The Federal Reserve’s balance sheet continues on an unprecedented upward trajectory.  I used to say that the Fed’s increase from 2008 to 2014 was unprecedented, which it was before March 2020.

If you ever saw the movie Spaceballs, the Fed has gone to ludicrous speed.

In 2008, right before the worst of the financial crisis hit, the Fed’s balance sheet was around $900 billion.  It went up to around $4.5 trillion in late 2014.  Then it stayed mostly flat for a while (ah, those were the good old days of Janet Yellen) and fell below $4 trillion in 2019.

Actually, before you go blaming Jerome Powell, I’m guessing any Fed chair of the last three decades would be doing the same thing right now.  If we go back to Paul Volcker, maybe he would have acted differently in this situation, but it’s hard to say.

In the course of less than a month, the Fed has increased its balance sheet over $1.5 trillion. It is now on a weekly pace exceeding $500 billion per week.  This is absolutely crazy.

This is a very serious situation.  The main problem facing most people is not the coronavirus.  In the long run, it isn’t even being laid off from a job or having a reduction in pay.  Whether they know it or not, the biggest problem facing most Americans is the government and the Fed working together to completely destroy the economy with debt and massive monetary inflation.

It is still unclear how exactly this will play out.  Americans are in a bind right now, and they are rightfully fearful.  This should reduce consumer prices.

But then you have the Fed trying to counteract this (and some) by engaging in massive monetary inflation.  We don’t know how much this will translate into massive price inflation.

Either way, we are going to experience a significant decline in living standards, even when the virus is long gone.  The massive government spending and the massive monetary inflation are causing major distortions throughout the economy, and this doesn’t even account for the violations taking place against contract law, freedom of association, and property rights.

I am going to keep a close eye on the excess reserves held by commercial banks.  I expect them to rise, but there tends to be a lag in this data.  Even if excess reserves increase in tandem with the Fed’s balance sheet, I can’t discount high consumer price inflation.

It may be a mix. The cost of taking a cruise probably isn’t going to skyrocket any time soon.  I expect that certain assets will see big price increases once this new money starts trading hands more down the road.

I think the housing market will suffer initially.  Who would want to be a landlord now with the government encouraging people not to pay rent?  If there is a rush into hard assets later on down the line, housing may see a rise again.

I expect stocks to go down further.  That will be a bumpy road too, as the Fed may be a buyer of stocks.  You might expect stocks to go higher just with the Fed creating so much new money out of thin air.  But how much can a company be worth when its profitability goes away and there is a question of how it will become profitable again?

I am very bearish on stocks, but make sure you have an exit plan if you are shorting the market (i.e., betting on stocks falling more).

I am incredibly bullish on gold.  Gold typically doesn’t do well in a recession, as there is a rush for liquidity in cash or the digital equivalent of cash.  In this case though, the situation really is unique.  There is incredible fear.  The whole financial system may be called into question.  Aside from that, just the Fed’s balance sheet alone should tell you all you need to know about where gold is headed over the next few years.

I like gold mining stocks too, but I am careful to warn everyone that they are very risky. A lot can go wrong with these companies too.  I would recommend buying an ETF or mutual fund that invests in multiple mining stocks if you are so inclined to speculate here.  If these funds take off, the returns could be ridiculously high.  I am talking 1,000% or more.  Just be aware that with the potential of high rewards comes high risk.

As long as the Fed continues on this path of destroying the U.S. dollar, I may do a weekly update after the Fed releases its updated balance sheet.

I have a friend with whom I used to discuss the prospects of hyperinflation.  I always insisted that the chances of hyperinflation in the U.S. are very low.

While I still think the chances are low, I am dropping the “very” part.  I don’t discount the possibility of seeing consumer prices rising at 50% or greater on an annual basis.

I think we are more likely to see double-digit price inflation and then see someone playing the role of Paul Volcker and slamming on the monetary brakes.  If that happens, the recession and the defaults will be something that can’t be imagined by most Americans at this point. But the alternative of hyperinflation would be worse.

It is a scary road ahead, but we have to step back and look at the big picture and take rational and controlled steps to protect ourselves.  I think life will go on, but it is important to stay alert and take steps to prepare in these unprecedented times.

This is a continuation of a series of articles reacting to the impacts of the shutdowns from the coronavirus, and more importantly, the reactions from the federal government and the Federal Reserve.

Today, I will discuss another portion of the CARES Act, the unprecedented $2 trillion legislation that sailed through Congress with little opposition.

In particular, I would like to focus today on the extended unemployment benefits that were included in this massive bill.

When I first read about a large portion being devoted to extended unemployment benefits, I thought Congress was just extending unemployment benefits in the future instead of expiring as normal.

Unfortunately, it goes way beyond this.  There is a “bonus” amount for people who qualify for unemployment benefits in the form of $600 extra per week.  This is absolutely insane.

This is $600 per week. It is not per month.  This is on top of whatever unemployment benefits are collected based on state law. The additional $600 also doesn’t count as income when determining Medicaid benefits.

This means that many people collecting unemployment will be “earning” over $40,000 on an annual basis.  Does anyone see a problem here?

Many people will be collecting unemployment benefits in excess of what they were actually making when they were working.  There’s nothing like a government program to provide incentives.

If your employer is struggling and cuts your pay by 10% to get through this tough time, it is possible you might have been better off getting fired.  I’m not saying you should wish to be fired, but I can definitely see where many millions of people will look at being laid off as positive.

This is another example of what a joke this $2 trillion stimulus bill is.  It is going to stimulate non-productivity.

Productivity is What Matters

One thing I will have to remind people of throughout this crisis and beyond is that our living standards are based on productivity.  It doesn’t matter how much the government and Federal Reserve shift resources around.  They can create money out of thin air.  They can hand large checks to people.  But none of this creates productivity.  If anything, it is incentivizing people not to produce.

There is a large focus on employment, but the focus is on the dollar earnings of people. Ultimately though, our living standards depend on productivity that meets consumer demands.

It may seem great that someone who was previously making $30,000 per year at a job is now getting somewhere around $40,000 per year to do nothing.  And maybe it is good temporarily for that person.  But that is lost productivity, and someone has to pay for that person to consume while doing nothing.  Someone else’s productivity has to be stolen away to provide for those who aren’t producing.

This means fewer goods and services will be available.  It means a drastic reduction in living standards.  Even for the person getting $40,000 (on an annual basis), if you don’t count the fact that the person doesn’t have to work, this person will also be worse off in the long run.

There may be a select few who get wealthier due to having a business that sells a product in high demand.  There may be a few who get wealthier in the financial markets while most everyone else gets poorer.  But overall, there will be far less in terms of goods and services in our society, even when the virus has gone away.

I can’t emphasize enough just how much damage is currently being done to the economy.  There was already a massive bubble and massive dislocations.

If nearly everything just shut down for a month or two and nothing was done, it certainly would be hard for a lot of people, especially those with little savings.

But the damage being done by the Fed and the government is incalculable.  We will be facing tough economic times for a long while.