The Financial Fire Trucks Of 2021

Gentle reader, be careful as you exit the building, there might be more than smoke. And be sure and grab some wine on the way out. You might as well enjoy it while you wait to get back to dinner.

Ben Bernanke heard my plea (or someone’s) and dropped the Federal Funds Rate from 4.5% to effectively zero over the next year. Even so, 2008 almost brought the financial system to its knees.

Roll forward a dozen years and we are in a different but no less serious bind. Instead of crazy derivatives, a troublesome virus is afflicting the economy. The Fed acted quickly last March, cutting rates and launching a massive asset purchase program. Congress helped with a giant fiscal aid package. Together, these jolted the economy back to life.

The jolt wasn’t permanent, however. The patient is now wavering again, and this time, the fiscal part of the cure is not forthcoming, despite pleas from Fed chair Jerome Powell and many others that monetary policy has reached its limits.

Ah, but this word “limits” doesn’t really apply to central bankers. Particularly the central bank of the world’s largest economy and issuer of the global reserve currency. The Fed has constraints—some practical, some legal—but is highly creative in overcoming both.

Going back to my 2007 metaphor, the Fed has the world’s largest financial fire hose and will use it if the flames grow large enough. Powell repeated this quite clearly just last week. Speaking to a San Francisco business group on November 17, he said“The Fed will stay here and be strongly committed to using all of our tools to support the recovery for as long as it takes until the job is well and truly done.”

That is not the usual equivocating Fedspeak. Powell promised to use all the Fed’s tools, for as long as it takes, until they are well and truly done. No mention of any limits.

Powell isn’t one to make promises he doesn’t plan to keep. So if the economy begins slipping into a double-dip recession, I believe he will open the spigot again. What the barrage will look like, I don’t know, but it is probably coming.

A quick note on all the angst surrounding Treasury Secretary Mnuchin taking back some of the Federal Reserve’s CARES Act funding. First, the Fed used a little bit in the beginning but much of that money was just sitting there. My sources say Mnuchin is looking for a way to make a deal with Democrats more palatable to Republican senators. Recovering unused Fed money gives him almost $500 billion to soften their frustration with the price tag. The Senate seems to want a number below $1 trillion. With the recovered money, they could pass a “new bill” for less than $1 trillion, while actually spending more.

Whoever you blame for the deadlock, the simple fact is a bill needs to pass soon. I believe there is a serious risk of a double-dip recession without some major unemployment funding. We have about reached the limits of jobs recovery absent a vaccine. That leaves us with a real-world unemployment rate higher than the Great Recession’s worst. Waiting until February to pass a stimulus bill simply tempts the recession gods to strike again.

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Disclaimer: The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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