Forget Federal Reserve, this is Federal Excess

Well that was it, dear reader.

“Whatever it takes” indeed. Mario Draghi’s statement, which is credited with saving the euro back in the sovereign debt crisis, has been taken to heart – and to market – by the Federal Reserve. This is the biggest stimulus plan, the greatest dollar injection into the financial system, that the world has ever seen.

“QE to Infinity” is here. The Fed has announced it will print money to buy bonds… and then just keep on printing. It’ll print whatever it takes to tame the market and crush volatility. Un-limited.

As The Wall Street Journal put it:

The central bank signaled it would do practically anything—extending loans to big and small businesses and purchasing unlimited amounts of government debt—to help an American economy in a race against time.

After firing its arsenal at funding markets last week to prevent a public health crisis from morphing into a financial crisis, the Fed said it would throw another kitchen sink this week at credit markets that have broken down. The central bank unveiled a new generation of lending facilities to prevent a liquidity crunch from turning into a solvency crisis for American businesses.

The Fed has even gone as far as to bend the law to inject more money into the financial system. When it was first passed in 1913, the Federal Reserve Act didn’t allow the central bank to print money and buy any asset that didn’t have some kind of government guarantee. As a result, the Fed shouldn’t be allowed to print money to lend it to corporations – only to government entities.

But desperate times call for desperate measures. In cahoots with the US Treasury, the Fed has set up a Special Purpose Vehicle, or SPV, which will lend the printed money to the corporations second-hand, after it’s been emitted by the Fed.

The Americans and the Fed may feel a very long way away right now as we’re all couped up at home, but this is the reserve currency of the world that is being vastly expanded to try and stop deflation from sinking in.

Back in the days of the gold standard, this would be like a sudden, massive gold discovery suddenly expanding the amount of money in society and distorting the prices of everything. Like a gold miner suddenly finding a vast hoard of ore underground, minting it into currency, and handing it out to multiple sectors of the economy all at once in an attempt to keep prices up during a pandemic.

But gold isn’t at the centre of the global financial system any more. The dollar is. And it can be summoned and conjured in ways that gold never can be – such is the property of our “flexible” fiat currency system. Interestingly, the US market sold off on the news of this vast money-printing effort – a foreshadowing of what’s to come? Let’s watch.

I’ll be back with you tomorrow to discuss the implications of this, explore more of the strange stories emerging from the gold market, and take a look at how the state is once again not letting a crisis go to waste…

In the meantime, I want to know how you’re getting on amid the corona-crisis: how are you finding life in the age of WuFlu? Do you think the central banks will ride in and save the day as they continually have for the last decade?

I’ve been away from my editorial inbox for a little while now, but I’ll be getting right back to it today – I can see plenty of you have written in already with your thoughts and experiences. Keep ‘em coming: [email protected].

I’ve also just set up a Twitter account for readers like yourself; in the spirit of the day, my handle is @FederalExcess. Alternately, you should be able to find me by just searching my name – there aren’t too many Boaz’s out there I’ve found, or Shoshans for that matter. While my feed is pretty bare so far, I intend to start posting some investing/geopolitical content that may be of interest to you. Do give me a follow if you enjoy these scribblings of mine – I’ll try and share some decent content over the coming weeks.

It feels like we’ve just embarked on a 21st century Robinson Crusoe experience. I’m isolated in the small urban island that is my flat, it’s very nice weather outside, I can’t get a haircut, and I’m scavenging for food from my cupboards and bare store shelves. This should be fun.

The government has placed these conditions upon us almost as easily as we’ve accept them. Keep that in mind if you wonder whether the government would think twice before locking down financial markets, bank accounts, brokerage accounts, and ATMs once things get really wild. If the government can get away with locking people up, how much resistance will it get to locking up the financial system? You don’t wanna be “bailed in” if that happens…

In the interests of time, I’ll keep this note short today – and leave you with a link to today’s market broadcast I just finished recording with Tim Price.

Tim was as verbose as only he can be, offering the same level-headed but humorous insights that his subscribers over at The Price Report get on a regular basis. He was calm, collected, funny as ever, and shared the unique insights that can only come with decades of experience – .

Until tomorrow,

Boaz Shoshan
Editor, Capital & Conflict

Category: Market updates

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2021 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