THE FALL OF OLYMPUS - WEALTH & INFLATION
Printing and minting of money is no new story in the history of economics and finance. For more details about the historic economic events of similar scenarios you can read my recent article “Man’s Hand VS The Invisible Hand” (link below). Let’s fast forward to year 2007! The Fed began reacting to the rise in unemployment with their closest-to-hand tool : cutting interest rates, in hopes to increase customer spending which leads to an increase in employment and economic output etc…The Federal reserve and other policymakers, and after the collapse of Lehman Brothers, feared that other major banks would fail. Consequently, knowing how costly the collapse of banks can be, the Fed stipulated the Congress to pass the Troubled Asset Relief Program (TARP), which was major bailout of the financial system. It also eased the access of the banks to cheap overnight lending to prevent additional bankruptcies. An unconventional tool called quantitative easing (QE) emerged, a term that stands for Large-Scale Asset Purchases which is the process of buying back as many of the longer-term debt issues as possible by the federal government and other governmental appointed institutions. Using that tool, the Feds no longer even need to print money, it just contracts the banks’ balance sheets and expands its own, increasing the banks’ liquidity which in return banks create loans and money supply is increased in the markets!
WHAT ABOUT INFLATION?
During Ben Bernanke's tenure in office, lots of money has been created, yet much of it was still controlled by the Feds. HOW? The required reserves ratio imposed on Banks as part of the regulatory framework, obliges banks to deposit an X percentage of the money with the central back which is not allowed to be lent out. At that time, the Feds were Paying interest on excess reserves as a useful way to pull money out of the economy if it becomes worried about inflation in the future. The safest investment on Earth!
But this is 2020!
Once again the Feds repeat almost the same steps in efforts to increase liquidity and counter the impact of the coronavirus on the economy (The economy was already suffering before the Covid-19 pandemic/epidemic which will be discussed in details in the next article). When the coronavirus came along, treasury markets cracks became clearer. The Feds who were already intervening in the repo-markets (A repurchase agreement – repo - is a form of short-term borrowing for dealers in governement securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations. – source: Investopedia) realized the situation and decided to further ramp it up. Amid fears about the impact of the coronavirus pandemic on the economy, and investors dumping Treasury securities seeking cash, the Fed stepped in to buy these government bonds.
On March 12, the Fed said it would offer $500 billion in a three-months operation. The following day, the Fed planned to inject $1 trillion more, split between a three-month operation and a one-month operation. It was prepared to offer up to $1 trillion every subsequent week.
Given that several of the stimulus programs have no defined cap, it seems a safe bet that, as the Wall Street Journal’s Nick Timiraos wrote last week, the Fed will remain on track to double its balance sheet — a $4.5 trillion jump — by the middle of this year. But even if you look only at current programs, the theoretical maximum is much, much higher.
There is an obvious correlation between liquidity and the stock markets (since 2009), and Trump’s re-election depends heavily on the rise of the stock markets. Trillions more are expected to fall from the sky instructed by the Trump’s administration, to prop up the markets and insure he wins the up-coming elections in November.
THE TRADE WAR
According to ustr.gov, U.S. goods imports from China totaled $539.5 billion in 2018, up 6.7% ($34.0 billion) from 2017, and up 59.7% from 2008. U.S. imports from are up 427% from 2001 (pre-WTO accession). U.S. imports from China account for 21.2% of overall U.S. imports in 2018.The escalation in the trade war between President Xi and President Trump leads to two different scenarios. The first scenario is where we see the tariffs imposed on the Chinese imported goods cause it to become more expensive to the U.S consumer which means inflation. The second scenario is if Trump decides to stick to his word and cut off the Chinese-American relationship! This means that the Chinese products won’t even reach the U.S consumer which will push the U.S consumer to look for alternatives which will be more expensive and therefore inflation! This lack of product provision will cause a supply shock to the American markets. Although demand is falling (temporarily – although retail sales show a recovery due to the reliance on product delivery and online shopping), it will fall at a slower pace than supply which will cause prices to soar and therefore inflation or hyper stagflation especially with the threat of a second coronavirus wave knocking at the door!
TRANSFER OF WEALTH
Half of the US dollar or more is held outside of the U.S. and when the Fed devalues the dollar - printing more money, the purchasing power will be shifted from the holders of the USD currency to whoever gets the newly printed money first which is in this case the U.S.! So it is like stealing from the rest of the world to bolster the US economy. Not only from the rest of the world, but also from the U.S. citizens to the major corporate and financial institutions who have the most direct access to that newly created money.
