The Federal Reserve’s balance sheet is now at $6.367 trillion.  The previous week it was at $6.083 trillion.  This is an increase of approximately  $284 billion in one week.  For a couple of weeks in March, it was going up over $500 billion per week.

This is what is being added every single week.  The total balance sheet was around $900 billion in 2008 before the worst of the financial crisis hit.

The Fed doubled its balance sheet in late 2008 in the matter of a couple of months.  It then took over 5 years to double it again, which in itself is crazy.

Now it looks like the Fed could double its balance sheet again in the matter of a couple of months.  But instead of starting at under $1 trillion, it was starting around $4 trillion.

I don’t know where this ends.  Maybe it will be at $10 trillion by the end of the year.

This is going to have severe consequences that are far greater than businesses being shut down for a couple of months.  We are going to see a dramatic decrease in living standards.  Real wages will decline significantly.

On the one hand, people will be fearful and cut back consumption.  But then we have the Fed creating massive amounts of money, almost daring people to defy it by holding back consumption.

The Fed is seemingly trying to create significant price inflation, and I am afraid we will get it good and hard one of these days.  The positive side is that it might finally force the Fed to scale back, and government along with it.

This is going to hit government at every level.  The Fed is going to buy municipal bonds to help bail out state and local governments, but it can only do so much.  The state and local governments cannot create money on their own.  With a major decline in tax collections, they will eventually be forced to scale back dramatically.

This whole thing is going to be extremely painful.  You should prepare yourself accordingly.  I think your number one concern should be protecting your main source (or sources) of income as best as you can.  Your second concern should be protecting against massive price inflation.

Let’s hope that we can get through this and government at all levels will be forced to scale back drastically.  Maybe we can one day look forward to much greater liberty when the welfare state loses legitimacy.

When Donald Trump was elected president, I felt like it exposed a lot of people.  I saw people who called themselves libertarians who supported almost every aspect of Trump.  I also saw people who called themselves libertarians who opposed virtually every word uttered by Trump.  There really is such a thing as Trump Derangement Syndrome (TDS).

It is understandable for a libertarian to love Trump for his political incorrectness, his slams against the establishment media, and his exposing (even if inadvertent) of the deep state.

It is also understandable for a libertarian to hate Trump for his bad economics, his horrible cabinet picks, and his continuing of foreign wars.

With that said, it is almost impossible to be a principled libertarian and not have something of a nuanced position towards Trump.  Some of the things he says are really good.  Some of the things he says are really bad.  I think the best a libertarian can do is to cheer him on when he says or does something that favors liberty and to speak against him when he says or does something against liberty.

When I hear a libertarian who says Trump should be impeached for colluding with Russia, it tells me something about that person.  This is someone who doesn’t really oppose the state.  They are buying into the war propaganda (against Russia). They are buying into the establishment lies.

I can see where libertarians could have legitimate differences regarding Trump on an issue like immigration.  I can see legitimate differences on opinions of Trump’s effectiveness or his overall intentions.

But overall, Trump’s presidency has done me a favor of further identifying people who call themselves libertarians who I just can’t trust.

I have my safe spaces, if you will.  There are websites and podcasts that I go to on a fairly regular basis where I can depend on hearing good libertarian thought.

I am in a small minority in the world.  Most of my life is surrounded by people who see the world in a different way, at least politically speaking.  I also get some exposure to the establishment news, even when I try to avoid it.  This is why I like to be able to escape to a libertarian world at times.  I find this in reading articles, watching videos, and listening to podcasts.

The Coronavirus Exposure

Like almost everyone else in this world, things have changed dramatically in my life over the last month.  Many businesses are shut down in my area.  I am working at home full time.  Fortunately, we can go outside and get exercise, and my kids were already homeschooled, so there is no adjustment there.

Unfortunately, something else in my life has changed over the last month.  Some of my “safe spaces” have become a little less safe.

I have seen many libertarians fall for the media hysteria hook, line, and sinker.  They have been swindled.  They have been taken for a ride.  Some of them are starting to admit this is the case. Some of them are gradually changing their tune without admitting they were duped.  Some of them are standing by the hysteria.

I am not just talking about the libertarians who I already didn’t trust.  This isn’t about people who enthusiastically supported Gary Johnson and Bill Weld in 2016.  This isn’t about someone working at a DC think-tank who calls himself a libertarian just because he wants lower marginal tax rates and the legalization of marijuana.  (There is nothing wrong with these things, but libertarianism goes way beyond this.)

I am talking about people who consider themselves to be hardcore libertarians.  They follow the Austrian school of economics. They have been hardcore against the state.  Some of them even call themselves anarcho-capitalists.

Yet, they bought into the media lies and propaganda.  They listened to Fauci and his predictions of hundreds of thousands of people dying and the hospitals being overwhelmed.

