By George Daugharty

 

In an attempt to reduce the spread of the coronavirus and alleviate an overwhelmed healthcare system, government-enforced shutdowns have crippled the global economy. No one can say that we had little warning. This pandemic has fallen upon us like a west Texas thunderstorm. From our back-porch rocking chairs, the United States has had many weeks to decipher the amassing storm clouds. Despite the signs, we’ve been caught with our pants down. The U.S. is not financially prepared.

 

The Government Stimulus

On March 27, President Trump signed into law the largest stimulus bill in U.S. history. We are likely The coronavirus stimulus bill has dramatically increased the Fed's balance sheet.nowhere near the peak of the outbreak, but fiscal and monetary policy makers are on DEFCON 1, pulling all the levers they can to minimize this crisis. Monetarily, the stimulus has been almost unprecedented. To what extent can fiscal and monetary stimulus save us, though? This question is far from being answered.

In response to this crisis, the Fed has stepped in to do the only thing it knows how: re-inflate the economy. Fed balance sheet expansions usually mean the purchase of Treasury notes, but today, mortgage-backed securities and even the bonds of specific U.S. corporations have been bought up as well. This money is printed out of thin air. By definition, Fed purchases increase the money supply. Inflation will be of increasing concern moving forward from here.

Congress’s actions are equally reckless. The image above visualizes the enormity of bill. The Coronavirus Aid, Relief and Economic Security Act of 2020 is nothing to cheer. Conservatives (the economically educated) truly understand that this bill will not be good for America. The headlines will cheer the large checks for Main Street and cheap credit for small business, but there will be scandalous aspects inevitably be hidden in the bill, too.

 

Corporatism Within

One does have to ask, if the idea is simply to put money in the pockets of Americans, why not just direct all the money to them? A two trillion-dollar bill would provide roughly $6,100 for every American. This is far more than the current $1,200 they are expecting to receive.

The reason is simple: it’s not in the interest of lawmakers. In fact, the majority of spending will not even Where will the money from the coronavirus stimulus bill go?be paychecks for citizens. The largest portion will be a $500+ billion slush fund for select corporations. Which corporations might you ask? That is yet to be determined. Some potential beneficiaries will likely be American airlines, aircraft manufacturers and maybe even cruise line companies. Details are still forthcoming.

The $500 billion corporate bailout fund is actually a misleading idea. The Treasury will deposit these funds at the Fed, which will, in turn, use the money to backstop more bailouts via newly created Specialty Purpose Vehicles. $500 billion in stimulus parked at the Fed as reserves could turn into $5 trillion presto thanks to the magic of fiduciary media issuance.

Much of this 883-page stimulus bill is smacked with loopholes and self-dealings for the political elite. Under the “small business loans” portion of the bill, independent hotels with over 500 employees will be able to receive loans of up to 2.5 times monthly payrolls. If the hotels do not layoff their employees through the crisis, they will be forgiven the debt. Interestingly, major chains such as Marriott and Hilton do not qualify as “independent,” but the empire of Trump-owned real estate does. Other instances of special non-pandemic related funding include $25 million for the Washington, D.C. Kennedy Center and a six-month extension of a $24 million dollar sex education program.

The bill also significantly changes the national and global monetary regime. Reserve requirements for rural banks have been cut and an exemption to the “Government in the Sunshine” law has been passed, meaning that, until further notice, operations by America’s central bank will be conducted in secrecy. Furthermore, the bill bolsters the International Monetary Fund’s New Arrangements to Borrow, thus aiding the IMF’s potential future attempts to bailout foreign nations.

 

The Funding Problem

Even with ignoring all the pesky details of the legislation, a major problem remains. Funding this stimulus will not be as easy as in the past.

To date, governments have only discovered four ways to pay for their operations. They can tax, sell The cornavirus bill has dramatically increased the U.S. national debt.bonds, inflate the money supply or take resources at gunpoint. As seen in the Fed’s balance sheet, option three is already being utilized. Option one and four are both unpopular and very transparent. So, the Treasury Department will have to issue new bonds. This will only suppress bond prices and raise rates, a serious problem when interest on the debt already accounts for 10.1% of the Federal budget.

And with interest rates already suppressed to zero, the only movement here can be upward. With the federal debt going to a record 100+% of GDP, the list of options is narrowing. The only foreseeable saving grace for U.S. policymakers and U.S. markets alike is the relative safe heaven status of the U.S. dollar. So long as foreign governments are more leveraged, more broke, and less militarily powerful, the dollar will remain a place of refuge.

The decade when this is no longer the case, Americans will pay dearly.

 

 

George Daugharty is a senior economics and finance major from New Market, Virginia. He is excited about his work with the Institute, expanding the frontiers of liberty for a better society.
George’s interests lie in foreign languages, entrepreneurship, economics, investments and the Church. He was a recipient of the U.S. State Department’s National Security Language Initiative scholarship to study Russian in the city of Kirov, Russia. After two years at the College, he left Grove City College to become an English teacher in the Basque Country of Northern Spain, returning to Grove City in the fall of 2018. George has started two businesses while a student at the College, a successful lawn care company and an online subscription service, Roommate Capital Research, which was co-founded with another student colleague. George interned with Jeff Harris and Associates, an investment advisory firm in Virginia, and currently helps manage the Grove City Crimson Collegiate Investor’s portfolio as the head of the Financial Institutions Group. A weekly columnist in the Collegian and a published author on Seeking Alpha, he enjoys researching and writing on macroeconomic events, especially those related to central banking, geopolitics and fiscal policy. George is an active member of Grace Anglican Church and enjoys singing hymns and reading in his free time.