COVID-19 left the US and global economies in dire straits.
After a sharp drop in economic activity that started in February, the economy created 2.5 million jobs in May. During the whole celebration, 295,000 additional workers were lost and over a million in the past three months: they have been classified as permanent unemployed.
The Federal Reserve does not wait the unemployment rate will fall to pre-recession levels until at least 2023. President Jerome Powell and colleagues may be determined to do “what we can”, but even their expanded toolkit may be inadequate, especially if there is a The second wave of infections causes the economy.
A synergy of monetary and fiscal stimulus by creating digital dollars and additional treasury loans to finance direct stimulus may be the best solution.
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Congress has committed $ 3.6 billion for stimulus and relief measures. Preservatives can be horrified by the impact on the national debt. However, part of this money is in the form of loans which must be repaid, additional economic activity will stimulate tax collection and in the long term. impact on federal debt held by the public
will be less
The latter includes Treasures held by the Fed. These have already increased by $ 1.8 trillion this year, and their total assets have increased by $ 2.9 trillion.
Since the interest earned on these assets is largely returned to the Consolidated Revenue Fund, the real problem is not the additional interest on the national debt, but the Fed prints money to buy these assets. Inflation could become a problem, but only as the economy gets closer to full employment, unless foreign investors lose their voracious appetite for treasury bills.
More problematic is the way federal aid has been distributed.
As economic theory suggests, households saved a lot of their one-time stimulus payments, and the IRS had to plan for many 2019 income tax refunds to change resources to make those payments.
Most importantly, the structure of the post-COVID-19 economy will be very different. Layoffs and reductions in capital spending indicate that companies as distant as the manufacturing and production of films are preparing to permanently reduce demand, while store closings and accelerated long-term trends Work at home promotes online retailing, industrial kitchens for meals delivered, virtualized meetings and collaboration.
Recessions eliminate marginal businesses that do not make a profit during boom and bust cycles. This redistributes capital and workers for more productive purposes, but the Fed is now expanding its purchases to lower-quality bonds and loans to companies that are expected to go through Chapter 11 or close completely.
In the end, some of the bonds purchased and loans offered by the Fed will fail. The same goes for Treasury and Small Business Administration loans that are not delivered through the payment check protection plan.
By venturing into the territory of private banking, the Federal Reserve risks its political independence and yields to pressure from Congress to transfer these loans and support bankrupt businesses indefinitely.
It would be better to get the Fed, the Treasury and the SBA out of business support activity and increased consumer demand. Allow each legal resident to open an electronic checking account at the Federal Reserve; people could register with their social security number. Then deposit the monthly payments into these accounts while the crisis persists, reducing this support as the unemployment rate falls to defined reference levels to ensure the phasing out of payments.
Consumer spending would drive capital and workers to their most productive uses through more efficient market forces, and the whole process would introduce electronic money that would make the economy more efficient than card-backed money bank credit, paper and currency checks.