The year is now 2020 and late March and we are officially shut down as a nation to fight this unknown virus. While we all sit at home in fear, the Government and Wall Street start planning their next moves on what to do with the global collapse. This collapse didn’t just effect stocks, but also bonds which a lot of foreign countries generally bet on US bonds because they are typically great investments and a safehouse to store their money. The problem with bonds is if other countries do not have substantial GDP, then they can usually not pay back their debt when these bonds mature.
Understanding how bonds work is important because it is the way that banks and central banks play with one another in order to sell the money to us the consumers and let us pay the interest for them. (Now you see how big banks and central banks make money) The Government and Wall Street start playing out on how to fix this issue so they decide to start printing money and raising our debt ceiling in order to save the US. “Let’s offer trillions in stimulus” was the verdict and we need to reopen our markets and reopen our economy. The problem goes back to what I mentioned in my previous article, where I talked about how one idea to help our infrastructure actually backfired and companies used the tax breaks to raise the value of their assets in their own company. The decision to offer money to companies to bring back employees to work with salary assistance (PPP) and to disburse money to every tax paying American on unemployment to encourage spending was now in effect and this would only add to problem that was brewing in 2019.
Certain industries were extremely limited or not open at all which would only go on to create greater demand in the future and limit supply. This included many verticals such as tourism, restaurants and specially real estate. Now Americans had money burning in their pockets and they wanted to simply spend money they never had. Now here’s where Wall Street saw their biggest opportunity to get some of that sweet stimulus money and they would see retail soar while also investing the money they made in 2019 to accelerate the rise of stocks at an even faster rate than before. As industries begin to open up, the supply is still extremely limited but many people were now willing to overpay as they saw prices begin to inflate on everything because companies simply could ask and people were willing to pay.
To add to this giant rise of wealth in Wall Street and to the banks giving out loans, the FED slashed rates to almost 0% which would encourage banks to borrow as much as they could to make profit from the time lost during the lockdown. At this point, mortgage rates were being offered at the lowest rates ever and more and more people wanted to take advantage of these great rates but many people were left not qualifying because of their sudden loss of income. The banks would then take all their new fresh loans and package them as MBS (mortgage backed securities) knowing that the FED (who was encouraging spending) would buy them all no problem. Every FED meeting from 2021 until today has resulted in rising rates to control inflation but the rate of inflation was out pacing the rate that the FED was raising their rates.
I know this all sounds confusing, but I wanted to take you all back to how we got here in the first place so that you can see how money works. Basically, this demand for everything in the US was artificially created and the spending that occurred was stimulated by our leaders to keep our USD valuable and most importantly still the currency used for the IMF (International Monetary Fund). I know that it is all very confusing and our leaders want it to be but it’s very easy to see where we were heading when you know how to follow the money. There was nothing to slow down the rise of costs of goods and our infrastructure had virtually no improvements made so we didn’t do anything as a nation to actually help with our GDP for when the world would reopen. Matter of fact, we did the opposite and outsourced a lot of our production to China in order to increase profit margins. Now let’s recall another problem prior to the new administration. Tariffs…
Now, China is upset and they will attack us by simply tying up supplies to the US and now our products that we buy (mostly retail sector) are sitting on ships in ports we have no control over. At this point, companies were scrambling to find manufacturers and most importantly supplies that they have always depended on in order to get their products out to consumers. This of course would result in less supply and thus creating more demand yet again. Now as China’s biggest client (the US) has become less profitable, their GDP has also started to take a hit. A BIG HIT. Now here’s were our future issues will come into play. China WILL default on their US bonds and will miss their payments because they do not have anymore USD to pay.
I will wrap this up and the part of this series will tie how this will effect the real estate market both here in Las Vegas and in markets throughout the nation…