April 10, 2020
Fed Chair Jerome Powell said the economy is deteriorating “with alarming speed” yesterday.
This is very significant!
Part of the job of economic officials is to maintain faith in the economy. Saying anything even a little negative about the economy can have dramatic effects. That’s why in the 2008 catastrophe banking officials were putting a positive spin on the economy right up to the near collapse of the banking system.
Anything even approaching a negative comment can have dramatic effect.
For example, last August the President urged businesses to find alternatives to China and the Dow Jones stock average dropped 2.6%.
When the Fed Chair makes such a dramatic statement – the economy collapsing “with alarming speed” — it is stunning for its bluntness. Things must be very bad to justify the Fed Chair saying such a thing.
At the same time worries are growing about the increasing size of the national debt…
Stimulus bills now have pushed the national debt to $24 trillion dollars, more than ever before.
Concerns had been growing even before the COVID-19 crisis. The GAO warned that the Federal debt is unsustainable last April, a year ago!
There are four generally accepted disadvantages of a large national debt:
- Lower per capita wealth. We all become poorer, with all that entails.
- Government must pay higher interest on Treasury bonds
- Higher taxes and spending cuts
- Decreased ability to finance stimulus during recessions
Members of Congress are beginning to push against the knee-jerk stimulus bills that are adding staging amounts to the national debt.
Maya MacGuineas, Committee for a Responsible Federal Budget, appeared on Bloomberg giving dire warnings about the exploding national debt.
In other economic news…
Gas prices are lowest in a half century
That’s good news for the environment – the desert sky is stunning lately!
On the other hand…
Investors with have large stakes in petroleum are seeing a drop in the value of the investments. If they are using them as collateral for other investments they are in big trouble. Suddenly their collateral isn’t worth what it was and they have to cover the difference immediately. This can lead to a domino effect, generating huge losses throughout the market.
Be prepared for personal bankruptcies to explode in the next few months. While this is a personal and small business tragedy it will depress the health of the economy for years.
The Paycheck Protection Program passed by Congress as part of the stimulus package is not a panacea. It’s getting off to a rocky start, and although it’s better than nothing there are some high hurdles. Small businesses will still go out of business and/or declare bankruptcy, leaving creditors with less money to pay their debts. Read more about it here.
One last thing…
Get ready for a repeat of the run-up to the Trump impeachment. Earlier today Democrats formally proposed a probe into Trumps flawed response to coronavirus.
Let the games begin!
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