The Federal Reserve serves as the great enabler. As I put it in a recent article, it is the engine that drives the most powerful government in the history of the world. The Fed’s ability to print money out of thin air backstops borrowing spending and removes any meaningful limits on the US government’s actions. It also creates the illusion that there are no consequences to the government’s actions.
We’re seeing that in spades in the central bank and federal government’s response to the coronavirus pandemic. The government is borrowing trillions of dollars and the Fed is monetizing that debt. On top of that, the central bank is propping up the stock market through its easy-money policy and corporate bond-buying programs.
Money is power and the Federal Reserve serves as an unlimited spigot pumping dollars into the system, enabling the biggest government in the history of the world to keep running.
As economist Mark Thornton put it in a Q&A published at the Mises Wire, we now have a generation in power that has no concept of monetary restraint. As a result, there is no need for government restraint. Thornton called it a collective “kick the can down the road” mindset.
It is truly remarkable. In the past, we had the gold standard restraint on fiscal and monetary policy (until 1971). That restraint had a lingering effect for a long time. However, the current group of voters and politicians no longer recognize that restraint or the consequences of ignoring a balanced budget restraint. The average American has no memory of the gold standard or even the stagflation of the 1970s. The current generation does not even recognize the idea of a government budget! The collective mindset is the classic ‘kick the can down the road.’ Obviously, the idea of a national debt limit is now rightly regarded as a joke.”
The federal budget deficit in June was nearly as big as the entire 2019 deficit and bigger than the budget shortfall in 2018. But people have been warning about budget deficits and the national debt for years. Most people don’t even care anymore. Thornton says we should.
Spending is out of control and tax revenues will probably miss the initial estimates. The millions of unemployed will likely have a hard time making tax payments. Expenditures for things like unemployment insurance and welfare payments will likely remain high. I think I am most concerned about interest paid on the national debt, as an uptick in rates could cause such payments and the deficit to balloon.
“Why should we care? The simple reason is that all this spending eats up real resources. The government buys something and the resources are not available for productive use. GNP (gross national product) goes up, but what are the real benefits? The government writes welfare payments or unemployment insurance checks and potential workers stay unemployed. It also raises future taxes. Good economic policy is about increasing private production and free trade. Bad economic policy is about living beyond your means and protectionism.”
We have been saying that the economy was already in bad shape before the coronavirus pandemic. The economy was a great, big, fat, ugly bubble that was doomed to pop. COVID-19 simply sped up this process. Thornton agrees with this assessment.
The rising unemployment and missed mortgage and rental payments will be linked to the government-mandated shutdowns, but the overall economy was already weak beforehand despite record stock markets and record low unemployment in late February. Savings were low and debt at all levels was very high. Job openings hit a record high in early December 2019 and were declining noticeably well before the virus and shutdowns hit. Therefore, I was expecting a weak economy in 2020 and the shutdowns brought it about sooner than anticipated and have no doubt made it worse. So, we have in effect both a business cycle depression and the economic restriction of the lockdown at the same time. I would not have been surprised if we had reached 10 percent unemployment, but obviously it would not have occurred so quickly without the shutdowns.”
Peter Schiff has been saying that the Federal Reserve’s money-printing will ultimately lead to a dollar crisis. But some believe the dollar’s role as the world reserve currency will save it. While the Fed’s policy is unprecedented and even outlandish, other central banks are going to even greater extremes resulting in a monetary race to the bottom. Thornton said it’s true that other central banks are trying to outdo the Fed, that doesn’t mean it’s no problem for the dollar.
Yes, while Fed policy is outlandish, other central banks are doing even worse. In particular, the Bank of Japan and the European Central Bank have been doing more so in terms of interest rates and buying assets. The Bank of Japan has increased its balance sheet 500 percent over the last decade, and they have had a near-zero interest rate policy for many, many years. The interest rate on Greek ten-year government bonds is 1 percent, for Spain it is 0.4 percent due to ECB asset purchases. Under normal circumstances who would lend to such governments for ten years for less than 1 percent interest? That says it all.
“It might seem that central bankers can paper over all our problems, but that will not be the case. Take a look at countries that have negative interest rates, negative interest rates on government bonds, and even negative prices for oil in futures markets. These are troubling facts that the world economy is fundamentally unbalanced.”
“The upside here is that this crisis holds the promise to discredit mainstream economics and fiat money.”