The American economy is nearing the apocalypse.
About 40 million Americans have filed for unemployment benefits. Government statisticians believe the official unemployment rate published by the
Importantly, the Federal Reserve’s Treasuries holdings are included in the oft-cited total of federal debt held by the public. Those have increased by
Virtually all the interest the Fed collects on those securities is remitted back to the
The real issue is not the national debt but the Fed printing money to buy Treasuries. That won’t create additional inflation unless the economy nears full employment — not likely to happen anytime soon — or foreign central banks and private investors lose their voracious appetite for Treasuries.
With the future of the euro shaky and yuan carrying great political risk, the dollar is currency of choice for international commerce and safe haven for foreign investors. Foreign holdings of Treasuries were growing at a strong clip prior to the crisis, and those purchases should continue.
More problematic is how sloppily federal aid is doled out.
State unemployment offices don’t have the capacity to process 40 million claims in a matter of weeks, and many unemployed who lived paycheck to paycheck are desperate for money.
Not surprisingly, consumer demand is plummeting, and the patterns of layoffs and capital spending cuts indicate that businesses as far flung as in manufacturing and movie-making are bracing for a permanently downsized economy. After a quick bounce in the third and fourth quarters, GDP will likely emerge 10 percent or more smaller.
As the crisis unfolded, the Fed and
Recessions clear out marginal businesses that do not generate a profit over cycles of expansion and recession. That redeploys capital and workers to more productive uses, but now the Fed is extending its buying to below investment grade bonds and lending to businesses that should go through Chapter 11 or shutter completely.
Ultimately, some of the bonds purchased and loans tendered by the Fed will fail. The same applies to
By venturing into the territory of private banking, the Fed risks its political independence by relenting to congressional pressure to roll over those loans and prop up failing enterprises indefinitely.
Once the unemployment checks arrive, those pay many recipients more than they would earn working — creating disincentives to find new employment. Extended benefits are scheduled to end
It would be better to get the Fed,
Consumer spending would pull capital and workers to their most productive uses via more efficient market forces, and the whole process would usher in an electronic currency that would make the economy run more efficiently than one supported by bank credit cards, paper checks and currency.