The US and many other countries have printed over 20% of the total money supply ever created over the course of the last 12 months.

The 2008 Financial Crisis and Start of American Quantitative Easing

In 2008, the Federal Reserve (Fed) bailed out the banks and corporations through, what has now been defined as, Quantitative Easing (QE) and other revolving credit facilities. Although the Fed took further action resulting in some increased long-term debt and direct funding to the economy, we will focus this section on QE.

QE, as defined during the 2008 financial crisis, is an unconventional monetary policy where the financial market is provided a boost through large scale asset purchases. These asset purchases of Treasury securities, corporate bonds, mortgage-backed securities, and other financial instruments work to increase security prices and in turn, lower yields (or interest rates).

The idea behind QE is that as interest rates fall, the cost of doing business is reduced, and active members of a reviving economy may feel more comfortable financing capital investments.

Between the years of 2008 and 2011, the two QE programs consisted of $1.25 trillion in mortgage-backed securities purchases, $200 billion in federal agency debt, and $900 billion in long term Treasury securities purchases.

During the time, critics of these unconventional monetary policies warned that because QE increases the total money in circulation and the money held in bank reserves, a recovering economy would coincide with a rapid increase in inflation. To quell these concerns, the Fed instated incentives and reserve requirements for banks in an attempt to prevent a swift outflow of money into circulation. These incentives and requirements included, but were not limited to:

  1. Paying banks interest on reserves held. These interest incentives were designed to sustain a level at which the banks’ opportunity costs were negligible or in the favor of the banks involved.
  2. Dodd-Frank Wall Street Reform and Consumer Protection Act requiring banks to “keep billions of dollars in cash in reserves.” (https://www.wsj.com/articles/big-banks-seek-to-liberate-billions-of-dollars-in-funds-11557135001)

Current federal funds rate – 0.06% as of May, 04, 2021.

Federal Funds Rate - 62 Year Historical Chart
Federal Funds Rate – 62 Year Historical Chart – From https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

Although some fears of runaway inflation were quelled by limiting money outflow from bank reserves, it is assumed that upon adequate economic recovery the Fed will be able to and willing to reverse the QE programs.

The 2020 Financial Crisis and Expansion of American Quantitative Easing

At the beginning of the financial and liquidity crisis of 2020, the Federal Reserve and the U.S. Treasury greatly expanded economic stimulus activity first introduced during the 2008 financial crisis. We will focus on the expansion of the Quantitative Easing programs, direct corporate lending programs, and municipal borrowing programs.

“Unlimited QE”

The Fed took action to expand massive securities purchases, in the form of QE, following global responses to the COVID-19 pandemic dramatically reducing economic activity. On March 15th, 2020, the Fed committed to purchasing $500 billion in Treasury securities and $200 billion in mortgage-backed securities.

Immediately following this announcement, the Fed expanded again, stating that they will continue QE “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.” This, along with other expanded programs such as the Primary Dealer Credit Facility (PDCF) and Repurchase Agreements, was labeled by the media and investing community – “Unlimited QE.”

The Fed would go on to taper these purchases until June 10th, 2020, where they committed to purchasing a minimum of $80 billion in Treasury securities and $40 billion in mortgage backed securities every month until further notice.

https://www.newyorkfed.org/markets/opolicy/operating_policy_200610

The Corporate “Junk” Bond Market

The Fed took QE a step further in 2020, compared with years prior, with the creation of the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF).

In the eyes of the Fed and the excitement of large corporations across America, these credit facilities committed to providing access to credit through bond purchasing. The Fed committed to at least $750 billion in corporate debt including exchange-traded funds.

Note – These companies were not required to stop any stock buyback activities or dividend payments while taking advantage of the programs.

https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a5.pdf

https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a2.pdf

State and Municipal “Bankruptcy Protection”

The Municipal Liquidity Facility was created in a new attempt to reduce the economic risk exposure by individual states and municipal bodies. The facility allowed the Fed to loan up to $500 billion to state and municipal organizations such as the New York Metropolitan Transportation Authority. This facility ended December 31st, 2020 as it was not carried over to 2021.

https://www.federalreserve.gov/monetarypolicy/muni.htm

Total Assets of the Federal Reserve = $7.78 trillion as of April 28th
Total Assets of the Federal Reserve = $7.78 trillion as of April 28th – From https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

The chart above shows the total assets currently held by the Federal Reserve. Compare 2008 – 2010 to 2019 – 2021.

