While most everyone seems to be concerned with flattening the curve with regard to the number of people infected with the coronavirus, there is another issue that hangs over us.  It is an issue that will have a longer lasting impact on most people, whether they know it or not.

The Federal Reserve’s balance sheet zoomed past the $5 trillion mark this past week.  It is an unprecedented spike in new money in such a short period, even surpassing what happened in late 2008.

For context, the total balance sheet was under $900 billion in 2008.  The Fed is now creating over $600 billion per week.  So in a period of about 10 days, the Fed is creating more money (in terms of U.S. dollars) than what was in existence just 12 years ago.

With regard to the balance sheet, someone needs to tell the Fed to flatten the curve.

With regard to the U.S. government’s national debt, someone needs to tell Congress to flatten the curve.

Before this month, I had been emphasizing that we were in a giant bubble, particularly with regard to the stock market.  I have been trying to prepare my readers for a major change in the economy.

I have been warning about an impending crash in stocks, especially since the yield curve inverted last year.  I have been warning to prepare for a hard recession.  I never could have imagined it would come this hard and this fast.

I have been saying that bonds would initially do well, as investors seek safety in U.S. government debt. So far, this has been correct. I have been saying that gold would be a good longer-term play when the Fed ramps up the digital printing press. This has happened much harder and faster than I could have imagined.

Ben Bernanke (once known as Helicopter Ben for suggesting direct handouts of money) is saying that we will have a short recession followed by a quick recovery.  This is the same man who denied there was a housing bubble in 2006.

Here is the problem. The yield curve had already mostly inverted.  Long-term rates were already falling.  Stocks were already in a giant bubble.  A major recession was baked into the cake.  But now the almost certain recession is being blamed on the coronavirus.  The virus, and the reactions to the virus, may have been a trigger event for the recession, but we were already on shaky ground.

Don’t be fooled. This is going to be a deep and hard recession.  It will likely be long too.

What scares me more is the unprecedented actions that are currently being taken.  It is bad enough that state and local governments have shut down many businesses, thus forcing many people into unemployment and forcing many small businesses on the edge of extinction.  What’s even more dangerous are the interventions coming through Congress and the Federal Reserve.

Debt and Inflation, The Only Answers

Other than radical libertarians and Austrian school economists (mostly the same people), most people are accepting the unprecedented actions coming from the federal government and the Fed.

The Fed has lowered its target rate to near zero.  Some of the short-term yields have been reported as negative.

The Fed has eliminated reserve requirements for banks, which means that banks don’t even have to have a measly 10% of deposits (as before) in reserve.  This is especially curious given that excess reserves are still high.  It tells me that there is at least one major bank, but probably more, that is in major trouble.

The Fed has said it will expand its buying of assets beyond Treasury securities and mortgage-backed securities.  The Fed will be buying municipal bonds (to bail out irresponsible state and local governments) and corporate bonds (to bail out irresponsible corporations).  The Fed will likely be buying stocks too, if it hasn’t been already.  This is why I am hesitant to short the market too much at this point.

The Fed has also indicated that it will expand its balance sheet as much as it takes.  I don’t know if this includes sending us into a situation of massive price inflation.  But at this point, it is open-ended QE.  I thought the Fed was in high gear pushing the pedal to the metal in 2008 through 2014, but apparently there is a higher gear still.

This is going to have horrible consequences for the economy.  It is going to massively distort the allocation of resources. It is going to dry up capital investments.  It may end up ruining savers who conservatively invest their money in what they think are non-risky assets.  But holding cash and cash equivalents may turn out to be one of the riskiest investments of all.

Meanwhile, Congress is also making a mockery of economics.  A “stimulus” bill of over $2 trillion just sailed through. A few hundred billion was allocated to directly paying off the American people (helicopter money).  A portion is for extended unemployment benefits.  An even larger portion is for corporate bailouts and what most would see as pork (if it were looked at closely).

For $2 trillion, Congress could have eliminated all federal taxes (income taxes, corporate taxes, payroll taxes, excise taxes, etc.) for the rest of the year, but of course they wouldn’t do that.

There was almost no opposition to this bill.  Rand Paul may have at least questioned parts of it, but he is out of commission right now after supposedly testing positive for the coronavirus.

