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The Power of Helicopter Money and Quantitative Easing.
The Fight Over the US Dollar.
Here is what we will be getting into today:
The Trade-Off Between Economic Growth and Inflation: Weighing the Costs and Benefits of Monetary and Fiscal Policy.
The Power of the Dollar: The Federal Reserve, US Treasury, and the Future of American Finance.
Consumer Price Index undergoes significant changes as BLS adjusts weightings.
Let's Dive In!
Newsletter: The Last Bear Standing
Title: Grading the Trade.
Here are the key highlights:
The Federal Reserve and the Treasury have demonstrated the power of monetary and fiscal policy to jump-start an economy in crisis. The American Rescue Plan Act of 2021 provided the final jolt necessary to bring consumption back to pre-COVID levels, but this was only possible due to the $3 trillion expansion of base money conducted by the Federal Reserve via Quantitative Easing.
While this intervention has allowed for a V-shaped recovery in economic growth, it has also resulted in decades-high inflation. This creates a trade-off between growth and inflation that must be carefully weighed.
In April 2020, with cratering GDP, near-zero inflation, and double-digit unemployment, the optimal choice seemed obvious - do whatever it takes, at any cost, to avoid a depression. The Fed seemed to have a single mandate: Stimulate demand. And it worked.
Contrary to the dire projections at the time, the recovery in employment, consumption, and GDP are best described as V-shaped. The pandemic demonstrated that a single-mandate Fed paired with unorthodox fiscal stimulus can be very effective - proving that helicopter money has a powerful first-order effect in stoking demand. The risk of stoking demand in the midst of supply disruption is inflation. This is what we are seeing today - real growth, consumption and employment rebound faster than nearly any expectation but prices rise to fill the gap and bring the economy back into equilibrium. This inflation deflates the wealth boom of the pandemic and creates an ongoing fight against it - forcing the Fed to slam on the brakes by raising interest rates and conducting Quantitative Tightening (QT).
There are those who have long argued for increased government spending as a more direct and equitable method to spur growth while others believe that QE has enabled a growing and unsustainable federal deficit by suppressing borrowing costs and monetizing debt. This leaves us with a difficult balancing act between desirable but conflicting goals - one that requires careful consideration of all implications before making any decisions.
In addition, it is essential to differentiate between temporary and permanent effects when considering economic figures such as GDP and unemployment. It is also important to remember that demand is not simply an individual's desire for things; rather, it is better understood as the desire and relative ability to purchase goods and services - a consequence largely of how much money one has available. This is why corporate profits have been so resilient during the pandemic; even as margins have begun to compress, earnings remain near all-time highs.
YouTube Channel: Mark Moss
Title: The Federal Reserve Is Fighting The US Gov
Here are the key highlights:
The Federal Reserve is an independent institution authorized by Congress to maintain control over money and the world. The ongoing battle between the Federal Reserve and the US government is exemplified by Jerome Powell and Janet Yellen, who have opposing views on economic policy and different goals for the American economy. The outcome of this battle will determine who controls money and ultimately, who controls the world.
The Federal Reserve is making an important pivot due to the change in the Consumer Price Index. The pivot has sparked a lot of questions and discussions about how it will affect our portfolios. The Federal Reserve, European Central Bank, People's Bank of China, and Bank of Japan are competing for control over cryptocurrency and the power that comes with it. Different governments will have varying regulations on how cryptocurrency can be used, but they must all accept that it is a permanent fixture in the financial world.
The United States of America is the global leader in money control, due to the Federal Reserve, US Treasury, and other central banks. The US Dollar is the world's reserve currency, giving the US significant power over other currencies and governments. The Federal Reserve controls monetary policy, while the Treasury manages fiscal policy, and both are vying for control over how money is used in the US. Ultimately, the US Government and Treasury hold the ultimate power to dictate how money is used in the country.
The Federal Reserve is in a battle over the strength of the US dollar. The Fed wants a stronger dollar, while those against the FED are pushing for a weaker dollar. This struggle is playing out in global markets and has implications for the value of the currency.
The U.S. government needs more money to fund social spending, military and industrial complexes, and other projects. Politicians promise more and more spending, leading to increasing debt ceilings and a cycle of ever-increasing government spending and a weaker dollar.
Inflation has not peaked yet despite a decrease in income, which is a cause for concern. Federal Reserve's policies of raising rates and restricting money can lead to an economic downturn, as seen in the current scenario. Asset prices coming down has caused a decrease in tax receipts for the government, leading to a further economic impact. Tax receipts are an important indicator of a nation's economic health, and their decrease indicates a decline in asset prices. When asset prices are high, tax receipts tend to be high as well, but when they come down, tax receipts also fall.
The Federal Reserve is facing a paradoxical situation as it tries to fight inflation, which requires it to crush the markets. This is forcing the US Treasury to become insolvent, leading to higher prices due to inflation, bigger losses, and lower incomes due to the market crash.
This situation needs to be addressed quickly before it worsens. Powell is sticking to his plan of raising rates and tightening monetary policy to bring down inflation, while Yellen is worried about a lack of liquidity.
The Treasury is attempting to remedy the out-of-control debt problem by breaking up the government's debt and potentially defaulting on it, which could have serious repercussions for US citizens.
Website: Wolf Street
Title: How the CPI Weights Changed and Moved CPI: Meet the Surprises
Here are the key highlights:
The Bureau of Labor Statistics recently announced that the weights for the calculation of the Consumer Price Index (CPI) will be adjusted on an annual basis, instead of a two-year cycle.
9 major categories, including rent, food at home and away from home, and new and used vehicles, account for 83% of the CPI. The weighting adjustments have had a significant effect on the overall CPI so far, particularly with regards to rent of shelter and food away from home. The weight of gasoline has also been adjusted due to a decrease in consumption due to price spikes in mid-2022.
For rent of shelter, its weight was increased from 32.05% in November 2021 to 34.04% in January 2023 as CPI spiked by 0.8% month-to-month and 8.0% year-over-year during this period.
For food at home, its weight jumped from 7.7% in November 2021 to 8.7% in January 2023 due to a surge in purchases during 2020, while the weight for food away from home dropped from 6.3% in November 2021 to 4.8% in January 2023.
The weight for new vehicles also rose from 3.9% in November 2021 to 4.3% in January 2023 as prices shot higher due to supply chain shortages, while the weight for used vehicles dropped from 4.2% in January 2022 to 2.7% in January 2023 as prices dropped for 12 months straight.
Finally, gas prices have remained relatively steady over the past six months leading up until January 2021 but its weight dropped from 3.9% in November 2021 to 3.2 % in January 2022.
The BLS’s decision to adjust weights annually will help more accurately capture shifts in consumer spending patterns more quickly than before.
Overall, these changes reflect the changing economic landscape as we move out of the pandemic and into a post-COVID world where consumer spending habits have shifted significantly from what we saw before the pandemic began.
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