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Juicing the Books: As the Fed Prints, There’s One Thing You Can Do to Prepare Your Business for a Recession (or Worse)

Nov 16, 2020 | Business & Enterprise, Short-form

Reading Time: 5 minutes

First things first. To clear the air, we’re going to need to recognize two misconceptions from the title of this article. And these two are critical to understand when you’re looking for an answer on how to prepare your business for a recession. Or your household, for that matter.

The leading misconception is that the Federal Reserve prints money. But they don’t.

I know, I know, I know. They practically scream how they do. And you’ve probably read it just about everywhere. You’ve probably also seen the amusing meme showing a completely out-of-control Jay Powell printing like a madman. But that doesn’t change reality. The Fed does not print money; they’re lying.

But don’t take my word for it because they straight up admit it themselves.

.We’ll see in a moment why this is so important to understand, especially from a business perspective. But let’s cut to the meat of our article today with a recent quote from Real Investment Advice.

To understand the problem, we have to go back to the beginning. As we noted in our article on financial rescues, the bailouts and stimulus programs started in 2008 when the Federal Reserve intervened with the insolvency of Bear Stearns. They haven’t stopped since.

 

To date, the Federal Reserve, and the Government, have pumped more than $36 Trillion into the economy. As shown below, the amount of economic growth achieved has been minimal during that same time frame. (The chart is the cumulative growth of interventions compared to the incremental increase in GDP.)

 

What this equates to is more than $12 of liquidity for each $1 of economic growth.

 

The trap the Federal Reserve has stumbled into is that it continues to require more interventions to sustain lower rates of economic growth. Whenever the Fed withdraws interventions, economic growth collapses.

 

As shown, since the turn of the century, each economic cycle has failed to attain a higher rate of growth than previously. The Federal Reserve lowered interest rates to stimulate growth. However, after reaching the “zero bound,” the Fed engaged in expansionary monetary policy.

Keeping up with where we’re going? Because that’s a phenomenal business insight there.

So, the Fed doesn’t print money. But they sure seem to want you to believe they do. And every time they play their little game of hopscotch, we sink a little lower economically. Simply take a look at this chart.

QE-Fed-Funds-GDP-BalanceSheet-110320

We probably shouldn’t forget to highlight…they also never stopped bailing out the financial industry from 2007. And we destructively locked down the economy in 2020.

Whether you want to prepare your business for a recession or just your household, this should scare you. And it should scare you an enormous amount. They—never—stopped—the bailouts. And there never was any serious economic growth over the past decade. In actuality, not much changed in the real world. Then we foolishly wreaked even more havoc with shutdowns.

Now, onto our second misconception.

And that’s how “the economy” is a singular monolith. It mostly definitely is not. In fact, it’s a fluid amalgamation of hundreds of millions of people (in the US). And a complex set of activities spanning the entire globe. It is so complex that it truly is unfathomable for any single one of us or group of us to understand its parts.

Keep this thought in mind.

lower yields force households to save more_6

Okay, stay with me. I know that this one is getting a bit more abstract. If you’re new to business or economics, trust me. Because we’re going somewhere with this.

As interest rates fall (and economic activity never rises to meet its previous threshold), regular people save more money as they’re able. And this even as everyone is screaming to spend everything you’ve got because insane inflation is almost here.

The first time I saw this chart, I was a little surprised but not entirely. In a way, it confirmed something I thought may already be the case. But what’s happening is the opposite of what the Fed says they want.

Still, I immediately wondered if it applied to more than just households. Could Big Business, as opposed to small business, be saving in the same way? What about in different countries?

Well, we find something interesting. And that’s how the answer is “yes,” they all are increasingly saving cash. Of course, this could be for a few reasons.

So, let’s step back here for a moment.

Why, if everyone is screaming about inflation, are savings rates stubbornly up instead of going down, over more than a decade? And what does this mean for you?

Remember, we said the global economy is magnificently complex. And most people don’t know this stuff exists, let alone how it works. They’re not all looking at correlations with interest rates or economic activity by decade.

But as a complex system, it’s responding in almost lockstep to un-ignorable conditions. Or what we might call reality. My guess is that there is a point where people assume, whatever story authorities are selling, the opposite is probably true.

Let me repeat that: as the Fed screams about coming inflation, more and more people run in the opposite direction. And they do this intuitively. Additionally, that’s not something to take lightly from a business perspective.

Now, there’s also the organizational perspective. We might hazard a guess that this phenomenon is more widespread than most people are aware. And let’s call it the Law of Janus, since elites, like the Fed, seem to be looking one way, while the rest of the world looks the other.

Food for thought and for another day. And we’ve already covered a lot of new ground here for many small business owners.

Either way, as a consequence, when you’re trying to prepare your business for a recession or a household for chaos, there is one single, surefire thing you can do to protect yourself.

Learn from the intricacies of the system.

And in this case, that’s to do exactly what Big Business and regular people all over the world have been doing for more than a decade… save so you have more encumbered capital to deploy if things get volatile.

Because it most likely will get more bumpy. This is especially likely as we find out what happens when the global reserve currency, the US dollar, runs headlong into negative rates and zero future economic growth.

Because that chart suggests it’s coming rather soon.

And if this game goes badly, my suggestion, above, will be the number one biggest step you can take. And especially so to minimize your exposure to circumstances that could wipe out your business or household.

Oh, and let’s not forget one more piece of advice from all this… ignore the financial media and the Fed.

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