Tuesday’s speech by Fed Chair Jerome Powell began with the usual nod to the pandemic for making life difficult for the masses, followed by the various pats on the back for the central bankers and what they have done in fighting the problems caused by COVID. Powell even praised the government, noting “the fiscal response was truly extraordinary,” thanks to the $3 Trillion of “economic support” under the CARES Act as well as several other lesser known bills.
The Paycheck Protection Program (PPP), was also mentioned, which, according to the Chair, “partly forestalled an expected wave of bankruptcies and lessened permanent layoffs.”
A few weeks ago the cost was noted by Randal Quarles, Vice Chair for Supervision:
The PPP disbursed $525 billion in loans to businesses through August 8, most of which will be forgiven…
As of August 8, there was still another $134 Billion of forgivable loans remaining in the program.
Powell continued, explaining that the market appeared to be normal again and praised “highly accommodative” monetary policy. Yet despite the self-congratulations, things took a bit of a turn when he re-visited the fiscal side of central planning, saying the “expansion is still far from complete,” and that :
Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.
He concluded that both monetary and fiscal policy should be used “side by side” until, again, in his own words, the economy is “clearly out of the woods.” Yet it’s difficult to know just how long getting out of the woods will take. Whether it requires a forced vaccination or an inflation rate sufficient to satisfy central bankers remains to be seen.
While the continual push for fiscal support from the Fed is concerning, it was the Q and A which delivered the final blow:
So at least I guess I would start by saying that the U.S. Federal budget is on an unsustainable path, has been for some time.
It appears Powell read the Congressional Budget Office (CBO) on September 2, the budget outlook to 2030 which predicts a:
federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019, mostly because of the economic disruption caused by the 2020 coronavirus pandemic and the enactment of legislation in response.
But it gets worse:
CBO now projects a cumulative deficit over the 2021–2030 period of $13.0 trillion…
Keep in mind the US National Debt has recently passed the $27 Trillion mark, which puts the 2030 National Debt prediction closer to $40 Trillion by 2030. Of course, the kneejerk response should be that this 10-year budget projection is well off the mark.
Consider that in March of this year, the CBO underestimated the 2020 budget by $2.2 Trillion. Now we’re being asked to believe they can project a decade into the future, with the assumption that for the next 10 years the deficit will “only” amount to a little over $1 Trillion a year. That’s a tough sell!
Concerned citizens should begin to wonder how well the CBO can predict the outcome of COVID-19, future pandemics, wars, market downturns, unfunded liabilities, and all the other unforeseen events which cannot be reasonably factored into a decade long budget model. Additionally, we’ve been given little to no assurance that the Fed or the US Government ever intend to stop these short-term lending programs and stimulus checks, ever again.
A reporter summed it up the best with one question:
If we look back 10 years from now at the policy that has just been implemented, what would be signs of success?
Powell addressed the issues of providing stability and relief, supporting the expansion, and avoiding long run damage to the economy; however, we know that looking back 10 years from now, if nothing is done to limit the powers of the Federal Reserve and the US Government, we will be in a world of pain. The US Debt will be much higher than $40 Trillion. Stocks, bonds and real estate prices will be making new highs. Yet, most people will find they are no better off than they were a decade ago.