Federal Government to the Rescue

Scott Anderson
Posted by Scott Anderson
Chief Economist

For the first time since the Great Recession, people are again using words like “unprecedented” and “uncharted territory” to describe the current economic and financial environment as business shutdowns and layoffs quickly follow the virus’s spread around the world.

We have already seen mind-bending statistics coming from financial markets, including record high stock market volatility and the fastest plunge to bear market territory in U.S. stock market history (20% plus decline).

Ten trillion dollars has been wiped out from U.S. equity markets alone in only a month and a half.

Mind bending data from the economy with nearly 3.3 million new jobless claims in one week, five times higher than we have ever seen before.

And now mind bending figures from the Federal Government as they try and finalize passage of a $2 trillion dollar government rescue package that is more than 2 times larger than one that was passed in the wake of the last financial crisis and Great Recession.

Our initial thoughts on the $2 trillion plus rescue package is that it is sizable, nearly 10% of U.S. GDP, timely, with individual checks and expanded unemployment benefits coming quickly, and a better-targeted fiscal package that includes more coordination with the Federal Reserve than efforts we have seen from Congress in the past.

This Phase 3 rescue package includes: $377 billion for small business loans. These small business loans really turn into grants if small businesses are able maintain payrolls and keeping paying their employees’ wages.

The trick will be getting all the money out the door quickly enough to those that really need it to avoid widespread loan defaults, bankruptcies, and job destruction. $500 billion for larger company loans and loan guarantees and to backstop Fed facilities. $250 billion for payments to individuals ($1,200 per adult, and $500 per child). $250 billion for expanded unemployment insurance, $150 billion in fiscal aid to the states, and $340 billion in added Federal spending with $130 billion going directly to hospitals.

Equity markets have shown their approval this week, taking a break from their month and a half long plunge to rebound around 10% over the last 5 days.

Even so, it is important for investors to realize that this fiscal package won’t be a miracle cure that will make the coronavirus or its global spread go away, or end all the economic and financial hardship that the virus will leave in its wake. As this week’s initial jobless claim’s data makes crystal clear, the U.S. economy is shutting down to a greater extent and faster than it ever has before.

Millions will still lose their jobs, possibly miss their credit card payments, and depend more than ever on government support and programs to an extent we haven’t seen since the Great Depression. Congress is already thinking about a Phase 4 or 5 fiscal package to come.

The economic and financial pain is bound to mount the longer the shutdowns continue. Moreover, there is no guarantee consumer and business behavior will go right back to where it was before the crisis started. History suggests it will take some time, perhaps a considerable amount of time for consumer spending and business investment to come roaring back.

Finally, this health, economic, and financial crisis will do tremendous damage to the nation’s finances.

We were forecasting a U.S. budget deficit of over $1 trillion this fiscal year even before these rescue packages were even contemplated. These spending packages will likely push the U.S. deficit toward $3 trillion and assuming a drop in tax revenue from this recession in the ballpark of the Great Recession, the Federal budget deficit could easily rise to $3.7 to $4 trillion dollars.

This will require a heck of a lot of new Treasury issuance and a Federal Reserve that is an active and major buyer of that new issuance. Monetization of the debt is finally here in the United States with all the negative implications for future inflation and value of the U.S. dollar.

But that is a battle we will need to fight another day. Stay healthy and safe everyone.

To learn more how the recent economic and financial volatility is impacting our forecasts, check out this week’s U.S. Outlook.



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