Tomorrow the Federal Reserve Chairman, Jerome Powel, is scheduled to release to the public some inkling of what the Federal Reserve decided after their meeting this week. It will not be the full report, that will be coming out at their next meeting. But Chairman Powel is expected to say that the Fed will encourage the core inflation rate to overshoot the targeted 2%. The current rate of 1.5% has been stagnant for the past three years, despite the Feds attempts to bring it to the target rate of 2%. That leaves the Federal Reserve very little room for corrections. This move signals that the benchmark interest rate will remain low for the rest of 2020 and 2021. The Fed was expecting the Congress to pass another stimulus package in the vicinity of $3 trillion, to ensure that the economy does not enter into a double dip recession. Instead the Congress adjourned and went home.
One of the reasons for the stalemate over the pandemic aid package is it size. The Democrats proposed a $3 trillion package, before agreeing to cut a trillion dollars from it. The Republican's main objection was that some of the money was going to cash-strapped states - mostly Democratic led states - to help them balance budgets that have for years been running a deficit. In a fit of pique, Mitch McConnel adjourned the Senate and they are now in recess. Meanwhile, the unemployment supplements had run out at the end of July, and people are really hurting.
Due to the tax cut pushed thru by Trump and the Congress early in the administration plus the usual budget overruns, the United States was $17 trillion in debt at the end of 2019 - roughly 80% of the country's GDP. At that point analysts predicted the debt would approach 100% by the year 2030. However, by the end of June of this year, the debt had reached $20.5 trillion. Or roughly 106% of the GDP. The debt figures don't include the trillions of dollars the government owes itself in bonds held by Social Security and Medicare. And now Trump is suggesting a tax holiday until the end of the year on these payments, saying the government will pay the deficit out of the general fund in 2021.
As levels of debt held by rich nations, and the US is one of them, have climbed steadily in recent decades, the interest rates have tumbled. For years the theory had been that the circular form of fiscal finance - where one arm of the government creates the money needed to fund the arm of the government that taxes and spends - would lead to inflation, and loss of confidence in their currency, have been proven false. It has been replaced with what has been called Modern Monetary Theory. It holds that countries which control their own currencies have more leeway to run up deficits without driving up interest rates.
Analysts believe that the United States economy still has some room for another fiscal aid package, even though it is anticipated that Congress will need to borrow an additional $1 trillion before the end of the year. But instead of freaking out, financial markets are looking at this bottomless need to borrow, with calm assurance. The interest on the 10-year T-Note, is 0.7%, far below where it was last year, when it was 2%. And the markets are on target to reach new highs.
The QE program of the United States has been one of the worlds most aggressive, And it has only increased since the 2008 crisis. Critics said it would lead to disaster and set off a surge of inflation. But as we know, inflation has stayed well below the benchmark 2%. This is not to say, it will be this way in the long term. Look at the price of gold, which investors turn to as a hedge against inflation, it has reached an all-time high of $2000 an ounce, and the dollar has dropped against all major currencies.
Some studies have shown that high levels of debt -particularly debt-to-GDP ratios - are associated with lower economic growth. But other analysts believe that may not be true. What is not needed at this time is slower economic growth, as if it could get slower than zero.
But fiscal constraints are not what they were once thought to be. Apparently, when you have a central bank essentially printing money to fund these deficits, you can take on debt to much higher levels. Let's hope that they are right.
I'm just sayin'
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