The EZ-PZ Guide to your Financial Future…

The largest obstacle to our collective financial well being will come this fall. That is when Republicans, despite not really practicing sound political methods, may retake both houses of Congress, That would result in a claw back of the spending bills, and leave the Treasury/Fed sitting on a pile of money. The Fed has nearly ten trillion of bonds bought on consignment.

The Fed may stop “rolling over” securities on their balance sheet when they mature, which isn’t all that effective after the money is spent. Much of it already is, because the national debt needs servicing. The excess liquidity that government created will have trouble finding a home, (especially if the economy slows) and that would not be the fault of anyone really, but the bipartisan rejoinders will cause some heated political discourse. More likely the Fed remains accommodative. After Jan. 6 they see political division as a threat to the economy. Just wait for them to say so that should be an interesting moment.

The Fed would need to tighten conditions if a liquidity trap began to manifest itself.  “A liquidity trap is when monetary policy becomes ineffective due to very low interest rates combined with consumers who prefer to save rather than invest in higher-yielding bonds or other investments..” When monetary policy becomes ineffective, fiscal policy is the best work around, and with an obstructionist Congress that may not be possible.

[Rejoinder: First of all interest rates are low, historically AND relative to inflation. Consumers when facing inflation opt to spend rather than watch their saved money evaporate, however there are other microeconomic scenarios. Why people would want to save money while inflation is at 8% – well it won’t be for much longer???]

The crisis in Europe occurs when Russia fails. Sanctions are giving the corrupt oligarchy a push. The Russians barely have enough energy and food to take care of themselves. Their collapse would move the process of Deglobalization along, but fears of supply chain shutdowns are overblown. China is internalizing their own growth, fewer exports, and more high end items [or no high end items] (This is the process by which Japan became a global economic powerhouse after W2) China is pulling back on production, and in places like Vietnam new production is ramping up and Mexico is ready to expand their economy. Re-globalization will not be automatic, but it will fill the supply chain gaps, eventually.

The loss of grain production in Europe is startling from a global market perspective, however the consequences are playing out similar to the shift in energy toward renewable energy and away from fossil fuel. Higher prices for gasoline will actually help that change in reduced dependence on fossil fuel [policy] along. Consumers have been moving away from bread, and gluten products, to plant based. Consider how long this change has really been at work. Then the effects of climate change are impacting the wheat growing zones.

Real estate is the major source of wealth for most middle income consumers. Climate change is reducing the number of desirable locations causing a supply shortage in housing. Location ^3 applies in this new format. A less desirable property in a desirable area will be worth more than a prime property in a climate risk zone.

Covid is morphing into new strains, and we believe we understand this, and we don’t. Like Climate Change, regions with bad weather, you want to avoid areas which are coincident with populations who resist public health measures.

Summary: The Treasury/Fed has expanded the monetary base to a degree that no single exogenous market, (like crypto currency) can bring down the major markets in a deleveraging event. The money supply is ten times the size of the crypto market, while in 2008 the mortgage market and the money supply were more closely aligned and when mortgages collapsed the shocks went through all the markets. If the Fed begins winding down the excess in the money supply that would put the system more at risk. The global system is safe for the moment. Russia has been cut off the from global economy, their failure would most likely be contained.

The United States is considered more desirable financially than say Russia, and for the moment China. I am just not sure what the Cassandras who extol the loss of empire, what they believe is happening? We have a president who comes to office without ethnic, religious, or racial bias, and he can bolster the secular government, which can prevent various factions from tearing apart the system from within. He is elderly and he may not win reelection and the minions who would make us back into a collection of states with only a set of narrow religious principles, stand ready to reduce Federal government to a largely ceremonial power. That would be beneficial to autocrats everywhere and does not reflect American values.

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