Well, There's Stimulus And Then There's That Other Stimulus.

OK, let's kick it off with our former reality: up until recently we were in a deflationary environment with The Fed pumping almost 8 trillion into financial markets, largely by purchasing treasuries, quality bonds, mortgage instruments along with all that is shit, in terms of bond and other financial products. The whisper tune was that Blackrock was also buying stocks as per The Fed's instructions. Maybe, maybe not.

But now, we're in a new economic paradigm, in the wake of unhealthy financial markets and its secondary cause otherwise known as COVID-19. Remember that the Repo Crisis came first in late 2019 and that told you all you needed to know about these markets, the financial institutions related to it and the banking industry as a whole.

Under l'ancien régime, The Fed called all the shots in a deflationary world where monetary stimulus was sent largely to financial institutions who many expected would use that influx of cash to save jobs. But financial services being what financial services always is, the money went instead to fund stock buybacks and pay bonuses to financial firm bigwigs. How thoroughly predictable, but I digress. The end result was like giving an addict a continuing hit so markets could keep going up based on nothing even remotely resembling traditional market cycles or corporate fundamentals. So, it looked relatively good because during deflation, asset prices drop making things less expensive for consumers and so it went until...

Once the politicians finally got it that much of the large cap companies had turned their backs on many of their employees and that medium to small companies were closing and going bust at an alarming pace, it suddenly dawned on everyone that an epidemic of homelessness, job loss and other economic misery was in full flight. That meant that Treasury had no choice but to start moving toward fiscal stimulus and that led to the beginnings of helicopter money to individuals, with no means-test or even an effort at determining if the universal drop was required by most people's financial predicament. Sure, it was then and is now the humanitarian thing to do but it changed the game.

Suddenly, money velocity which is always close to or at zero in a deflationary environment began to tick up and continues to this day. That meant that some of those receiving checks spent it on the necessities of life but a lot of others simply spent it on non-essentials. And thus, that set off an uptick in inflation as spending increased as the dollar continued to go down. 

That in turn severely reduced the demand for Treasuries as money flowed out of the semi-safe haven otherwise known as the bond market and into stocks. Because demand for treasuries dropped, that meant that bond yields would rise and they sure have. Just check out the ten-year treasury note. 

As ten-year yields rise, so will rates for commercial loans and mortgages. Remember when The Fed went to 2.5% FFR, only to have to back-track when all hell broke lose in the markets? So much for the late 2018 confidence in the American economy. In light of that, inflation will likely continue to rise but we're a long way from an 18% FFR and the Volcker thing. IMHO, that precludes going this route again to limit inflation's rise because the economy is already DOA and QE is what has it on life-support.

That leaves only one other major thing in the toolbox: negative FFR rates that are already in effect in the EU and Japan with the UK foolishly lining up to join the band. That would mean a return to deflation and an attempt to spur borrowing and investing rather than hording cash and saving money. It's supposed to give a good kick to an economy but where tried, results have been mixed at best.

For the average Joe and Jane, first and foremost stay out of The Dixie: during deflation, the dollar continues to drop while the same thing happens if inflation gets out of control. That means reduced purchasing power and worthless money if we ever hit hyperinflation. 

Meanwhile, gold is the beneficiary of pronounced inflation or negative interest rates. However, if both treasury rates and the dollar rise, gold is toast. In short, there are no easy answers to the economic circumstances affecting us all. But one thing is almost a no-brainer: get us the hell away from QE, because if we don't it will only magnify 10-fold the crash, when the market crash inevitably comes. That's what continuing monetary heroin ultimately does, it kills the addict.