Deficit Spending and Bailouts

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The latest in Corona news has me thinking. With some states considering re-opening either partially or in some other form or another, and others warning it is way too soon, I have to fall back on what I said a few weeks back.

With the world in shutdown and most forecasting the worse economic ramifications in a century or more because of it, we have to ask, is the damage done by the global shutdown worth it?

Listing all the economic harm done and ongoing to world economies seems like an endless list of bad news. The price of oil is in freefall, unemployment is skyrocketing, small businesses are shuttered and many will not reopen. Many others will try to and close their doors later. Bankruptcies loom, and likely many of them. Supply chains are being disrupted while distortions in the market conduits of the world that bring supplies to inhabitants are short-circuiting everywhere. Mortgage defaults are climbing to unheard of levels while many large corporations are staring into the abyss of insolvency. Auto sales are off by a staggering amount while the worlds airline companies park their jets on tarmacs all over the globe. Cruises lines and theme parks, sports arenas and concert halls, all are empty. It’s like the worlds economic wiring harness is slowly but surely being short circuited.

It is truly unprecedented.

In response to the shutdown and the damage it will cause, central banks of governments worldwide are initiating an historic arsenal of bailouts and stimulus programs. Targeting both individual and business rescues alike, the amount of money being sprayed into the global monetary system exceeds the wildest of previous imaginations.

With over six trillion in stimulus already in process in the U.S. alone, even more trillion dollar programs are being discussed by Congress. $1200 payments to every citizen in the states is in process with an additional $500 per eligible dependent being added to the stipend.  The Paycheck Protection Program throws billions at businesses to retain employees while the various departments of unemployment are overwhelmed with applicants. Applications are being ramrodded through with probably little oversight due to the sheer volume of them. On top of benefits, weekly $600 bonuses are added to each and every unemployment claim. 

The newest program in congressional discussion will give every business with annual revenues under one million up to $75,000 as a onetime gift. The final amount will be somewhere in the area of 30% of gross revenues or the $75,000 maximum cap, whichever is less. This program is targeted to help the small mom and pop stores. In other words, the epitome of small business entities. 

The large corporate bailouts are also encompassing trillions more with even larger amounts likely. 

Despite the damage to individuals and the businesses they represent, the potential damage to the financial balance sheets of world governments that these massive bailouts may eventually cause is going mostly unnoticed and almost entirely undiscussed. Put simply, how much money can a government give away before the government itself is in need of a bailout? 

U.S. bailouts and stimulus are financed by the Treasury department who in turn are financed by our central bank, the Federal Reserve (the FED).

Most central banks no matter where they are possess no real funds per se. Although tax receipts are the major source of funding for governments everywhere and are comprised of real funds, the debt owed by almost all central banks worldwide far exceed their assets. Hence there is a negative balance on most if not all central bank ledgers. Any new monies spent subsequently then have to come from issuing or creating new debt. 

Some new U.S. debt is issued through government IOU’s from the Treasury Department and then purchased by the FED. This mechanism is called Quantitative Easing (QE). The IOUs are also sold to investors worldwide. Whichever of the two mechanisms is used, both create new government debt, also known deficit spending.

Although deficit spending used to be a hot political topic between the two parties since our governments inception, the discussion has seemed to all but disappear from political conversations in recent years. 

Most economists agree deficit spending in times of economic stress may be necessary to stabilize an otherwise unstable economy brought about by some sort of shock to the system, whether it be a recession, war, a 2008/9 like event or in this case, the Corona virus. 

The concern being that there is only so far governments can go into the red with deficit spending. At some point excessive deficits can lead to loss of confidence in the currency at hand, which shows up in unwanted inflation, and in the extreme, severe hyperinflation, a devastating situation that can implode an economy.

What is hyperinflation? 

Think Mexican Peso.

​This article expresses the opinions of Marc Cuniberti and should not be construed as individual investment advice. No one can predict market movements. Investing involves risk. You can lose money. Mr. Cuniberti is an investment advisor representative through Cambridge Investor Research Advisors Inc. a registered investment advisor. California insurance license 0L34249

Marc Cuniberti

Marc Cuniberti hosts Money Matters Financial Radio and the Money Management Radio on KVMR FM and is carried on 66 stations nationwide. He is a financial columnist for the Union News and half a dozen newspaper publications. Marc holds a degree in Economics with Honors from San Diego State University. He is a registered financial advisor for SMC Wealth Management in Auburn, California. He holds California Insurance License 0L34249 and is the owner of BAP Inc. Insurance Services. He also owns Bay Area Process Inc., an engineering and services corporation. He is the founder and producer of the video series “Investing in Community” carried on NCTV and on 65 social media sites. He is also the founder and administrator of Money Matters, Investing in Community Video Series, Fire Insurance Information and Inquiries, Daily Laughter and Inspiration and Nevada City Peeps Facebook pages. He has appeared on NBC and ABC television and the subject of a host of TV documentaries for his financial insights, successfully calling the banking and real estate implosion of 2008 two years before it occurred. Marc holds a masters teaching certification in Tae Kwon Do martial arts and is a big brother for the Big Brothers Big Sisters program in Nevada County. He is presently media consultant for the IFM Food Bank of Nevada County.

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