Even worse, I have even heard a few of them consider the possibility that we may need government action to deal with a pandemic.  This is disheartening beyond belief.

The establishment media constantly lies and distorts about anything that is remotely political. I don’t understand why some libertarians all of a sudden started trusting them just because of the existence of a virus.

Establishment Media: We have to invade Iraq because there are weapons of mass destruction.

Libertarian Guy: That’s fake news.

Establishment Media: Assad used chemical weapons against his own people.

Libertarian Guy: That’s fake news.

Establishment Media: We have to deal with climate change now and listen to our models or we will be under water in 10 years.

Libertarian Guy: That’s fake news.

Establishment Media: Trump won the presidency because Putin interfered in our elections.

Libertarian Guy: That’s fake news.

Establishment Media: There’s a virus that is highly contagious with a high mortality rate.  We must listen to our models and act now or there will be hundreds of thousands or even millions dying in a pandemic.

Libertarian Guy: Oh my.  They said there’s a horrible virus.  We really need to take this one seriously and listen to the experts on how to handle this.

This is my world crashing down on me.  My safe spaces are now limited.  Lew Rockwell has been fantastic with his website.  Ron Paul has been excellent on the issue.  The Mises Institute has had some good material.  Beyond that, I don’t know what happened to my libertarian world.

I have heard some libertarians who bought into the media hysteria but still insisted that there should be no mandatory lockdowns.  So I can’t pull their libertarian credentials because they aren’t advocating for the use of force.  I don’t understand how they could be so gullible this time, but at least they didn’t sell out their principles.  In the long run, I can forgive these people.

For the ones who seemed to justify government action, especially in the form of lockdowns, they have probably lost me forever.  I won’t be able to trust them again.

The good news out of this is that I have talked to many people who think that shutting down the economy is a joke.  These are people who are not libertarians, but they understand that the reactions to the virus are way overblown. 

So in the last few weeks, many libertarians I know have moved away from libertarianism, while many non-libertarians I know have moved slightly towards libertarianism, at least as far as not trusting the government.

I actually heard some libertarians defending the hysteria because in this case, it was expert epidemiologists who were warning of a severe pandemic.  But how is this any different than climate scientists saying we will get global warming or flooding or whatever bad thing will happen?

The problem is that the people we are told are the experts are the people handpicked by the establishment and their media.  There are epidemiologists who think this virus is way overblown, but you have to find them on the internet.  You won’t likely see them on ABC news or CNN.

You can always find an expert in something to tell you what you want to hear.  This is especially true in government when there is money and political power involved.

It has been sad to see some libertarians fall for this hoax.  I am not saying the virus itself is a hoax, but the media and government hysteria is a hoax.  It allowed the politicians to do things that were almost unimaginable 6 weeks ago.

There is going to be great economic carnage from this whole thing.  If the government stays out of the way (relatively speaking), then we should still be able to buy toilet paper and food.  Thank goodness that our grocery stores are not run like our medical care system.

The federal government and the Federal Reserve are being reckless now and will make things very bad.  But I am optimistic that the government will lose legitimacy over this whole thing.  There are many people seeing through the propaganda.  It is easier to see through when you are unemployed because of the propaganda.

Our living standards are going to suffer, but I hope we can come out of the other side of this with more liberty, as more people see that they can’t trust the government, and they can’t depend on the government.

I have been analyzing various aspects of the government’s and the Federal Reserve’s responses to the current economic conditions, which were largely brought on by the government and the Fed in the first place.  For this post, I am going to discuss the Fed’s move to eliminate reserve requirements for banks that it announced on March 15, 2020.

This new policy almost slipped through the cracks with all of the major moves coming from the Fed.  It’s possible the move isn’t significant, but it’s also possible it is quite significant.  I tend to think it is significant because it wouldn’t make sense for the Fed to implement this new policy if it has no impact.

Before implementing this new policy, banks were previously required to hold 10% in reserves. In other words, if you deposit $1,000 into a bank, then the bank must keep at least $100 of that in reserve. The other $900 could be lent out. This is fractional reserve banking.

Austrian school economists differ on the policy of whether fractional reserve banking should be legal in a free society.  I take the position that it should be legal as long as the parties are consenting to it.  If a bank says it is keeping all checking deposits in reserve (like a storage facility) but then loans some of it out, then this would be fraudulent.  But if all parties agree to the terms of the contract and those terms are upheld, then I see no issue from a libertarian standpoint.

With that said, I take the view that Mises held that fractional reserve lending would be extremely limited in a system of free market money.  This would mean the non-existence of a central bank and the FDIC.

Given that we don’t have anything resembling a free market system in banking, it makes some sense for the banks to be required to hold reserves.  If the Fed is going to prop up and bail out the banks when needed, then it makes a certain degree of sense to require the banks not to be completely reckless.

