The Blueprint


Putting Economic Intervention Into Perspective

Jul 2020

Understanding The Tools Of Economic Intervention

When you turn on the news you might hear the terms “Monetary Policy” and “Fiscal Policy” in regards to recent economic stimulus. Monetary Policy typically refers to actions taken by the Federal Reserve bank (in this case purchasing financial assets and printing money), while Fiscal Policy refers to actions taken by the U.S. government around its budget and spending (in this case stimulus checks). Together these policies make up the two levers that governments are using to aid economies during the recent economic crisis.

Getting economic intervention right is not simple, doing too much or too little can be equally damaging to the economy — making an appropriate and measured response critical. Given the large economic impact of COVID-19, both policy levers have been used to an extreme; significantly increasing the already large US budget deficit as well as the Federal Reserve’s balance sheet.

Currently, the US Dollar is the reserve currency of the world and our ability to simply print more money and buy assets seems like a win-win scenario. However, when it comes to assessing the cost of these actions, can we expect a “Free Lunch”?

The State of the Deficits


Source: Ycharts 1/1/2007-6/24/2020

13 Years of Stimulus in 3 Months

COVID-19 put the US economy under extreme pressure in very short period of time. The Federal Reserve’s balance sheet has ballooned, rising from about $870 billion in mid-2007 to a more than $4.1 trillion in early 2020 (About $3 Tr in 13 years) and it now stands at $7.02 trillion. (Adding about $3 tr in the last 3 months)1

Many economists suggest the Fed did what it had to do in order to keep the capital markets functioning efficiently. These deficits seem justified when the money borrowed is expected to result in stronger GDP and/or stronger employment. Despite this consensus, there is another side that suggests the Fed’s actions have led to a market that is now dependent on the Fed’s support, and is no longer trading on fundamentals.

Can the Market Stand on Its Own?


Source: Ycharts 1/1/2020-6/24/2020

What Does This Dependence Mean for Markets?

While the Federal Reserve has purchased financial assets and printed money in previous recessions, the speed and magnitude with which it has responded to COVID-19 is clearly unprecedented. In past recessions the Fed’s actions provided support to the markets — but never have they influenced the market to this degree.

There is continued discussion about further stimulus to the tune of trillions. (To put this amount into perspective, 1 trillion seconds is equal to 31,000 years). While the government can continue to inject trillions of dollars into the system — the question is, “at what cost?”

Carefully Returning to the “Old Normal”

In order for the markets to return to a healthy state, they will eventually have to wean off of government support. Similar to how “too much” or “too little” policy can have negative effects, this reconciliation occurring “too fast” or “too slow” can also end up undermining the potential benefits of the initial policy.

What makes the decisions about “how much” and “how fast” so difficult is that the cause of this recession is not rooted in economics, but rather a pandemic. A successful response from governments all over the world is one that is proportional to both the magnitude and duration of the pandemic’s economic impact, which has been a very hard thing to forecast.

You Deserve Less Volatility

Markets do not necessarily behave rationally and are almost impossible to predict. At Blue Square rather than trying to predict the future, we aim to prepare for it, regardless of its direction. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.

Our investment strategy has a risk management focus that aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.


1) Source: Ycharts, US Total Liabilities Held by All Federal Reserve Banks, 1/1/07-6/24/20

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