What's The Worst That Could Happen?
Updated: 10 hours ago
Markets flow with the tide and finish about even on the week. The Finsanity continues as financial markets overpowered by stimulus don’t know where to go. As long as the money keeps pumping in, the markets will go up, but how long will that last?
💸 Key Events
Potential Debt Crisis Incoming…
One after another these crises keep coming. Covid, wildfires, flooding, mass shootings, Climate Change, and now, potentially, a debt crisis. Every crisis listed had very clear indicators and was entirely preventable; this is no different.
Here’s How It Works: When you borrow money, you eventually repay the amount you borrowed plus an additional amount of “interest”. You pay the interest because it keeps lenders interested in letting you borrow money again. The United States has a limit as to how much it can borrow, the limit is set by Congress. The US borrows money to pay for all kinds of stuff, mainly right now for Covid spending and stimulus. If Congress cannot agree to raise the debt limit (or put it on pause, i.e. “suspend” it), then the US will be forced to pay for things using only money collected through taxes. Already, the US makes just enough money from taxes to barely pay the interest payments on the country’s debt. If these were credit card payments, the US has been making the minimum monthly payment for years now, so our debt has piled up.
In Short: We’re almost out of money, we are very close to not being able to borrow any additional money, and if the US tried to rely on just using tax revenue to pay for its additional Covid expenses, then the US could miss a debt payment by the end of the year.
Is That A Bad Thing? Yes. As solemn as I can make it in a light-hearted email newsletter attempting to demystify finance/investing, yes that would be catastrophic. The United States is trusted around the world as the country that will never fail (i.e. “default”) on its debt. Lending money to the United States is literally known in the finance world as “risk-free” investment. It's part of the reason that we're the country that sets interest rates. If we default on our debt, that trustworthiness goes away and it may never come back.
The Big Picture: A default has the potential to crash the US economy and stock markets, force companies into bankruptcy, and even worse, it can affect the geopolitical landscape amidst an ongoing technological Cold War between the US, Russia, and China. Our political standing has a lot to do with our economy and our place in the monetary system. If that goes away, the United States will look like a very different place.
“Inequality Begets Inequality!”
A report from the National Bureau for Economic Research found that wealthy Americans have an unprecedented amount of power within US society.
In short, the wealthy have contributed massive amounts to savings accounts and their large deposits have put enough pressure to collectively push deposit interest rates downward. Which made savings accounts go from offering 10% interest rates in the 70s and early 80s, to less than 0.05% in 2021. A savings account offering 10% interest sounds amazing right now. Your savings account right now probably offers 0.01% annually.
Let's Back Up...
The Federal Reserve controls interest rates in the US; more specifically, they control an interest rate that the entire world derives their own interest rates from. So, most investors just say the Federal Reserve controls “interest rates”. Ultimately, they decide when rates for nearly the entire world are lifted or dropped. There’s a committee that gathers, they all vote, batta-bing batta-boom, interest rates change.
Okay Let's Flash Forward...
So this new report from NBER suggests the rich are actually putting pressure on interest rates, and that the Federal Reserve didn’t act to stop it. The Fed probably didn’t know, the report did just come out Monday.
Why Does Any Of This Matter: Lower interest rates makes it easier to take out large loans because interest on the money you pay back is less. It’s bad for people saving money because the money that is paid to you by the bank is less. So rich people can borrow money to make investments for cheaper, meanwhile people saving money at the bank and living paycheck to paycheck are worse off.
The painful part is that this finding only solidifies the truth behind finance as a whole, and that is “money makes more money”, or “inequality begets inequality!” said by Atif Mian, one of the authors and a world renowned economist.
The Big Picture: Capitalism isn’t a perfect system by any means. It needs consistent regulation to ensure fairness, and an environment with low interest rates and high wealth inequality is inherently unfair. Now the US is on the brink of a debt crisis without ammunition to fight back because interest rates have hit 0%.
🤷 What To Watch For…
● Scientists were able to generate energy akin to a small star in a monumental nuclear fusion test. The test was successful, making it stable is the next challenge according to Michio Kaku who called it “A giant step toward the Holy Grail of energy research.” (Read more here).
● High inflation and high unemployment at the same time has only happened twice in American history. The late 70s amid the Oil Crisis during the Cold War, and right now. The difference then was that interest rates back then were between 10-18%, and right now they’re at 0%. (Read more here)
● New ETFs are being created to give investors more access to derivatives a.k.a. uber risky assets. They’re good for hedging, but most retail investors just use them to gamble within the financial markets. High risk, high reward, plenty of consequences, but YOLO; don’t YOLO your assets. Buy a $1 scratch-off ticket and relax. (Read more here)