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U.S. Budget Deficit
April 6, 2020

What could the coronavirus bailout mean for debt?

What the $2 trillion coronavirus bailout is really going to cost

“Economists tell us that there is no such thing as a free lunch — that you must always give up something of value to get something you value more. But Americans may be getting something close to a free lunch in the $2 trillion economic rescue package, thanks to an accommodating Federal Reserve and a financial sleight-of-hand known as “monetizing the debt.” Here’s how.

To get the money promised to businesses, households, hospitals and local governments, the Treasury will have to borrow it over the coming months by selling IOUs of various durations to investors in the Treasury bond market. But at the same time that the Treasury is selling trillions of dollars of these short-term notes and longer-term bonds, the Fed will be buying up a roughly equal amount from the Treasury market (though not necessarily the exact same IOUs), making good on its recent promise to provide whatever “liquidity” the economy needs to get through the pandemic.

And where will the Fed get these trillions of dollars? That’s easy. All it has to do is print as much money as it needs by increasing the balance that banks have “on reserve” at the Fed. That power to print money is engraved at the top of every bill in your wallet, in the words “Federal Reserve Note.” In other words, one arm of the government will create $2 trillion out of thin air and then lend it to another government agency, which will turn around and give or lend it to households, businesses, hospitals and local governments.

The Fed rejects the idea that it is engaged in anything so sketchy as monetizing the national debt. It sees itself as merely fulfilling its mandate to promote full employment and price stability. And in good times and bad, the way the Fed accomplishes this mission is by buying and selling Treasury notes in the open market. Rather than a free lunch, debt monetization would be an extravagantly expensive repast paid in the form of hyperinflation, massive unemployment, an epidemic of bank and business failures. Just ask the folks in Argentina.

In the end, the real cost of printing and spending trillions of dollars to rescue the economy is not likely to come in the form of higher taxes to pay debt service or higher inflation that reduces our standard of living. Instead, the price will be paid by having a boom-and-bust economy in which the level of indebtedness, the depth of the recession and the size of the government rescue increase with each cycle, until the world finally loses faith and we are forced to give up our exorbitant privilege, much as Britain did a century ago.

Nobody knows when that tipping point might be reached. But it is worth noting that the United States has already gone from being the world’s largest creditor to the world’s largest debtor, and our lead in that dubious category is widening by the day. So as we enjoy the benefits of our $2 trillion free lunch, we might do well to remember the advice of a wise economist, Herb Stein, who famously reminded us that “if something can’t go on forever, it will stop.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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