"That's the way that the world goes 'round’
You're up one day, the next you're down...
It's half an inch of water, and you think you're gonna drown;
That's the way that the world goes 'round."
-"That's the Way That the World Goes 'Round" as performed by John Prine
As coronavirus cases surge again, most of us worry that another economic slowdown is in the offing. Getting the virus under control is commensurate with returning to full economic strength.
So does the federal government have the firepower to sustain the economy while tens of thousands of businesses cut back or close their doors again? Actually, it does.
Now let's be forthright. The national debt has gone from $22.5 trillion to over $26 trillion in about eight months. So we've increased the debt by over 15% in less than a year. Ouch. As a nation with a fiat currency system, we can always print more money, and we've recently discussed how the U.S. is likely to never pay off its debt. Borrowing is so inexpensive right now, though, that even modest inflation over time will mean that the dollars we’re repaying won’t be worth as much as they were when they were originally borrowed. That said, none of us want to witness the federal debt grow unchecked.
At any rate, the debt ship sailed long ago. The idea that we're going to balance the federal budget annually and incur no annual deficit (which adds to the cumulative debt) does not seem to be gaining any foothold in Congress.
So if we are forced to endure another slowdown, how will the federal government react? By utilizing more financial firepower at its disposal, and there's plenty of dry powder. Federal emergency credit facilities have lent $95 billion so far, only about 20% of the resources they have at their disposal. As of June 17th, the $600 billion Main Street Lending Program had yet to distribute any money. Equally as important, the Federal Reserve continues its pace of net QE asset purchases at a rate of $30 billion per week.
The Federal Reserve has thus far purchased a total of about $7 billion in bond ETF's and has also begun buying individual corporate bonds. But this is a minuscule percentage of the dollars that the government can spend buying securities to stabilize markets.
More dollars will likely be appropriated for the unemployed. It's difficult to determine what the actual unemployment rate is currently, but it's safe to say it's as high as it has been at any time since the Great Depression. So an extension of enhanced personal unemployment benefits, many of which will run out soon, is probably under consideration as well.
We simply have no choice but to rely on government financial intervention to guide us through this crisis. Monetary authorities are determined to stave off a deflationary bust, and governments typically get what they want. None of us particularly like it, but without it, individuals, businesses and investors will suffer terribly.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850-608-6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Destin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.
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