Thomas Massie of Kentucky tried to get a recorded vote on the bill only to be cursed at by John Kerry and called out by Trump that Massie should be thrown out of the Republican Party.  Massie is the closest thing that libertarians have to Ron Paul in Congress.  He is a small light of good and hope in a dark tunnel of evil.

As Massie said of the legislation and the government’s other spending, “If getting us into $6 trillion more debt doesn’t matter, then why are we not getting $350 trillion more in debt so that we can give a check of $1 million to every person in the country?”

That’s about all that needs to be said.  So many people are cheering that they will be getting “free” money.  A typical family of four will receive $3,400.  But if this is so good, why not send everyone a million dollars?

I thought the stimulus under Obama in 2009 that was near $1 trillion was crazy.  I thought the run up of the national debt has been crazy for nearly two decades.  I thought it was crazy that the government was running a trillion-dollar deficit before this virus hit, and during a time of relatively low unemployment.

The government was already set to run a trillion-dollar deficit this year without a recession. Now tax collections will go way down, especially with unemployment jumping so high.  And now the government is adding another $2 trillion on top of all of this.  I think the deficit will hit $3 trillion this year alone.  It was already unsustainable.

It may seem that this can just go on forever because the powers-that-be have seemingly gotten away with it for so long.  But I can assure you that this is unsustainable, and something has to give.

Maybe it will be negative growth for a while.  Maybe it will be shortages in consumer goods (especially if there are price controls).  Maybe it will be massive unemployment for an extended period.  Maybe it will be massive consumer price inflation.  It may be all of these things combined.

There ain’t no such thing as a free lunch.  There ain’t no such thing as free money from the government.  The government is throwing a bone to the dog to distract him from the real threat.  We are the dog.

I will continue to explore how this whole thing may play out in 2020 and beyond.  I can tell you with certainty that when the hype of the virus dies down, things are not going back to normal.  That is impossible now.

If the government and Fed weren’t doing these extraordinary measures, we might have a chance of somewhat returning to normal.  But everything has changed now in just the last few weeks.  There will be massive defaults.  There will be massive bailouts.  There will be massive monetary inflation.

A recession like this would typically mean a reduction in overall consumer prices as the demand for money increases.  When people are fearful, they tend to spend less money.  Some people have no choice but to spend less money.

Unfortunately, the lower prices may not last long.  The Fed is trying its best for the monetary inflation to translate into consumer price inflation.  Unfortunately, it may be more successful this time.

Owning Assets

Commodities typically fall in a recession.  As we can see with oil, this time is no different.

The one exception in all of this may be gold.  It has been volatile.  I have heard that there has been a high demand for physical gold, but I don’t know if that’s true.  It hasn’t translated over to the paper market yet.

People typically seek liquidity in a deep recession.  Gold will usually go down in price unless there is fear of significant price inflation in the future.

I have no idea if gold will fall from where it is, but I don’t think it will last long.  The Fed’s unprecedented increasing of its balance sheet and the uncertainties of the whole economy will increase demand for gold in the long run.

In a couple of years, I expect the gold price in dollars to be multiples of what it is today. As I said, the debt is unsustainable, and the Fed is going to do massive damage with its monetary inflation. The only things that can put a stop to this are interest rates and price inflation.  If we see double-digit interest rates and price inflation similar to the 1970s, then maybe we’ll finally see the Fed pull back, and Congress may actually be forced to examine its budget.

I am uncertain about interest rates and if they will spike and when it will happen.  I am more certain about the prospects for gold. I believe that liquid money and gold are the two most important financial assets to have right now. In dollar terms, I expect gold to go wild.  It will be volatile, but I expect more ups than downs.

I have little interest in stocks right now.  I have some gold funds for speculative purposes, and I have some stocks in PRPFX, which is the mutual fund that somewhat mimics the permanent portfolio that I advocate.

I have a small short position in stocks, but nothing that would be devastating if I am completely wrong.  But I do expect stocks to go down more from here, even with the bailouts and monetary inflation. Maybe I will start dollar-cost averaging small amounts into an index fund, but they need to get beaten down further from here.  I will seriously consider starting to go into stock index funds when the Dow goes below 10,000.  If it doesn’t ever do this, then I am fine with that.

This is going to be a wild ride.  The short-term impact of the virus will be nothing for most people compared to what they are about to experience financially.  If you are getting helicopter money from the government, I suggest that you use it to pay down debt or buy gold.