Since the fall of 2008, commercial banks in the U.S. have largely increased their reserves in tandem with the Fed’s monetary inflation.  I believe this is one of the reasons that we did not see massive price inflation over the last decade.  The Fed was inflating the money supply, but it largely wasn’t being multiplied by the banks through fractional reserve lending.

The massive excess reserves started to fall in 2019 with the Fed’s mild deflation of its balance sheet.  Now that the Fed is creating money out of thin air like never before ($1.5 trillion over a three-week period), I expect that excess reserves will increase.  It appears that is happening already.

Banking Troubles?

It doesn’t make that much sense why the Fed would eliminate reserve requirements when there are already massive excess reserves held by banks.  In other words, it seems that most banks are well over the 10% threshold already, so why did the Fed eliminate the 10% requirement if it was easily being met?

The only thing I can conclude is that one or more of the major banks is on the verge of bankruptcy, or else the Fed is worried that the major banks will quickly deplete their excess reserves and possibly face bank runs.

I don’t think we are going to get bank runs as was seen in the Great Depression.  Most of our banking system is digital.  This doesn’t mean that you shouldn’t have a small amount of physical cash available just in case.

But the banks can experience a digital run, so to speak.  The Fed is obviously taking pre-emptive action to reduce this possibility.  We know that massive defaults are coming.  If there is 25% unemployment, that alone will mean massive defaults on mortgages and other loans.

With regard to the elimination of reserve requirements for banks, the obvious major fear is hyperinflation.  If banks can loan out essentially all of the money they receive for deposits, this can multiply the money supply almost infinitesimal.  This is why the Fed’s new policy makes no sense.

It says in its statement: “This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.”

This is exactly the thing we should be afraid will happen.

As I have argued before, the Fed doesn’t want to see hyperinflation.  The people working at the Fed would be destroying their own power.  They would also be destroying their own dollar-based pensions.  But that’s not to say that the Fed couldn’t lose control of the situation and still destroy the dollar.

I was going to say that we need to keep a close eye on excess reserves held by banks, but then I realized that essentially everything the banks have will be considered excess reserves since the reserve requirement is now zero.  So I’m not sure how this will get measured.

My biggest fear coming out of all of this is that we face some kind of hyperinflation without any alternative functioning money in place.  I am a big fan of using gold as money (as was chosen by the marketplace for thousands of years), but it isn’t easy to just switch to gold overnight.

I fear hyperinflation because it could mean a major breakdown in the division of labor. It would make the last month look pleasant by comparison.

I am not predicting this will happen.  I hope the Fed’s move in eliminating reserve requirements was done for other reasons that I cannot see.  But forgive me for feeling a little anxious over the Fed giving a green light to banks to lend everything they have.  It’s something I am going to keep a close eye on.  Either way, we should prepare for massive price inflation ahead.

The Federal Reserve’s balance sheet continues to rise, although at a slower pace than it had the previous three weeks. This isn’t saying much.

From April 1, 2020 to April 8, 2020, it went from $5.81 trillion to $6.08 trillion.  It is sad that I am rounding off to the nearest $10 billion.

So in the period of one week, it went up a little under $300 billion.  This is after it went up $1.5 trillion in the matter of three weeks.

The Fed’s balance sheet was around $900 billion in 2008 when the financial crisis hit.  The Fed quickly expanded its balance sheet to over $2 trillion in the matter of a couple of months.  From 2009 to 2014, it eventually doubled again.

The balance sheet sat around $4.4 to $4.5 trillion for several years until 2018, when the Fed gradually reduced it.  It went a little below $4 trillion in 2019.

The Fed had already started expanding it again in late 2019, before there was any fear of a virus. It is important to remember that the yield curve had somewhat inverted in 2019.  The 10-year yield fell below the 3-month yield, which is a marker of a coming recession.  Also remember that the repo rate had spiked up in September 2019.

The economy was not on a sound footing before the virus hit.  The Fed had already started expanding, and it had lowered its target federal funds rate.

The reactions to the virus would have been serious regardless of where the economy stood at that time.  When the government shuts down millions of businesses, this obviously has a major impact on productivity.

The bigger problem though is that we were already on shaky ground.  There is not going to be any V shaped recovery.  There will not be a U shaped recovery either.

The Federal Reserve and the federal government are making things dramatically worse.  They are both massively misallocating resources.

Wages are going to decline significantly.  The Fed has moved to a policy of massive monetary inflation.  It is unclear how this will play out, but it isn’t going to be good.

There is no question that Americans are going to experience a major decline in living standards. Things will not be fixed when governments allow businesses to reopen.  Many businesses will stay closed.  The ones that do reopen will be very conservative.  They may only hire back a portion of the previous workers.

