WHO’S GOING TO PAY THE PIPER?

I had written about the upcoming economic apocalypse, which is being orchestrated by the four horsemen on the 14^th of June blog post. This blog is based on a combination of events prompted by the Covid-19 pandemic. 

The Fed and this administration continue to follow a path of total economic disaster with magic thinking rather than one of stability and economic health. 

Let me explain, European countries took the complete opposite approach to the economic recession as a result of the virus.  England for example, gave up to 80% of the salaries to employees during the shutdown. By putting the monies at the bottom, everyone gets paid and can live a near normal life afterwards. Landlords’ rents are paid, groceries are purchased and life goes on as semi-normal.  Department stores, restaurants, bars, and sporting events are suffering without profits; however everyone is paid. 

When you take on the responsibility of a business you expect to either succeed or fail.  Those companies that adapt to the crisis will succeed and those that cannot adapt, could fail, or should fail, according to Darwin.  Business is all about survival.

What was meant by the subject “paying the piper” is a referring to all the experimental deferred debt the Fed and this administration has and is incurring in the name of the taxpayer.  The Republican playbook seems to be in favor of incurring future debt in the form of borrowing from taxpayers, lending monies at near 0% interest, making risk investments with taxpayer dollars and then, if the virus continues, defaults on the loans, or default if you are a bank and get a bailout. Or just spend and default like the Republican Party economic response to the pandemic.  Is spend and default worse than borrow and spend liberal democrats?  With the liberal democrats at least you get health care and infrastructure.

PRE COVID-19

Early on in my postings in March, I was suspicious why when the economy was sound and did not need a stimulus, this administration passed the 2017 tax bill that insured that the annual debt would be 1 trillion dollars projected by the bill.  The taxpayer debt went to tax breaks for corporations that buoyed the stock market with stock buybacks and gave a visual that the economy was soaring.   This effort did little to nothing for anyone in the lower 1/4^th of the income ladder.  The markets fared well and so did most 401K’s and everything was ok.

The same time as the tax break, Droopy Don pressured the Fed to lower the prime rate to near 1%.  These actions during good times gave an added boost to the stock market and helped the market push to new highs.  The action of lowering the borrowing interest rate (prime) was once thought to be a last vestige of tools to provide economic oomph that was afforded to the Federal Reserve, until the pandemic.

PANIC SETS IN AT THE FED SO FOLLOW THE MONEY

Faced with economic calamity the likes of which had not been seen since the great depression, the Fed was seemingly up the creek without a paddle. Interest rates that had been the last tool used, was already at lows and as a result of the virus, were lowered to near 0%.  That was the first step.  Watching the markets fall in March set the Fed out on a search for a way to jack up the stock market for the visual effect, and to hell with the public health crisis.

If someone wanted to bilk the government and the taxpayer, all they have to do is make up a program with trillions of taxpayer dollars thrown around without oversight. 

Droopy Don has fired the inspectors general and has stonewalled the House requesting information on the programs, even though the information can be made publicly available through a FOYA requests. 

The second step involved congress and a recovery bill that authorized 4 trillion dollars in spending due to the Covid-19 pandemic. 2 trillion dollars went to support the PPP and small businesses.  These dollars also went to support unemployment insurance and the Droopy Don bribery payment of $1,200 per person.  The other 2 trillion dollars were magically transformed by the Fed, to 4 trillion dollars. POOF!

Below were my thoughts on this subject 1 month ago on May 31^st in italics.

I had previously stated the obvious, that the Reserve is going where no other Federal Reserve has gone before.  And no other economist worth his salt would have recommended.  What could go wrong?  On a Princeton University webinar on 29 May, 2020, when asked about his actions, Jerome H. Powell, Fed Chair said,  “We felt called to do what we could” and felt they needed to use tools at their disposal to “to their fullest extent.”

His most revealing statement was this: “We crossed a lot of red lines that have not been crossed before”.  He admitted to this and also said, ”this is a situation in which you do that and you figure it out afterward”.  This is mighty slim justification for sheer stupidity.  How many “oops I did it again” Brittney Spears moments does this administration get?  His admission to knowing there were red lines that he knowingly crossed and in retrospect he is going to look into the potential damage? And at what cost? I thought gambling was illegal in Washington D.C.?

