EDITOR NOTE: This article provides a play-by-play look at the state of the US economy in the months leading up to the COVID-19 pandemic to the aftermath of its spread, and the monetary and fiscal actions that followed. No doubt, stimulus response is a “time bomb,” as the article clearly lays out. Eventually, the very people the stimulus aims to help are going to be the ones paying the costs. And the more the debt accumulates, the larger its claim on Americans’ future earnings. Stimulus may provide immediate assistance. But it does so at the cost of choking Americans’ future prospects for growth and wealth creation.
Since the outbreak of the coronavirus, the United States has experienced one of the most unprecedented economic interventions in all of its history. Since March and April both the Federal Reserve and the US federal government have injected trillions into the economy in hopes of stabilizing it and reducing unemployment. At the expense of the public, both institutions have handicapped themselves for the future, and it will be extremely difficult to ever return to a “normalized” policy situation without triggering a larger economic crisis.
On February 11, 2020, Federal Reserve chairman Jerome Powell delivered a semiannual report wherein he laid out the present risks that both the Fed and the federal government face. Some of the risks addressed were low interest rates spurred by the Fed and burdensome debt from the federal government that would limit the ability of both institutions to provide the necessary stability when an economy goes into a downturn. By the next day, the Dow Jones had reached an all-time high of 29,551.42. The rise in equity prices sparked confidence in the market and, for the most part, overlooked the risks that the coronavirus had in store for both the nation and the world.
By March, as concerns over the covid-19 virus spread, many investors began to question the sustainability of profits for businesses as mass lockdowns became a policy implemented throughout the world. On March 11, the World Health Organization (WHO) declared the coronavirus a pandemic, as the world had over 118,000 cases, and on that same day, the United States entered into a bear market as the Dow fell 20 percent from its peak.
Immediately following, the Federal Reserve on March 13 began to inject $1.5 trillion in liquidity through repurchase operations (short-term loans) through incremental portions of $500 billion over the next three months. In addition, the Fed two days later cut the federal funds rate an entire percent, to 0–0.25 percent, and injected an additional $700 billion in liquidity into the markets. The intervention by the Fed was not well accepted, as the Dow Jones declined another 12.3 percent, reaching what Wall Street viewed as a low of 18,591.93 on March 23.
While panic brewed in the markets, state governments across the United States began to impose stay-at-home orders during the month of March that would last up until the end of May in most areas. The stay-at-home orders ordered any “nonessential” business to be closed, whether it was movie theaters, gyms, or sporting events. In response, Congress formulated a stimulus plan known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) that would provide $2.2 trillion of liquidity to businesses in the forms of loans and grants and checks of up to $1,200 to individuals depending on their income. After days of debate, it was passed by Congress and finally signed by President Trump on March 27. The stay-at-home orders, which closed or partially closed many businesses, were in effect, resulted in the unemployment rate rising to 4.4 percent, with 701,000 jobs lost by the end of March.
More stimulus followed in April as the Fed decided to embark on providing an additional $2.3 trillion in liquidity that would provide funding for different-sized corporations and target asset prices to keep them from falling. Within the CARES Act, the Paycheck Protection Program (PPP), which was used to distribute low-cost loans to businesses, immediately ran out of money. As a result, Congress, with the approval of President Trump, created a new stimulus package on April 24 to provide an additional $484 billion in funding to small businesses. Unemployment surged in April to an alarming 14.7 percent, with over 23.1 million Americans losing their jobs.
The fever for cheap money did not stop. The US Treasury announced on May 4 that they would borrow a record $2.99 trillion from April to June, when at the time the federal debt stood at an astronomical $24.974 trillion. Furthermore, on May 12, US representative for New York Nita Lowley proposed the HEROES Act (Health and Economic Recovery Omnibus Emergency Solutions Act), an additional $3 trillion stimulus package which would provide additional relief to both households and businesses. Although there was controversy, the bill managed to pass the House on May 15 by a vote of 208 to 199. As the number of coronavirus cases throughout the world began to slowly decrease, the unemployment numbers continued to skyrocket, with unemployment claims rising to a high of 42.879 million by the end of May.
Figure 1.1: Federal Reserve Total Assets, January 1 to September 30, 2020
As we near the next election, there have been over 3.8 million jobs permanently lost following the lockdowns in the United States.
Since the start of 2020, the Federal Reserve has pursued an aggressive expansion of monetary policy amid the coronavirus, injecting trillions into the economy. As seen in figure 1.1, at the start of the year, the Federal Reserve’s balance sheet rose astronomically, by 69.95 percent from $4.17 trillion to $7.09 trillion by September 30. While the Fed’s balance sheet increased, the M1 money supply followed suit, which includes physical paper money, checking accounts, demand deposits, and other highly liquid assets, rising 41.31 percent from $3.95 trillion at the beginning of 2020 to $5.58 trillion by October 1.1 When the covid-19 panic began, the Fed had $4.12 trillion in liabilities and only $39 billion in capital at hand. As of October 1, the situation has worsened, with Fed now having $7.02 trillion in liabilities and $39.2 billion in capital.2
With interest rates being artificially manipulated by the Federal Reserve and kept at historically low levels of 0–0.25 percent, the federal government can get away with borrowing more money than ever before. This has enabled to the Treasury to increase its debt by 16.5 percent from $23.17 trillion at the beginning of the year to $27 trillion by October 1. It is important to note that last year the federal government paid $574.59 billion in interest on $23.201 trillion in debt, which is an average interest rate of 2.48 percent on the debt. With last year’s picture in mind, the question that we must ask ourselves is how much more expensive our debt will become by the end of this year, as the Treasury has already paid out $484 billion in interest as it nears the final quarter. In addition, how much more expensive will the debt become when the Fed determines it appropriate to allow interest rates to rise again? Can the Fed afford to ever let this happen?
Even though the equity market looks as though it has corrected itself, the Fed is in a precarious position that calls into question its ability to mitigate another disaster if one presents itself before it can wind down on its balance sheet. The Fed’s situation would not be as concerning if the federal government itself were more fiscally run, which would give it more room to provide liquidity. However, with complete abandonment of fiscal responsibility by our policymakers, running deficits since 2001 and working to pass another stimulus package of $2.2 trillion on top of that should leave the American public asking how much longer fanatically driven stimulus of phony money will go on.
The answer may be longer than usual, as Federal Reserve chairman Jerome Powell after the September Federal Open Market Committee meeting stated that they intend on keeping rates low for several years and at least until 2023 to keep the economy afloat. It is no surprise that the Treasury danced to the same song as the Fed, with Secretary of the Treasury Steven Mnuchin stressing that he is prepared to request additional fiscal stimulus from Congress to help spur the economy as he deems fit.
As politicians and economists in Washington deem what is appropriate for the American people, it will be the very individual for whom these policies were intended who will have to eventually pay for these policies, whether through inflation or taxation. Unfortunately for the American citizen, when the plans of Washington are successful, it is the politicians and their special interests who reap the rewards. At the same time, any mistakes incurred are deferred upon the citizen. The reader must ask themselves again, How much longer will this go on? Unfortunately, the policies of intervening within the market may go on for much longer than we hope, for the addiction to cheap money only increases the appetite of a hungry government. As the prominent Austrian economist, Henry Hazlitt said,
The only way government bureaucrats know of keeping prosperity going is to inflate some more—to increase the deficit or to pump more money into the system.
Originally posted on Mises Institute