In a talk held at the Berlin Global Dialogue forum on Friday, BlackRock CEO Larry Fink made predictions about our economic future. “I would clearly say we are in a period of time with so many transitions, whether it’s a transition from deflation to inflation or a geopolitical transition. The fragmentation of supply chains is just beginning,” he warned.
Fink also believes inflation will continue to rise, and predicted that this will result in 10-year Treasury bond yields hitting 5 percent. He attributed the rise in inflation to geopolitics and supply chain issues.
“My opinion is we’re going to have 10-year rates at least at 5% or higher because of this embedded inflation,” he suggested. “We’re underestimating the change in geopolitics is so structurally inflationary.”
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Treasury bond yields, or rates, are paid by the U.S. government as interest for borrowing money. It is considered the cost of U.S. government borrowing. They are seen as an indication of investor confidence by the financial community, as they are one of the safest investments to make. If they are increasing, that means the government is experiencing great inflation.
Fink’s predictions are similar to others made by prominent Wall Street figures this week. Pershing Square Capital’s Bill Ackman predicted 30-year Treasury yields will reach 5 percent. JPMorgan Chase CEO Jamie Dimon implied to the Indian Times that he thinks interest rates could hit 7 percent.
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“Going from zero to 5 percent caught some people off guard, but no one would have taken 5 percent out of the realm of possibility. I am not sure if the world is prepared for 7 percent. I ask people in business, ‘are you prepared for something like 7 percent?’ The worst case is 7 percent with stagflation,” he said.
Currently, 10-year Treasuries are at 4.68 percent as of Thursday, the highest since 2007. Experts attribute their rise to Federal Reserve interest rate-hikes as well as Federal Reserve Chairman Jerome Powell’s recent statements about his readiness to continue raising rates.
America was downgraded from a AAA credit rating to a AA+ by Fitch Ratings in August, and the situation has not been helped by heightened oil prices and rampant U.S. government borrowing.
As argued in The Economist yesterday, the real story is not the impending government shutdown but rather rising bond yields. The government shutdown, which is expected to halt roughly 25 percent of U.S. government operations and services, will likely be caused by disagreement over government spending.
However, a shutdown is nothing compared to the damage caused by interest on government debt. If we continue at this pace without cutting spending or raising taxes, we will have to spend more on interest payments than we do on national defense by 2030. And by 2051, debt interest payments will eat up half of federal tax revenue, according to the Manhattan Institute.
However, Fink believes it is unlikely we will experience a “hyperinflation” scenario like we saw in the 1970s, where prices in the U.S. grew by a double-digit magnitude.
“I was a young bond trader during the late 70s where we had hyperinflation. I don’t think we’re going to have anything close to this inflation of the 70s,” Fink said.
When he veered off into political territory at the forum, somebody asked Fink if he would run for president. “I’m too young,” the 70-year-old joked.
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