Why Covidmania Won’t Go Away
Posted July 19, 2021
I asked some friends their opinions on why this Covidmania won’t seem to go away. There were all the usual theories about great resets, pharmaceutical profits, and the attempt to create a global health passport. But the most intriguing comment I received was this explanation: money printing.
Huh? How is that related to virus control?
Let’s think about that. A year ago March, most countries in the world locked and stayed that way for the better part of a year. In the US today, we are again faced with the prospect of more invasive policies. The big virus news these days is the reimposition of a mask mandate in Los Angeles. It pertains to everyone including the fully vaccinated, even though cases are down 93% from their peak and mortality is below normal.
It never seems to end. The reason traces to a fateful day: March 27, 2020. On this day, two weeks into the lockdowns, a bill came before Congress that would dump $2.3 trillion on the states to beef up their locked-down economies. Members of Congress were all huddled in their respective homes, hiding from a virus they were certain was a mortal threat.
The vote was to take place on Zoom. Thomas Massie of Kentucky was outraged. A very smart man, he knew from the outset that this “15 days to flatten the curve” was complete rot. It was a mathematical impossibility. He knew that this disaster would continue. He further knew that it was certain to be the case that it would continue if Congress showered the states with money. This would mean keeping businesses closed.
No longer having to worry about an impending fiscal crisis due to lost tax revenue, state governments could actually be paid good money for destroying things and controlling their people in a massive social experiment. That sounds like fun!
Money for the Taking
Most Republicans supported the bill based on a flawed idea that this was nothing but compensation for having harmed commerce. Massie however said the truth: this money would be a moral hazard. So he did a hilarious and brilliant thing. He called a quorum so that members of Congress had actually to show up to Washington to record a voice vote.
It wasn’t just Congress that was furious that he was risking pathogenic exposure in a time of wild disease panic. It was also Trump. Trump was demanding the bill be passed right away. So he took to Twitter and denounced Massie in vitriolic terms, saying that he should be kicked out of the Republican Party.
The bill passed of course, with only Massie dissenting.
Now let’s dig a bit deeper. How precisely does it come to be that Congress has that kind of money to spend with only a few day’s notice? It’s not from taxes. It’s running up debt ever more. Now in a normal world of debt – think of the municipal bond market – there has to be a market to underwrite it. But that can have big effects on the yield curve and production structures, generally. If you are a local or state official, you have to watch these market signals. But if you are part of the federal government, it is another matter entirely.
You have the Federal Reserve on your side. The Fed stands ready to buy all the debt you issue with newly created money – a weird and destructive power, but one that is possessed by most central banks around the world. So legislatures no longer have to worry about creating debt, spending money, or otherwise massively expanding their power.
Let’s let the Federal Reserve bank of St. Louis tell the story:
Though the Fed quickly lowered short-term interest rates down to zero, financial conditions were not obviously auspicious from April to June for such a massive and sudden debt issuance. A pertinent question is who purchased the newly issued debt that let the federal government respond to the economic effects of the pandemic?
As it turned out, the biggest buyer of federal debt was the Fed, which acquired $2.3 trillion during fiscal year 2020. Hence, the net issuance to the non-Fed public was about $1.9 trillion, which is still quite sizable. The first chart shows debt held by the public net of Fed holdings, while the second chart shows Fed holdings of federal debt.
The domestic financial sector (excluding the Fed) has become the main buyer of federal debt in recent years, a trend that was reinforced during the current episode. Money market mutual funds were the key players within this group, increasing their holdings of Treasury securities by $1.4 trillion between September 2019 and June 2020.
Money for Nothing
People are working to find every excuse for the upward price pressure today. Commentators say it is only post-pandemic dislocations working through the system. There is truth in that, but it simply cannot be the case that the Federal Reserve has nothing to do with it. Nor can it be true that the Fed knows precisely how to shut off inflation if it gets out of hand.
Sometimes there is a tendency to overcomplicate things. Considering the Fed bought half the astonishing debt created by Congress in 2020, is it really such a shock to observe alarming levels of upward price pressure?
In any case, back to the issue of cause and effect here. Think about this. Without a Fed, Congress could not just suddenly throw down $2.3 trillion without a thought for fear of the consequences. This kind of recklessness absolutely requires a printing press. And without that spending, it is highly unlikely that even Blue states would have remained so long in lockdown because their governments would have been starved of revenue. That way risks real fiscal danger and even default, except and to the extent that Congress slathers subsidies all over terrible policies.
And without that spending, the lockdowns might not have lasted more than a few weeks. There are natural limits to stupidity in the policy world. What can override such limits is the ability to generate as much funding as one needs through highly specialized powers. If Bitcoin did this, its value would plummet. The government and central bank get away with it because of their legal and quasi-monopoly privileges.
It’s the Fed, Stupid
So, yes, I’m persuaded of my friend’s theory that the real reason that Covidmania persists and will last as long as possible is because of the Fed. It takes several steps of logic to see it but once you do, you cannot unsee it.
This country, and all countries of the world, took a fateful step when they created central banks to prop up not only the banking system, but the federal government itself in times of crisis. The Fed has been at it for longer than 100 years, but never more egregiously than we’ve seen most recently when the Fed is deploying its powers to back despotic policies and then denies any responsibility for doing so.
This is also why spending restraints on Congress, even a Constitutional amendment, will not work. So long as the Fed stands ready to bail out the political class from the results of its stupidity, it will continue.
As powerful as the Fed is, it lacks the ability fundamentally to blot out the existence of reality. There is just no world in which the Fed can purchase unlimited amounts of debt racked up by unlimited amounts of legislative spending. The bill will come due one way or another.