Inflation Super Cycle

A massive financial risk is looming and will have serious impact on economy, business, and your wealth. There will also be volatile and deep impact on currencies and commodities. Certain sectors will be extremely affected by it. 

Biggest Risk of this century – Inflation Super Cycle

Inflation has moved in big cyclical ups and downs historically. The chart below shows that the long-term interest rates (proxy for inflation) in US is near all-time low.

US rates

During the 19th and early 20th centuries, the US inflation used to be well below 3%. In 1966, it shot above 3% and kept rising till 1981, reaching as high as 16%. This proved disastrous for economy and Dow Jones index sank from 985 to near 600 by 1975, causing a whopping wealth destruction of ~40%. Bond markets saw even more serious damage as bond prices have an inverse relation with inflation and interest rates.

From the current levels, we may see the beginning of an inflation (and interest rates) super cycle which can go up to a great extent and may last for a very long period of time. A real big risk.

Key points about this risk:

  1. The epicentre of this financial earthquake will mainly be US. But it will impact all nations.
  2. Multiple factors are converging to indicate that an inflation rally of massive strength may take place anytime during next 12 quarters. It will definitely destroy a lot of businesses and wealth. We are mentioning here the key points that are indicating arrival of this risk.
  3. The chart above shows that there is a wide gap between PE ratios and rates, even wider than what it was during 1966. The rates can not go any lower than 0 (they are already negative in some countries), and PE (valuations) are near all time high. Both will reverse in near future, indicating the risk of inflation is real and is around the corner.
  4. One of the most talked about reason for inflation risk is the mind-boggling amount of money infused as Quantitative Easing by US Fed and other central bankers since the great recession of 2008. This money is reflected in the balance sheet of Fed, as shown below.


  1. Even if most economic indicators show a strong global recovery, it can easily be derailed by a financial crisis as the foundations of this recovery are built on deep fault lines. Point 8 explains it.
  2. Globally, the markets have been flushed with money ever since the QE started during the great depression. Easy money mostly leads to inflation but that did not happen this time. Though there are several explanations for this but instead of going into that, we wish to deal with the immediate problem at hand – what happens when all this stimulus money stops and Fed (and other central banks) start unwinding this history’s unparalleled quantitative easing?
    1. If unwinding is not done or delayed too much, the recent rise in inflation may reach uncontrollable levels. That is a known recipe for killing the economy and financial markets.
    2. If unwinding is done, bond prices will drop, yields will rise, forcing a rise in interest rates and inflation. It will also derail the economic recovery.

The outcome is devastating in both the options. The gigantic amount of QE money implies the repercussions will be extremely severe.

When Fed had announced its taper plan in 2013, Nifty had crashed by over 15%. That time the Fed had infused near $2.5 trillions by QE, which this time may cross $10 trillions!

  1. Every year the financial position of US government is deteriorating. The individuals have amassed huge wealth, but the government’s reserves are negative and deficit is rising every year. The facts below show that it is financially very weak and susceptible to financial collapse.US debt
    1. US debt is $28 trillion, while its GDP was $22.8 trillion in 2020 (debt/GDP ratio over 100)
    2. US debt is expected to reach 185% of its GDP by 2050 (source: Congressional Budget Office), no estimates that it will ever be repaid!
    3. US deficit in 2009 was $459 billion, and in 2021 it is $3400 billion (15% of its GDP)
    4. US federal government’s net worth (negative) as on January 2021 was $-11 trillions (almost 50% of its GDP)

US – Federal government; net worth as on January 2021

united states federal government net worth ima level fed data

A recent Nomura research has identified six economies – including the US, Japan and Germany – that could be subject to a financial crisis in the next 12 quarters. Their model correctly signalled two-thirds of the past 53 crises in a sample of 40 economies since the early 1990s.

If US were a company, it would have been rated junk.

US being the most powerful country, has a unique advantage of having the currency of the world. It can print any amount of dollars, it can rollover its debt every year, it can continue to raise its debt ceiling every year, but can it really go on for ever?

The federal deficit and debt are concerns because the debt is held by those who have purchased Treasury notes and other securities. A continuous deficit adds to the national debt, increasing the amount owed to security holders.

US debt is sky-rocketing and there is a serious concern that the country may not be able to pay. When people start believing this, debt holders will demand higher interest to compensate for the higher risk. That will increase the cost of all interest rates and can cause a recession.

Just a large money supply may not lead to serious inflation, but when trust in US ability to repay its debt fails, it will trigger a run on the dollar. When will that happen? That is a difficult task to time it, but there are proven and tested ways to make estimates.

Is this risk imminent?

Inflation and interest rates move in similar direction are very closely related. US Interest rates have been declining since 1981 and are at historical lows. If you look at the first chart, rates move in cycles, and there have been two bottoms of such cycles, first in 1900, second in 1940. It appears that we may be near the third major bottom but the rates may also remain low for few more years before finally rising up.

We need some proven ways to indicate a reversal of low inflation (interest rates).

Gold is closely corelated with inflation. A very broad estimate of inflation cycle reversal can be made by the Gold/Equity Index ratio. At lower levels, the equities are too costly compared to gold, and indicates the beginning of a recession. It has always been able to broadly estimate major recessions/corrections as you can see in chart below.



We are now already seeing the beginning of an inflation super cycle.

“If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.” – Gary Cohn

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