By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader Larry on the Federal Reserve’s money printing…
I heard 40 years ago or so that when the Federal Government needed money, it borrowed from the Federal Reserve.
But the Federal Reserve didn’t have the money, so the government requested the Fed to “create” the funds needed.
The Fed used to “print” the money and give it to the government. The government would then pay the “borrowed money” back over time to the Fed, “plus interest.”
Correct me if I’m wrong: That means the Federal Reserve got all of that money it printed back, but also got the interest (on the money it printed) from the government.
That would mean the Fed makes out like a bandit, especially when a spendthrift government comes into power. Am I correct on this?
Today, there probably isn’t much in the way of hard print-money. So the Fed electronically “prints” funds, not hard money.
So does that mean that the Fed today still gets all of that “money” – electronically produced and loaned to the government, then paid back electronically to the Fed?
– Larry G.
Hi Larry, thank you for writing in and for that terrific question.
To clarify, when the U.S. government needs money and runs on a budget deficit, the Treasury Department issues bonds.
That means the Treasury borrows money and, in return, pays interest on those bonds to bondholders. Holders can be individual investors, funds, asset management companies, financial institutions, or countries.
The Fed creates money to purchase those bonds. This is called quantitative easing (QE). Then, the Fed injects liquidity into the markets – and the banking system – in return for banks keeping those bonds.
After that, the Treasury pays the Fed interest on those bonds.
It’s a bizarre thing…
But basically, the U.S. government, through the Treasury, borrows money in the form of bonds. Then, it pays interest on those bonds to bondholders, including the Fed.
Meanwhile, the Fed creates money out of thin air to buy those bonds. In that way, the Fed enables the U.S. government to borrow more money just by being a major bond buyer.
This is a big driver of The Great Distortion between markets and the real economy, which I’ve warned about in these pages.
As long as the Fed can create trillions of dollars to buy U.S. debt, market players can use this money to buy more speculative assets. These include paper assets like stocks.
Paper assets are represented by documents or records. They contrast with actual money going into the real economy for longer-term projects and initiatives.
Projects like building and fixing bridges, roads, and highways. Or creating and updating power grids, constructing high-speed railway lines, and improving U.S. ports and airports.
But for the Fed, it’s easier to throw money at the markets. When the Fed creates money to inject into the banking system, banks can use that money to speculate in the markets.
Banks are not obligated to lend the money to companies that build lasting infrastructure. For instance, just in the past few weeks, the Fed lent $300 billion worth of money to banks. It called this an emergency fund… But that’s a lie that I’ll cover in a piece soon.
Whenever the Fed creates money and its book of assets grows, it’s an act of QE. The Fed might not call it that, but that’s what it is. The money goes to the banks. Then, the banks use it to help themselves, buy stock, buy options, or whatever else they want to do with it.
They don’t have to lend it out to anything physical or that’s part of the real economy. The Fed has no cap on the amount of money it can create. And the banks have no requirement to use that money in a way that benefits the real, physical economy.
Unfortunately, there’s nothing you can do to change the Fed, but you can educate yourself on how it operates.
The more we know, the more we can call it out on its bank-coddling practices.
I wrote about how the Fed has served the interests of big bankers since its creation in my book, All the Presidents’ Bankers.
If you have a copy, it’s in Chapter 1, “The Early 1910s: Post-Panic Creature and Party Posturing.” I also shared an excerpt in these pages, which you can read right here.
Fortunately, the more money that is injected into the system by central banks, the more we can follow that money into the markets. And the more we can detect profit opportunities.
Even though the banking system is still wobbly, the Fed creating $300 billion has led to a rally in the markets. This doesn’t mean other factors didn’t influence the markets. But the availability of Fed money can elevate certain parts of the market. In this recent period, it has elevated tech stocks, like Microsoft.
