Posted on Saturday, 25th April 2020 by

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The Covid19 pandemic shutdown may truly be worse than the disease itself. Tens of millions have been forced on unemployment and many small businesses may never recover. Companies selectively deemed essential like Walmart, Amazon, Target, Home Depot, Lowes and others are doing great while their smaller competitors are being forced out of business.

This virus is highly contagious and targets the elderly and those with certain diseases and/or compromised immune systems. It has devastated families around the world and continues to do so especially in elder care facilities or in highly concentrated areas like New York City where it spreads like wildfire. Hopefully, what we’ve done to fight this pandemic will help us weather future storms that may come to our shores. If we practice the hygiene and social distancing recommendations to the extent necessary, we could reduce deaths dramatically during upcoming flu seasons or when the Covid19 decides to return and hopefully, without an across the board shutdown.

What I do know is that we can’t shut down our country for extended periods like this without severe societal consequences. There are limits to what the Federal Reserve and government can do, and without a running economy the States and federal government can’t function. The extraordinary measures implemented this go around still may eventually break the bank.

Now, the States are asking for trillions more to make up for all of the revenue they lost. When the country is shut down the tax revenue from sales tax and so much more isn’t there to pay State worker salaries and operational expenses. Expand that to local governments, how do they pay their police officers and expenses?

The stimulus package of around 6 trillion dollars after all is said and done, along with the Federal Reserve’s infusion of trillions more to shore up the banks and bond markets, still isn’t enough if the country doesn’t open up for business soon.

The Federal Reserve, also known as the Fed, manages the central banking system of the United States. It was founded in 1913 under the Federal Reserve Act to manage financial and economic instability.  The Fed creates the nation’s money supply however the majority of our money supply isn’t printed, it is digitally credited or debited to banks throughout the country. Simply put, a ledger entry on a spreadsheet, nothing more.

The Fed Balance Sheet prior to the shutdown was just over $4 trillion which included mortgage backed securities and U.S. Treasuries. When the stimulus started the balance sheet went exponentially off the chart upward to over 6 trillion dollars.  Where did the additional funds come from?

This is the scary part for a novice like myself. According to Wikipedia, “Money creation doesn’t have to be physical, either; the central bank can simply imagine up new dollar balances and credit them to other accounts.” In the old days the Fed actually had to print new money and prior to 1933 it was backed up with gold. For every dollar printed there was an appropriate amount of that precious metal stored at Fort Knox.  Now, they simply make a book entry and “imagine” that it is real!

I’m taken aback when I hear the Fed is infusing trillions of “book entry” dollars into our already overburdened system. Then add the trillions added most recently to shore up the economy due to the shutdown. Is it all smoke and mirrors and monopoly money?  Now that being said, with out the Feds infusion our bond market and banks could have collapsed. There was no one other than the Fed buying bonds and without bond sales our federal government can’t function.  What most aren’t aware of is that our government borrows over 25 percent of what it spends each and every year! Could you and I do this and survive?

The Federal budget for 2019 was $4.526 trillion dollars, total revenue was $3.422 trillion for a deficit of $1.092 trillion! This year with the 3 to 6 trillion additional spending for the pandemic our deficit may be close to or more than 7 trillion dollars! About twice what the Federal government generates in revenue each year.

What I imagine is either taxes are going to skyrocket or runaway inflation is on the horizon. Again, I’m a novice and look at things from a common sense perspective. Our government operates far from that realm. Actions like this create a vicious circle. The government doesn’t have the revenue for the stimulus package and they must borrow trillions by selling Treasury Bonds. However, there are no buyers. The Fed balance sheet is insufficient to support this massive infusion so they imagine the trillions by making a book entry of a sufficient amount to buy the Treasury bonds from Uncle Sam!

I drive down route 60 close to home and see one small business after another shuttered, dreams dashed, and hardship for all of the owners and workers that staff them, and the customers that are deprived of their offerings.  It’s time to get back to a new normal and fast before the country collapses under its own weight.

I understand the hardship on all sides of this issue; for the sick and those most susceptible, workers deprived of their livelihood, and the entrepreneurs that put their heart, soul, and life savings into their small businesses.  There are sensible options to reopen the economy and it isn’t wise for government to ignore the hardships endured by all segments of society at this crucial time.

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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

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