Quote from Savings Beagle on October 18, 2020, 11:08 am

I saw this blurb from a Financial Times article yesterday via a tweet by Mohamed El-Erian (@elerianm).  I just had to shake my head and chuckle.  And not in a good way.

I've been warning about Federal Reserve actions which have indirectly manipulated the U.S. markets on an upward trajectory for many years now.  And coupled with my warnings about America's high, and increasing, debt loads, we've moved away from traditional economic principles managing the U.S. economy to what is basically an experiment, the end result of which we really don't know.

And now, some Federal Reserve Bank officials are publicly expressing concern over the decade-long Fed involvement to "shore up" the economy via long-term extremely low interest rates and bond buying efforts.  Specifically, the concerns surround the possible negative effects these actions may have on U.S. households and the economy overall.

Here are the first few paragraphs from the Financial Times article "Federal Reserve debates tougher regulation to prevent asset bubbles" by James Politi.

Senior Federal Reserve officials are calling for tougher financial regulation to prevent the US central bank’s low interest-rate policies from giving rise to excessive risk-taking and asset bubbles in the markets.

The push reflects concerns that the Fed’s ultra-loose monetary policy for struggling families and businesses risks becoming a double-edge sword, encouraging behaviour detrimental to economic recovery and creating pressure for additional bailouts.

It also highlights fears at the Fed that the financial system remains vulnerable to new shocks, despite massive central bank intervention this year to stabilise markets and the economy during the pandemic.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times that the Fed lacked sufficient tools to “stop firms and households” from taking on “excessive leverage” and called for a “rethink” on “financial stability” issues in the US.

It's interesting that this concern is just now being raised.  Considering you could look back to the post-Great Recession period, 2009 and on, to see issues with the Fed's actions...primarily forcing money into the equity markets (stocks) and away from safer investments (bonds) as a result of the low-interest rate policy which has only gotten more aggressive over the last few years.

To see the policy's effects, all you have to do is look at the "High Yield" Savings Account page we publish...the returns which are currently offered are anything but "High Yield."  And the "High Yield" CDs page is not much better.

So where do you put money to work - safely - to get some kind of return?  I'll just let that question hang out there. 

And because we have such low interest rates, the U.S. government is fine with loading up debt without concern.  Except there should be a concern.  During the Obama administration, U.S. debt rose approximately $8 trillion from $10 trillion to $18 trillion.  And in the first three years of the Trump administration, the debt rose another $3 trillion from $18 trillion to roughly $21 trillion.

2020 is a definite aberration due to Covid, but the additional $3+trillion to cover the economic issues surrounding the pandemic can't be ignored...it gets added to the U.S. debt load just like any other spending which is not covered by annual tax revenues.  And, unless I'm wrong, the amount of government funding needed to keep the U.S. economy moving in a positive direction will be significantly more...if members of Congress can stop acting like children with their political gameplay and do what's needed for many struggling Americans.

So, we're likely to see not only America's debt level increase significantly as a result of more government spending, but also additional Federal Reserve actions to buoy the economy as we continue through this pandemic.

Will the negative ramifications of both become evident in the near future?  Who knows.  That's the issue with fiscal and monetary policies that stretch the boundaries of economic feasibility.  As the saying goes, "It's not a problem...until it is."  And when the "it is" time hits, it may be too late to do anything to offset the negative economic effects that will result.