The big unknown is how the reduction in living standards will take place.  Will consumer prices decline or rise?  It will obviously depend on the product or service in question, but there will be a general trend one way or the other.

The thing I do know is that real wages will go down.  Nominal wages will likely go down for the rest of 2020.  When a lot people are looking for work, wages go down.  It is a supply and demand issue.

But if the Fed’s massive monetary inflation starts to translate into massive price inflation, then maybe nominal wages will eventually go higher.  The problem is that the increased wages will not buy as much.

It is possible that, in a few years, a $100,000 salary may not qualify as a middle class salary, even in a lower cost-of-living area.  This will be the case if a loaf of bread costs $10.  We will see if dollar stores can remain dollar stores.

Everything has changed over the last month.  When the lockdowns end, the economy is not going back to the way it was. The federal government is making things worse with its massive spending.  The Fed is making things worse with its massive monetary inflation.  It is inescapable that living standards will decline well beyond this year.

This isn’t one of my best titles for a blog post, but I am going to attempt to analyze some of the economics in dealing with the massive shutdowns with businesses.

I have been analyzing various aspects of the government’s and the Federal Reserve’s responses to the current economic conditions, which were largely brought on by the government and the Fed in the first place.  For this post, it is going to be more high level in terms of the economics.

The government has certainly brought on this economic disaster by hyping up the fear of a virus that may end up killing fewer people than the seasonal flu.  On top of that, governments at all levels – especially the state level – have shut down many businesses that are considered non-essential.  Of course, they are judged to be non-essential by the politicians themselves and not by the business owners, the employees, or the customers.

But even if these businesses had closed down temporarily in a completely voluntary fashion, there is still plenty of blame that goes to the government and the Fed.  Many years of reckless spending, high regulation, easy money, and artificially low interest rates have left Americans and American businesses in a situation where they don’t have a lot of savings. Therefore, just a few weeks of temporarily closing down puts many individuals on the edge of bankruptcy. It is largely the same for business owners.

Now the government and the central bank are making things worse by upping the ante because of the current situation.  They are exacerbating everything, especially when it comes to spending and money creation.

It is important to understand what gives us a high standard of living.  It is the high production of goods and services that allow us to live well.  The government doesn’t increase production by spending money.  The Fed doesn’t increase production by creating money.  If anything, they misallocate resources and plant the seeds for a decrease in production.

You can only consume what has already been produced.  This holds true for all of society.  If people save money, it delays consumption.  It allows for more consumption in the future.

Decreased Production and Decreased Consumption

Let’s take an example of a massage parlor.  Let’s say that the massage parlor shuts down for a month due to fears of the virus.  For the discussion of the economics, it doesn’t matter whether this was shut down by the government or it was done voluntarily by the business owner.  It could also be a situation of closing down because people choose not to use this service at this time.

The massage therapist working there is no longer producing.  The production is massages.  But at the same time, people have reduced their consumption. They are not paying for massages.

In this example, there is no long line of production.  The business owner still has to pay rent for a building that is sitting there empty.  But overall, there is close to a net zero difference in society.  A massage therapist gives one fewer massage to a customer, while the customer receives one fewer massage.  But the customer then has the extra money that would have been spent on the massage.  The massage therapist does not have this money that would have otherwise been received.

To be clear, it actually is a slight overall reduction in living standards.  The customer has, let’s say, 60 dollars extra from not getting an hour massage.  The massage therapist did not have to work, but has 60 fewer dollars than what would have happened.  Under ordinary circumstances, the customer would have preferred an hour massage to the 60 dollars.  The massage therapist would have preferred the 60 dollars to an hour less of work.

But you can see that, on a whole, society is not much worse off.  From an individual standpoint, the massage therapist is not earning money.

If this were a permanent situation, the massage therapist would have to find other work (assuming no long-term government or charitable assistance).  If the new situation were permanent, then it might make sense for the massage therapist to work somewhere that is in higher demand. For example, grocery stores actually need more help with fewer people eating out at restaurants.  There is a shift in consumer demand.

The massage therapist could go into nutrition, where maybe the demand has stayed about the same. But someone who might have gone into nutrition will instead go work at a grocery store that is now paying higher wages.  The price system is supposed to work all of this out.

This whole concept is important to understand if you want to understand the workings of the economy, which most people don’t.  They don’t understand, and they probably don’t want to understand.

If everyone reduces their consumption, then production can actually go down.  It probably isn’t the case that most people want to permanently reduce their consumption.  They want to delay some consumption.  Due to uncertainty, many people are going to go into savings mode, even if they still have a secure income.  Many people are building emergency funds that should have already been built.

