We understand that in the business world the word ‘monetization’ of a service a company provides has become one of the most important words as, if successful, this monetization increases the valuation of that company’s stock price. That is, this word indicates the ability of a company that has been providing a service for free to be able to charge for its services successfully. Lately, we have been hearing a lot about proposals to monetize the gold at Fort Knox, or to monetize Federal Government assets, etc. But there is a problem with this word, as it is different in business parlance than in economics.
In economics, the meaning of the word monetization is very different and is, typically, a bad idea. Argentina, Brazil, Venezuela, Israel (back in the hyperinflation days), etc., knew/know very well of what monetizing the fiscal deficit did/still does, to their economies. Monetization is creating money from nothing, that is, printing money and thus debasing the currency.
The Federal Reserve has gone the extra mile with its new policies to help stabilize the U.S. economy to avoid monetizing the fiscal deficits. The U.S. still has the privilege that it can borrow money in order to finance the fiscal deficit. The countries above did not have that privilege and opted, at some point in time, to monetize fiscal deficits by printing money out of thin air.
During the Covid Pandemic the U.S. engaged on a massive transfer of income financed with debt. These transfers filled the pockets of U.S. households and businesses at a precarious time and was reflected in a surge in bank deposits, a surge in money supply and, consequently, an increase in inflation.
That is, the increase in inflation in 2021 was not the fault of the Federal Reserve (Fed)! We would say that 50% of the responsibility fell on the pandemic and the break of supply chains and 50% was due to the increase in the fiscal deficit due to the massive transfer of income from the federal government to households and firms! Of course, the Fed should have increased interest rates at the same time when fiscal policy started to become so expansive, but it was probably going to make little difference on the inflation outcome. Furthermore, that would have meant ‘political suicide’ for an institution that should not be influenced by politics but many times it is! And this was one of those times!
Difference between fiscal and monetary policy: Taking out the punch bowl!
Monetary policy’s punch bowl, that is, lowering interest rates in order to increase lending and incentivize economic growth can be taken out very fast if the economy overheats. That is, the Fed can increase interest rates very fast and take the punch bowl of increased lending, typically generating a recession. However, the fiscal policy bowl is something we have to live with, without almost any possibility for that bowl to be taken out! That is, the fiscal policy bowl was out there for everybody to see and there was nothing done to take it out. The consequence was an increase in inflation but also higher economic growth coming out of the Pandemic recession compared to other countries in the world.
If this was a monetary policy issue, the monetary authorities would have taken back that ~$5 trillion dollar in federal income transfers to households, which increased our U.S. debt by that same amount, by asking households to return the monies once the economy was back on track. But imagine if politicians had done that! It would have been suicidal for their political careers, but it was probably the right thing to do… in monetary policy terms. If that had occurred, we would probably have gone into a recession. On the other hand, the debt would not have been a serious issue as it is today!
What about a sovereign wealth fund (SWF)?
It is not that the creation of a SWF is a bad idea per se, but countries, and states in the U.S., that have instituted SWF have done it from ‘real’ resources, not by tweaking accounting rules in order to ‘create’ excess government income from those accounting tweaks. When countries or states have excess revenues, let’s say, from a discovery of natural resources, etc., they create these funds to invest and help fiscal coffers. Sometimes these funds work as countercyclical mechanisms to help stabilize fiscal accounts, etc.
Eleven states in the U.S. have created sovereign wealth funds, with Alaska and Texas being the largest ones. Many times, countries that discover and exploit new natural resources suffer from what has been called “Dutch disease,” which is an appreciation of the currency that hurts the ability of the country to remain competitive in the global economy. The creation of SWF by these countries has helped them minimize the negative consequences of these discoveries.
The creation of a SWF in the U.S. should be done with utmost seriousness and has to require real income sources! As we said before, we have even heard that the administration wants to create excess income from the revalorization (i.e., the act of reassessing and increasing the value of something) of Fort Knox gold or the U.S. government’s gold reserves, ideas that are worrisome because nobody knows what the potential impact could be on monetary policy, on fiscal policy, on interest rates, on the value of the U.S. dollar, etc.
But our biggest concern in our current environment is the possibility of creating a SWF without sourcing it with real resources and putting it in the hands of politicians. What could go wrong?
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Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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