Mind on money: questions about the grand economic experiment

Mind on money: questions about the grand economic experiment
By: Marc Ruiz Last Updated: July 6, 2020

We are living through a grand experiment, some kind of double-blind economic study. Once we open our eyes to this possibility, the immediate question to follow is “who is getting the placebo?” The answer may be all of us. The second question then becomes, “what could go wrong?”

Now that the immediate fog of the COVID-19 lockdowns are in the rear-view mirror, I am finding it possible to look back and ask better questions. Many of the stabilization policies effected by the Federal Reserve and the Federal government were completely without precedent.

Never before had the Fed expanded its balance sheet (aka created and circulated new money) at a pace of nearly 70% in three months. Never before had the Fed openly announced it would buy corporate bonds in the market, never before had it even hinted at loaning directly to people and companies without using banking intermediaries.

Never before had the Federal government loaned and granted money directly to employers to keep people on the payroll, and to keep the lights in businesses on. Never before had the Federal government nearly tripled state unemployment benefits and made even self-employed people eligible to receive government payments.

All this “never before,” and yet very little debate or dissent, and, most interestingly of all, hardly any delay. Clearly policy makers had discerned lessons from the policy approach taken to the 2008 financial crisis, and unlike other systemic crises of the past, current policy makers did not study the last crisis in a lecture or textbook, they actually lived it. Today's policy makers are the same people, it's been only 12 years. 

An important regulatory focus in my industry over the past few years has been each firm’s Business Continuity Plan in the event our office experienced a business disrupting disaster. For 23 years Oak Partners did not have a Business Continuity Plan, and yet three years ago this plan was requested in our annual exam. The following year it was required. Eighteen months later it had to be activated for COVID. How fortunate that we had it.

The response of the Fed and the government to the COVID-19 crisis kind of feels like a giant economic Business Continuity Plan to me. Almost as if the response to the crisis pre-dated the crisis itself. These kind of thoughts can leave you staring at the ceiling at night, and I don’t have time for staring at the ceiling, so instead I choose to just go with it; hopefully I’m not the one getting the placebo.

Which then begs the second question. What could go wrong? With trillions and trillions of dollars in monetary expansion and government spending there are bound to be unintended consequences. In an academic sense, this type of fiscal and monetary activity should, by most logic, result in increasing inflationary pressure in the economy.

I believe inflation in the world’s developed economies has been naturally suppressed by factors such as demographics and globalization. Or in other words, baby boomers getting older, and cheap overseas labor. I also believe both trends have been further enhanced by improvements in technology, or, in other terms, we collectively have become just too good at extracting, making, moving and selling things.

Each of these trends is deflationary, meaning it should drive prices lower over time, which is what has been occurring with many goods and services in the U.S. for decades.

What if, however, the Fed and the government, emboldened by these deflationary trends, decided to go “all in” on inflationary policies under the belief that the deflationary trends provided a blank check to create and spend money? What if at the same time, however, global supply chains began to fracture due to political- and pandemic-related drivers, causing companies to question the wisdom of making everything they sell in Asia? And what if the aging baby boomers were supplanted by a younger and even larger generation coming into their peak spending years? What if all these things happened at the same time. What then? What could go wrong? Back to staring at the ceiling again.

Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.