April 9, 2020

Unemployment and a looming housing crisis are leading the news this morning.

CNBC reports the unemployment rate now tops 10%.

Temper this number with the fact gig workers, formerly contractor workers, account for 25% to 35 % of those employed are not counted in unemployment calculations.

Plans are now being made to include gig workers in the recent $600 a week increase in unemployment benefits, but it’s a huge challenge. Economists have been struggling for years to define what gig worker is. State level unemployment bureaucracies aren’t likely to solve the riddle either.

The true unemployment number is probably closer to 15% to 20%, and a large portion will not receive unemployment benefits.

Like dominoes, the loss of income of a large portion of American workers now threatens the housing industry.

About 44% of New Yorker’s are having trouble paying rent. It’s likely that number is represents the plight of many Americans.  Government is discouraging evictions, but that won’t really address the real problem…

When banks receive less in come because of massive drops in mortgage payments from homeowners and companies owning apartments they lose money needed to cover demands of depositors writing checks. The money we think we have in checking or savings does not in in a vault somewhere, it is used for loans.

The Federal Reserve requires member banks to hold cash reserves. They can’t lend out all the money depositors entrust them and depend only on debt payments to remain solvent.

That is, until the 26th of last month…

That’s when the Federal Reserve dropped the requirement for reserves to zero. The idea was to free up more money to lend to businesses struggling to get through the COVID-19 crisis. But what if large numbers of people write checks to pay rent or mortgage? Might banks not have the cash to honor those checks?

Not to worry…

The Fed will stand behind strapped banks with low cost loans. That’s their job. The only change is that banks can now lend out every penny and still depend on the Fed as a “lender of last resort” to cover demands by depositors.

In addition the Fed announced today that is injecting $2.3 trillion into the economy by buying bonds issued by cities, (in effect long term loans to cities), direct loans to businesses deemed too risky by the Small Business Admiration, and companies with less than 10,000 workers.

The Fed is pumping more money into the economy than it did in the 2008 crisis. That’s how precarious the economy now is.

And where does all that money come from?

The future earnings of the United States. That is, future tax revenue. Imagine, the Fed adding $2.3 trillion to a line in a ledger book that records the national debt.

That money has to be paid back eventually, but our GDP – the measure of our national wealth – has been pretty anemic since the turn of the century.

That’s why yesterday’s executive order announcing the right of the United States to mine space resources – minerals on the Moon, Mars and asteroids – is significant…

The United States is taking the first step towards building a space-based economy!

Read more at VicNapier.com and my Medium.com page.

Links may lead to sites where the author has an affiliate relationship.

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