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BIDEN SAYS HE CAN DO LITTLE TO REVERSE INFLATION
The Biden administration has little power and few tools to control rising food and fuel prices, president Joe Biden said last week after meeting with Jerome Powell, chair of the U.S. Federal Reserve.
The average U.S. gas price set a record at $4.82 per gallon on 3 June, according to the American Automobile Association, and ended 6 June at $4.86.
The country’s overall inflation rate sits above 8 percent, highest in more than 40 years.
“We can’t take immediate action that I’m aware of to bring the price of gasoline back to $3 a gallon,” Biden said, “but we can compensate by providing for other necessary costs for families by bringing those down.”
Inflation “is going to be the defining issue of the midterm elections” in November, Republican political consultant Ken Spain told The Wall Street Journal. “The issue is now entrenched in the minds of American voters.”
Polls indicate that Republicans are favored to take control of the House of Representatives next year, with a strong chance of taking the Senate as well.
TRENDPOST: One obvious thing Biden could do to slow inflation but will not do is lift war-related sanctions against Russia’s exports of food and fuel.
To do so would break faith with the NATO allies that Biden worked so hard to align against Russia and its invasion of Ukraine. That would seriously damage the alliance for years to come.
Instead, Biden will continue to point fingers, insisting the Fed, not he, has the power to tame rising prices and that inflation will slow when Putin ends the Ukraine war.
PUTIN ABSOLVES UKRAINE WAR FROM BLAME FOR INFLATION
After U.S. treasury secretary Janet Yellen admitted last week that she had underestimated inflation’s strength and duration (see related story in this issue), Russian president Vladimir Putin seized on her comment to absolve Russia and its war on Ukraine from any responsibility for the world’s current runaway inflation.
“This [inflation] is a mistake of the financial and economic authorities in the U.S.,” Putin told a Russian television interviewer last week.
“It has nothing to do with Russia’s actions in Ukraine, not at all,” he emphasized.
Like other governments, Russia used fiscal and monetary policy to keep its economy functioning during the COVID War.
However, Russia did it “much more carefully and precisely” than others in ways that kept inflation at bay, Putin boasted.
In contrast, the U.S. money supply ballooned $5.9 trillion, growing by 38 percent in less than two years in what Putin called an “unprecedented output of the printing press.”
He blamed Europe’s stiff inflation pace on poor energy policies enacted by the European Union that favored renewable energy initiatives in response to the climate crisis.
Rising natural gas prices drove up the cost of producing fertilizer, forcing some European fertilizer factories to shut down. High gas prices also have curtailed industrial production in the auto industry and output from other sectors.
“We warned about this,” Putin said. “This has nothing to do with any Russian military operation in the Donbass, nothing at all,” he repeated.
TREND FORECAST: Putin is right about the U.S.’s “unprecedented output of the printing press.”
For years, we have called attention to the government’s money-pumping scheme to artificially inflate the economy and the dangers that will befall markets when that scheme ends, as it has begun to end now.
We have warned of the money junkies’ addiction to monetary methadone in several of our Economic and Market Overview sections, for example in our 12 May, 2020, 26 January, 2021 and 24 May, 2022 issues, among many others.
As for his other comments, Putin protests too much. Of course his war in Ukraine is helping to fuel global inflation and a bad situation is made worse by the U.S. and NATO sanctions which have driven up prices and created shortages.
For example, auto factories in Germany have shut down because they remain unable to get wiring harnesses that were being made in Ukraine, which we reported in “Car Sales in Europe Dive 20 Percent in April” (24 May 2022).
Fewer new cars coming out of Europe’s factories means higher prices for those that do.
Ukraine is a major exporter of wheat, corn, and cooking oil. Its’ inability to plant, grow, harvest, and ship those products is spiking food prices across Africa and the Middle East, which depend heavily on Ukraine’s exports, and driving food inflation around the world.
Because of Putin’s war, Ukraine’s productive capacity has been damaged for years to come, and it will take at least two years for other countries to replace Ukraine’s lost food crops and industrial production.
UKRAINE RAISES INTEREST RATE TO 25 PERCENT
Taking a “resolute step” to rein back inflation now running at 17 percent, Ukraine’s central bank jacked its base interest rate from 10 percent to 25 last week.
It was the National Bank of Ukraine’s first rate hike since Russia invaded the country in late February.
The high figure will protect household savings and help the country hold onto its foreign currency reserves, which will protect the exchange rate of the hryvnia, its national currency, the bank said in a statement announcing the increase.
The National Bank of Ukraine more than doubled its rate to match its outlook for inflation, which is projected to surpass 20 percent in the near future, the Financial Times reported.
A smaller boost “would have had no significant influence on the financial and economic system” during the war, the bank said.
The central bank “expects that the government and banks will respond adequately to the hike in the key policy rate by raising interest rates on domestic government debt securities and deposits,” making “hryvnia…assets more attractive.” A smaller bump would not have kept returns on hryvnia-denominated investments ahead of inflation, the bank noted.
Ukraine’s defensive war with Russia pushed the government’s deficit up 27 percent in May to $7.7 billion, Ukraine’s Dragon Capital bank said.
Ukraine’s economy will contract 45 percent this year, the World Bank has forecast.
PUBLISHER’S NOTE: Unlike central banks in the U.S. and European Union, Ukraine’s understands that interest rates have to be close to the inflation rate to make a difference.
Another difference is the war. Ukraine is under existential threat and its economy is already near destruction so raising the interest rate by 150 percent in one move can hardly do more damage than Russia’s invasion.
