If The Fed's Powell Is Ready To 'Print Trillions' To Help The States, Tightwad GOP Should Let Him!

Fed chairman Jay Powell, makes an excellent case for providing a safety net to states, as well as corporations.

"Congress seems to be at war with the states. Only $150 billion of its nearly $3 trillion coronavirus relief package – a mere 5% – has been allocated to the 50 states; and they are not allowed to use it where they need it most, to plug the holes in their budgets caused by the mandatory shutdown. On April 22, Senate Majority Leader Mitch McConnell said he was opposed to additional federal aid to the states, and that his preference was to allow states to go bankrupt"- Ellen Brown, today, 'Crushing The States, Saving The Banks', smirkingchimp.com blog


'Powell Urges Policy Makers To Spend More'  (WSJ, April 30, p. A2)  shows that Fed Chairman Jerome ('Jay') Powell has a much deeper appreciation of the financial straits the nation is in than the Repuke bean counters, Scrooges and austerity clowns. Right now, the greatest imperative is to get money to state and local governments, which the earlier CARES act omitted.  Why infuse  more $$$ for the states and local governments? Well, because they embody the essence of what government is about.   I mean, what citizen in his or her right might wants to see schools, law enforcement, fire departments and utilities shut down - because of lack of funding?  That way madness lies.   

To fix ideas, as reported in The Denver Post (p. 1A,  5/2) , Colorado's state government is now planning some $228 million in spending cuts that could affect everything from police departments, to schools, to health clinics to correctional facilities and even Medicaid.   In Maryland, the state we used to live (before coming to Colo. in December,  2000) 90 days of shelter in place orders are forecast to blow a $3 billion hole in its $90 b annual budget.   That will mean severe cutting of vital services. Other states are having to do the same with no federal lifelines in the pipeline.   Do people in these states really want to do without police, fire depts. and schools?

But this is the gist of the Republican penny-pinching strategy which -  if it succeeds - will see the U.S. end up in a 2nd Great Depression, not just a bad recession.   In fact, while the austerity -minded Repubs have resisted calls for additional funding, citing added debt burdens,  Jay Powell pointed out (ibid.):

"This is not the time to act on these concerns. This is the time to use the great fiscal power of the United States to get through this with as little damage to the longer run productive capacity of the economy as possible."

It's incredible that the Scrooge clones like Mitch McConnell don't grasp this, and would rather put us into another Depression but there it is.  They would rather be chintzy now - especially with the states, local governments-  and pay ten to fifty times later to dig out from the carnage.   Which is why it's good we didn't have these losers in power after the credit meltdown in 2008.

Across the country now there are  massive budget shortfalls  in state and local governments arising from cratering tax revenues. 21 states will have to fill budget gaps of at least ten percent to avoid furloughs of police, firemen and other critical service workers.  And don't even think the existing federal benefits are enough. For example, just applying for and renewing the SNAP (food stamps) requires overcoming a host of bureaucratic hurdles.  And even the fraction who qualify must also rely on food banks given the average monthly SNAP benefit amounts to $134.

In truth, we desperately need not just a $1, 200 one off payment to each American, but a universal basic income (UBI) of at least $2,000/ month for the next 6 months.  (As policy analyst Heather McGee noted on 'All In' last week). So despite the caterwauling and gaslighting from the Repukes, it is clear we need a massive infusion of at least $800 b to help the states, and possibly another $2 trillion more by the end of the fiscal year.  This despite the endless austerity whining of the likes of The Wall Street Journal (e.g. 'The Government Economy',  April 30, p. A14) who bellyache the states "contributed only 0.2% to  the CARES Act".  Well, duh! That's because THEY took the brunt of the lockdown hit ("economy put into the equivalent of a medical coma"), and also they have laws that require balanced budgets -  so must cut if spending exceeds a certain threshold. Also they have no latitude to print money like the Federal Reserve.

Playing into the WSJ editors' hands, Moscow Mitch and his sidekick in stupidity, Rick Scott, blame many blue states for "mismanagement" of their money to explain the predicament and having to cut services, furlough state employees. That is bollocks.  As  NY Gov. Andrew Cuomo  has acidly observed (according to Joe Conason), New York pays $116 billion more than it gets back annually, while Kentucky, the deadbeat home of Senate Majority Leader Mitch McConnell, gets $148 billion more than it pays each year. By that reckoning, New York has kicked in far more over the past few decades than any of the states whose Republican leaders criticize supposed liberal profligacy.

McConnell, meanwhile, doesn't get the dire straits states are in could lead to a true Depression era, and collapse of remaining demand.   The goober with the mouth of a drunken Guppy blabbed:

"We're not interested in borrowing money from future generations to send down to states to help them with bad decisions they've made in the past, unrelated to the coronavirus."