What we should really hope for is that production returns to normal while consumption goes down. The only thing is, if consumption goes down, then there will be a shift in some resources.  If people are consuming less at massage parlors and restaurants, then there will ultimately be fewer restaurants and massage parlors, or prices and wages will go down in those industries, relatively speaking.

In a free market, consumers ultimately determine where production goes.  It is a question of what they are willing to consume, and at what price.

Government Handouts

When the government hands out money to people who are unemployed, it is a redistribution of wealth.  When the Federal Reserve creates money out of thin air, it is a redistribution of wealth, even if it is used to hand a check to everyone.  It is impossible to distribute the money evenly, and an equal distribution is still a redistribution of wealth.

It may temporarily help people who have lost their income.  Most people understand that paying unemployment benefits helps people who are unemployed.  But it is important to understand that this is a redistribution of wealth. And in addition to this, it further incentivizes non-productivity.  Meanwhile, the Fed is distorting the whole price system and only exacerbating the situation by further misallocating resources.

In our current situation, consumption is down.  But with less consumption, we should be saving more.  Unfortunately, productivity is also down with consumption, so we may not be saving any additional wealth.  And with the government policies in place, it will actually serve to further decrease production in the future, at least as compared to where it was before.

I don’t think most Americans understand that our living standards are going to take a major hit. This is not just a temporary situation of things closing down for six weeks.  If the fears of a virus disappear tomorrow, we are not going back to normal.

If half of the businesses in the country closed for six weeks and then reopened with no interventions from the government and the Fed, then we would just be missing six weeks of production.  But the six weeks of a shutdown for some businesses is nothing compared to the damage of trillions of dollars spent by the government, along with trillions of dollars created out of thin air by the Federal Reserve.

What we have experienced over the last month is only the beginning of a very rough time ahead.

The Federal Reserve’s balance sheet continues on an unprecedented upward trajectory.  I used to say that the Fed’s increase from 2008 to 2014 was unprecedented, which it was before March 2020.

If you ever saw the movie Spaceballs, the Fed has gone to ludicrous speed.

In 2008, right before the worst of the financial crisis hit, the Fed’s balance sheet was around $900 billion.  It went up to around $4.5 trillion in late 2014.  Then it stayed mostly flat for a while (ah, those were the good old days of Janet Yellen) and fell below $4 trillion in 2019.

Actually, before you go blaming Jerome Powell, I’m guessing any Fed chair of the last three decades would be doing the same thing right now.  If we go back to Paul Volcker, maybe he would have acted differently in this situation, but it’s hard to say.

In the course of less than a month, the Fed has increased its balance sheet over $1.5 trillion. It is now on a weekly pace exceeding $500 billion per week.  This is absolutely crazy.

This is a very serious situation.  The main problem facing most people is not the coronavirus.  In the long run, it isn’t even being laid off from a job or having a reduction in pay.  Whether they know it or not, the biggest problem facing most Americans is the government and the Fed working together to completely destroy the economy with debt and massive monetary inflation.

It is still unclear how exactly this will play out.  Americans are in a bind right now, and they are rightfully fearful.  This should reduce consumer prices.

But then you have the Fed trying to counteract this (and some) by engaging in massive monetary inflation.  We don’t know how much this will translate into massive price inflation.

Either way, we are going to experience a significant decline in living standards, even when the virus is long gone.  The massive government spending and the massive monetary inflation are causing major distortions throughout the economy, and this doesn’t even account for the violations taking place against contract law, freedom of association, and property rights.

I am going to keep a close eye on the excess reserves held by commercial banks.  I expect them to rise, but there tends to be a lag in this data.  Even if excess reserves increase in tandem with the Fed’s balance sheet, I can’t discount high consumer price inflation.

It may be a mix. The cost of taking a cruise probably isn’t going to skyrocket any time soon.  I expect that certain assets will see big price increases once this new money starts trading hands more down the road.

I think the housing market will suffer initially.  Who would want to be a landlord now with the government encouraging people not to pay rent?  If there is a rush into hard assets later on down the line, housing may see a rise again.

I expect stocks to go down further.  That will be a bumpy road too, as the Fed may be a buyer of stocks.  You might expect stocks to go higher just with the Fed creating so much new money out of thin air.  But how much can a company be worth when its profitability goes away and there is a question of how it will become profitable again?

I am very bearish on stocks, but make sure you have an exit plan if you are shorting the market (i.e., betting on stocks falling more).

I am incredibly bullish on gold.  Gold typically doesn’t do well in a recession, as there is a rush for liquidity in cash or the digital equivalent of cash.  In this case though, the situation really is unique.  There is incredible fear.  The whole financial system may be called into question.  Aside from that, just the Fed’s balance sheet alone should tell you all you need to know about where gold is headed over the next few years.

