What happens when the Government prints more money than its capabilities?
- Money becomes cheaply available for borrowing, i.e., borrowing costs are much lower. If most of the money goes into infrastructure projects, then you can label it as future investment. For example, if the money is spent on building roads, bridges, and ports, it will yield returns in the future as more people use those facilities.
- In reality, when the money supply is high, it may end up in individual and corporate loans. Individuals may borrow more than their capacity, as might corporations. This can lead to individuals having more liabilities, and organizations with bad products may result in zombie companies.
- The increased money circulation may create more jobs, meaning more employment, and employee costs for companies will rise. Since money is so cheap, people will invest in assets for more than their worth, creating an asset bubble.
- Not everyone will take advantage of cheap borrowing, leading to an unequal distribution of wealth. Rich people may become richer, while poor people may become much poorer. The cost of living increases, making it difficult for many to afford a decent lifestyle. Raising kids may become unaffordable, and people may choose to stay single, decreasing the birth rate. Japan is the best example of this case.
How is the housing situation in the USA?
Since the inception of MBS, corporations have emphasized that more retirement funds sought that type of investment. Corporations created zombie products that resulted in the Global Financial Crisis (GFC). After the GFC, instead of correcting the mistakes, the government started printing money to avoid job loss and prevent bankruptcies (This is called QE). The debt of the USA grew much bigger. In 2012, four years after the GFC, the government allowed syndicates and corporations to buy Single-Family Homes (SFH). Demand grew, and prices also increased. Now, most SFH are owned by BlackRock and Blackstone. Again, this is just part of the problem.
How is corporate America doing?
Free money flow created more zombie companies. No one cared about profits, and everyone was focusing on innovation. With some innovations, more junk was created. Only a certain set of people benefited from the new innovation. This unequal distribution of wealth created a homeless situation and instability (California, especially Silicon Valley, is the best example).
The above situation was certainly working until 2019, and no one was questioning this new economy. One fine day, some people in China ate bats, and Covid came. The world stumbled, and no one was doing any productive jobs for a few months. Governments across the world printed enormous amounts of money and distributed them to everyone. As residents, we got $4,500 as our part, but corporations and mom-and-pop shops got millions and millions of dollars as loans. Suddenly, everyone has money but very few resources, resulting in the biggest inflation in history.
What governments are doing to stop the inflation?
Governments are cutting the money supply, steeply increasing borrowing costs. They are trying to sell all the assets they owned when QE was alive. This is called QT, creating pain points for corporations. Borrowing is costly, and suddenly corporations are focused on profits.
What may happen in future?
The Fed may stop the interest rate hike, but there should be some reason to carry that out. A credit event may help the Fed cut the rates. If there is no credit event, the current rate may continue, but there is no incentive to cut the rates. In both scenarios, high-paying jobs will be severely affected. The current trend may be the "recession of the rich." If the Fed cuts the rate too fast, it may reignite inflation. This happened in 1970 and 1980.
However, if there is deflation, the Fed will try to correct the conditions swiftly. Governments across the world fear deflation more than inflation. In that scenario, QE will start again. Look what is happening in China now. Stocks and RE in a downward spiral and government is trying to pump more money into the system.
If corporations are doing badly why stock prices are going up and how unemployment is so low?
Corporations are trying to become lean and seek profits. Meanwhile, AI hype is keeping the market high. Money is concentrated only on the "Magnificent 7" stocks. It may be a bubble or it may be real; time will tell.
The government is the net job creator in recent times. Most of these jobs are service jobs, although there are some infrastructure investments like EV and green deals. The unemployment rate is measured in various ways. From my understanding, unemployment insurance is one of the measures. With rising costs, unemployment insurance payments are meaningless, and people are not going for that. Or, people who lost jobs have been going for side gigs that pay more. People with multiple jobs are not a healthy sign for economy rather a dismal one. If you are comfortable with those answers, start investing in that.
Why am I writing this here?
Things are very uncertain in the future. When you invest, look for:
- How is that investment making money?
- What is the survival chance for that investment in a high-rate environment?
