The Federal Reserve–the central bank of the United States–uses several tools to “push” monetary policy in the direction the Federal Open Market Committee (FOMC) members deem fit. One of the many gadgets in the Feds toolkit is their ability to pay interest on reserve balances that commercial banks hold at the Fed (IORB). The Fed first gained the authority to pay IORB in 2008 amidst the ongoing global financial crisis, primarily as a way to influence the lower bound of the federal funds rate or FFR–the target interest rate set by the Fed for overnight lending between banks.
IORB establishes this lower bound because banks have no incentive to lend money at a rate below the interest they can earn risk-free by simply parking cash reserves at the Fed. As a result, the IORB rate effectively acts as a floor for the federal funds rate, thus allowing the Fed to steer monetary policy in the direction of their choosing.
Today, many critics highlight a significant downside to the IORB framework: opponents say it discourages banks from lending to the private sector, where loans could stimulate productive economic activity. The permittance of paying IORB incentivizes banks to maintain high depository accounts at the Fed rather than engaging in traditional lending to the private sector. In 2008, this dynamic greatly slowed economic growth as parking funds at the Fed produced zero economic activity; it didn't help spur any economic growth as the capital wasn't being put to use in the real economy.
As of early 2024, commercial banks held over three trillion dollars worth of reserves at the Fed. Critics point out that this capital could be put to more productive use in the real economy as individuals, businesses, and organizations must have greater access to financial capital if democratic capitalism is to survive. Given this concern, many believe that the United States monetary and Financial system could be due for major reforms if its intent really is to efficiently and effectively distribute capital and protect individuals.
Equity Insights
↓Bitcoin: Yes I am aware bitcoin is not a publicly traded company, but it's a proxy for risk in the tech/AI sector of the stock market so I’ve included it here. Currently sitting just above $89,000 as of Sunday December 7th, bitcoin has suffered immensely over the past month. Down double digit percentage wise–revealing investors are less prone to taking on more risky tech related stocks as shares of stocks in this arena such as Oracle, Palantir, and Nvidia are all down 10 plus percent in the prior 30 days as well. Although with all that said, bitcoin will (in my opinion) eventually hit new highs as it sets out to be the future of currency movements and digital payment systems.
↑American Eagle (AEO): Fresh off the back of a productive year of lucrative marketing campaigns featuring Sydney Sweeney and Travis Kelce, American Eagle is up 130% in the past six months. Shares gained 15% premarket on Wednesday December 3rd off the back of a positive third quarter earnings call.
Theme of the Week
I recently read an online article titled Heresy by Paul Graham that touched on the resurgence of “cancel culture” in the workplace and the decline that freedom of expression has experienced over the past two decades. Heresy is defined as a belief or teaching that contradicts the doctrines (established beliefs or views) of a certain religion–usually orthodox christianity. In the article Graham mainly zooms in on secular heresy; any belief that goes against a groups or authorities established views (not relating to religion). Through concise yet thought-out writing, Graham displays that the window of opinions you can express has narrowed over the past 20 or so years due to a heightened level of intolerance stemming from the left–he makes it clear that intolerance and orthodox viewpoints can arise from either the left or right, although he says the current wave of intolerance arises from the left.
Graham covers so-called “heretic-hunters”--people seeking out and denouncing those that they believe promote false doctrines or heresy. These un-needed vigilantes only serve to ban the truth on their modern day witch hunts. Just because someone calls a statement “x-ist”, for whatever value of x, that does not automatically negate its truth value. Although, speech vigilantes seeking to promote their “correct” viewpoints don't care whether the statement is true or not, they seek only to end the conversation through the usage of destructive “x-ist” labeling.
Don't throw babies out with the bathwater, just because someone labels a statement as “x-ist”, that does not automatically negate its truth value. To add to that, just because a divisive, disliked, and ideologically provocative personality says something you loathe, that loathing feeling doesn't mean it’s false. “The same statement can't be true when one person says it, but “x-ist”, and thus false, when another person does” (Graham). Western society needs to disable the concept of Heresy and return to an enlightenment-esque era of intellectual prosperity and forward thinking ideas. Graham urges independent minds to push back against the current intolerance wave and fight for their freedom to express.
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References
Graham, Paul. Heresy, Apr. 2022, paulgraham.com/heresy.html.