I like gold mining stocks too, but I am careful to warn everyone that they are very risky. A lot can go wrong with these companies too.  I would recommend buying an ETF or mutual fund that invests in multiple mining stocks if you are so inclined to speculate here.  If these funds take off, the returns could be ridiculously high.  I am talking 1,000% or more.  Just be aware that with the potential of high rewards comes high risk.

As long as the Fed continues on this path of destroying the U.S. dollar, I may do a weekly update after the Fed releases its updated balance sheet.

I have a friend with whom I used to discuss the prospects of hyperinflation.  I always insisted that the chances of hyperinflation in the U.S. are very low.

While I still think the chances are low, I am dropping the “very” part.  I don’t discount the possibility of seeing consumer prices rising at 50% or greater on an annual basis.

I think we are more likely to see double-digit price inflation and then see someone playing the role of Paul Volcker and slamming on the monetary brakes.  If that happens, the recession and the defaults will be something that can’t be imagined by most Americans at this point. But the alternative of hyperinflation would be worse.

It is a scary road ahead, but we have to step back and look at the big picture and take rational and controlled steps to protect ourselves.  I think life will go on, but it is important to stay alert and take steps to prepare in these unprecedented times.

This is a continuation of a series of articles reacting to the impacts of the shutdowns from the coronavirus, and more importantly, the reactions from the federal government and the Federal Reserve.

Today, I will discuss another portion of the CARES Act, the unprecedented $2 trillion legislation that sailed through Congress with little opposition.

In particular, I would like to focus today on the extended unemployment benefits that were included in this massive bill.

When I first read about a large portion being devoted to extended unemployment benefits, I thought Congress was just extending unemployment benefits in the future instead of expiring as normal.

Unfortunately, it goes way beyond this.  There is a “bonus” amount for people who qualify for unemployment benefits in the form of $600 extra per week.  This is absolutely insane.

This is $600 per week. It is not per month.  This is on top of whatever unemployment benefits are collected based on state law. The additional $600 also doesn’t count as income when determining Medicaid benefits.

This means that many people collecting unemployment will be “earning” over $40,000 on an annual basis.  Does anyone see a problem here?

Many people will be collecting unemployment benefits in excess of what they were actually making when they were working.  There’s nothing like a government program to provide incentives.

If your employer is struggling and cuts your pay by 10% to get through this tough time, it is possible you might have been better off getting fired.  I’m not saying you should wish to be fired, but I can definitely see where many millions of people will look at being laid off as positive.

This is another example of what a joke this $2 trillion stimulus bill is.  It is going to stimulate non-productivity.

Productivity is What Matters

One thing I will have to remind people of throughout this crisis and beyond is that our living standards are based on productivity.  It doesn’t matter how much the government and Federal Reserve shift resources around.  They can create money out of thin air.  They can hand large checks to people.  But none of this creates productivity.  If anything, it is incentivizing people not to produce.

There is a large focus on employment, but the focus is on the dollar earnings of people. Ultimately though, our living standards depend on productivity that meets consumer demands.

It may seem great that someone who was previously making $30,000 per year at a job is now getting somewhere around $40,000 per year to do nothing.  And maybe it is good temporarily for that person.  But that is lost productivity, and someone has to pay for that person to consume while doing nothing.  Someone else’s productivity has to be stolen away to provide for those who aren’t producing.

This means fewer goods and services will be available.  It means a drastic reduction in living standards.  Even for the person getting $40,000 (on an annual basis), if you don’t count the fact that the person doesn’t have to work, this person will also be worse off in the long run.

There may be a select few who get wealthier due to having a business that sells a product in high demand.  There may be a few who get wealthier in the financial markets while most everyone else gets poorer.  But overall, there will be far less in terms of goods and services in our society, even when the virus has gone away.

I can’t emphasize enough just how much damage is currently being done to the economy.  There was already a massive bubble and massive dislocations.

If nearly everything just shut down for a month or two and nothing was done, it certainly would be hard for a lot of people, especially those with little savings.

But the damage being done by the Fed and the government is incalculable.  We will be facing tough economic times for a long while.

I will be writing a series of articles on the ramifications of the business shutdowns related to the coronavirus, and, more importantly, the response of the federal government and the Federal Reserve.

Even if the virus disappears within the next month and everything is declared open for business, we are not going back to normal.  There is already talk about unemployment in excess of 30%. This would exceed the highest reported unemployment from the Great Depression.

Even if things are reopened, how many businesses will be able to just open their doors as if nothing had happened?  And for those that do open their doors again, will they be hiring back the people that were let go during the shutdown?

In this article, I am going to discuss one portion of the $2 trillion bailout legislation that sailed through Congress.  It is called the CARES Act, which reminds me of the naming of the Patriot Act.  If you “care”, then surely you must support this legislation.

