Alchanati Campbell & Associates
Dear Reader,
The job of physically printing currency belongs to the Treasury Department’s Bureau of Engraving and Printing. After the currency is printed it is distributed to 28 cash offices that individually distribute the money to over 8,400 banks and other financial institutions where the currency can enter the money supply. For the 2020 final year, the Fed’s Board of Governors voted to have the BEP print 5.2 billion Federal Reserve notes, valued at $146.4 billion. This process seemingly creates money out of thin air but is actually built on the foundation of international commerce. Before 1971, most currencies were backed by gold and silver therefore the central banks of the world were limited in how they could print currency and increase the money supply. Now governments like the U.S can print money as needed and the value of their currency is decided by demand for the currency, tied to debt, and backed by the credit of the issuing nation. When people refer to “printing money” they are usually referring to the processes the Fed undergoes to increase the money supply. The U.S Federal Reserve has several tools to control the supply of money, but two methods, in particular, are being used to carry the economy through the nationwide economic standstill. Quantitative Easing is a policy that was pioneered and widely used during the Great Recession and it involves the Fed purchasing massive amounts of financial securities, mostly U.S. government bonds, from financial institutions, with the goal of pumping more money into the economy. The other method is referred to as “helicopter money” and used much less. Helicopter money involves the Treasury Department, which under the direction of the Fed sends money directly to individuals. Most recently, the Feds have used this method and started distributing $1,200 to individuals who are eligible. You can see if you are eligible by going to IRS.gov and filling out the form. When the Fed institutes a “helicopter money” policy, like the stimulus checks being sent out this month, it is to help get rescue the economy from what is known as a liquidity trap. A liquidity trap in a simple sense is when interest rates are near zero, but the economy remains in a recession. As of this week, the Fed’s balance sheet due to its aggressive round of quantitative easing has inflated to a record of $6.13 trillion; $5 trillion in bond holdings alone. While these measures are seen as necessary, they will likely have long term consequences. Critics of QE argue that it will lead to hyperinflation, that it allows corporations and investors to act irresponsibly, and that it could make the U.S dollar less favorable to other nations and jeopardize its status as the global reserve currency. Long term, the status of the US dollar as a global reserve currency is in trouble but short term, we are seeing a large use of the Fed’s central bank liquidity swap lines, which allow foreign central banks to exchange their local currency for dollars, rise to $358.1 billion. Economists currently believe that the U.S can avoid hyperinflation and even deflation by using a combination of its many other economic management policies like cutting tax rates, lowering bank reserve limits, and potentially using negative interest rates. While the long term consequences of these policies remain uncertain, it is very likely that they will remain prominent for more than a decade. Now that we have some background, we can look at how printing and spending money affects the U.S Government. It is no secret that the federal debt had been increasing at an alarming rate and in many years the government operates with a large deficit, but now COVID-19 and the unsteady direction of President Trump has the U.S operating like never before. Ceteris paribus, the U.S federal budget deficit is on track to exceed $3.8 trillion this year, making it nearly 4 times the deficit from the prior fiscal year. By October 1st, the Committee for a Responsible Federal Budget estimated that the federal debt to GDP ratio will be larger than the record set after World War 2 at 121.7%. Years of economic expansion, combined with the novel coronavirus have set the world stage for the worst economic conditions of our lifetime, here at the ACA Foundation we will keep you updated with the latest news and straightforward analysis to help you navigate these troubling times. Stay safe. Keep Climbing, The ACA Foundation |
AuthorWHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now. Archives
July 2020
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