If there was one thing that Bernie Sanders got right in last
night debate, it was when he told Donald Trump to shut
up. It seems every time Trump opens his mouth the
situation gets worse, and let's face it, it will get worse, a
lot worse before it gets better.
Last night the Federal Reserve essentially lowered the prime
interest rate to zero in an attempt to put the brakes on the
downward spiral in the economy. It also announced a series
of steps to free up the money supply, called Quantitative
Easement, or QE. QE is when the Federal Reserve, the
U.S.'s Central Bank, pushes a virtual button and increases
the supply of money in the country. It used to be called
'printing money' but now the money supply is in your mind
not your wallet. It's a good bet, what is in your wallet is
plastic, not greenbacks, anyway.
The Fed then uses the virtual money to buy actual securities
from banks, mostly in the form of low risk and mortgage
bonds. That frees up money to the banks and allows them to
lend money at reduced interest rates and that puts money into
the economy. The Fed is tying to prevent a temporary health
emergency from becoming a global recession.
Why do we need to do this at this time, it's called Covid-19,
now declared a pandemic? The global economy is grinding
to a halt, right now the hardest hit are travel, leisure and
retail industries. But as time goes by the problem will spread
and jobs will be lost, spending will crash as companies and
people will begin hoarding cash, and defaults will surge. The
economic impact of self-imposed containment is unavoidable,
and the ensuing market sell-off is rational.
Right now there is little more the Fed can do; they can't make
people spend, they can't cut taxes, they can't free up the supply
chain. The rate cut won't have that big of a stimulative effect.
We've reached the 'liquidity trap', with rates of zero percent
because of pressure by the Trump administration. Trump's
insistence on lowering the prime rate over the past 18-months
to protect his economy that he needs to insure his re-election,
has left the Fed with little wiggle room. Thus forcing a QE as a
last resort to avoid a recession.
Quantitative Easing's main effect is on the psychology of the
market, however as sometimes happens, this time it had the
opposite effect. After the announcement last night, just before
the Asian markets opened, fearing the move by the Fed meant
more pain in the future, the Asia markets tanked again. All
across China, Japan, and North Korea, markets fell. And as
markets opened across the EU and the UK the same thing
occurred. U.S. futured were down at the opening bell and
trading had to be halted for the third time after the first fifteen
minutes of trading.
The Fed can only do so much, they cannot prevent the job lay-offs
which are coming. What is needed now is a huge government
stimulus program that will guarantee wage replacement, and help
with mortgages and rent. And will pay any medical bills associated
with the illness and deaths occurring from the virus. The best guess
is the virus's effect on the economy will last until next Spring. And
the contagion is not expected to peak for another three months in
Europe and perhaps longer in the U.S.
The question is whether there will be a global recession resulting from
the economic trauma, and if there is will it be a 'V' recovery or a 'U'
recovery? In the long run, 'printing' more money will just devalue the
dollar and while that is good news to industries who export goods, it will
mean an increase in the cost of goods coming into the country. It may
raise the cost of that Mercedes or Lexus, but it will also increase the
cost of basic goods purchased by those in the lower income bracket. And
may lead to inflation higher than the mark set by the Federal Reserve.
Another problem with QE, is that the expanded cash in the economy more
often than not ends up as profit, and adds to the already extreme income
inequality. QE has been called a regressive redistribution program, boosting
the wealth of the 'haves' and passing little along to the rest of the country. Also,
many countries do not know when to end the program. The lasting result of
the QE of 2008 in our country, is that the holdings of the Federal Reserve is
at 4 trillion dollars up from 1 trillion dollars before the recession.
Adding another Quantitative Easement program hopefully will shorten the
length and the pain of the recession, but the cost of the stimulus that is
needed to assist those affected by Covid-19, will balloon the already
burgeoning deficit. This with the projected reduction in the GDP, will
result in a multitude of problems for years. Let's hope the winner in
November has a plan for that.
I'm just sayin'.
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