Where is The Fed taking us? – David Wildasinn
It is interesting to think about the Fed’s actions in the present as the topic of a recession occurring is building in the media. It is possible that the Federal Reserve sees a recession in the near horizon, and is choosing to counter act that conclusion with the decreasing of the Fed Funds rate, when it might seem illogical to decrease the rate in such a prolonged expansionary period in the business cycle. Decreasing the Fed Funds rate will allow for, at the basis, growth in the money supply do to a lower cost of borrowing for banks. This gives banks more room to create credit, which leads to loaning out more money and creating spending to spur growth. In the short term, this action may seem logical because it will prevent a recession, especially if you believe a recession (which can be as little as two quarters of negative economic growth) is bad.
But what is the cost of this in the long term?
If the Fed does decline rates one or two more times, and then a recession does still occur in the next one to two years, the Fed will likely be prompted to take further action to counter the recession and move the country back to a pathway of expansion. The Fed Funds rate would likely drop back to zero, and then Quantitative Easing may be brought back into policy and put into place. QE is where the Fed purchases assets from financial institutions, pushing money into the system, allowing the banks to create more credit and spur greater growth. At the fundamental core of the action is that ultimately, these actions extrapolate the money supply of the United States. QE may become a normal part of monetary policy, or the policy the Fed takes to control money and the business cycle, further expanding the money supply, creating inflation, increasing prices, devaluing the dollar, and likely increasing the value of the stock market at the same time.
To me, the idea of QE becoming normal and the banking system existing in a long term naturally low interest rate environment will ultimately lead to hyperinflation. It could be a moderate growth of inflation, but when you look at the system at the core, it seems inevitable. This will especially be problematic if wages do not rise with inflation, which (I believe) they have not historically done so. This is fundamental to beliefs by others that internal problems will arise between classes in the US, leading to greater political upheaval between the right and the left. Credit increases, inflation occurs, prices rise, revenues increase, and the stock market grows with it, exponentially helping those who have positions in the public markets.
Counter intuitive to that is Modern Monetary Theory, which states that a country can ultimately exist in continuous and growing spending as long as debt is denominated in its local currency and a central bank exists. This claim suspects that the growing U.S. debt is not a problem, which democrats like because it supports their notion of growing government programs, spending, and declines that this will create economic problems.
Regardless of a belief of whether the system is going to work over the long term or not, money is continuously growing. That means the supply of money, or total dollars in circulation, continues to grow and the central bank, or the Federal Reserve, has control of that. It is difficult to conclude whether this is good or not, as in the present day in history, this is likely the only real time this system has existed in this form. Money gets fed into the system, and the finical institutions extrapolate that growth through credit creation. You can think about this growth with the fact that when you deposit money into the bank, 90% of that money gets loaned, creating credit, and then that loan ultimately gets deposited into a bank to only get loaned out again. A deposit ultimately leads to the creation of ten times the amount of the deposit in the supply of money. In a more grand sense, it would be interesting to see the growth of the money supply as an effect of Quantitative Easing after the last financial crisis and considering the growth of credit through it, and compare that to the total supply of money that existed pre-2008.
People are concerned about the stock market losing value, but what do you do when the dollar ultimately begins to lose (more) value at a greater rate than it already is? If the common individual were able to know that this was going to happen, it’d be a very different world. But we don’t know if this will happen, because the future is unpredictable, but it is a risk one may want to consider preparing for (in the long term). If the world ever gets into an extreme situation in the future where hyperinflation begins to occur in western nations that rely around central banking, you might ultimately see the use of cryptocurrency become more common as a store of value, especially if blockchains grow as a means of transaction. This perspective of money may have ultimately been the motivating factor in the creation of the original block chain, and the cryptocurrency that came about with it — bitcoin.