The COVID pandemic that began in 2019 was met with lockdowns the world over, with a few notable exceptions (such as Florida, where leaders decided to keep the state open). However, in most places, people in jobs dubbed “non essential” faced unemployment as everyone was told to “Stay Home, Save Lives.”
With so much of the economy immobilized, policymakers turned to quantitative easing on a massive scale. Countries around the world created money out of thin air.
A brief from the United Nations Department of Economic and Social Affairs states:
“ultra-loose monetary policies—injecting massive liquidity into the financial system—have also contributed to underpricing of risks and sharp increases in asset prices worldwide. Given the large buildup of their balance sheets, major central banks face significant challenges in tapering asset purchases and reverting to conventional monetary policy measures.”
So many workers around the world being told to “Stay Home, Save Lives” led to the “supply chain crisis” and shortages of toilet paper, baby formula, and computer chips among many other products. Panic buying and black markets emerged and prices began to rise.
All in all, the US spent over $5.3 trillion on COVID relief — 3.5 times what was spent on the 2008 TARP bailout.
Additional recent government spending includes $75 billion to support Ukraine and $370 billion for an “Inflation Reduction Act,” which unfortunately does not actually address the causes of inflation but instead allocates its funds to subsidize green energy programs.
All of this led us to where we are now, with banks teetering on the brink around the world.
To address the inflation caused by easy money, the Federal Reserve has been raising rates. However, higher interest rates have also devalued banks’ investments in Treasury Bonds, which had been receiving only 1 percent interest. By causing the Treasury Bonds to be worth less, the Fed has diminished the value of banks’ assets.
Further rate increases are likely to cause yet more bank failures. And yet rate increases were their main option for countering rising inflation.
That easy money policy caused the crisis currently at hand seems clear in retrospect, but policymakers may find it difficult to dig themselves out of the hole they’ve dug for us all. Raise rates and cause more banks to fail or keep rates constant and allow more family’s purchasing power to be diminished by inflation. It’s a catch 22.
Meanwhile, even before the recent bank collapses made the situation worse, majorities of analysts have been predicting that recession looms on the horizon. 64 percent predicted recession in a BankRate survey conducted in January and 70 percent in a December Bloomberg survey, and 55 percent, according to an index maintained by the New York Federal Reserve.
What can policymakers do to minimize the suffering to the American people as we enter a turbulent future? What can you do to protect yourself amid inflation and a struggling economy? These will be the topics of our final installment of this blog series.
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
