The Economy of Indulgence
- 3 minutes
From experience, we know that it can be hard to excuse the behavior of spoiled children at any age. But these kids are often hamstrung by the choices of others (grandparents, we know you can't help yourself). Some of these children will either grow out of it or painstakingly learn a better way forward. But what about those who don't? Tantrums, much like precociousness, become hard to excuse in adult form. As is the careless, indulgent spoiling of children by key authority figures. The facts appear to show that our current economy finds itself in a very similar conundrum. And it is spoiled rotten.
We might trace it to the crisis of 2008. Emergency measures enacted then ultimately “saved the day” (albeit inelegantly). Which is what they were intended for: the ‘day.' But the Federal Reserve, while limited in its choices at the time, could not foresee that those measures would foster an environment where an irascible child could play without consequence. And by child, we mean the market. And by irascible, we mean pathologically.
Moreover, when the market throws a tantrum, surrender is inevitable.
Bear in mind that the Fed is (by design) unable to make nuanced alterations to the economy. Such finesse is (also by design) within the purview of skillful governance. But given the evolving political gridlock since ‘08, the Fed found itself playing stand-in for statesmen in a desperate attempt to pull the American economy back from the brink.
This brings us to the Fed's experimental elixir, “quantitative easing” (QE)—a novel monetary policy concocted to stimulate an economy when the federal funds rate is already hovering around 0. In QE, a central bank buys up a bunch of securities, increasing the national money supply and encouraging lending. In November 2008, the Fed began its first round of quantitative easing by spending $600 billion on mortgage-backed securities in its efforts to revive the ailing market.
Again, this was intended as a means to an end. But once the market got a taste of that refined, sugary ultra-low-cost borrowing, it wouldn't let go. As the economy stabilized, repeated efforts to ease out of QE were met with a full-on, snot-nosed tantrum. Inadvertently, a new global system had been forged, hooked fast on the high blood sugar of low interest.
Since March 2022, out of necessity, the Fed has changed course and tried to parent more assertively. But, like with young children, once empowered, it’s hard to take that power away. If there’s any hope of success, it’ll be a long and painful process for child and parent alike.
On the other hand, the economy might have less of that luxury of time. Both the Fed and the market will have to act more responsibly. We’re effectively left with these two characters until politicians work to get their minds right (cue the faint cries of Aerosmith’s Steven Tyler—“dream on, dream on” as his voice fades with a torturous squeal).
If, loosely, we can see the Fed as indulgent parent and the market as awfully spoiled, then that makes government our weird, not-so-harmless boarder in the basement, at best. But what about us? How can we work to keep our own mind right in the face of this beleaguered economic paradigm? Well, when the sticky sweet residual taffy of QE gets inside your head, reach deep into your internal apothecary for our favorite OTC psycho-insulin fix, EQ (transposition, irresistible). And right here in the FNA blog, you can find some helpful ideas on how to muster and employ this potent QE taffy buster. The Zen Investor’s Bliss rounds out an insightful three-part series by looking at EQ (Emotional Quotient) and emphasizing how it can help us better manage our investment psychology—especially when we’re at the table with the dysfunctional family that is our current economy.
Let’s raise a glass to Uncle Percy, who found a way to use EQ to keep his head on and avoid that colorful retelling of The Godfather when helping put the kids to bed. Sleep tight, children. Rest well, fellow investors. No horse heads, please.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Beacon Advisory or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.