Newsletters - Past Issues

Can it get any weirder?

Hello Money Matters Fans,

Pretty good question eh? 

What is next is anyone's guess. For us? We are more nuetral than long in our management. Feel free to call me to explain. Meanwhile keep reading todays articles and ideas below:

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I have always said if printing money solves economic problems how come we still have economic problems?

Our money supply, basically our currency the U.S. dollar, is handled by the Federal Reserve (Fed). One of their missions is to assist in the financial stability of the `system` any way it can. It has limits on what it can do, yet some argue it has exceeded those limits in recent decades.

The savings and loan bailout in the 80’s, the 1997 Long Term Capital Management rescue, the dot com crash combined with the Y2K scare, then 9/11, the 08 real estate crash and now CoVid 19, the reasons for Fed intervention can be argued on each occasion.  Interestingly, each subsequent crisis has been bigger than the last, and therefore each intervention by the Fed has encompassed more and more money.

The Fed has a handful of tools it can use to try and juice the economy from what ails it. Those tools include lowering overnight interest rates (Fed Funds Rate) so financial institutions can borrow money cheaply. Lower overnight rates bleed over to consumer credit rates making overall borrowing costs cheaper. The Fed can also add funds to the Repurchase Agreement mechanism (REPO) which lubricates the conduit for corporate credit. The REPO market can and has frozen up during times of severe market stress. The Fed can buy Treasury and agency debt (called Quantitative Easing (QE). QE is often mentioned in the news as a major tool of the Fed. Increasing QE increases the U.S. government deficit. It is seldom argued the tools mentioned are outside of the Feds permitted actions.

Where the Feds cross into the proverbial grey area is in the purchasing of private debt (corporate bonds and bond funds) or outright loaning money to private for-profit companies. They may also, in conjunction with the treasury department or related government entity, be buying individual company stock or stock funds outright. Most analysts agree this would definitely be outside their scope of permitted actions.

Much of the money created by the Federal Reserve is funneled to the U.S. government directly for stimulus payments and programs, infrastructure and other projects and direct assistance to consumers.

Each time questions have been raised about the legality of Fed intervention, the reasoning trumps the discussion. In other words, many in Congress may be hesitant to voice concerns over reining in the Fed’s actions when Americans are in dire need of assistance.

It is interesting to note that the Feds obviously feels the tools it explicitly has is not enough if it is tip toeing around in the grey areas of its mandate.

The Fed could be said to have ventured off course in the recent bailouts starting even before the 08 housing crisis without much objection. The Fed governors may be of the opinion as long as the economic needs are great enough, the rules it operates under should and will be relaxed. After all, it has repeatedly dipped its proverbial toe into other areas of influence without much fanfare throughout the many economic crisis that have occurred in recent decades.

The real question may be does the main tool of the Fed, which is manufacturing paper currency (the U.S. dollar) to throw wherever needed, really solve a crisis or is it just “papering over a symptom” of a much greater problem?

Since the bailouts are getting larger and larger with each crisis, are they using permanent solutions or are they just pushing the day of reckoning (if there is one) further out into the future?

If the next crisis is even larger, when it comes, can the same tools be used again and again without ramifications?

Experts disagree on the answer to this question but a major concern is inflation raising its ugly head sometime in the near or far future due to the massive increase in the money supply from all the bailouts.

Other countries throughout civilization who have tried monetary creation to permanently solve economic crisis have not come out unscathed. The ramifications have run the gamut to moderate inflation, creeping stagflation (economic stagnation coupled with inflation) or a complete currency collapse.

Opinions expressed here are author’s alone, not those of any bank, investment advisory firm, news media company, or broker dealer. Nothing stated on this site is meant to insure a guarantee of any kind, or to be construed as individual advice. Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access or monitor client funds, accounts, or portfolios. For a full list of the services Marc Cuniberti provides, please contact him directly. California Insurance License #0L34249. Insurance services offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity. (530)559-1214

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