The problem comes with what the Fed did with the 4 trillion dollars. They gambled by first converting the 2 trillion and using that as a loss reserve and loan out 4 trillion dollars.  This is what the banks do when  they have a loss reserve (a reserve in a reserve bank? Huh!). Ok let’s look at what they did with the taxpayer monies. They invested in grants to corporations, bonds, including junk bonds, other commercial paper and high risk investments.  All this was to infuse liquidity into the economy.  It succeeded to boost the economy and the stock market all based on a magically having a vaccine by the end of the year and all without oversight.  It worked, however this is only a temporary fix.  The market was happy.

These are investments during a pandemic, where without a vaccine by early next year, could be catastrophic for the economy and the chances of default becomes another taxpayer debt. Only this time, it’s deferred debt that will become part of the National debt for the next president. This is similar to the Bush Iraq War debt being paid by Obama or the 2008 bailout for this similar oversight ineptitude, although it was the banks creating the same problem not the Fed. Banks were also the junk bond dealers buying high-risk mortgages, not the Fed, that caused the 2008 financial problems.

I thought there could be only one arrow left in the Fed’s quiver when I said they could eventually forgive all the bond debt, commercial paper debt and put it all into the national debt.

The Fed’s action of gambling with risk instruments was a bad look for the central bank picking winners and losers.  The Fed is normally risk-adverse, but not this time and I think it was not such a good look. It did its purpose and infused liquidity quickly and again was a boost to the market,

I was wrong, the Federal Reserve took one out of the 2008 playbook and allowed banks once again deal with high-risk junk bonds and risky mortgages, in June 2020.  The banks then ended up selling mortgages to investment bankers and in the future (January 2021) having all the 40 million unemployed, owing back payments with hospital and medical bills that cause them to default on the mortgages.  Will they be bailed out once again?  Again, I call this deferred National debt. 

By my calculations by the end of 2021, without a vaccine or with one that is not delivered prior to mid-2021, the National debt will increase by 1 trillion dollars for the Droopy Don tax bill of 2017. 2 trillion dollars for payouts for the PPP and small businesses and the additional 4 trillion the Fed went out and gambled with taxpayer monies based on the magic appearance of a vaccine.  That’s 7 trillion dollars of National debt by the end of next year without any other bailouts. 

That does not count the banks that are now emulating 2008 buying and selling high-risk mortgages, using low interest monies given out by the Fed to purchase and refinance risky mortgages with the impending doom if there is no vaccine.  The banks and investment bankers that trafficked in high-risk bonds and mortgage backed securities will be too big to fail again and who knows how much their stupidity could cost the taxpayer.  This is not even counted in the 7 trillion dollars above.

The question I have is why hasn’t Droopy Don put the dollars in the hands of the consumer at the bottom and insure all individuals a living stipend, wouldn’t that be better than chasing a stock market with money that is being artificially inseminated and used as gambling with all being potential deferred debt?  After all, the repayment will come from bottom, from the taxpayers that are increasingly the working class.

All the actions of the Fed described above have one thing in common.  They benefit the highest income groups, with everyone else holding the bag of excrement.  The wage and income gap widens with each and every Fed move shown above.   Question to Droopy Don is this- why not put the monies at the bottom?

The answer to the question poised to Droopy Don above can be answered in one word, PROFIT.  All of the above high-risk investments are made with higher rates of profit. This I see as only as a temporary situation, which is enough salve for the market, due to higher yields on investments. I deem the yields to only be temporary due to the impact of a virus that has no vaccine.  My feeling on profiting on a pandemic and public health disaster is not a good look for Droopy Don.  Happy market, happy Droopy Don.

Droopy Don has only one demand of the Fed – do anything you can do to pump up the stock market for the appearance and optics of Laissez les bons temps rouler.  The problem with optics during a pandemic is the visuals no longer outweigh the importance of an individual’s health.

I can see another round of bailouts like 2008 in 2021 with banks and investment firms that think they are too big to fail. Investment bankers in 2008 gambled on junk bonds and are doing the same and it will result in the same action. Again they will again hold out their hands for relief.  Is there no shame in their short term memory?  It was only 12 year ago?