As we watch the world sink into a sea of COVID-19 induced chaos, the global financial markets are feeling the panic. The $SPX (SP500 Index) dropped by 37% in 34 days — the fastest and most violent sell-off in US stock market history, erasing all the gains dating back to August 2016 (yes, that’s nearly 4 years of stock market gains).
To combat the financial destruction, the US federal government and central bank have been throwing all means of “last resort” measures at the wall, hoping one of them will stick and steady the ship. On March 15th, the Federal Reserve cut interest rates from an already low 1.25% to near-zero to stimulate borrowing, but the stock market did not respond. Now, a week later, the Fed decided to blatantly announce that they will undertake “infinite QE” (quantitative easing) measures if necessary, to bail out large businesses and state programs.
Now, we all knew that the Fed and government have the power to print unlimited amounts of money at the will of a few people. But to see them so blatantly abuse this flawed system and so openly admit it — that’s something new.
The government and central bank are literally admitting that they are in full control of the supply of money in our system, and they can decide how much new money is added into circulation at any time.
What’s the point of this? The point is, the amount of money you have worked so hard over the years to save in your 0% interest savings account or in cash under the mattress are going to be worth less and less by the day. Infinite money printing is a temporary band-aid that saves some large businesses from bankruptcy, but it is a core part of the problem and will only worsen things in the long run, as it further induces the Cantillon Effect.
The Cantillon Effect basically means that whenever a large amount of money is added to the system and causes inflation, the effects are not equally distributed. The big fish at the top of the food chain (government, politicians, high net worth individuals) will always get the bulk supply of that new money, in the form of inflated assets which they own. The average middle class citizen or lower class worker are getting nearly none of that new money supply as wages do not increase in tough times, and bear the brunt of pain on inflated costs of goods, services, and assets. In other words, in such a system, the rich gets richer much faster and the poor get poorer much faster — a recipe for eventual populism and social unrest.
To delay this inevitable future, the government is now considering Universal Basic Income (UBI) — more “free money” which is given to every citizen. While UBI is nice for helping those desperately in need during tough times (e.g. unemployment due to COVID-19 crisis), it will inevitably crush the Dollar’s value even more — leading to widespread inflation on the consumer level. The effects of this will be more universal and more crushing, as rampant inflation will affect daily consumer items and not just the large and expensive assets at the top. Also, let’s not forget that the majority of Americans do not even have more than one month’s living expenses in savings — how can we expect them to save/invest money that they got for free?
Another problem comes along with unlimited money printing. People are now starting to wonder — if the government can create infinite supplies of money for themselves and for big companies like Boeing, then why do we need to pay taxes? A very valid point, if you ask me.
Politicians and mainstream media always give money printing cute names like “quantitative easing” or “monetary stimulation,” but that’s no longer enough to hide its ugly horns. This week the United States made a potentially monumental move in announcing their unhinged ability to print money, and this is the official signal of the nation transitioning from capitalism to socialism. Very interesting (and potentially troubling) decade ahead.