Fed Needs Electronic Currency To Quickly Distribute Funds And Avoid A Depression

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 Commerce Department substantially undercounts those without work, and the true rate is about 23.5 percent — close to the depths of the Great Depression.

Congress has committed $3 trillion to stimulus spending. Conservatives may be aghast at the impact on the national debt but some of that money is in loans that should be repaid. Added economic activity will boost tax collections, and the long-term impact on federal debt held by the public will be less.

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 $1.8 trillion this year, and Fed purchases will likely match or exceed Treasury borrowing before the crisis is over.

Virtually all the interest the Fed collects on those securities is remitted back to the Treasury, so the net impact of stimulus spending on federal debt payments should be negligible.

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. The United States is in the happy position of printing the global currency.

More problematic is how sloppily federal aid is doled out.

The Internal Revenue Service lacks the apparatus to get stimulus payments to many households quickly. It does not have bank account information for taxpayers who file paper returns, and many working poor don’t have checking accounts.

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 Treasury moved quickly to shore up banks and money-market funds. It entered new territory by supporting markets for state and municipal bonds, consumer credit and direct lending to businesses. By doing so, however, it risks supporting businesses that are insolvent, not illiquid.

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 Treasury and Small Business Administration lending that is not forgiven through Paycheck Protection Plan.

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 July 31, but this being an election year, pressures will mount to continue benefits and unemployment could simply lock in.

It would be better to get the Fed, Treasury and SBA out of the business of propping businesses and into supporting consumer demand. Let every legal resident open an electronic checking account at the Fed — folks could register with their Social Security numbers. Then deposit monthly payments into those accounts as long as the crisis persists — reducing that support as the unemployment rate falls to 5 percent would ensure payments phase out.

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.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.