The Trillion Dollars Bet on the Inflation
YOPIE HIDAYAT, Contributor
THE floodgates of the American dollar are opening wider. Joe Biden’s administration will soon begin to disburse stimulus for United States citizens, with a fantastic amount of US$1.9 trillion. With this, the total stimulus given by the US government since the early stage of pandemic will reach US$3 trillion.
And this is just stimulus from the government budget, the fiscal policy. The Federal Reserve also administered a monetary policy in the form of liquidity injections into the market. So far, The Fed has bought a total of US$2.5 trillion in government and corporate bonds. This is the most visible economic effect of the pandemic: a flood of dollars on an unimaginable scale.
As a result, it is not surprising that inflation has become the hottest topic in market these days. Such a colossal flood of dollars will certainly cause inflation, that’s how the logic goes. If inflation in the US is higher than two percent on average that will be The Fed’s cue to act-interest rates will rise. The financial market, which has been lively due to low interest rates, might just collapse.
Of course, with the Fed’s target being average inflation, that benchmark will not be reached soon. Throughout the pandemic, inflation in the US has been very low at under 1.5 percent and just started to climb to 1.7 percent last February. Analysts are debating whether the rising trend of inflation will continue in the coming months, reaching the Fed’s benchmark sooner, and interest will rise. The answer to this question determines the fate of markets around the world.
Both The Fed Chairman Jay Powell and US Secretary of Treasury Janet Yellen believed that inflation would not stay high for long. On the other hands, many economists, including former secretary of treasury Lawrence Summers, worried that inflation would absolutely come after the flood of dollars and destabilize the global economy.
The market is being swayed back and forth between these arguments. The bond market has experienced a shock at the end of last month. Then after a period of calm, it received another shock on March 12. The bond yield for 10-year US government bonds jumped to over 1.6 percent, the highest in the last 13 months. When the yield goes up, bond price falls. Bond investors will be the most adversely affected when inflation is high. The real return of bond coupons to investors will be reduced because of it.
And while inflation in the US just started to move, globally, the price of various commodities had been in moving. The prices of copper, iron and nickel kept creeping up since last year. The price of copper, for instance, was only at US$4,600 per ton in March last year. Now, it is at US$9,000 per ton, nearly doubling.
The surging demand for semiconductors has induced a sharp increase in chip prices. The price of a 4GB DRAM computer chip, the market benchmark, rose from US$1.54 per piece in October 2020 to US$2.69 last week, a 75 percent increase. Food commodities are the same, the price of soybeans almost doubled since April last year to early March this year.
On the other hand, the short supply of containers has caused shipping cost to increase. As of this March, cost to send a 40-feet container between Shanghai-Rotterdam, which is the market benchmark route, rose 272 percent compared to October last year.
Lastly, but not the least worrying, the price of crude oil has also taken flight. The Brent oil price, the most important market benchmark, almost reached US$70 per barrel now. In early November, it was only at US$37.5 per barrel, which means it has risen by 87 percent in just three months.
The rising prices in the global market will eventually affect every economy in the world, including that of the US. It is inevitable. However, investors are still doubtful: whether the ghost of inflation will strike soon and linger for long, forcing The Fed to raise interest rates; or whether Powell and Yellen’s calculation were right that inflation would last only for a short while. That is a trillion dollar bet, and the whole world is on it.