The portion I will discuss today is the checks that will be sent out to most adult Americans. If you are single and make under $75,000, then you will receive a check for $1,200.  For a married couple who make under $150,000, they will receive a check for $2,400.  You can add in $500 for each dependent child.  Therefore, a typical family of four (married couple with two kids) will receive a total of $3,400.

First, it is important to realize that the checks being sent to individuals are actually a small portion of the bill, relatively speaking.  This makes up about $300 billion of the legislation.  In other words, Congress could have spent the same money ($2 trillion) and sent checks to nearly everyone totaling almost seven times what they are sending.

In this scenario, a typical family of four, instead of receiving $3,400, would receive over $22,000.  Of course, that would have meant no corporate bailouts, no extended unemployment benefits, and no allocations to all of the pet projects pushed by the lobbyists.

If a small business owner received a check for $22,00, that might go somewhere.  It might be enough to cover the shortfall for a couple of months.  But we know that wasn’t going to happen.

As Thomas Massie stated on Twitter: “The stimulus package that just passed is the biggest wealth transfer from common folks to the super-rich (Wall Street and bankers) in the history of mankind. Done in the name of a virus with $1200 checks as the cheese in the trap.  This will be obvious in short order.”

Many Americans cheer that they will get “free” money from the government.  Some are rightly skeptical.  The truth is that this is going to be a major disaster.

This will ultimately make most people poorer than they otherwise would have been.  This money is being extracted out of the private sector in the form of debt and monetary inflation.

Your Situation

Everyone’s personal situation is different, so it is hard to give blanket advice on what to do with the “free” money, if in fact you are receiving some of it.

First, I think it is important to continue paying your bills (your obligations) as long as you are able to do so.  If you still have your regular income coming in, then this should not be a problem for now. If you are unfortunate enough to have lost all or some of your income, then you should still try to pay your bills if possible.  But if it is a choice between feeding your kids and paying your credit card bill, then feed your kids.  You should even feed your kids (inexpensively) before paying your rent.

The next thing to consider is whether you have any debt that should be paid down.  If you can eliminate credit card debt with your coronavirus check, then it may be a good idea to do so.  For bigger things, like a mortgage, and possibly car loans and student loans, you probably shouldn’t pay down that debt unless it will pay it off entirely.  It is better to keep some emergency funds on hand.

If you have anything that needs to be done, such as new tires for your car, then you should certainly take care of important things like that.  But hopefully you had budgeted for such an expense before and this new money is not needed for that.

It may be tempting for some of you to invest the money.  There is plenty of volatility in the stock market.  There is money to be made there, but there is also money to lose there.

I think at this point in time, it is best to be conservative with your money.  We face a very uncertain future at this point. Again, even if the scare of the coronavirus goes away shortly, we are going to be left with economic devastation.

I was already convinced that we had major economic troubles ahead, and that was before I had ever heard of the coronavirus.

There is a bit of a conflict between what should be done in the short term and what should be done in the long term.  For the short term, I think it is important to have emergency money. Most of this should be in an FDIC-insured bank with a little bit of physical cash at home.

For the longer term, I think we should fear the destruction of the dollar.  There is a great degree of uncertainty how this will play out.  With the U.S. dollar, there is going to be a tug-of-war between a high demand for cash and the Fed’s money creation.

There is great fear, and we are almost certainly in a deep recession.  The demand for money goes up.  Most people will be cutting back their spending on non-essential things.  This should be mostly deflationary for consumer prices.

But then you have the Fed on a wild digital money printing spree.  If the Fed keeps going at its current pace of something like $600 billion per week, or even anything close to it, then I can’t discount the possibility of hyperinflation.  I still give hyperinflation a low chance, but the chances are a lot more significant than they were a month ago.

I don’t know who will win the tug-of-war.  I fear it will be the Fed in the sense that they will exceed their 2% price inflation target.  Regardless, there is going to be great damage done to the economy.  There will be a massive misallocation of resources.  Capital investment will be severely hampered.

If we end up with price inflation in the double digits, I think the Fed will be forced to pull back.  We just have to hope that it’s not too late.  I would love to see the end of the Fed, but not as a result of hyperinflation that destroys the division of labor and our civilization.

I can’t predict anything in the financial markets with certainty.  But I am as certain as can be that gold is going to ultimately go up significantly in terms of U.S. dollars.  Regardless, it is important to have gold as a form of insurance, and it is more important now than ever before in our lifetimes in the United States.

If you already have an emergency fund, then my best suggestion is to take your “free” government money and split it between cash and gold.  The cash portion can bulk up your emergency fund a little more.  The gold can give you a little bit of insurance against a currency crisis.

That is the best I’ve got for you right now.  I will continue to stay up to date on what the Fed is doing.  I think the unsustainable spending from Congress will continue until the Fed has to refuse to buy more new debt. Unfortunately, the Fed will only take this stance once it is forced to do so because of high price inflation. In the meantime, most everyone will get poorer, but some will get poorer than others.

