Gorging on Debt to Survive the COVID-19 EconomyTags Financial MarketsMonetary Policy
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Because the country could not stop for debt, he kindly stopped for the nation.
You venture to your mailbox to find a statement notifying you that you have maxed out your credit card. Instead of making sacrifices and cutting back on your spending, you choose to get another piece of plastic to pay off your old debt. You claim you are debt-free. That is, until you receive the next credit card statement the following month. Does this sound crazy? Well, JPMorgan Chase believes that this could be the panacea to stave off the inevitable decay of the US and global economy, absorbing even more debt than it already has since the fallout of the Great Recession. With the world nearly $200 trillion in debt, what is a few trillion more at this point?
Debt Is the Disease, Debt Is the Cure
Did you know that there is too much debt in the world for the stock market to collapse or for interest rates to come down? And the only way to keep the indebted system from collapsing is to continue drowning in debt. This may sound like a sick joke delivered by a dark-humored accountant on April Fools' Day or by Keynesian icon Paul Krugman, but this is an analysis from one of the richest and most respected financial institutions in the world.
According to JPMorgan Chase, financial markets are sending a message that they need additional fiscal and monetary stimulus. Without trillions in additional debt and liquidity, the banking juggernaut writes, the situation could “eventually become a more problematic signal for equity and risky markets going forward.”
Put simply, if the Fed wants to avoid a repeat of the March meltdown, it will need to engage in trillions of dollars in preemptive stimulus. Indeed, you could argue that what the Fed is doing is not stimulus but rather trying to stop the US economy from falling off a cliff.
But JPMorgan is not the only financial juggernaut to present this argument. Goldman Sachs recently urged the Fed to monetize an extra $1.6 trillion in Treasurys to avoid spikes in Treasury yields.
The Federal Reserve has printed $3 trillion to stop the hemorrhaging in the stock market. Although equities have stabilized, any time it looks like it will crash, the Fed intervenes and promises another injection of sunshine and lollipops. You think this would appease the fine folks on The Street. But it is not enough. It never is when you are a junkie, and you increase your dosage.
Baby, You’re Addicted to Debt
In a lot of major markets, interest rates have been on a downward trend for many years. This has made money cheap and credit easy to access, artificially fueling borrowing levels and propping up credit markets. If the free market dictated interest rates, we would have a better sense of consumer demand for credit, but that is a different discussion for another day.
So, with a ferocious appetite for red ink, we have become addicted to debt. Millions of people are surviving by using their credit cards and lines of credit to pay the rent, buy groceries, and renew magazine subscriptions to Wind Tunnel International. As a result, the economy is chugging along by imbibing debt, and this is a dangerous situation to be in when there are steep economic downturns or market crashes.
America’s debt fixation is so bad that Bloomberg published a study that looked at what would happen if borrowing were outlawed. The business news network learned that the US economy would be wiped out and per capita income would crater to –$4,857. China would flourish at the onset because of its trillions in gold and foreign exchange reserves. However, this would only be temporary, since the country’s young generation of consumers has abandoned fiscal responsibility for instant gratification, relying more on debt than savings—the age-old practice of their generational predecessors.
The nationwide lockdown—you know, the nursing home epidemic that left millions out of work—forced many Americans to add to their credit card debt totals. US credit card balances are forecast to increase by a whopping $140 billion by the end of the year, and this is on top of the enormous amount of consumer debt before the public health crisis.
Even the stock market is relying on debt to get richer. Many investors—young and old—are utilizing margin accounts to attain or build positions in Tesla, Amazon, or Clorox stock. Robinhood, for example, will give you as much as $50,000 in credit. We have seen what happens when brokerages call in their margins: everything crashes due to the illiquidity in the system.
The New Stimulus: Drown in Debt
Is debt inherently bad? Not quite. It can be highly beneficial when it is used correctly. Remember, many use debt to purchase time, whether it is a mortgage to move into a house now or a margin account to buy stocks before it gets too expensive. When that debt becomes the basis of civilization, then we have barked up the wrong tree. Before the coronavirus infected 10 million people, governments spent like drunken sailors and central banks printed like it was nobody’s business. In this post-COVID-19 economy, it is as if governments and central banks have swallowed an experimental beverage that was concocted in the basement of the Eccles Building. Worse, policymakers are being encouraged by the titans of Wall Street to exacerbate this reckless behavior and ensure the planet endures our brave new world. The only way to keep from drowning is pouring more water over the victim.