THE LUDICROUS
BAILOUT PLAN “GOING DIRECT” – (SNAP FROM AN ARTICLE PUBLISHED AT THE WALL STREET PARADE By Pam Martens and Russ Martens: June 5, 2020)
It’s called “Going Direct.” That’s the financial bailout plan designed and authored by former central bankers now on the payroll at BlackRock, an investment manager of $7 trillion in stock and bond funds. The plan was rolled out in August 2019 at the G7 summit of central bankers in Jackson Hole, Wyoming – months before the public was aware of any financial crisis. One month later, on September 17, 2019, the U.S. Federal Reserve would begin an emergency repo loan bailout program, making hundreds of billions of dollars a week in loans by “going direct” to the trading houses on Wall Street.
The BlackRock planscalls for blurring the lines between government fiscal policy and central bank monetary policy – exactly what the U.S. Treasury and the Federal Reserve are doing today in the United States. BlackRock has now been hired by the Federal Reserve, the Bank of Canada, and Sweden’s central bank, Riksbank, to implement key features of the plan. Three of the authors of the BlackRock plan previously worked as central bankers in the U.S., Canada and Switzerland, respectively.
The authors wrote in the white paper that “in a downturn the only solution is for a more formal – and historically unusual – coordination of monetary and fiscal policy to provide effective stimulus.”
We now understand why, for the first time in history, the U.S. Congress handed over $454 billion of taxpayers’ money to the Fed, without any meaningful debate, to eat losses on toxic assets produced by the Wall Street banks it supervises. The Fed plans to leverage the $454 billion into a $4.54 trillion bailout plan, “going direct” with bailouts to the commercial paper market, money market funds, and a host of other markets.
The BlackRock plan further explains why, for the first time in history, the Fed has hired BlackRock to “go direct” and buy up $750 billion in both primary and secondary corporate bonds and bond ETFs (Exchange Traded Funds), a product of which BlackRock is one of the largest purveyors in the world. Adding further outrage, the BlackRock-run program will get $75 billion of the $454 billion in taxpayers’ money to eat the losses on its corporate bond purchases, which will include its own ETFs, which the Fed is allowing it to buy in the program.
Helicopter money is also spelled out in the BlackRock plan, which explains why simultaneously with the $454 billion Congress carved out for the Fed under the CARES Act, fiscal stimulus was also “going direct” with $1200 checks and direct deposits to the little people of America and Paycheck Protection Program loans and grants “going direct” to small businesses.
One feature of the BlackRock plan that is certain to get wide public pushback in the U.S. is the proposal for central banks to buy stocks (equities). The authors write this:
“Any additional measures to stimulate economic growth will have to go beyond the interest rate channel and ‘go direct’ – [with] a central bank crediting private or public sector accounts directly with money. One way or another, this will mean subsidizing spending – and such a measure would be fiscal rather than monetary by design. This can be done directly through fiscal policy or by expanding the monetary policy toolkit with an instrument that will be fiscal in nature, such as credit easing by way of buying equities. This implies that an effective stimulus would require coordination between monetary and fiscal policy –be it implicitly or explicitly.”
In the United States, approximately 85 percent of the stock market is owned by the richest 10 percent of Americans. Buying stocks would simply expand and accelerate the wealth and income inequality which is already at the highest levels since the 1920s – a time when Wall Street also owned large deposit-taking banks.
The Swiss National Bank, the central bank of Switzerland, where one of the BlackRock authors previously worked, already has massive holdings of individual stocks, including $94 billion in publicly traded stocks in the U.S. according to its March 31,2020 report that was filed with the Securities and Exchange Commission.
THE MONOPOLY
With all the above being said, we can now come to a conclusion and understand where the liquidity is being channeled to! With all small to medium and some major corporations being crushed, we see companies of different sectors like Apple, Tesla, Facebook and Microsoft at their all-time high while their earnings are plummeting. Why? Maybe it is easier to deal with a hand full of corporate only or maybe it is just “THE PLAN”! I’ll keep this question for you to research and come to a personal conclusion.
A QUICK TIP: GOLD AND SILVER
One longstanding line of criticism of the Federal Reserve holds the idea of a pure fiat currency! A legal tender-currency that is not backed by any precious metal and of no intrinsic value (Check out my article “Man’s Hand VS The Invisible Hand” - link below). The loss of confidence, as explained earlier, in the U.S dollar will cause the rush of investors to Gold and Silver as a safe haven and a more secure currency! After 2008, the price of gold rose from the lows of $692.50/oz to ab all-time high of $1,896.50/oz in 2011. You can imagine with all the money created (loss of value of the USD), the current economic conditions, the potential fall in the U.S dollar standard, the Chinese threat to drop the U.S dollar as a foreign currency reserve and the fact that Russia and China (the biggest gold exporter which is restricting the permissible exported amount of gold) are accumulating gold and buying mines all over the world, seem to be reasonable data to believe that a surge in the prices of gold and silver is almost eminent!
