Money for Nothing

"Money for Nothing" was released in 1985 by the British group Dire Straits with a guest appearance on the single by Sting. The song was the second track of their fifth album named "Brothers in Arms". The single was a huge hit, peaking at #1 for 3 weeks on the US Billboard Hot 100 and the Top Rock Tracks charts. The song went on to win various other awards and was performed at Live Aid and the 28th Grammy Awards in 1986. The lyrics are a reflection of two working class men watching music videos on tv. During the covid 19 pandemic, the U.S. goverment distributed billions of dollars in the form of stimulus payments and PPP payments to businesses. The intention was to keep businesses from failing and to help households during shutdowns and layoffs. The payments were basically money for nothing, you just needed a social security number to qualify. Retail bank accounts swelled with this new-found wealth because due to supply chain disruptions and self imposed quarantees, spending became difficult. Once the economy opened-up, too many dollars began chasing too few goods and rampant inflation ensued. The stimulus also created a problem for banks and credit unions because their deposit base swelled to unprecedented levels and there was not enough loan demand to draw down all the liquidity. Too much cash on the balance sheet can be a problem because the ratios banks use to manage their finances were out of whack. Compounding the problem was the very low level of market interest rates, preventing CFO's from getting a return on all that cash. Currently, the Federal Reserve is raising interest rates to combat the inflation caused by the massive liquidity injected into the economy. The idea is to lower asset prices by suppressing demand and also lower wages by limiting job openings. An example of lowering asset prices is the housing market: higher rates on morgages make housing less affordable because the monthly payment becomes excessive. Auto demand is another example: that car you had your eye on is now unaffordable because higher rates on the loan means you can't make the payments. It will take some time for the excess liquidity in consumers' bank accounts to get spent down but it will happen. My fear is that it will happen suddenly and throw the economy into a deep recession. One thing that could delay a recession is corporate and consumer credit. Even though excess liquidity is drained from bank accounts and corporate balance sheets, buying on credit could keep inflation high for longer. It's almost like Jerome Powell and the Fed is trying to cure inflation with the wrong set of tools, like brain surgery with a hammer and chisel. It's important to remember that stocks are also an asset. If the stock market goes up there is a "wealth effect" where investors feel confident and continue to spend money on goods and services. The Fed's effort to slow the economy also includes an effort to lower stock prices. This is why I can't get too excited about adding new money into this market right now. I still think the stock market is the best place to create long term wealth but for now I sleep better knowing that I have a sizable portion of my assets in safe investments like CD's and treasury bonds. I have waited a long time to get any kind of yield in safe investments and I intend to take advantage of it. I don't worry that the "real" yield is negative because that is beyond my control and eventually inflation will abate. I also have resisted the temptation to invest in any crypto or meme stocks because I view these investments as a symptom of the excess liquidity created during the pandemic. I find it odd that the recent collapse of FTX, which was a brokerage for crypto, scammed some high profile names like Kevin O'Leary out of millions of dollars. How embarassing. These are the people who never hesitate to broadcast investment advise to anyone who might listen. Going back to the job market, my take is that there is simply not enough workers to fill the jobs in the U.S. Raising interest rates simply won't get the job done. Increasing legal immigration would help, so would increasing the worker participation rate. Good luck with that one because with a pension, social security increasing over 7% next year, and 4.5% interest on my savings, I'm getting money for nothing.