More than 16 million Americans have filed for unemployment benefits in the past four weeks. Economists estimate that the jobless rate in the U.S. is around 13 percent, the worst it’s been since the Great Depression. To stave off economic collapse, the Federal Reserve has turned on the money printing machine. It’s going brrrr.
With all these people out of work, businesses closed, and economic activity stagnating, some experts have suggested we can put the economy on “pause” by, essentially, printing infinite money, and giving it to businesses and people to keep things more or less the way they were before the coronavirus pandemic hit.
Checks are on the way to Americans, but that’s cold comfort for people with bills to pay now and who have no idea when, if ever, they’ll get back to work. To get through the crisis, can the Fed just print unlimited money? What are the consequences of just giving everyone enough cash to survive the next few months?
According to David Weil, a Professor of Economics at Brown University and the Director of the James M. and Cathleen D. Stone Wealth and Income Inequality Project, it’s complicated.
But that doesn’t mean we shouldn’t do it.
Motherboard: Are you familiar with the “money printer go brrr” meme?
David Weil : Yes, yes.
When we talk about financing the spending that's gonna happen, people conflate two things. One is the federal government going to debt markets and borrowing—that is issuing bonds.
So the deficit for this year was going to come in at about a trillion dollars. So the federal government was going to have to issue a net trillion dollars of bonds to finance operations. That's before all this happened.
And the debt was somewhere around $17 trillion. And now, with what's happened to the economy already and with the spending bills that have been passed already, It looks like the deficit for this coming year is going to be, lord knows, $3 trillion? $4 trillion? And the government's gonna have to borrow a lot of money.
Money, this special asset, is created by the Federal Reserve, which is part of the government. And it is true that the Federal Reserve creates money out of nothing. The Federal Reserve snaps fingers and a little computer entry in a bank account at the Fed suddenly has an extra billion dollars in it.
Most economists, including me, would tell you that in the long run, you can't finance the government that way. We're in an unusual period now in which people are happy to hold the money that the Fed produces. And so the Fed is going out into asset markets and it's trading this money that it produces for other assets. That's what we called quantitative easing, or monetary expansion. But that is something that only happens in sort of special circumstances.
In the long run, people don't want to hold money, they want to hold assets. Houses or shares of stock or something like that. And when people don't want to hold money, either the Fed soaks it back up, or you get inflation. In this emergency that we're in now, yes, the Fed’s creating a lot of money and that's helping to finance all this spending.
But there's no real sense in which that's free money or free spending power for the government that's gonna all get rolled into government debt. And that's gonna all have to be paid by us or our children or our grandchildren. There is no magic money printing thing that the Fed has been hiding from the people that allows us to just finance whatever spending we want by turning the money crank.
OK, but I’ve been hearing that we’re running up the debt and that I’m going to have to pay it, or my children are going to have to pay it, my entire life. And the check never seems to come due or, if it does, I don’t seem to understand the ways in which it is.
So that’s a fair question.
Imagine we were a sovereign nation that could borrow, but we couldn’t print our own money. We have examples of that. Panama uses dollars. So Panama can borrow money, but there is no Panamanian Federal Reserve that can turn the money crank and get more money.
All the scolds and sour people who told us that we’re running up big debts and someday they’d come due, and yet so far it doesn’t seem too bad. There’s an Ernest Hemingway line about what it’s like to go bankrupt. You do it very slowly then all at once. For people, companies, and government’s it’s always been the case that when you have access to credit, and you run up debts, and people tell you shouldn’t, you can often keep doing that until you can’t anymore.
Since the Reagan administration, the United States has been doing this experiment in running up the debt to GDP ratio in peacetime, which is unprecedented. Now that chicken hasn’t come home to roost yet, you’re right. But I think it will someday and that’s going to really suck.
We’re very lucky that, right now, the U.S. has what they call ‘fiscal space.’ We can go to credit markets and say, ‘Hey guys, we need another $3 trillion.’ And the credit markets look at us and say, ‘OK, your debt's not out of control. We’re happy to give you that money.’
We have been pissing away that fiscal space since the Reagan administration. We still have some left, which is great. But at some point, we’re not gonna.
Another thing that’s happened that’s unprecedented and not that well understood, is that interest rates around the world over the last several decades have fallen quite a bit. That means that servicing debt is way cheaper than we thought it was going to be. That’s a piece of good luck that’s allowed us to run these large deficits and not suffer for it.
Did you see this interview on 60 Minutes with Neel Kashkari where he said "There’s an infinite amount of cash at the Federal Reserve?"
