Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.
Here’s a recap of some of the larger Fed moves during the Crisis:
- Cutting interest rates from 5.25-0.25% (Sept ’07-today).
- The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
- Opening various lending windows to investment banks (Mar ’08).
- Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
- The Fed takes over insurance company AIG for $85 billion (Sept ’08).
- The Fed doles out $25 billion for the automakers (Sept ’08)
- The Feds kick off the $700 billion TARP program (Oct ’08)
- The Fed buys commercial paper from non-financial firms (Oct ’08)
- The Fed offers $540 billion to backstop money market funds (Oct ’08)
- The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
- $40 billion more to AIG (Nov ’08)
- The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
- Obama’s $787 Billion Stimulus (Jan ’09)
- QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
- QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
- QE 2 buys $600 billion in Treasuries (Nov ’10)
- Operation Twist reshuffles $400 billion of the Fed’s portfolio (Oct ’11)
- QE 3 buys $40 billion of Mortgage Backed Securities monthly (Sept ‘12)
- QE 4 buys $45 billion worth of Treasuries monthly (Dec ’12)
The Fed is not the only one. Collectively, the world’s Central Banks have pumped over $10 trillion into the financial system since 2007. This money printing has resulted in a massive expansion of Central Bank balance sheets as the below chart indicates (BoE= Bank of England, Fed= US Federal Reserve, ECB= European Central Bank, SNB= Swiss National Bank, BoJ= Bank of Japan).
This money printing has unleashed inflation in the financial system. In the emerging markets, where consumers can spend as much as 50% of their income, this has resulted in food riots and even revolutions as we saw with the Arab Spring in 2011.
This situation is far from over. Higher food prices continue to be a source of civil unrest throughout the emerging market space. Recently Saudi Arabia banned the exporting of poultry to halt prices which rose by as much as 40%:
Saudi Arabia has banned the export of chickens in an attempt to curb an online public campaign to boycott poultry consumption due to high prices.
The Saudi Ministry of Commerce and Industry decided Wednesday to halt the export of chicken until the domestic market is stabilized, Emirates 24/7 reported.
The decision followed a campaign launched by Saudis on Twitter to boycott buying and eating chicken in the country when prices for poultry rose 30-40 percent, the Financial Times reported.
In the US, a series of droughts and biofuel policies have resulted in corn prices skyrocketing. This has crushed some Latin American markets such as Guatamala:
In the tiny tortillerias of this city, people complain ceaselessly about the high price of corn. Just three years ago, one quetzal — about 15 cents — bought eight tortillas; today it buys only four. And eggs have tripled in price because chickens eat corn feed…
In a globalized world, the expansion of the biofuels industry has contributed to spikes in food prices and a shortage of land for food-based agriculture in poor corners of Asia, Africa and Latin America because the raw material is grown wherever it is cheapest.
Nowhere, perhaps, is that squeeze more obvious than in Guatemala… With its corn-based diet and proximity to the United States, Central America has long been vulnerable to economic riptides related to the United States’ corn policy. Now that the United States is using 40 percent of its crop to make biofuel, it is not surprising that tortilla prices have doubled in Guatemala, which imports nearly half of its corn.
As the cost of living increases around the globe fueled by the Central Banks money printing, wage protests and strikes have become commonplace:
South Africa - A total of 26 people were arrested overnight in connection with farmworkers' protests for higher wages, Western Cape police said on Wednesday.
At least 180 people had been arrested in connection with the protests since Wednesday last week…
Indonesia: Thousands of workers took to the city’s main thoroughfares on Wednesday to protest delays in the increased minimum wage and hikes in electricity rates.
The workers from industrial areas in Bekasi, Bogor, Depok, Jakarta and Karawang belonging to the Indonesian Metal Workers Federation (FSPMI), the All-Indonesia Workers Union (KSPSI) and the Indonesian Workers Assembly (MPBI), demanded that Governor Joko “Jokowi” Widodo instruct companies to immediately comply with the 44 percent raise of the provincial minimum wage to Rp 2.2 million (US$228) for 2013.
http://www.thejakartapost.com/news/2013/01/17/workers-protest-against-minimum-wage-delays.html [30]
China-Sanitation workers' salaries will be increased by 10 percent this year in
Guangzhou, the capital of South China's Guangdong province, following
recent protests demanding higher pay…
"The salary of sanitation workers will be increased by 10 percent this year and the government will also boost other subsidies, for example, housing allowances," Huang said…
Guangzhou has an estimated 38,840 sanitation workers, who earn an average of about 1,300 yuan ($209) a month, almost equal to the city's minimum wage.
http://www.china.org.cn/china/2013-01/22/content_27756710.htm [31]
Germany-Germany’s major public services trade union Verdi had called for a daylong strike on Friday at Hamburg Airport, impeding security operations and delaying flights as passengers struggled to get to their gates.
The union is calling for an hourly wage of 14.50 euros for its members, who currently earn 11.80 euros per hour.
Only one of 20 security checkpoints had opened, with approximately 95 percent of the passenger security-check staff walking off the job.
http://www.presstv.ir/detail/2013/01/20/284554/german-airport-workers-go-on-strike/ [32]
These wage protests and the political instability they create have dramatically changed the investment landscape. Historically, precious metals mining companies have been excellent inflation hedges. Not anymore.
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