Stimulus Checks “Money Does Grow on Trees”

As governments from around the world borrow more and more money to provide stimulus to a halted global economy, the line between printing money and borrowing money blurs.

The U.S. Government, through the Federal Reserve, has “borrowed”:

$5,736,300,000,000

This “borrowed” stimulus money is being used as direct relief to the individual American people in the form of direct stimulus checks, small business loan forgiveness, paid sick leave, unemployment benefits, and more. (Visualization by USA Today – https://www.usatoday.com/in-depth/news/2021/03/11/covid-19-stimulus-how-much-do-coronavirus-relief-bills-cost/4602942001/)

Some Healthy Money Printing

In a healthy operating relationship between the Fed and major banking organizations in America, money is created or “borrowed” through open market activity – including bank reserve issuing. This allows the Fed to be the orchestrator of the money supply while the banking organizations distribute to individuals and businesses in the form of loans and debt.

The modern fractional reserve banking system allows banks to hold as little as 10% as reserve while lending out the other 90% to the broader economy. The 90% lent to the broader economy often ends up back in the banking system and can be loaned out again with a 10% reserve ratio. Here is a breakdown of how $100 billion in reserve funding can turn into $1 trillion in broader economic activity:

  1. Federal Reserve provides $100 billion in reserves to Bank A.
  2. Bank A holds $10 billion (10%) in reserves and lends out $90 billion (90%) to the broader market. Most of this loaned money ends up in Banks B thru D.
  3. Banks B thru D holds $9 billion (10%) in reserves and lends out $81 billion (90%) to the broader market. Most of this loaned money ends up in Banks E thru H.
  4. Banks E thru H holds $8.1 billion (10%) in reserves and lends out $72.9 billion (90%) to the broader market.
  5. Etc.

This system allows the fed and banking system to control the increases to the total money supply in circulation through new money and limit inflation.

The Money Printing Addiction

Government Transfer Payments as % of Total Income in the United States reached 35% in 2020.
Government Transfer Payments as % of Total Income in the United States reached 35% in 2020.

As with every government system, eventually programs are expanded to the point of no return. During the course of 2020 and 2021 relief programs installed by the Fed and Congress included trillions of dollars of “borrowed” money that was sent directly to the American people, mostly bypassing the banking systems.

These relief packages were immediately eligible to be used in the circulated money supply, unlike most programs installed during the 2008 financial crisis.

As a result of these continued stimulus programs, the government is now responsible for nearly 34% of all household income.

Imagine Being Employed During a Pandemic

Civilian Unemployment Rate, Seasonally Adjusted
Civilian Unemployment Rate, Seasonally Adjusted – https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm#

The Federal Reserve released unemployment projections early 2021 that expected a fall in unemployment to 4.5 percent by the end of the year.

In an attempt by the federal government to limit the financial difficulties of families facing extended unemployment due to Covid-19 economic policies, unemployment benefits were greatly expanded. These unemployment benefits included multiple rounds of direct payment stimulus checks to Americans, the payroll protection program, federal unemployment payments with reduced requirements, and more. Many of these benefits are concluded in September of 2021, but some politicians are actively working to extend these unemployment policies indefinitely.

Focusing specifically on the federal unemployment payments, let’s take the example of an unemployed adult living in Arizona. The federal unemployment supplemental payment includes an additional $300 per week in payments. This brings the total unemployment benefits (not including other stimulus benefits) to $520 per week – Note this money is now anticipated to not be taxed. Calculated over time, the adult unemployed “worker” would be receiving $13.50 per hour. The Arizona state minimum wage is $12.15 per hour.

This unemployment wage also allows the “worker” to forego many other expenses that come with working a job, including gas.

It is uncertain whether these unemployment policies will continue to be expanded, but in the current political landscape, many strategists believe they will. It has been speculated that if these unemployment policies are expanded into an election year, such as 2022, many of the benefits could become permanent.

For example, increased wages will increase cost of labor, leading to a potentially permanent cost to the company. These costs are most often passed onto the consumer through higher product costs. The companies can also use these higher wages as an excuse to reduce employees on payroll and employ robotics and automation.