But this is horse manure. As economist Paul Krugman pointed out Friday on Morning Joe , there is no "borrowing from future generations" since we are  borrowing  internally and in our own currency - not from outside creditors like the IMF or other nations. The truth is there is almost no limit to what can be borrowed given we are borrowing  from ourselves, and also interest rates are effectively zero.   Other nations like Great Britain and Japan have done it, and the U.S. can do the same. As Krugman has recently  written in the WaPo:

"Deficit obsession was deeply destructive in the years that followed the global financial crisis, helping conservatives push for austerity measures that held back economic recovery for years." 

And on 'Morning Joe' last week Prof. Krugman made it clear deficit spending was the primary way to alleviate hardship for the 30 million now unemployed, as well as the states.  As he told Joe Scarborough, who mentioned his abiding concern over the deficit for 25 years and asked why we shouldn't be concerned now:  

"If  you ask what is the future burden on the budget by the borrowing we're doing now, it's negligible, a rounding error.  It's just not going to matter.   Yeah, the headline numbers will be large and debt as a percentage of GDP will be as larger or larger than during World War II.  But everything we know about advanced nations that borrow in their own currency - like Great Britain and Japan - shows they are able to carry very high debt loads without crisis.  Even when interest rates aren't as low as they are now they are consistently below the growth rate of the economy.  So the debt will erode over time relative to GDP so long as you aren't totally irresponsible.   

Yes, there must be some limit but looking at the historical record it's very hard to find it. Look at Japan, its debt is 200 percent of GDP and no problems.  We came out of World War Two with debt at 100 percent of GDP and which everyone thought was terrible, but it turned out to be no problem at all.  And by the way we never paid that debt back, we just grew out of it.  Britain had debt that was 270 percent of GDP and they grew out of it too, after a few years down to 50 percent of GDP.

If there is an upper limit it should be so far from where we are that it shouldn't  bear on our policy decisions now."

The  responses to deficit worries given above also comport with what Krugman wrote for the Guardian not long ago:

In such an economy (with zero interest rates) the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialize...  

Why does deficit obsession and pandering to austerity work, say in the public debate sphere? Krugman again:

"Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances."


The point Krugman is making is that while family finances are limited by the family income, and hence a family cannot spend more than it earns (unless it uses credit cards and runs up debt and a greater likelihood of delinquency), the federal gov't can print as much money as it needs to. Yep, debt is generated but in its own currency.  Also the debtor here is also the creditor so there's no problem. But the family has to answer to outside banks, credit card issuers, collectors etc.  So the family debtors are not the same as the creditors.   Nor can the family just print money to pay off its outside obligations, whether an auto loan, mortgage or medical bill.


Bottom line? If we measured national debt and deficits in the standard ways other nations do, i.e. to external  nations, or agencies like the IMF (like Barbados, when it needs loans)  there wouldn't be  half the kerfuffle about it.  Rather than wasting time fretting over an increase in the national debt that amounts to a "rounding error" we need to help the states and 30 m suffering citizens get the money they need.  And in the process help the whole nation avoid an economic calamity.  

All the Fed needs is the green light from congress (namely the GOP run Senate), since it cannot lend or provide money to states on its own, only to businesses. 

   See also:

Economic Policy | Mitch McConnell

As McConnell Tries to Hold Aid to States and Cities Hostage, Mass Layoffs of Public Employees Begin

Excerpt:

"People like having their garbage collected, their roads plowed, and their 911 calls answered. They want their cities to function. They like their kids' teachers. They know all these people in their communities. That's the fire Mitch McConnell is playing with, and you can bet more than one vulnerable Republican senator recognizes that."

And:

Economic Policy

Republicans Are Indulging in a Nasty Gambit — but They Won’t like the Final Endgame

Don't Like Thinking About Deficits? Then Better Be Sure You Win The PowerBall Or Mega Millions.

Let's concede that deficits are not a choice subject of conversation or discussion for too many Americans. They'd almost rather reach for their Instagram and look at the latest flicks of kitties punching each other than delve into any economic topic, especially deficits.   But with the latest planned shitstorm by the GOP - passing a new round of tax cuts they ought to be paying more attention.

In a WSJ report on Friday we learned just how reckless the GOP and Trump bunch has been in pumping up spending (via tax cuts) to record levels, even as the likes of 'Bitch' McConnell talk about "having to cut entitlements" - namely Social Security, Medicare and Medicaid. Why pray tell?  Well, because the tax cuts passed last year didn't "pay for themselves" as the Repuke hucksters had promised. Indeed, the Treasury Department reported that the federal government's budget deficit grew to $779 billion for the year ending Sept. 30th.  This was up 17 percent from the year before and came as a result of last year's sweeping tax cut.

