Warren Buffet’s recent comments regarding U.S. debt and the fact it will likely never be repaid is a good reminder that some fundamental economic shifts are taking place. If you look around you can see we are deep into a global test of the Keynesian Theory of Money on an enormous scale.
The purpose of the U.S. Central Bank, the Federal Reserve, is to provide the nation with a safe, flexible, and stable monetary and financial system. It has specific goals it looks to achieve and an arsenal of tools at its disposal to accomplish this. Since the 2008 financial crisis, the Fed has been tasked with taking much more aggressive action and the pendulum hasn’t stopped swinging. The graph of the monetary base (total amount of money available, which the Fed controls) shows this clearly.
Total Monetary Base, Source: FRED
You can see the massive action taken by the Fed to increase the monetary supply following the events of 2008, which lasted for several years, and came to be known as Quantitative Easing. Once the economy was stabilized the Fed started to slowly shrink its balance sheet and therefore the money supply until a few cracks in the system appeared pre-COVID. This made the central bank slightly reverse course for the first time. Obviously, the Fed has been an active participant in supporting U.S. Fiscal policy as well as managing the tools at its disposal to take quick action since the start of the global pandemic.
Warren Buffet’s comments drive home the point that the economic world has shifted and how money works has changed from just 15 years ago. With central banks around the world synchronized in their approach to the easing and tightening of monetary policy, government debit is here to stay. Now, the genie is out of the bottle. The underlying economic activity generated by the investment and the capacity to keep paying on that debt is the real issue.
So what does all this mean for your personal wealth or your business? It is challenging to understand all the implications of macroeconomic policy from a single vantage point. However, the potential consequences are significant and should not be ignored. The good news is there are strategies to mitigate the risks associated with these changes. If you have questions or would like to get advice, contact Wealth Advocacy, we are here to help!
Useful Links:
The Fed’s Website – https://www.federalreserve.gov/
FRED (St. Louis Fed’s Economic Data) – https://fred.stlouisfed.org/
Bureau of Economic Analysis – https://www.bea.gov/