, so they have already held meetings these two days to discuss the financial risks that the property market may bring.

At present, the Fed has no choice but to close its eyes and go dark.

Continue to release water to bring the scourge of the dollar to the world, pushing up global inflation and asset price bubbles.

After the rise in inflation, the one who cannot bear to raise interest rates first will burst his bubble first and will be plagiarized by others. The game of great powers is a game of poking bubbles with each other.

Ending:

Several harvests by the dollar in global history have taken place in the process of the dollar from loosening to tightening.

So when asset prices are high and inflation rises, countries focus on when the Fed starts to tighten.

A typical example is that while the United States has recently released water to push up inflation, the Chinese side has been selling large amounts of strategic reserves to suppress inflation.

Other countries around the world are also dealing with laxity in the United States. Some countries have raised interest rates, while others have stepped in to control inflation for the Federal Reserve.

Thanks to the efforts of various countries, inflation has been kept within affordability. Commodities will not "rise too fast", giving the Fed reason to continue to ease.

The more manageable inflation is, the more leisurely the Fed will be able to release water. Because what the Fed needs is manageable gradual inflation, not the hyperinflation of stagflation.

The release of water in the US dollar itself is the process of delinquency and harvest in the United States through seigniorage.

This is also amply demonstrated by the Federal Reserve Chairman's statement at a congressional hearing on July 14, 2021.

There is a good chance that what the Fed will do here is not to hastily tighten monetary policy, but to continue to release water.

Against the backdrop of the Fed's continued release of water, there is no doubt that the most explosive investment in the next year or two will be commodities.

So the current commodity shock adjustment should only be the intermission after the end of the first wave of rally.

After the shock is over, the second wave of rally is coming. Next year we will even see many commodity prices heading to new highs.

For example, the price of King of bulk crude oil is likely to exceed 100, and it is not impossible to rise to 120.

After the bulk price increases are transmitted to food prices, we will usher in interest rate hikes and bubble bursting.

However, due to the limitation of debt level, the rate hike this time may not be too big.

After the bubble burst, we may see negative interest rates coming, when the best investment period for precious metals will come.