Some Scary Talk from the Fed – Forward Observer

Some Scary Talk from the Fed

Good morning. It’s Mike Shelby (Culper) from Forward Observer.

I watched the 2021 Financial Markets Conference held this week by the Federal Reserve Bank of Atlanta. It’s revamped my monetary outlook, and there are some things you should know.

While there’s been a lot of speculation about economic collapse, hyperinflation, etc., as a foregone conclusion, my overall takeaway from this conference is that the Fed actually does have some options for dealing with more financial instability.

None of them are good options.

The Fed’s primary response has shifted from being the buyer and lender of last resort to the buyer and lender of first resort.

The Fed’s balance sheet sits at $7.8 trillion and growing. The next financial crisis is likely already on the way. This almost certainly means trillions in new money printing during the next crisis.

This is problematic because a major part of the conference’s first day was about how the Fed winds down its balance sheet from here.

The Fed’s money printing and Treasury’s growing debt will not only weigh on economic growth, but will also undermine dollar strength.

In short, there are no painless options for the Fed.

One of the suggestions made by a panelist, who is not a Fed official, included negative interest rates. Not only that, but he encouraged the Fed to abolish cash and to use a serial number lottery system to take dollars out of circulation.

Yes, this would be outright thievery.

I want to be clear that this proposed solution is not in the mainstream, but it could be one day.

It underscores for me that the Fed will get quite creative in attempts to mitigate risks of financial and monetary catastrophes (such as hyperinflation).

The Fed’s aim would be to bolster international faith in the US Dollar, but it will happen at the expense of the American citizenry. This is why some Americans are starting to “de-dollarize.”

Virtually all options for the Fed will be painful. What’s taken decades to wind up won’t be unwound in a few years. This will be a decadal or generational problem for the Fed and the dollar, if either survives another generation.

I’ll have the full write up with details in tomorrow’s Economic Early Warning report.

Always Out Front,

Mike Shelby

P.S. – If you want to stay ahead of the curve, then sign up for my Early Warning briefs. Every Thursday, I publish an economic intelligence brief on future risks to monetary, financial, and economic stability.

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Mike Shelby is a former Intelligence NCO and contractor. He's now the CEO of Forward Observer.

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