The Federal Reserve’s balance sheet rose by $205 billion according to the latest data. This is a slowdown in the rate of increase from the last 6 weeks, but it is still extraordinary.
Again, this is on a per week basis that I am doing these weekly reports on the balance sheet. Since February, it is up by close to $2.5 trillion. The total balance sheet was around $900 billion when the financial crisis hit in 2008.
If you had told me back in February that the Fed’s balance sheet would exceed $6.5 trillion before the end of April 2020, I would have either thought you to be insane or I would have thought there was some kind of worldwide crisis coming. I would have been correct on the latter, but I didn’t expect it to come in the form of a pandemic or, more accurately, fear from a possible pandemic.
The coronavirus did not put us in this situation to be sure. This is a result of massive government lockdowns, which got the consent of a large portion of the population due to the fear instilled in them from the “experts” and their “models”.
We also can’t overlook that we were already in a bad situation due to previous government and Fed policies. There was a lot of monetary inflation from 2008 to 2014, and we have had artificially low interest rates courtesy of the Fed for well over a decade (if not more). There was also massive government spending, and the annual deficit was already at approximately $1 trillion during supposedly good times.
The Fed and the government have disincentivized savings. They have made it difficult for people to save even if they want to. They have made it difficult for businesses to build up capital.
While there never should have been these major shutdowns of private businesses, it also shouldn’t have been the case that there are so many individuals and businesses that are hanging on by a thread. It says something when there are shutdowns for 6 weeks and a large segment of the population can’t pay their rent or mortgage. And it isn’t much better for businesses, many of which are on the brink of bankruptcy from missing about 6 weeks in revenue.
I continue to stress that even if all fears of the virus go away in the next month or two (which they probably won’t), you can’t just flick a switch to turn back on the economy. We certainly do need to move on and allow businesses to reopen, but we can’t go back to the way things were in February any time soon.
A lot of businesses are going to attempt to reopen and they are going to find that business is a lot slower than it was before. The virus may play a role in keeping some people from eating out right away, but I think more people will avoid eating out because they are worried about their family budgets. They certainly won’t be buying a new car. They won’t be taking expensive vacations.
Don’t get me wrong here. I don’t want to sound like a Keynesian. I understand that consumption isn’t what gives us economic growth. But if we see a major shift in consumer demand (away from things like eating out, buying new cars, and taking vacations), then there will have to be a shift in resources. There will be failing businesses and there will be unemployed people. This is what happens in a recession when resources are reallocated.
In other words, even if there is no longer fear over the virus, there will be major fear about economic conditions, and rightly so. People are going to act differently than they did in February.
A more important point is that the Fed and the government are doing massive damage in response to the disaster that they already created. We are getting more spending and more monetary inflation, which will only serve to weaken economic growth in the long run.
Personal Protection
One thing that is going up with the Fed’s balance sheet is the price of gold. It ended the week strongly above the $1,700 mark. I have heard anecdotally that some gold dealers are out of physical gold. I think the price in the paper market will start to reflect this more and more.
Gold has not gone up as wildly as the Fed’s balance sheet, but it has the potential to do that.
I actually heard a financial advisor say that gold is the worst hedge against inflation/ hyperinflation. I’m sure there are others who feel the same.
Of course, this is a ridiculous thing to say. It is perhaps the best hedge against massive inflation. Maybe one could argue for real estate, but it would actually be pretty stressful to own rental real estate right now when renters are essentially being told they don’t have to pay rent. Also, real estate is not liquid.
You absolutely want gold in your portfolio. This can include physical gold, gold ETFs, gold certificates, and mining shares. On that last point, you should understand that buying stocks in gold mining companies is quite risky. But if things go well, share prices in some of these companies will go many multiples of where they are now.
I believe in diversification. This is why I still advocate the permanent portfolio, even though I have strayed a bit from it. I think the gold portion is more important than ever.
With that said, it is also important to have liquidity. You want cash and cash equivalents. You want a strong emergency fund, and it is nice to have cash on the sidelines for potential bargains down the line.
Even though we may eventually get hit with high price inflation, you still want to be out of debt with a few possible exceptions. You definitely don’t want any credit card debt or high-interest debt. Even if we do experience high price inflation, you don’t want debt to burden you. You also don’t know when the Fed may slam on the monetary brakes.
This is going to be a wild ride ahead. The Fed is setting us up for a disaster. We should actually hope for higher price inflation without going to hyperinflation. Maybe the Fed will be forced to stop with its reckless policies for a while.
Where is Paul Volcker when we need him? He was far from being anything close to a libertarian. He never wanted to end the Fed. But at least he recognized that you can’t just create money out of thin air like crazy without suffering consequences.