What central banks such as the Federal Reserve and federal governments are doing to counteract the negative impact of the pandemic related economic shutdown. What are the risks of this massive monetary and fiscal stimulus and how to mitigate those risks.
Topics covered include:
- How central banks have the capacity to create an infinite amount of money.
- How the Federal Reserve is using its money-printing ability to stabilize the financial system and reduce the negative impact of the pandemic related economic shutdown.
- What are the mechanics of quantitative easing.
- What are examples of stimulus programs during The Great Depression that didn’t work because they were too focused on social engineering.
- How massive central bank and government stimulus could lead to inflation or deflation.
- How inflation-indexed bonds such as Treasury Inflation Protection Securities can help reduce inflation risk, and why owning individual TIPs is particularly attractive right now.
- Why it’s okay for investors with a long time horizon to ride out the current market turmoil without reducing risk.
- What are current and leading economic indicators suggesting about the severity of the economic shutdown and the potential for recovery.
Show Notes
The economic emergency created by coronavirus—CBS
The Simple Life: Plain Living and High Thinking in American Culture by David E. Shi
Draft House Bill that mentions digital wallets
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 292. It’s titled “Will Infinite Money Save the Economy?”
Combating the economic recession
Governments and central banks around the world are working on measures to combat the economic recession, the contraction, really the shutdown of the economy related to the pandemic. Social distancing is causing people, rightfully so, to stay home. Jobs will be lost. Businesses will be hurt and are being hurt.
And it is the responsibility of the Federal Reserve, in the U.S., and other central banks around the world, to be the lender of last resort, and for federal governments to step up and provide stimulus and emergency relief to households and businesses.
Now, there’s a great deal of discussion with regard to how that relief should be delivered. In this episode, we’re going to look at some of the things that the Federal Reserve has announced and it appears the U.S. government will announce. I’m recording this on Tuesday, March 24th. They’ve not passed the final emergency relief bill yet, but we have some indication of what it will contain. And we want to look at, perhaps, some unintended consequences, namely the potential for inflation given the level of stimulus.
It is a challenging thing for politicians and central banks right now. I do not envy their situation. But we will see and discuss. And is there anything we can do to protect ourselves in case things don’t necessarily go as planned?
How the Federal Reserve Bank is stepping in
Last Sunday on the 60 Minutes news program Scott Pelley interviewed Neel Kashkari, he is the president of the Federal Reserve Bank of Minneapolis. He’s the former Assistant Treasury Secretary. He’s a member of the Federal Reserve Open-Market Committee. So he is in the room when the Federal Reserve is discussing what should be done.
In the interview, Kashkari mentioned there was a huge demand for cash, dollar bills, by businesses. And he says, “The Federal Reserve, as a member of the FMOC, we will absolutely meet those demands for cash withdrawals.” Pelley asks him, “Will the Federal Reserve just print money?” Kashkari responds, “That is literally what Congress has told us to do. That is the authority they have given, to print money, and provide liquidity into the financial system. We create it electronically and we can also print it with the Treasury Department.”
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