The Investment Scientist

Does Fed Know What They Are Doing?

Posted on: January 28, 2021

In July of 2007, I attended a special send-off party for then Fed vice-chair Larry Meyer. As part of the program, we all listened to him spill his thoughts about the economy at the time. You can read my note titled “Larry Meyer: Diminishing Risks …” here.

He essentially saw the risk of a recession diminishing. When asked when he thought the next recession would be, his answer was “not within in the next two years.”

Shortly after his talk, the subprime mortgage company, Countrywide Financial, collapsed. Seven months later, Bear Stearns collapsed, followed in a few months by Lehman Brothers. By the end of 2008, we were already in the depths of the worst recession since the Great Depression. Larry Meyer surely did not see that coming!

Reading that old note makes me wonder if the Fed knows what they are doing. In fact, quantitative easing, a euphemism for money printing, was first deployed in the 2008 financial crisis. At the time, only about $1 trillion was “printed” and even that amount caused quite a bit of angst. The main worry of hyperinflation did not come to pass. 

Fast forward to 2020 when $3 trillion was printed in that single year. We will likely see an additional $2 trillion printed in 2021. We can only hope the Fed knows what they are doing. As for me, I am closely watching the dollar’s reserve status. Any significant drop in that status would be a precursor to hyperinflation and the end of easy money.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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