That tax cut drastically reduced tax revenues as a share of gross domestic product .  At the same time, according to the WSJ report '(Federal Deficit Has Widened') government spending rose 3 percent to $4.1 trillion.  Meanwhile rising interest rates and the amount of total debt outstanding drove up federal interest costs 14 percent last year, by $65 billion".  (Imagine paying $65 b  just in interest on your credit card)  Trump complained that this was because of the Fed raising interest rates, but of course he was talking out of his fat ass.

The interest rates being leveraged by the Fed are most directly concerned with too rapidly rising wages and prices. However, it is true that the national debt does increase if  the federal interest rates increase.  Higher short and long term Treasury rates mean the federal government's borrowing costs also rise, so generating significant consequences for the budget and national debt.   This is why generating revenue - especially in an environment already replete with aggregate demand (because of the exceptionally low unemployment rate) - is more important than reducing revenue via tax cuts for an unnecessary stimulus.

But that is why we need circumspect leaders and political parties who are courageous enough to add revenue - via higher taxes - when needed, instead of tying to score political points.  Every manjack in the country - especially students with massive loan debt and ordinary folks tapped out on their credit cards- knows that interest on their debt can eat them alive if they're not careful. That is why credit card companies insist you pay back only a minimum amount each month - hoping to keep the interest $$$ flowing into their bank coffers.

But this is now the situation with the U.S. government which is spending way more than it takes in.  And instead of increasing our income to accommodate our spending - like you or I would -it insists on spending even more while reducing revenue!  Can anyone say madness?

But lo and behold there's a method to the madness.   Thus, earlier last week Sen. Mitch McConnell responded to the growing deficit by blaming "entitlement" programs like Medicare, Social Security and Medicaid.  Indeed, he and the putative next House GOP chair (if the Reeps win everything again) have promised the 'big three' will be the first things they will go after for cutting.

Trump himself has called for massive cuts - trillions of dollars worth - to food stamps, disability benefits, welfare and student loans.  (Not cutting interest on them, but cutting the loans altogether).

Nancy Pelosi, say what you will about her, was at least honest in her assessment of the situation, quoted in the WSJ report:

"Republicans have exposed their true agenda in budget after budget: add trillions to the deficits to justify slashing the Medicare, Medicaid, and Social Security that seniors and families rely on."

But, of course, we knew this from the time the odious "stimulus" tax bill was passed, when no stimulus was needed, see e.g.
http://brane-space.blogspot.com/2017/12/paul-munster-ryan-admits-he-wants-to.html

The shortfall in government expenditures will rise above $1 trillion next year. Deficit spending makes sense during a recession. But what Trump is doing now is essentially allowing the rich to siphon the cream off the top, providing the middle class with some skim milk, and leaving the sour dregs for everyone else.  The stimulus where none is needed also makes it much more probable the Fed will have to continue raising interest rates to cool off an overheated economy. Fed chief Jerome Powell has already indicated that if things keep going as they are several more interest rate hikes may be coming next year - not good news for those who have mortgages, or plan on buying a home. (Already as reported in the weekend  WSJ and FT, home sales are receding - as interest rates now approach 5 %.)

Then there’s corporate debt which is now set to be on rocket power given the corporate tax cuts.  Companies have taken advantage of low interest rates to borrow like crazy. This summer, corporate debt hit a new high of $6.3 trillion. Worse, the cash-to-debt ratio, which was 14 percent in 2008, has dropped to 12 percent: that’s $1 in cash for every $8 of debt.  Nor are companies doing much with that tax cut money other than share buybacks, further fueling excess valuations, higher P/E ratios in the asset bubble, overheated stock market.  It's no wonder now the volatility is spiking again.

Here's another alarm bell for those (mainly investors) who might need one. For several years the term premium (the additional yield investors demand for the risk of lending over long periods) on the 10-year Treasury has been negative.  This is a rarity that is tied - in part- to supply constraints and bond buying by the Fed and other central banks.  But this month the term premium became less negative, rising to -0.32 from -0.45 percentage point (at the end of last month)

In the months ahead the term premium could get even less negative and possibly even turn positive. Also, supply constraints on the bond market are likely to shift as the Fed continues to reduce its balance sheet, i.e. the trillions of bonds purchased via quantitative easing after the financial crisis.  The more imminent danger point then will arrive as other central banks also rein in their bond-buying programs and the U.S. government issues more debt in order to cover its growing budget deficit.

Buckle your seat belts and pay attention, because ultimately - unless you're independently wealthy - what happens with the deficits and tax cuts will affect you!