The Sequestering of Money
Board: Macro Economics
Back in the 1980's the US was beset with inflation. We currently morn the loss of interest without considering the devastation to returns of that era.
The Fed raise interest rates and the stock market tanked, but Volker succeeded in reducing the high rate of inflation. Then money dumped back in "to save the economy", but instead of inflation it entered the stock market causing the exponential rise of the 1990's. Well, all good things come to an end and the stock market finally (once more) blew up in 2000. The Fed once more pumped money to save the economy and this time it went largely into real estate. During both periods, despite the huge increase in the money supply, inflation was muted as the money went "elsewhere" and was effectively sequestered.
Well, all good things come to an end and the economy (stock market included) unraveled once more in 2008/9. Well, this time the Fed is pumping money, but trying to inflate stocks, bonds AND real estate simultaneously. So far this has been successful.
Yet people complain that "there is no yield on savings accounts" - well Virginia, there never has been (not a positive yield compared to inflation anyway). Your houses have stopped losing value way before their prices returned to the mean (after inflation over the last fifty years or so). Your bonds are worth more. Your stocks are worth more. So, you say you don't have bonds, stocks, real estate and depend solely on savings accounts for your income? I suspect you are no worse of there than you were before, but the currently low inflation rate no longer masks the negative returns of money kept in the bank.
So the Fed has announced that they will keep the music playing. People are no longer looking to make sure there is a stool handy to sit in if the music stops. The good times roll on for the Metar crowd and the portion of the population which did not properly prepare, judged wrong or were simply not in an economic position to respond likely will also not be vulnerable to an unwinding of the Fed's position as their savings (if any) will be protected as cash.
There are three parts to the question we should each be asking ourselves:
1) How long will; the Fed continue tolling the bell?
2) What will be the economic result on our particular asset mix when they stop pulling on the bell cord?
3) How should we prepare to take advantage of the subsequent Fed actions which will be taken to, once more, save the economy?