The Fed is doing some very alarming stuff

The Thinker by Rodin

Should you care about the Federal Reserve? Sometimes called the Federal Reserve Bank (it’s not a real bank), but generally just “The Fed”, the Fed basically controls our money supply. It does this with virtually no oversight by those who ultimately hold the bag when it makes mistakes: us taxpayers.

I am most alarmed by what the Federal Reserve has been up to lately. It looks both completely sane and completely crazy. To start, the Fed cut interest rates banks can charge to borrow from each other, or the Fed itself, to zero. This happened in 2008 too and it’s their way of stimulating the economy. I noted in an earlier post that this seemed to be the last trick in their toolbox. Since both consumers and companies were already in hoc to the maximum, this wasn’t a viable way to stimulate growth anymore. But it was what they knew how to do, so they did it.

But the Fed has invented some new tricks they haven’t done before. The Fed has basically decided to bail out any business, at least those that are publicly traded. In the last recession, a lot of large businesses were too big to fail. Now it looks like most businesses in the United States that are publicly traded are too big to fail, in the eyes of the Fed.

Most of these businesses got in trouble because of the cheap money the Fed has promulgated since the previous recession. With no rules, businesses borrowed instead of investing and saving. Mostly they used borrowed money to buy back their own stock. When the stock price invariably went up due to supply and demand, its executives (whose pay is largely based on stock prices, which they get at a discount) sell them and profit. In short, the Fed’s policies of making money so cheap in many ways made this new depression so much worse.

During the Great Recession the Fed also bought a lot of corporate stock too, to show faith in the market. It helped stabilize things and turned the market around, although it took a very long time. Now the Fed is buying corporate debt in unlimited quantities. Basically a business tells the Fed gets to say how much their debt is worth as a share of their company, and the Fed will buy it, no questions asked. Essentially the Fed is paying inflated prices for very shaky corporate debt that no one else wants to buy.

In exchange, companies get some ready cash to help them tie things over. Maybe the Fed will recoup its investment and eventually even make a profit for us taxpayers. But this money was created and doled out with essentially no oversight. The Fed is not accountable to anyone. While there are certain things the Fed cannot do, anything not specifically prohibited is in theory legal.

If I were to load up my family’s portfolio with junk bonds, my spouse would likely divorce me. But when the Fed does the same, there’s no spouse to object, and no oversight to worry. You have to hope the Fed knows what it’s doing, and Donald Trump appointed many of them. God help us.

I don’t have much trust in the Fed. These tactics strike me as desperate. Moreover, they are letting the rich reap a huge windfall. Many of them were like me: smart enough to sell at peak market when we knew it wouldn’t last due to COVID-19. They bought more stock at low market, toward the middle of March. And now with the stock market reaching their pre-crash highs again — due to the Fed buying so much stock that supply and demand is inflating their prices artificially again, despite the ruined economy — they are cashing in again. It appears that the Fed is exacerbating income inequality in the name of keeping the economy from collapsing even more. The Fed is becoming a wealth distribution mechanism that seems to favor the rich.

A rational government should not tolerate this. The Fed is basically trying to keep American capitalism, as we have known it, going. It’s just that it looks like American capitalism is in its death throes. A model of capitalism that is inured from the consequences its actions like the environment costs it inflicts on the rest of us deserves to die. If it is to be replaced at all, it should be with a version of capitalism that works in the interests of the people, not against it.

In short, the Fed’s actions strike me overall as desperate and very chancy. It needs oversight and reigning in. Consumer advocates, and not Wall Street insiders should oversee it. It needs to be accountable.

Expect a recession

The Thinker by Rodin

A recession is coming. It’s probably already here; we just can’t prove it yet.

The trigger was the emergence of the coronavirus and the resulting COVID-19 disease in late 2019 in China, but if it hadn’t happened it would have likely happened later in the year anyhow. As predicted it’s spreading all over the globe. People are already starting to hunker down. In some places it’s getting hard to find bottled water, toilet paper and hand sanitizer.

