$2 Trillion Isn’t Enough. We Need a Money Financed Fiscal Program.



Anyone who thinks the recently passed $2 trillion stimulus package is enough to stem the economic fallout from the Coronavirus is living in fantasyland. The United States produced almost $18 trillion in personal income in 2019; $2 trillion won’t put a dent into solving the myriad of problems the country is likely to face over the coming months.


Not only will unemployment reach levels not seen since the Great Depression, but small businesses, as well as individuals, will be forced into bankruptcy if our leaders continue to act with such a torporific level of urgency. It took far too long for Congress to pass this bill, and it's laughable how much it falls short of what the economy actually needs. Congress needs much more than $2 trillion to get our economy back to pre-Coronavirus levels, and the Fed is the only institution that can give them the amount they need.


To weather this, small and medium sized businesses will need zero interest loans just to keep the lights on; large corporations will demand financial incentives to convince their boards not to lay off a majority of the workforce; and consumers will need purchasing power — regardless of their employment situation — so they can spend us out of this mess. Expanded unemployment insurance and $1,200 per citizen is not a solution for a problem of this size. In the best of scenarios, it will be months before everyone goes back to work, and a one-off stimulus of this magnitude isn't the answer.

So when Congress realizes this, what will they do? Where will they find the real money needed to address this crisis? Well if we leave it up to them and what I like to call their "Congressional Budget Blinders," which make them believe the US government, with its own currency, and own central bank, actually has a budget constraint, we are going to be in a world of hurt. Because if we learned nothing else from the last two weeks, it's that Congress moves slow and rarely thinks outside the box. Today's situation calls for immediate, out of the box thinking, which is why we need to skip the political strong-arming altogether and simply give Congress the money it needs to fight this.


But how? Where would the money come from?


Well instead of running up the national debt to pass fragmentary stimulus packages —which is what we are currently doing — we can print our way out of this mess by implementing a money financed fiscal program. This is where the Fed creates new money and simply gives it to Congress to spend. What is colloquially referred to as Helicopter Money, the idea is that the Fed, with a few clicks of the mouse, creates new money and deposits it directly in the Treasury's digital account at the Fed. Rather than wasting time trying to raise money through eliminating tax loopholes, cutting non-essential programs, or issuing new treasury securities (debt), money is instantly deposited into the government’s general account. How Congress uses the money — tax breaks, basic income, investment incentives for small businesses — is a topic for another day. Today's issue is that Congress needs cash — a lot of cash— and the only place they can get the amount they need, and in a timely fashion, is the Fed.


So if $2 trillion isn't enough, what is?


The truthful answer is that there’s no way of knowing for sure. Nobody can say with any level of certainty how long this will last or much cash will need to be injected into our economy before this crisis is behind us. That's why this program should be an evolving capital facility designed to meet the needs of the economy as they arise. For instance, if $3 trillion is deposited into the Treasury's account, but it becomes clear Congress needs more money to bailout the auto manufacturers and provide additional assistance to small businesses, the Fed would simply deposit more. This may seem radical, but it will work.


Now there are some that take issue with this idea. Some believe giving Congress the proverbial blank check would lead to uncontrollable inflation. But anyone who thinks inflation should be a primary concern right now has their head in the sand. We are entering a deflationary environment, and, if anything, printing new money will provide the inflation we need. There's also a legal argument against it, albeit a weak one. In essence, the Fed is not legally authorized to do this. But, the "unusual and exigent circumstances" clause (13.3) of the Federal Reserve Act allows for such action. The Fed would need collateral, but the US tax base is more than sufficient to cover whatever is legally required.

We have the tools to combat this crisis we just need to open our minds to them. Yes, the idea mentioned here is new. Yes, it is untested. Yes, there are no assurances that some money will be wasted on pork-barrel projects that only serve a select few, but it is much better to let some money go to waste than to parsimoniously allow the economy to fail.


This week, with many routine payments coming due and the monthly jobs report coming out, we will finally see just how many Americans have lost their jobs and started missing payments because Congress failed to realize that what we are going through is worse than the 2008 financial crisis. Back then, commercial activity didn't come to a sudden halt the way it has today — yes, demand plummeted, people lost their jobs, and some unfortunate borrowers lost their homes, but the Main Street economy continued to function more or less uninterrupted. Today offers a much grimmer picture.


Having said that, we must keep things in perspective. We need to remember that Coronavirus is first and foremost a health crisis. It is a pandemic that is wreaking havoc around the world and can only be addressed by the best medical minds diligently working together and sharing their insight with the global community. But, if our policymakers don’t act decisively in crafting an appropriate economic response, the fallout from the virus will have morphed into perhaps the worst economic crisis we have ever seen.


We don't have time to argue about where to find the money. The Fed has it. Let them print it.