Last fall we began to follow the story about the Federal Reserve starting up unusual activity in the repo markets. First, they said these were just temporary actions related to some quarterly tax issues. Then they announced these unusual operations would be extended in 2020 and we saw the amounts jump considerably from time to time. The Fed continually assured the public that there is nothing to be concerned about and that we should not label their actions as QE (Quantitative Easing). More and more skeptics have questioned if the Fed operations suggest trouble behind the scenes.
Fast forwarding to the present, now we have a full blown global pandemic and markets around the world reeling into what seems like free fall. Oil prices collapsed due to a combination of market anticipation that world oil demand would drop due to the pandemic and a dispute between Saudi Arabia and Russia over whether to cut supply in response to a drop in demand.
Meanwhile, the impact of the virus pandemic on the US government continued to grow. At first it seemed as if government officials did not take the threat seriously enough. While they did begin to ramp up a government task force on the problem, the public seemed to sense that the threat from the pandemic was moving faster than the official response. This has led to a state of what I might describe as "mild panic" in the US with people reacting to their fears in a variety of ways including wiping out retail supplies of some key basic consumer goods.
Of course this kind of sudden panic buying puts enormous stress on our "just in time inventory" distribution system for those products in high demand. All of this creates an atmosphere of public uncertainty and is conducive to the potential for the sense of panic to ramp up depending upon what happens in the coming weeks. A lot will be determined by how effectively the pandemic threat is contained and the public perception of whether our leaders and public officials handled the crisis well or not.
Now the Fed fires another major round of ammunition in an effort to support markets and ease investor fears that this crisis will spill over into the financial system and threaten its stability (Initial market reaction was not good). Clearly, the trust and confidence of the public in its leaders is going to be tested both on the health care front and the economic front. This is exactly the kind of situation we have written about here on this blog for years now. We have arrived at a key point in time where we find out if all this is just another bump in the road for the our current system or this leads to a lack of public trust and confidence that shakes the stability of the current system. It's important to recall that our entire present system fully depends on the public trust.
At this time, all we can do is make a few observations as we wait to see how all this actually unfolds. As we have said here many times, what matters is what actually happens, not what any expert or official predicts will happen. As we stand today, things could go either way and I doubt that anyone knows for sure which direction things will go in terms of whether our present monetary and financial system emerges from this in tact or radically changed. We will monitor it here as best we can. For now, here are a few observations:
- We need to watch the Fed very closely. They have continued to assure us that things are fine and stable even as we see clear evidence that markets are not stable and Fed actions in response are becoming more urgent, more drastic, and more frequent. The Fed will say no one could the pandemic coming, but so far it's not good look for the Fed. They seem behind the curve whether they are or not.
- We are getting an interesting peek into how the general public will react in a crisis situation where genuine fear is motivating daily decision making. I am observing how people are reacting to this (at least in my area) with interest. On one level, there is not a panic leading to any kind of civil disorder. But clearly there is a sense of unease leading people to flock to panic buy key consumer goods despite being told that there is no reason to fear being able to acquire necessary goods. This suggests to me that down deep, people don't fully trust that public officials will handle things well. So far, it's probably just people wanting to err on the side of caution. But if things continue on such that instability persists over time (on the health front and on the economic front), it will be interesting to see how the public mood may change in this regard and become more intense.
- There are plenty of suspicions out there that this whole crisis is an engineered event for the very purpose of testing to see how the US general public will react to a situation like this. There are a variety of proposed culprits. I don't view things that way at this time, but there are many people who have suspicions about it and I try to keep an open mind. I suspect that how officials handle this going forward will either ramp up the intensity of suspicions like that or quell such suspicions. Only time will tell us.
- We should continue to watch what happens in all markets. This includes not only stock markets, but the gold market and the strength of the US dollar. Combined these will continue to provide some hints as to whether public trust and confidence is holding up or faltering.
Reactions to the Fed Rate Cut and QE Announcement:
Nouriel Roubini
Mohamed A. El-Erian
Jim Rickards
Jim Rickards #2
CNBC - Dollar Weakens after surprise rate cut
Gold is the only thing to own now (Kitco News)
Alternative Media Viewpoint from Egon Von Greyerz
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Added comment: The purpose of this blog has been and is to monitor events that might lead to some kind of change in our present monetary and financial system. While the current events certainly fall into that purview because of the potential stress to the financial system, it should be said that the financial and economic impact from the events are not as important as the health and safety of all people. This post on the Twitter feed of Dr. Judy Shelton is a reminder of what they are going through in hard hit Italy.
The health pandemic confronting the world right now is outside our area of expertise here so we have refrained from covering that to any significant degree. But as we come across information on this, if we feel it is credible information that might be helpful to anyone, we will certainly cover it here. If we do not post information, it will be because we do not feel we have the expertise here to determine if the information is credible. The recommendations that have been widely circulated to the public about how to combat the virus seem like reasonable common sense proposals and we would certainly encourage readers to follow them. As with any contagious disease, it makes sense that each of us doing what we can to try and limit the spread of the disease is just prudent behavior.
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