This is an overreaction. You don’t need bottled water unless the public water supply system goes out, which it won’t. And even if somehow the water is unclean, you can boil it. Fear of course makes people overly cautious, but it’s currently way overblown. It’s the fear that is driving down the stock market and making people buy too much toilet paper.

The world economy is now built on specialization and trade, so when China’s manufacturing sector takes an indefinite hit, it’s going to have large worldwide ripples. It’s already happening, but if you need proof you just have to look at Chinese ports, where little is going out or coming in. When items like rolled sheet metal don’t make it to manufacturing markets, value-added products can’t get produced. That will cause layoffs. But fear in general will cause people to be cautious with their money. The Fed can cut its discount rate by half a percent, but it won’t do much to solve the underlying problem.

Coronavirus was perhaps half the reason I sold twenty percent of my stocks and moved them into bonds on February 14, at just about peak market. Even then, it wasn’t too hard to see how this was likely to go. With the wholly inept response by the Trump Administration, it was clear that an intelligent response to the health crisis wasn’t going to be forthcoming. We could have been much better prepared than we were, but instead Trump cut the Center for Disease Control’s budget. Voters won’t forgive incompetence when it kills their family, friends and neighbors.

It’s also becoming clearer that this virus will not only put us into recession but turn into a pandemic. It’s pretty much there already. It’s not hard to catch and there is no vaccine available. Potentially 40-70% of us could contract it. For most of us, a bout of the flu will be much worse, but since it will spread so easily and has about a two percent mortality rate, it’s going to take a lot of lives.

There are 330 million Americans. It’s realistic that 10% of us will contract the virus this year, and there may be more next year. At a two percent mortality rate, it’s likely to kill about 660,000 of us this year, principally the aged and infirmed. This is just a ballpark figure, but it’s likely to be the biggest public health crisis since the 1918 Spanish Flu. I live in a 55+ community, with most of my neighbors probably 75+. If it gets me, it’s unlikely to kill me, but it’s likely to kill a few of my neighbors. Most neighborhoods will see at least a few casualties from this virus.

So of course we are going on a cruise. It’s hard to get out of as it’s paid for, but the cruise line won’t let in people cruise who fail a health check or who have traveled through certain countries recently. It’s unlikely to affect our cruise beyond perhaps being denied ports of call. But it’s still worrisome. 660 people on the cruise ship Diamond Princess out of Japan contracted the virus and 7 died, in part because Japan wouldn’t let them off the ship into proper quarantine facilities.

I’m not panicking. Prevention is mostly being vigilant, which means washing hands frequently. Still, cruise ships are great places to pass it on, as the Diamond Princess learned, because of the centralized air conditioning which can push the virus through the whole ship. In general, being in close quarters is not a good idea, and you can’t avoid that on a cruise ship.

Speaking of which, the travel industry will slump. Actually, it will go into a depression. And that will affect a large supply chain of its own, which will feed a downward economic spiral.

What can you do? Don’t overreact, but also take sensible precautions. Wash your hands regularly, particularly after touching foreign surfaces, with soap, for 20 seconds or more. A vaccine is probably at least a year away. This means you could easily get the virus anyhow, just realize that it probably won’t kill you, but it will be widespread.

With luck you can avoid it until there is a vaccine, but even when it’s available it will go to the elderly and infirmed first. One in 50 odds of dying is very good odds. Unfortunately, the way our society is ordered will make it worse here. So many workers have no sick leave, so they will come to work and spread it further. It’s the downside of a gig economy and our poor labor standards. Those who can will work from home. Those who can’t will bear much of the risk and be the principle carriers.

It also probably means that Trump will be a one-term president. He is managing this as ineptly as we feared. It won’t take too many MAGAers to die before their friends notice. It will help people put their prejudices aside and force them to understand the value of science again. At least I hope it will. It should.