In today’s Money Morning…US Fed policy won’t change until this happens…RBA’s QE ramp-up is just the beginning…the bell tolls for cash…and more…
Yesterday, I wrote to you about how to handle ‘life at zero’.
And today, I’m going to go one step further and say that cash is as dead as a doornail.
It’s been said before, but I’m saying this will be its permanent, irreversible state.
I’ll explain the progression of events before the asset class shuffles off the mortal coil in a bit, but first some context is needed.
First stop, the US.
Aussie investors be aware — US Fed policy won’t change until this happens
The Fed has said that it intends to keep rates low for a long, long time.
In comments published by Reuters, one Fed official made clear that US unemployment is the barometer (emphasis added):
‘A recent rise in U.S. Treasury bond yields seemed to show investors betting the Fed will move sooner than expected to tighten monetary policy as the recovery gains steam and life returns to normal.
‘But “we are far from reaching our objectives,” Fed Governor Lael Brainard said, ticking off the litany of ways, from 10 million missing jobs to the pandemic-related drop in women’s labor force participation, in which the U.S. job market is still falling short.
‘Inflation is also beneath the Fed’s 2% target, and under the central bank’s new approach policymakers want it on track to actually exceed that level “for some time” before taking any action to restrain it.’
Which means I think two or three years down the track you’ll see near full employment in the US, but inflation will be well past the 3% mark.
Great, everyone has a job, but your money is getting more useless by the day.
By which point, commodity prices may already be at nosebleed heights.
The Fed may then start to raise rates to cool things off, but by then your real interest rate on a cash savings account will be so far negative that all the cash will be in the market by then.
That is if you are getting .5% on your cash savings account, and inflation is 3%, you are just haemorrhaging money by keeping it there.
Paltry to negative returns on cash savings (via fees) is nothing new for people in the US, but Aussies might be a bit slower to wake up to this reality.
Which is why it’s important to keep an eye on what the RBA is up to.
RBA’s QE ramp-up is just the beginning
At the start of the week, the RBA doubled the size of its daily bond purchases from $2 billion to $4 billion.
As per the Australian Financial Review:
‘“Bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market,” governor Philip Lowe said in his statement.
‘“The bank is prepared to make further adjustments to its purchases in response to market conditions.”
‘The RBA said it would maintain “highly supportive” monetary conditions and that the board still did not expect the cash rate to rise until 2024 “at the earliest”, but it also cautioned that lending standards needed to remain sound as house prices headed higher.’
So, your cash savings account in Australia will get you little for at least the next three years then.
And although inflation was in the doldrums prior to the pandemic, I expect it will come to our shores eventually.
Meaning the ‘cash panic’ might happen in the US before Australia.
But you should still pay attention to a series of events which I think will play out over the next few years.
The bell tolls for cash savings
From Ernest Hemingway’s fine novel on the Spanish Civil War:
‘There is nothing else than now. There is neither yesterday, certainly, nor is there any tomorrow. How old must you be before you know that?’
I think this will be the mentality for investors for the next few years.
To be clear, central bankers made it this way.
Which entails the following events…
First, cash savings get flushed out by inflation and ultra-low interest rates.
Then once the central bankers achieve their stated ‘goals’, rates rise again.
But by then, the game is up.
Central bank backed digital currencies (CBDCs) are already in the system, launched by the countries with the weakest hands.
Unable to compete with these nimbler currencies, a cascade of CBDC launches take place.
This will be the new ‘cash’.
And people won’t trust it.
Meanwhile the cryptocurrency ecosystem matures, and people start to reject the effort to redefine what cash is.
How to navigate this treacherous environment though?
You could start by tuning in tomorrow to hear what our Editorial Director Greg Canavan has to say.
You won’t get this kind of straight-shooting look at how to manage ‘life at zero’ from your run-of-the-mill financial planner.
For Money Morning
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