One of the most interesting ideas that came out of the last Federal Reserve meeting at the end of October is a serious issue for everyone, including the Federal Reserve and the eventual impact of monetary policy. And that idea is that slow productivity growth might actually be the new norm. (Source: “Minutes of the Federal Open Market Committee,” FederalReserve.gov, November 20, 2013.)
Since the Great Recession, worker productivity has been running at roughly half the rate that the U.S. experienced over the 25 years prior. The problem is that potential gross domestic product (GDP) growth comes from a combination of productivity and the labor force.
If productivity stalls and the Federal Reserve continues with its monetary policy, at some point, this excess cash will begin to seep into the economy and cause inflation.
The reason we aren’t seeing inflation in the official data despite record levels of monetary policy is that the velocity of money has been low. This basically means that money is sitting in bank reserves or is being funneled into assets, such as stocks, instead of being channeled into the actual U.S. economy. There is asset inflation, but the official measures don’t track items like the stock market.
However, at some point, this begins to shift, especially when worker productivity remains low. The last time productivity hit such low levels was during the 1970s, and we all know what happened to the U.S. economy during that time.
Clearly, the monetary policy program run by the Federal Reserve is not having a positive impact on the real economy, as unemployment remains stubbornly high.
While the Federal Reserve continues to pump billions of dollars into the economy each month through the most aggressive monetary policy in its history, the U.S. economy is barely growing at all.
But let’s get to the more important question: how does this impact your investments?
The biggest problem for investors is that we, as humans, tend to have a short memory span. Most people only look back over the past year or two and make their investment decisions based on what worked then.
If we consider the weakness of the economy, the high levels of unemployment, a lack of growth in worker productivity, and the most aggressive monetary policy ever by the Federal Reserve, there are several possible risks that I think are quite likely to crop up.
The first is that holding long-term U.S. bonds is a very risky and poor investment. Even though the official data show no signs of inflation, considering the amount of money the Federal Reserve is pumping out through its monetary policy program, there’s no doubt in my mind that it will have negative implications over the next decade for bondholders.
The second is that market complacency is very dangerous. People seem extremely confident that stocks will keep going up and precious metals, like gold, will keep going down in price. While stocks might continue to benefit from the monetary policy program initiated by the Federal Reserve, I believe precious metals like gold and silver are looking more attractive.
Can anyone truly predict what will happen over the next decade? No one has a crystal ball, but when I see the Federal Reserve still pumping out money through an aggressive monetary policy that’s just not working, this worries me.
I would certainly feel far more comfortable over the next decade to have some gold and silver as a hedge against any side effects that could come as a result of this unprecedented level of monetary policy by the Federal Reserve.
If the Federal Reserve can’t predict what will happen next year, can you really trust that they’re able to keep printing money and not negatively impact your wealth?
This is why having some insurance in the form of precious metals can help, since it wouldn’t be the first time that monetary policy has caused more problems than benefits.
How to Insure Your Portfolio as Fed Second Guesses Its Monetary Policy,