The Federal Reserve doesn’t just send people money. I sometimes read left wing or socialist things that are like, “Oh, look, the Fed is just giving money to banks!” That’s not what the Fed does. What the Fed does is it trades its money for other assets.
So what Neel Kashkari was saying was that if the banking system needs money, we will allow the banking systems to trade other assets that they own for money that we will produce. And we will do that as much as is needed to stabilize the financial system. He didn’t mean, “Go ahead and build whatever windmills and aircraft carriers you want because we’re just gonna give you the money.” He very well understands that you can’t create spending power out of nowhere.
OK, but what is the consequence of everyone just waking up tomorrow with $100,000 in their bank account?
Let’s imagine two scenarios. In the first, the Fed sends you and everyone else $100,000 in your checking account. Boom, it’s there. And you just decide to leave it there. You say, “You know what, this is great. I feel better now kind of having $100,000 in my checking account, I feel more secure.” But you don't do anything with it. And everyone else behaves the same way. Okay, that's not inflationary.
At some point, you might say to yourself, “You know, normally, I only kept a small fraction of my wealth, or my assets in the form of cash. It’s nice to keep $5,000 in my checking account, now suddenly I have $100,000 in my checking account. So, I'm gonna fix that situation, I'm going to go buy some stocks, maybe I'll go buy some food stores, maybe I'll go buy a car.”
You're going to start spending that money. Now where does the cash go? You wanted to have less than $100,000 worth of cash. So you spent it on a car and now the car dealer has that extra cash so she's gonna do something else. Well, when people kind of try to reduce their cash balances, if the Fed doesn't, soak it back up, then you get inflation.
The money is sloshing around and everyone has more money than they want and, and they try to buy things from each other. And that just builds up the price of stuff. It ups the price of assets, it ups the price of real goods. At that point, the Fed would say, “Oh, no, this is no good. We've got inflation coming. Let's soak that money back up.” If you don't soak that money back up, you just get a rise in prices.
How bad do you think the economic impacts of this pandemic will be?
In an unrealistically happy scenario, I don’t see how you avoid a pretty steep recession based on all the economic damage that’s already been done. States have just blown through their spending. Schools, the NYC subway. All these institutions are in terrible financial shape.
With super aggressive federal spending in a way that even the Obama administration didn’t want to do, and the Republicans wouldn’t have let them do, just giving money to everyone, maybe we just have a deep recession...with a lot of business failures. That’s still pretty bad.
That’s the good scenario.
The bad scenario is truly scary. You get more of those business failures. You get households in even worse financial situations, a year behind in their rent. The federal government would have to come to the assistance of the states. The states are running out of money. The hospitals are running out of money. We’ve had two big spending bills so far, there’d have to be a third and a fourth and a fifth and a sixth and so on, just to patch things over.
It would still be carnage that you might feel, easily, a decade later. That’s the bad scenario.
To get a V-shaped recession, we’re going to have to shovel a lot of money out the door. Which I approve of. But we’re going to emerge from this thing with a lot of debt. That could weigh on the economy for a generation. We were not doing a good job of putting our fiscal house in order and it’s going to be very hard if we have another $10 trillion in debt as a result of this episode.
I don’t see a lot of easy, cheery, recovery from all this. There’s a chance that the economic system will emerge will be fundamentally different. If the government is going to be supporting people’s consumption in some kind of universal basic income, that might be good.
Ironically, it may be that we look back and say that Donald Trump was the man who brought social democracy to America. Maybe we’ll end up with universal health. Maybe we’ll end up with universal basic income. We might end up with a much bigger government.
I’m fine with that. What I’m not fine with is that we still have someone in power who doesn’t think that we have to pay for it by taxing folks.
Now I’m depressed.
I have that effect on people.
It’s worth going there. It’s early days, but it’s worth thinking about what kind of political or socio-economic realignment might result from this.
Something that hasn’t gotten that much attention is that the people who are really bearing the economic brunt of this, people in their 20s and 30s, that generation has been bearing the brunt of a lot of stuff. They’re bearing the brunt of the student debt crisis. They’ve been bearing the brunt of tepid wage growth.
They’re also the ones who are benefiting the least. Despite the fact that everyone can get sick...the fact is that mortality is concentrated among people who are older. I wonder, if at some point, there’s going to be a good deal more pushback in which these young people say, “You can’t put our lives on hold and give us nothing or only give us minor support for the benefit of the social good which is mostly not us.”
You might end up with some rewriting of the social contract. This young generation that’s bearing the brunt of this social isolation and economic fallout might say, “We want compensation for that.”
They’re sacrificing a lot.