Since the merger between the Fed and the Treasury (kidding, kind of), I've had so many conversations with individuals outside of the financial industry who struggle to fully grasp how central banks are stealing their money. Today, I'm going to share a short and simple post which I hope will help explain the direct effect of "money printing," on the working class. Let's jump right into it.
When interest rates remain low for an extended period of time (historically), risk assets become more prone to rampant speculation (lucky for those holding assets outside of cash), leading to massive distortions in the underlying fundamentals of those assets, and historical valuation deviations from the mean (which is mathematically unsustainable). The rapidily rising prices of both assets, and goods & services, which is not being stimulated by an actual increase in the velocity of money, but rather from central banks artificially flooding the monetary system with liquidity (while interest rates are near zero), contributes to a lower standard of living for those holding cash as their primary asset.
For example:
If you have $100 in your bank account, and perhaps this is your only asset, then the central bank increases the money supply by 25%, what they've just done is increase the denominator which underpins the value of that $100.
Here's a simple logical demonstration:
100/100 = 1 (baseline purchasing power.)
100/125 = 0.80 (a 25% increase in the money supply in this example, as a result of central bank money printing, results in a 20% loss in purchasing power.)
In essence, in this hypothetical situation, you've just lost 20% of your purchasing power. With CPI in the US running at 5.4% YoY vs the Fed's 2% "target," we're currently looking at an inflation rate almost triple the Fed's goal. The US10Y yield trades at 1.25% while CPI is 5.4%, and the Fed continues to print $1.44 Trillion on an annualized basis, with no end in sight. Welcome to the wonderfully horrific world of Modern Monetary Theory (MMT). Anyone looking for a hedge?
@JRML115847, Crazy times! I'm still waiting to see if monetary policy ever tightens again or if world markets will be slowly taken over by "zombies."
Mihai_Iacob
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Best post!Thanks a lot
Hedge_Of_The_World
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@OptimoomFX, Thank you, my friend! :)
ARGOS1
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In my opinion, total enslavement and eradication of the human race would be a better topic but thanks anyway.
Hedge_Of_The_World
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@ARGOS1 It’s just a basic concept. Maybe not for you. Thanks for sharing that idea though; that’s a very interesting topic. Elon would probably write the f*ck out of that piece from an AI perspective.
twitturi
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@ARGOS1, A man after my own heart…The only virus this planet needs to be rid of is the human host ….Slavery when i mention this to people they are insulted…Im self supporting myself tho o should I get a job I would be in debt…..people need to wake up
ARGOS1
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@twitturi, It is the little "g", god of this world, the accuser of the brethern, that continuously interferes with the natural progression of the species, not our species, that is causing our demise. We were originally incapable of doing wrong. Must go now...
horacejunior
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So agreed. So are you bearish on btc for technical reasons? Because the aforementioned is generally the argument for owning it. They can’t steal it or debase it and can’t incentivize their bullshit with it. This is the reason I bought btc in 2017. Of course, that doesn’t make it a good hedge. But I’m curious to hear your thoughts
Hedge_Of_The_World
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@horacejunior, Very well said, I agree. Well done picking up Bitcoin back then. I wanted some when it was around $3,600, but didn't pull the trigger. I think there's potential for Bitcoin in the future, however, I think it's being treated as a risk asset for now given the uncertainty around central bank policy. If the central banks begin to taper/hike rates, I think all risk asset "boats," will drop with the "tide." I'm looking at picking up a position if I see a test of 20k support. But, I have a feeling inflation is not transitory, and central banks are going to start tightening soon. Maybe at Jackson Hole, maybe not, but if that's the case, I think I could pick up some bargains in 2022. What are your thoughts on Gold?
Surprised?
I'm 60, watched it all my life.