Editorial by Economist and FISM Founder Dan Celia
Massive stimulus to support the U.S. economy through the coronavirus crisis will cause the Treasury to borrow a record $3 trillion this quarter. Earlier this week, the Treasury Department announced the total, which is actually $2.999 trillion, and said, “The increase in privately-held net marketable borrowing is primarily driven by the impact of the COVID-19 outbreak, including expenditures from new legislation to assist individuals and businesses, changes to tax receipts including the deferral of individual and business taxes from April–June until July, and an increase in the assumed end-of-June Treasury cash balance.” On top of that borrowing, CNBC reported, the Treasury also said it anticipates another $677 billion in the third quarter. First-quarter borrowing totaled $477 billion.
I indicated about two months ago that the Federal Reserve will likely have $9 trillion to $11 trillion on its balance sheet by the end of all this, and I’m sticking to that prediction. I think it’s important we understand that all this debt—the $3 trillion this quarter and then another half-trillion next quarter—is not money that will ever be recovered. That would be nearly impossible. We also have to understand that this money is not helping the economy currently; it is helping us to weather the storm so we can move toward an economy where people can go back to work.
We should look at the money being spent in order to survive during these very difficult times akin to giving money away. It is basically a grant to help America stay on its feet. Remember, the economy is shut down, and it is time that can never be made up. When people become unemployed, for instance, they can look back and say they wished they had that money they would have earned during that lost time. But the notion that any of this money will be coming back in some way shape or form would be misguided at best.
This, of course, all leads to an important question: Will we, at some point, fall under the weight of the debt that has necessarily been created? We would be well served to understand that in order for us to survive what seems to be an insurmountable amount of debt, we will need extremely good and very consistent growth for an unusual amount of time—something like what we had in America’s Reagan-Gingrich time period of 1983 to 1999.
The growing debt will undoubtedly be an election issue in November, and what Election Day will look like remains to be seen. As the coronavirus lockdown looks like it may last all summer, there won’t be any campaigning going on, which will certainly impact how Americans make their choices at the ballot box.
Let’s also remember that no matter how the Left paints this situation, what is happening in our economy is an effect; it’s not the cause. It’s not Donald Trump, it’s not economic fundamentals, it’s not a financial crisis, it’s not a recession from a pullback in markets, though all of those things have happened technically. The effect of all this is from the cause, and the cause is a global pandemic and a national health crisis.
As election decisions are made, we should also understand now that we will have a massive increase in taxes. I’m not sure what those taxes will look like or what form they will take, whether they will be individual taxes, business taxes, payroll taxes, or likely come in the form of a VAT tax—that is my bet—or all of the above. One way or another, taxes will need to be increased. Then, of course, there are state taxes to consider. States will be in the same situation. Particularly, those who live in one of those states that has been mismanaged for a long period of time long before COVID-19 can pretty much plan on dramatic increases to property, income, and sales taxes.
In the meantime, the markets seem to respond daily to news about treatments in the works or the possible availability of a vaccine by September. But that may be an overly hopeful outlook. So as far as the economy goes, things may be bad for some time. And I would suspect that as new economic data is released, we could see a very slow-motion recovery or even the market lows of this year revisited.
But as we do begin to recover from this pandemic, even in the midst of recovery, there will be some pain we will all have to bear. I emphasize that there will never be a time, with maybe the exception of the time we are in today, that leadership in Washington will be more critical—and that is the scariest thought of all.