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promises – The Reformed Broker


We’re starting the new year with a new stimulus to support people in the middle or lower range of the income scale. People who earn only what they can produce with their labor each day. People who don’t have seven-figure retirement account balances or YOLO trades on in the cloud software stocks.

It’s not only morally the right thing to do, it’s also – economically speaking – the intelligent thing to do. You want a three year recovery or a ten year recovery?

This is money that gets used immediately, almost entirely in our own economy. The recipients of direct deposit stimulus or increased unemployment benefits are not speculating on luxury apartments in Mayfair with a broker at KnightFrank. They’re not buying Treasury bond ETFs. They’re spending. And that spending becomes the income of others who then, in turn, spend it themselves.

And this is good. Velocity of money is what had largely been absent from the first half of the last economic recovery as stimulus trillions were essentially put into a parking lot on the balance sheets of banks. This summer was stimulus turbo-charged. And if a program is both direly needed and proven to be successful, we ought to do it again.

But it’s being backed by a promise. Many promises. It’s money that is someday owed back. Even if it is currently the Federal Reserve’s purchases making the creation of all this new money to spend possible. At the current interest rate regime, we can do this. Where will rates be tomorrow? How about in three years or in ten? Unknowable.

But we continue to make promises as if we’re not particularly worried about it. Maybe we’re right not to worry or maybe we’re just kidding ourselves once again.

Here’s my friend Allison Schrager, one of the foremost authorities on risk that I know, thinking about this out loud in her latest letter:

apparently the economist profession as a whole (or the credible economists, anyway) have decided that interest rates won’t ever go up, and neither will inflation…

This may be a reasonable view for the next year, or even the next 10 years. But the obligations that we’re making will take decades to pay off, and are these people willing to put money on what the economy will look like 30 or 50 years from now? If so, I have a 50-year swap to sell them…

If there was not so much at stake, it would be almost funny that, yet again, so many people think they’ve found new, clever reason why taking on tons and tons of leverage isn’t so risky after all.

Things work until they don’t. Markets aren’t what they used to be, but they can always change again. And if there’s one universal truth, it’s that once you count out a risk, it manages to reappear. Leverage is always extra risky.

Debts are promises. We’re making a lot of promises – implicit and explicit – these days. Some of these are promises we should make – have to make – but they won’t all be easily discharged when the bills come due.

Allison will be joining me on The Compound Show podcast this month to talk about risk, survival and thinking about probabilities in our own lives. Subscribe here so you don’t miss it.

In the meantime, you can subscribe to Allison’s letter here and read her recent piece on debt and deficits at City Journal here.



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