The Federal Reserve is not very good at saying no. When the U.S. Treasury comes calling, it fires up the printing press. Even amid a round of tightening—like the one we are in—when a few big banks get in trouble, the Fed pivots back to quantitative easing.
The Fed’s Money Printing
This chart illustrates that propensity. It represents Fed assets, mostly Treasury and mortgage bonds, that the Fed has purchased with money it created out of thin air, a practice generally referred to as “money printing.”
On the far left of the chart, you can see that Fed assets suddenly grew by 150% in three short months at the end of 2008. The Fed that couldn’t say no, printed money furiously to bail out banks that were holding increasingly worthless mortgage-backed securities.
Note as well that the chart sharply turns straight up–we call it a hockey stick formation–when COVID hit in early 2020. Washington met that crisis, spending trillions of dollars it didn’t have on so-called “stimmies,” stimulus measures, relying on the Fed to print like there was no tomorrow. In six months, it printed $3 trillion.
But the Fed wasn’t done yet. By this time last year, it had printed almost $8 trillion since the 2008 crisis began. Predictably, as all that made-up money eventually began to enter the consumer economy, inflation took off. Inflation was too painful to ignore, so the Fed apologized and began to try to undo some of the damage.
As you can see, it began tightening monetary conditions in the second half of last year with higher interest rates and unwinding some of its asset holdings.
But then a few banks teetered. It didn’t take much for the Fed-that-can’t-say-no to crank up the printing presses again to help the troubled but well-connected banks. You can see Fed assets turning north once again on the far right of the chart.
That’s all it took to send gold racing toward its all-time highs of more than $2,000 and silver more than $25 an ounce.
What’s next?
To begin with, we are not sure banks are out of danger.
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But certainly, our transitioning economy, characterized by higher interest rates, lower bonds, and inflation far above the Fed’s 2% target, is exacting costs beyond just the banks. If so, gold becomes ever more attractive as a safe haven from our tempest-tossed times.
Commercial real estate troubles are already approaching a high boil of the kind that is likely to cause the Fed-that-can’t-say-no to print money aggressively.
There’s $4.5 trillion worth of mortgages on income-producing properties according to WolfStreet.com. Wolf Richter writes, “Banks held $1.73 trillion (38.4%) of the $4.5 trillion CRE mortgages of income-producing properties. Investors and government entities held or guaranteed the remaining 61.6%.” He also reports on the staggering losses already taken on the fire sales and foreclosure sales of Class A office towers in major cities from coast to coast.
The problem is not limited to office towers but extends to retail space and apartment buildings. At the same time, their exposure to commercial real estate risk is high, regional banks are suffering severe deposit flight due to the Fed’s higher interest rates.
According to a recent Zero Hedge.com article, Morgan Stanley claims office and retail property valuations could fall as much as 40% from peak to trough, creating a feedback loop of liquidations, bank failures, defaults, and from there even more liquidations. In other words, ZeroHedge is warning that commercial real estate is about to become the next Subprime, an “existential shock” to the U.S. financial system.
These conditions in the commercial real estate market are not like clouds forming on some distant horizon. They are overhead today. If you wish to see the scope of the fire sales and foreclosures refer to the links above. It is just such existential shocks that we know from the historical precedents of 2008 and 2020 that summon up a massive Fed re-inflation. Gold investors should be aware that as with the Fed’s response to bank failure last month, as well as its sudden responses to the 2008 crisis and the 2020 pandemic, it pivots swiftly, creating gushers of liquidity suddenly and without prolonged public debate.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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