Welcome to our Friday mailbag edition!
Every week, we receive great questions from readers. And every Friday, I answer as many as I can.
Today, I want to address two topics on the minds of many readers – the rising cost of living, and our shaky banking system.
The first is in response to my recent mailbag essay, “What Is the Fed’s Endgame?”…
Your accurate explanation makes the whole government portion of the economy appear to be smoke and mirrors. I find that disturbing.
In addition, doesn’t the federal government in fact want inflation, considering the fact that it’s always in the borrower’s “interest” to pay off future debt with inflated dollars?
– Ken H.
Hi Ken, thanks so much for your question and kind words. It’s certainly true that our government is running our country while steeped in record debt.
It’s also true that if the government keeps issuing new debt to pay for old debt, it would make sense to pay for it with inflated dollars. Those dollars would stretch further, all things equal. But I’ll get to why they’re not doing this shortly.
First, I’ll say that the federal government doesn’t generally want price inflation. The biggest reason is public opinion. Voters tend to not like it when the costs of their basic necessities from rent to gas to food rise.
The latest polls show Americans say inflation or cost of living is the single most critical financial problem they face. This has been the case for three years. Plus, the percentage of citizens that feel this is at a new high.
This year, that percentage is 41%. That is up slightly from 35% last year and 32% in 2022.
We are in an election year, so the government is even more sensitive to these concerns. This is true of the Biden administration as the incumbent one, and it would be true of any other sitting administration.
But, just as the Federal Reserve can’t control supply side inflation, neither can the government.
Inflation is a complex phenomenon. Various factors can impact price inflation. Those factors include supply and demand dynamics, monetary policy, economic conditions, geopolitical tensions, weather, and banking crises.
Now, back to paying off future debt with inflated dollars.
It isn’t a desired outcome for the federal government, and here is the main reason why. The government has to make debt payments on that debt in the interim. And the higher the amount of outstanding debt, the higher those payments.
Today, national debt stands near $35 trillion. That figure is up nearly 35% since the pandemic.
Plus, the cost of paying interest on that debt has hit record highs. That’s due to the Fed’s tightening interest rate policy, which began in March 2022.
The current expenditures on our national debt surpassed $1 trillion for the first quarter of 2024.
That means the first $1 trillion each year from the federal budget goes to debt payments rather than activities that could benefit economic growth, infrastructure development, upgrading power grids, or anything else.
Plus, inflation can lead to economic instability, lower purchasing power, and increased costs for businesses and individuals. So the government wants to keep inflation in check.
But since it isn’t keeping it in check, everyone must take steps to protect their wealth. The best thing anyone can do is invest in assets that preserve their value in the face of inflation. Two such assets are gold and Bitcoin.
For my latest take on Bitcoin, see the June 10 Inside Wall Street. And for my favorite ways to buy gold, see my April 6, 2023 essay.
Nomi, I am a subscriber to your newsletter. I understood you have been emphasizing the importance of not having all our cash in one bank account.
How about the stock brokerage accounts? Should we also have multiple brokerage accounts to mitigate the risk in case of banking sector instability? Or are brokerage firms different from banks?
– Brian L.
Hi Brian, thanks for being a loyal subscriber! That’s a great question.
You’re right, I believe in dividing up your cash and banking services across multiple banks.
The same is true of brokerage accounts. The biggest reason is similar.
Having multiple brokerage accounts can help mitigate risks associated with banking sector instability, even if they are not tied to a specific bank.
They can also hedge each other in case one of them runs into trouble, in the same way that spreading your deposits across different banks can.
Here are other potential benefits…
1) Diversification of Products
By maintaining multiple accounts with different brokerage firms, you can spread your investments across different asset classes and market segments.
This reduces the overall impact of any negative events affecting a specific brokerage firm or asset class.
Some brokerages or financial platforms can give you access to certain investments that others can’t.
For instance, I’ll use E*TRADE and Interactive Brokers (or IBKR) as the static examples here.
IBKR allows you to purchase stock in other countries that don’t trade on U.S. stock exchanges. And it allows you to take advantage of foreign exchange trades in the process.
E*TRADE doesn’t do either of these things.
2) Access to Different Trading Platforms
Different brokerage firms or applications can offer different trading platforms and services. Having multiple accounts gives you wider access to a range of tools and features.
That can give you more flexibility in your trading experience, which can be useful for making different investment decisions.
Though not a brokerage, take Block’s Cash App. It allows you to buy fractional shares (or stock slices) and fractions of Bitcoin directly on your smartphone.
E*TRADE doesn’t.
3) Lower Fees and Commissions
Different banks can charge different fees or even provide different amounts of interest for money you hold with them.
It’s similar with brokerage firms. They can charge different fees or commissions based on the type of investment or account.
It’s useful to compare the costs and benefits of different brokerage accounts.
Lower transaction fees can beef up your long-term investing portfolio over time. So can higher interest for money you keep on deposit in your brokerage account.
I can’t give personal advice, but what I can tell all my readers is this. I personally have an E*TRADE account, an IBKR account, and a Cash App account.
So I do put these benefits of diversifying your brokerage accounts into practice. And to all my readers, I suggest you consider diversifying as well.
I can’t recommend specific platforms. – everyone has different needs. So do your research to find the brokers that best suits yours.
I hope that helps. And thanks to everyone who wrote in! If you have any other questions, write me at [email protected].
I’ll do my best to address them in a future Friday mailbag edition. Just remember, I can’t give personal investment advice.
In the meantime, happy investing… and have a fantastic weekend!
Regards,
 |
Nomi Prins
Editor, Inside Wall Street with Nomi Prins