More Unemployment and Wage Inflation Speculation

If the federal unemployment and stimulus benefits are greater than the minimum wages in an area, it may be difficult to justify moving off of these benefits while they’re available. People across America and Canada have been faced with this dilemma as the economy reopens to “non-essential workers” (as the Government classifies).

Many lower wage jobs in manufacturing and production companies, restaurants, etc. are not being filled without additional incentives (including increased wages).

With interest rates so low and liquidity in the market at an all-time high, the broader economy is attempting to expand quickly. This expansion puts pressure on commodities, manufacturing, and production companies to ramp up their output. The market now sees two scenarios:

  1. Available job openings are exploding as unemployment stays stagnated (April 2021 numbers)
  2. A large amount of demand in a short amount of time is creating backlogs and driving prices up

Not only does difficulty filling job roles hinder reopening of supply chains, a forced increase in wages through federal intervention creates wage inflation pressures. As the Fed and the U.S. Treasury so often state, the near-term prices and inflation metrics will be transitory. If companies are forced to succumb to wage inflation pressures, much of these transitory claims may become permanent.

An Expanding Commodities Market

Production and economic growth are facilitated by supply and demand in the open market. In a healthy economy, supply and demand are as close to equilibrium as possible to limit unnecessary excess and waste.

The 2020 economic crisis and response has disrupted the supply and demand curve in the following ways:

  1. Reduced production and capacity

    The production and production capacities of many commodities and essential products has been reduced to accommodate the reduced demand and hindered national and global supply chains. This production and capacity must restart organically as demand and supply routes reopen.
  2. Shipping and supply chain constraints

    Global shipping and supply chains halted nearly simultaneously in early 2020. These same supply chains are now opening back up slowly to accommodate supply and demand and predictions of future supply and demand.
  3. China and other countries refusing to supply certain goods

    Many countries have restricted the international trade of some commodities due to their own internal shortages and for strategic geopolitical gains. This includes, but is not limited to, lithium, precious metals, and some food products.
  4. Demand far surpassing supply

The commodities traded as U.S. futures contracts in the open market have seen a steady increase in value. Lumber is trading at over 200% increased prices, corn is trading at a similar premium, platinum and palladium are trading at triple digit increases in prices. These increased prices also increase the cost of acquisition by companies that use these commodities in their products. Higher raw material prices lead to companies passing costs onto customers, leading to higher product prices.

Companies that have pledged to raise the costs of their products in 2020:

  • General Mills – Mentions inflation as the root cause of increased prices.
  • Hormel – Mentions inflation as the root cause of increased prices.
  • Reynolds – Mentions high commodity prices as the root cause of increased prices.
  • Procter & Gamble – Mentions increased raw material costs as the root cause of increased prices.
  • Whirlpool – Mentions supply chain issues and increased costs of raw materials as the root cause of increased prices.
  • Kimberly-Clark – Mentions high commodity prices as the root cause of increased prices.
  • Tempur Sealy – Mentions high raw material costs as the root cause of increased prices.

These higher product prices will increase the cost of living of consumers, leading to a reduced quality of life on the same wages, leading potentially to further wage pressures to rise, and continued “wage inflation”.

Bank of America's tracked mentions of the term "inflation" during earnings calls.
Bank of America’s tracked mentions of the term “inflation” during earnings calls.

Bank of America began recording how often companies mention the term “inflation” during their earnings calls in 2003. You can see the massive influx of usage and compare the Consumer Price Index (CPI YoY) trend.

Some Final Questions and Comments

The global political and economic responses to the Covid-19 pandemic accelerated a liquidity and financial crises that may have been inevitable. The quantitative easing and stimulus policies put in place as a response to the crisis directly impacted the currency supply in circulation, inflation and inflationary pressures, and rising costs to the American people.

How will the vast $2 trillion infrastructure bill affect the U.S. economy and U.S. dollar?

Will the unemployment benefits and other benefits implemented through stimulus spending bills be extended into 2022?

How will continued economic expansion pressures affect a stagnated commodities market and an over-burdened supply chain?

Will China or other countries attempt to strike the USD as it is weakened through inflationary pressures?

How will the cryptocurrency market, gold and silver markets, and other inflation “safe haven” assets move in the coming years?

Will the Fed increase interest rates? At what point will the Fed default on their debt payments?

Will the U.S. government move towards a totally digital dollar?

Why doesn’t the CPI include housing costs, gas costs, food costs, etc.? Will increased commodity costs continue to raise CPI numbers?

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