Universal Basic Income, Student Loan Forgiveness, and Crypto Madness – Too Good to Be True?

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When I look at economics these days, I see an environment in which everything seems too good to be true. The delta strain of COVID continues to spread like wildfire, but vaccinations have begun to gain traction in many states, which is certainly a positive sign. Interest rates remain at their lowest, some say they are the lowest in 4,000 years. This is likely not to change anytime soon, as the Federal Reserve recently announced that it will continue to adhere to a zero to 0.25% range for its base interest rate. With money so cheap, even volatile companies that usually had to move to Chapter 11 can borrow, resulting in a sharp drop in defaults. In fact, there were no defaults on high yield bonds or loans in July 2021 – a phenomenon that has occurred just seven times in 163 months since the beginning of 2008.

In an effort to prevent a string of student loan defaults, the debt relief offered to 43 million federal student loan borrowers has been extended for another four months, until January 31, 2022. The Department of Education, which is in charge of the suspension of interest payments, levies on outstanding loans and negative credit reporting, says it will be the last renewal, but only time will tell.

Another program designed to make things seem better than they really are is the Universal Basic Income (UBI) pilot in California, where 800 Compton residents get paid up to $ 600 a month and 125 randomly selected Stockton residents get 500 dollars a month for two years. Similar programs are under development in several other cities, including Los Angeles, Oakland, San Francisco and San Diego.

Some also view the Biden administration’s new child tax credit, which promises to pay up to $ 3,600 to families with children, as a major step towards UBI at the federal level. Qualifying for this UBI form is not difficult; married couples who apply together can earn up to $ 440,000 a year and still be eligible for a portion of the loan. Half of the amount will be paid in monthly checks until the end of the year, and the rest will be paid in a lump sum upon filing the 2021 tax return. The IRS has already begun mailing checks to taxpayers that meet income requirements as an advance against next year’s tax payments, essentially providing “advance payments” for federal income tax.

While critics complain that upfront tax refunds are not good fiscal policy, it is not really “money in vain”. On the other hand, nongovernmental actors seem to be trying to create value out of nothing with various cryptocurrencies. Report recently released by Goldman Sachs
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pointed out that globally, 50% of medium and large family offices were interested in adding cryptocurrency to their assets. Despite significant price fluctuations (from $ 30,000 to $ 63,000 and then back to $ 30,000 per month), Bitcoin appears to be the cryptocurrency of choice for seasoned investors.

And while there is a lot of talk about the crypto space, in fact it is still in its early stages of development. One of the most important indicators that cryptocurrency is still far from maturity as an asset class is the huge number of cryptocurrencies. At this stage, Bitcoin is far from the only game in the city. The crypto-space tracking website (tokensniffer.com) estimates that there are currently around 70,000 cryptocurrencies in existence, with around 100 new ones emerging every day with names such as moonCakeApes, Pump100x, and SpaceGoat. Idiot Coin, launched in early July, produced 7 million out of 21 million tokens with a total capitalization of around $ 30. The offer warned people against buying: “Idiot Coin has nothing to recommend. There is nothing you can do with a coin other than hope that it will rise in value. That will not happen”. But the creator, the reporter New York Times The business section still managed to sell 73 coins for a small fraction of one cent. Cynics might say that this is proof of the most famous quote from P.T. Barnuma: “Every minute a goof is born,” but I think the over-interest in cryptocurrency is a reaction to the fear of inflation as investors are desperate to find a place to store value.

While at first glance it seems like the happy days are here again, there are a number of signs that conditions may change in a hurry. Investors are starting to shift to more specialized asset classes such as leveraged loans, looking for an alternative to low fixed income returns, and something to hedge against volatility in the stock markets. Moody’s Investors Service recently warned that as junk-rated companies take advantage of lower rates to negotiate better terms and extend maturities such as leverage limits, revocation protections are weakening. This is similar to what is happening in the bond market, where investors are increasingly willing to sacrifice safety in favor of profitability.

As tensions rise and national rivalries escalate, there is great potential for a global geopolitical event that could affect markets, such as the current turmoil in Afghanistan. Then there is the question of inflation, as the prices of food and other basic necessities rise in response to demand for higher wages, which could ultimately negatively impact our economic recovery. Or perhaps the Fed will give up and raise interest rates or start cutting back on its monthly purchases (remember when they last tried this?). Any of these, along with the ongoing COVID threat, could be a catalyst that will send the economic scene into decline.

It has been said many times, “If something seems too good to be true, then it probably is.” These are words that you need to live by at any time, but especially when it seems that the market is priced at the ideal price. There is a lot of uncertainty right now, so, as always, investors should do their homework, exercise caution and pay attention to fundamentals.

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