by Anonymous guest
Right now you have people split into two camps. The fed should raise rates to fight inflation camp, and the fed should lower rates to save the economy camp. This is a false dichotomy constructed by the media to distract you from the truth.
The truth is that the fed cannot control rates. They can influence the very short end of the curve, but that, in the end, has very little effect on longer term rates, like the 10 year bond and mortgage rates, for example.
Rates are going up because we’re in a liquidity crisis, which means there’s not enough new money being created to service existing debt, resulting in a net outflow of money from the system. I.e. money is being destroyed faster than it’s being created.
Rates won’t begin going down until asset prices fall far enough to stimulate more borrowing. That will make it affordable for people to buy homes, purchase goods and services, etc., which will begin bringing more newly created money back into the system. This will reverse the process, creating a net inflow of money into the system, which will rekindle economic growth and bring interest rates down.
The caveat to this is that it’s tricky to prevent a systemic debt default in the meantime. That’s the big hairy monster that forced them to bail out the banks in 2008, and forced the CARES act in 2020, along with the moratoriums, forbearance, and student loan pause.
This is going to be ugly, and the announcement of the fed now system in 2023 indicates that the fed might not be very optimistic that we’re going to get through it this time. That is, we might not make it out of the liquidity crisis before a systemic debt default occurs, requiring direct monetization of the debt. Which is basically a fancy way of saying that the dollar will no longer be backed by debt. In that event, it will be backed by nothing, and it and its instruments (e.g. bonds) will be worthless. Or less than worthless actually. At that point they would be a liability.
All I can say is don’t trust the banks. Whether you put your money in money markets or stuff it in your mattress is up to you, but by no means trust the banks with any amount you’re not willing to lose.
I would also be cautious of putting it in assets. Lots of people are flocking to assets, and that may be a wise solution, but it may also mean short term consequences that range from temporary losses to financial disaster. For example, if you put all your savings in gold, and gold goes to 300 an ounce, and you need to sell that gold to pay your mortgage, you could find yourself in very uncomfortable position. While this will eventually almost certainly result in inflation and higher asset prices, the short term deflation during the depths of the liquidity crisis could be unlike anything we’ve ever seen.
For this next period, cash will be king. This may be the dollar’s last day in the sun, but it might go out with a spectacular bang that could bring the world to its knees. Van Mises himself said something not too far removed from that, actually. The smart money is dumping assets and moving to cash right now, and their actions mesh with my understanding of what’s happening, which doesn’t seem coincidental. Perhaps they’ve been told something, or perhaps they simply see the same things I’m seeing, or perhaps both. They may also have inside knowledge regarding where to keep their cash in a place it won’t get wiped out. They have access to bank accounts that are out of the financial reach of most people. That said, it seems they’re simply keeping their money in T bills, which are considered a cash equivalent. That might be due to relative safety compared to money markets, or might be for the rate, or both.