If we’ve learned anything this year other than what it feels like to dress like a healthcare worker, it would be that the Federal Reserve is ready and willing to print whatever sum of money it takes to keep an all out recession off our hands in the U.S.
It is estimated that the FED will have around an $8 Trillion balance sheet by the end of 2020 from its numerous plans to prop up everything from money market funds to state and local government debt. This is double the level they reached in their QE program from 2008 that never had a chance to get unwound.
With the government going for another round of epic spending before it could pay off the last one, many fiscal conservatives have wondered if this time will be too much. I mean we’ve all been there, you’re trying to light the grill and it’s not working so you just keep hosing down the charcoal with lighter fluid until “BOOM!” bye bye eyebrows.
Will flooding all of this money into the system eventually cause uncontrollable inflation and devaluation of money?
Surprisingly, most sources would say no. According to a recent report from Argus Equity Research, current inflation estimates sit somewhere between 1.2% and deflation even with the Fed having boosted its balance sheet to $7.5 Trillion already. And those inflation numbers are expected to stay around in the near term.
There are several reasons that economists aren’t afraid of hyperinflation, one being that the Fed still has its age-old tool of raising interest rates to cool things back off if needed. Another reason is that, like 2008, the government printing money doesn’t necessarily mean it makes it to the economy. Pretty much all of what was created in 2008 has stayed on the FED’s balance sheet as bank reserves and never fueled any real inflation in the economy.
How this will affect capital markets could be a different story since the Federal Reserve is buying all manner of assets to help provide liquidity to the markets. This could certainly cause some strange behavior in these areas despite what goes on in the economy and leave many scratching their heads as it did coming out of 2008 as well.
You know by now how most of these articles end; this is why it’s important to stay diversified. We also wanted to put out there that despite the level of government spending, the smart folks don’t see this blowing up the barbecue any time soon.