Next, reader Carole wants to know what’s going on in the U.K. – and what it means in a wider context…
I’m enjoying the Inside Wall Street insights and would love to hear Nomi’s take on the record highs reached by the U.K.’s FTSE 100 Index in recent days.
Given the not-so-great economic conditions there, what’s going on? Is this a blip, or is it significant in ways that might reflect in the wider global context?
– Carole E.
Hi Carole, thank you for your kind words about Inside Wall Street and for your great question.
The recent rise in the U.K.’s FTSE 100 Index was due to expectations that the Bank of England (BoE) would slow down its pace or size of rate hikes. The FTSE reversed when the banking sector weakness hit the markets initially.
But since March 17, it’s continued to rise.
There are a couple of reasons for the rise.
First, overall economic conditions in the United Kingdom are certainly bleak. However, the BoE now believes a recession in England will be shorter and less severe than previously thought.
Also, there is concern that the banking crisis in the United States and Europe will spread to the U.K. banking sector.
As a result, the Bank of England won’t likely raise interest rates as quickly, or possibly anymore for a while.
Just last Thursday, the BoE raised interest rates again by 0.25%, putting the overall rate at 4.25%. In a statement, bank officials said this step was taken to bring down inflation.
However, the BoE reviews how the economy is doing every six weeks or so. And given the banking turmoil, many experts agree that the BoE might reach rate neutrality sooner than before. After all, it doesn’t want to create more disruption in the banking system.
So any potential move towards bringing down the rising cost of money or rates is a positive for the markets.
And I think that’s what we’re seeing in the U.K. FTSE 100.
As for whether the upside continues, it depends on what the Bank of England does in the following weeks and months.
If it does indeed continue to slow down its rate hikes, we could see this upside for longer. Its next interest rate decision is due out on May 11.
And that brings us to your other question: What does this mean in a wider global context?
In general, since 2008, major central banks – especially those in the G7 nations – follow whatever the Fed does. This was a big premise of my book, Collusion: How Central Bankers Rigged the World.
Recently, central banks have raised rates together (from different base levels) since March 2022. And they are likely to stop together, and cut together.
So when major central banks pivot to easier policies, or what I call Stage 2, we could see their respective markets rally. As a reminder, Stage 2 would be a pause in rate hikes.
Meaning, we could see more upside in not just the FTSE, but also in the Dow, DAX, and other major markets.
Finally, our last question this week is from William. He wants to know about the relationship between CBDCs and the status of the U.S. dollar…
I’ve heard a lot about the new CBDC that’s being rolled out, mostly about the privacy issues. But there’s one thing nobody has mentioned that puzzles me, and maybe you can shed some light on it.
Since it’s supposedly going to be programmable, why on earth would any foreign country want to settle its international transactions with a currency that could be made worthless with the push of a button? It’s only a matter of time before the CBDC gets weaponized, and that will mean the death of the dollar as we know it.
– William B.
Hi William, thank you very much for writing in about this. There has certainly been a lot of talk about CBDCs and the privacy issues surrounding data collected through CBDCs.
And to address your other point about foreign countries and transactions…
We already know that the Federal Reserve can create an unlimited amount of U.S. dollars through an electronic push of a button.
So from that perspective, there would be no difference if it was creating digital coins or electronic dollars.
Even so, let’s look at one of the reasons the Federal Reserve has been able to create so much money and keep dollars pumping through the global economy. The U.S. dollar, and by extension any digital coin associated with the U.S. dollar, has the might of a global superpower and reserve currency behind it.
That means that foreign countries have no choice in the matter. If they want to be involved with the United States economically, they’ll have to be involved with the future CBDC.
The good news is that you can profit from the dollar’s value to other countries. And you can do that whether the dollar is digital or represented by a CBDC.
One way to take advantage is to invest in a hard asset with historical currency value, such as gold. You can do this by buying accredited gold coins or bars from an official source like the U.S. mint.
You can also buy into an exchange-traded fund (ETF) that provides exposure to gold, such as GLD.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins