Larry Fink on debt, interest rates, and what to expect going forward.

[KnightWhoSaysNit]

The Blackrock CEO was on Fox Business yesterday and gave his perspective on what to expect as the bond crash continues. The parallels in history with the 1970s, now aligned with the high debt situation that was apparent during WW2, point the way. To be honest I did not realize how we got out of that post WW2 debt problem but Larry made it clear: We used the central bank and inflated it away.

To start, there are two big drivers pointed out by Larry that will make elevated inflation inevitable given a starting debt/GDP that exceeds 100%:

• The need to pour even greater amounts into defense spending.
• The need to re-shore manufacturing.

Larry said that we were able to cut WW2 debt/GDP by having our central bank do much the same thing that the Bank of Japan has been doing for decades -- buy our own bonds (i.e., QE). (I had previously thought it was high taxation.). This is inflationary -- expand the money supply -- but it is the only way to prop up a declining economy that is riddled with debt. It is, in fact, a defrauding of bond holders and pensioners, which explains why bonds are crashing. The market can see the writing on the wall.

I think there are some other supporting factors:

• Tax rates now that are far lower than the post WW2 era rates.
• The imbalance of wealth.
• Aging population / less productive younger generations.

It's not all gloom and doom though. Larry thinks that AI and robotics will save the day for investors, though he does see more worker "displacement" ahead. In other words, you can't expect to earn a living working with your hands.

What Larry expects is that the Fed will eventually intervene and suppress interest rates. I see this as likely even before they reach their stated 2% "goal," which they will be forced to abandon. Others agree. Some think a 100 basis point cut next year is inevitable even without inflation reaching target. [The recessionary forces of stagflation will outweigh the desire to control inflation.]

My guess is that they will relieve Powell at the Fed, replace the hawks with doves, and then proceed. When they do the dollar will be devalued. Stocks will be prevented from a free fall, and inflation will take off. I think Larry doesn't expect a 1970s repeat, but it would be impossible to know. No one knows the severity of the war in the Middle East going forward -- the weight that this will put on military spending and energy prices.

Though today investors see Japan as quite an opportunity, it comes after a multi-decade period of losses. Should we expect this going forward in the US? I think we can -- at least against inflation. We're starting with all of the above headwinds.

This has been my expectation for a while, kind of cemented now that we have war and a need to spend even more on the military. It just means that the private economy will change and the public sector will continue to grow. You won't be able to buy the things you like, and you won't be able to retire in comfort. The capital will go into bullets, bombs, and factories of a kind that are likely to put many out of work, at least out of a high-paying job. Infrastructure spending will be paid for through the inflation tax.

This is going to be really bad. Again, remember that, in relative terms, our starting point is ultra low tax rates, inflation, and a stock market bubble that rivals Japan in 1990. I don't see how the technology revolution outgrows these headwinds, but that is really what it will take to preserve living standards. It won't be through importing unskilled labor and handing out more picks and shovels.