POTASH PRICES SKYROCKET
Russia’s war on Ukraine has flipped the market for potash, an essential fertilizer ingredient, from surplus to shortage.
Potash is mined from ancient seabeds and is rich in potassium, one of three minerals necessary to grow food crops.
Belarus and Russia together supply about 40 percent of the world’s potash. Wartime sanctions have blocked Belarus’s ability to ship potash along its usual export routes and the country’s shipments have plunged by 95 percent, the Financial Times reported.
However, Belarus is now working out a way to send potash through Russia’s ports on the Baltic Sea, IHS Markit analyst Allan Pickett told the FT.
Brazil, also rich in potash, has seen prices rise 185 percent this year to more than $1,100 per ton; Europe’s price has jumped 240 percent to €875 per ton.
BHP, the Australian mining giant, is rescheduling production from a project in Saskatchewan from 2027 to 2026; its Australian colleague Highfield Resources is finalizing €312.5 million in funding for a new potash mine in Spain.
In part, prices have jumped quickly because many existing potash deposits were largely depleted by China’s economic boom early this century.
“We’ve seen a huge difference in the level of interest since the war in Ukraine,” Highfield CEO Ignacio Salazar told the FT.
“Europe is realizing its need to be self-sufficient,” he added.
Europe’s move to provide itself with potash aligns with our Top 2022 Trend of Self-Sufficient Economies.
However, “there are a lot of risks around the market outlook,” Humphrey Knight, an IHS Markit minerals analyst, said to the FT.
“Russia and Belarus are unlikely to be out of the market forever,” he added. “This is one thing that could change very quickly.”
Prices are likely to remain high as long as sanctions last because “we are now at the start of a new [demand] cycle but without many attractive [supply] options in the industry’s collective hopper,” Huw McKay, BHP’s chief economist, said in an FT interview.
TREND FORECAST: The equation is simple, the longer the Ukraine War lasts and the stricter the sanctions imposed on Russia and its allies by the United States and NATO… the higher prices of numerous essential commodities will rise.
Therefore, despite central banks raising interest to bring down inflation, if there are essential commodity scarcities, their prices will continue to rise… and so too will inflation.
TURKEY’S INFLATION RATE REACHES 23-YEAR PEAK
Inflation in Turkey rampaged at 73.5 percent in May, riding on soaring prices for food and energy and president Recep Erdogan’s failed policy on interest rates.
Food prices last month were 91.6 percent higher than a year previous, the country’s statistics agency said.
Turkey’s economy was robust earlier this century, but that eventually led to inflation.
Usually as inflation sets in, central banks raise interest rates to cool spending and slow, or reverse, price growth.
However, Erdogan—for no apparent reason—has long held that low interest rates will tame inflation while allowing Turkey’s economy to continue to expand.
As inflation climbed from 20 to 40 and now 70 percent, the lira—Turkey’s national currency—plunged to new lows against the dollar.
However, Erdogan has refused to budge, firing central bank officials who raised rates against his wishes or failed to support his quirky view of interest rates’ impact.
In spring 2021, Turkey had its fourth central bank chief in two years.
Thanks to low rates, the lira has tanked and banks across the country have exhausted their foreign currency reserves to buy lira to try to anchor its value.
We documented Turkey’s succession of central bank governors, price inflation, and the lira’s descent in:
- “Turkey’s Central Bank Governor Fired After Rate Hike” (23 Mar 2021)
- “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021)
- “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021)
- “Turkey: Interest Rates Down, Lira Crashing. War Next?” (19 Oct 2021)
- “Turkey’s Economy Continues to Implode” (14 Dec 2021)
- Turkey’s Inflation Rate Nears 50 Percent (8 Feb 2022)
- Turkey’s Central Bank Interest Rate Gamble (22 Feb 2022)
Erdogan has cast his policies as a “new economic model” (“Turkey’s Bonds Downgraded. Worse to Come,” 15 Feb 2022) in which a near-worthless lira would spark an export boom, because a cheap lira would make Turkey’s products cheaper abroad.
The export boom would wipe out Turkey’s trade deficit, taming inflation, he said.
The policy failed on both counts.
Now Turkey faces higher oil prices that must be paid in dollars, the currency the country has spent in its futile attempt to save the lira.
“The laser focus on [unorthodox] measures over conventional monetary policy will unlikely solve the inflation challenge and we anticipate levels breaching 80 percent” in this year’s third quarter, Ehsan Khoman, MUFG Bank’s chief of emerging markets research for the Middle East, said in a statement quoted by the Financial Times.
Until then, inflation will remain above 70 percent due to “a confluence of elevated commodity prices, rising domestic production costs, and a precipitously depreciating lira,” he added.
TREND FORECAST: As we noted in “Turkey: The Famous Lira Dive” (23 Nov 2021), the country’s crashing currency and soaring inflation continue to roil an increasingly chaotic and unstable Turkish socioeconomic and geopolitical environment. Foreign investors are pulling their cash out before Turkey’s economy crumbles completely.
As the global economic recovery decelerates—and as inflation keeps rising across the globe—the lira and Turkey’s economy will continue to decline. Ongoing COVID outbreaks will worsen Turkey’s plight; nearly 13 percent of its GDP rests on travel and tourism.
Erdogan’s domestic popularity recently fell to a two-year low and will continue to sink with citizens’ economic prospects.
For that reason, look for Erdogan to become more belligerent in his comments and actions directed at foreign “enemies.” As Gerald Celente often says, “When all else fails, they take you to war.”