- Dec 8, 2011
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The NY Fed and the massive spending increases saved Trump's bacon before the virus, and the Central Fed has saved it after. He takes the credit, of course, and his sheep don't know any better.How Long Can the Fed Keep This Time Bomb from Exploding?
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.
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.
Capitalism 2.0: The Fed as important to the economy as the consumer. Good luck to us.