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.

“The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.  The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” ~Henry Hazlitt

“In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects.  Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen.  The others unfold in succession — they are not seen: it is well for us, if they are foreseen.  Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.” ~Frederic Bastiat

As I write this, most of the United States has been shut down for the last week or so due to fear of the coronavirus spreading.  Admittedly, it is even worse in many other places, particularly parts of Western Europe, where people are forced to stay inside their homes while needing papers to go anywhere.

In the U.S., just over 700 people have died where the coronavirus was attributed to the death.  It is hard to get accurate statistics, but it seems that most of the people who have died were elderly people who already had other significant health problems.  It is hard to know if some of these people would have died within a matter of weeks or days without the coronavirus.

There are about 327 million people in the United States.  About 100 people die every day on the roads, yet the roads don’t close down.  On average, according to the CDC, over 1,700 people die every single day of heart disease, yet you don’t see a ticker on your local news with the annual death count.

It should be acceptable to point this out without others calling you heartless.  Personally, I think it is heartless with what is being allowed to happen to the economy.

Everyone has a story.  It is tragic for anyone and their families who dies of the coronavirus, just like it is tragic for those who die of a heart attack.

Do you know what else is tragic?  When you see someone lose their job while living on the brink of poverty.  When you see someone who doesn’t know how they are going to feed their family this weekend. When you talk to someone who has spent years and countless money trying to build up a sustainable business only to see it shut down by the government.  There are millions of these stories right now.

I guess one person’s story is a tragedy, while one million is a statistic.

To say that the cure (shutting down most of society) is worse than the disease (the coronavirus) is to put it mildly.  Up to this point, it has been socially unacceptable to utter such words, but I think things are finally starting to shift.

A Cost/ Benefit Analysis

I hear that we should listen to the experts.  In this case, the experts are the epidemiologists.

I hear this a lot.  We are told we have to listen to the experts when it comes to vaccination. We have to listen to the experts when it comes to climate change.  We have to listen to the experts when it comes to Iraq having weapons of mass destruction.  I guess there are experts in pointing out who the acceptable experts are.

One problem here is that not all of the “experts” agree.  I’ve been told I don’t know what I am talking about with a legal issue because the Supreme Court ruled contrary to my own thoughts on a particular case.  Yet, the Supreme Court decision wasn’t unanimous, so there were obviously Supreme Court justices (experts?) who did not agree with the consensus.

You can almost always find people in a particular field who disagree on certain things.  It is no different with the coronavirus.  We shouldn’t assume that the experts are just the ones who get the most airtime on the mainstream (establishment) media.

For the sake of argument, let’s say that we could completely trust the epidemiologists who say that we should really be worried about the coronavirus and that it could potentially kill tens of thousands of people in the United States.

Even if that were the case, it shouldn’t be up to the epidemiologists to decide whether or not to shut down society.  Just because they are experts in viruses, it doesn’t make them experts in economics or cost/ benefit analysis.

When you largely shut down society as has been done by governments at all levels, there are consequences.  There are the unseen impacts.

You may hear, “it is worth it if we can save just one life.”  But this is a ridiculous statement, especially when we are talking about an economy of 327 million people.  We could save 100 lives per day by closing roads, yet nobody I know suggests that.

There will be no ticker on the news for the number of people who die because of the economic depression that is upon us.  Yet, these are real lives.  These are real people.

There are people losing their jobs and experiencing severe anxiety. There are children watching their parents panic about how they will pay rent.  There are people losing their business and not sure if they will ever be able to reopen.  There are people not going to the doctor with health problems other than the coronavirus.  There are factories that have been shut down.  There are interruptions in the development of new technologies, which could include delays in life-saving equipment and life-saving medicine.

How many suicides will occur just because of the economic disruption that has taken place?  Do those lives count?  Do those people get a ticker?

Greater wealth in general means longer lives.  Socialism kills.  Socialism doesn’t just kill in the sense of Stalin setting up death camps in the Soviet Union.  The economics of socialism kills, as people are deprived of proper nutrition, medical care, and a lack of life-saving technology.

Our only hope is that the fear of economic devastation will start to outweigh the fear of the coronavirus.  But even if everything is allowed to open back up for business within a couple of weeks, the devastation will not easily be undone, especially with the massive interference of the government and the central bank.

We can only hope that people will come to their senses quickly and not succumb to the fearmongering that has taken place over a virus that little is known about.  I don’t know that anything is ever going back to the way it was, but if we can reopen society, hopefully the disastrous unseen consequences can be minimized.

You can fear the virus, but you shouldn’t ignore the lessons of Bastiat and Hazlitt.