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.

“Find out just what any people will quietly submit to and you have the exact measure of the injustice and wrong which will be imposed on them…”  ~ Frederick Douglass

I want to expand on a couple of things from my last post.

I have no expertise in the coronavirus other than what I have digested from articles and television stories.  However, I do have expertise in recognizing power grabbing and people control.

Many people who are hyping the coronavirus and telling us we need to submit to government orders are the same people who told us Iraq had weapons of mass destruction.  They told us that Assad gassed his own people. They told us we need the Patriot Act to keep us safe in the wake of 9/11.  They told us that Russia hacked the U.S. presidential election.

Even when it comes to so-called experts, I often believe the opposite of what they say when it comes to a national agenda.  It’s one thing to listen to your car mechanic about needing new brakes, or to trust a plumber about your leaky toilet.  But I am talking about a widespread agenda to get people to change their behavior.

We are told that almost all of the so-called experts believe in significant man-made climate change. This in itself isn’t true, and the “experts” usually have an incentive behind them in the form of government money.

Even when it comes to doctors, there has been a lot of bad information pushed.  We were told for a long time to eat carbohydrates while avoiding fat (not just trans fat).  Now this is being completely turned on its head.  In many cases, it would have been better to do the exact opposite of what “mainstream” doctors were recommending.

I know vaccines are a controversial topic, but there are many doctors who won’t even admit that there can be severe adverse side effects from vaccines, especially for certain vulnerable individuals.

What I am trying to say is that we are surrounded by fake news.  I don’t trust anything that CNN or NBC or any of the other major networks tell me when it comes to anything remotely political.  I am almost at a point of assuming the opposite until I can verify it.

Statistics

The statistics with the coronavirus are a joke.  Entire countries are being shut down from a few hundred deaths.

In many ways, it reminds me of the reaction to 9/11.  Almost 3,000 people died in the terror attacks that day, but it is still out of a country of more than 300 million people.  About that many people die every month on the roads in the U.S. More than that die every month from a heart attack.  But the people got behind a war in Afghanistan and many other wars that were tied to the fear of terrorism.  There are thousands of Americans dead from these wars with many more suffering mental and physical issues.  There are hundreds of thousands, or perhaps millions, dead in foreign countries from these wars.

Even from a financial standpoint, the U.S. has spent probably a couple of trillion dollars because almost 3,000 people died on September 11, 2001.  This is so incredibly irrational.

There have barely been over 100 people who have died from the coronavirus in the U.S., or at least those are the documented cases.  Some of these people were elderly who were probably on their last legs anyway. But we are going to shut down a country of 330 million people.

I know people make the argument that we have to shut almost everything down so that we keep the numbers low.  Some people have said that if we don’t take action, there could be over a million people dying. But I also heard that if we don’t go to war in Iraq, it could end with a nuclear cloud over a major city in the United States.  In other words, there is no basis to this claim.

The flu supposedly kills tens of thousands of people every year, yet we don’t shut down our society. The mortality rate is determined by projecting the number of people who had the flu.  It is based on statistics.  They don’t actually know how many people had the flu.

With the coronavirus, they are taking the number of people who tested positive for the virus against the number of people who have died from it.  Therefore, the mortality rate seems higher, but it isn’t a valid comparison.  They are largely testing people who are the worst off.  There will be many people who had the coronavirus who never got tested.

It’s always possible that this is a situation of the boy who cried wolf.  Maybe there really is a wolf this time.  But it isn’t because the establishment media and the politicians actually see a wolf.  They are lying like they always do.

Even a blind squirrel gets a nut every now and then.  Even a broken clock (not digital) is right twice a day.  But these people aren’t broken or just wrong. They are liars who seek power.

Totalitarianism and Public Opinion

I don’t think it is any coincidence that there is almost a direct correlation between the level of government controls coming down amid the virus with the authoritarian nature of the politics.

Look at the places that have been locked down with tight government controls on the people. You can start with China. You can look at Italy and France. But I think the best case for this is just looking within the United States.

Look at the places that have shut almost everything down and prohibited people from freely traveling. There is New York City, California, Illinois, and many of the states in the northeast.  These are the places I wouldn’t want to live, and I would have said this before any of the lockdowns.

I have been using the Frederick Douglass quote to illustrate the situation.  Here it is again to digest.

“Find out just what any people will quietly submit to and you have the exact measure of the injustice and wrong which will be imposed on them…”

I know the governor of California is a totalitarian.  The same could be said for the mayor of New York City and the mayor of San Francisco.  But they are in that position because the people put them there.  The people who praise Fidel Castro and socialism put them in power.

There are certainly controls by government going on throughout the country, but the worst of the controls are happening in places where the populations tolerate and seek big government.  They fall right in line and say, “Whatever you need to do to keep us safe.”

Most politicians are authoritarians.  Politicians are politicians because they love power.  They want to control people.  I’m sure that governors and mayors in many southern and midwestern states would enact these same controls, but they know they can’t get away with that much. 

The governor of California can lock down the entire state because there aren’t enough people willing to stand up and say “no”.

This is why I am 99% confident that this virus hype is a hoax.  I am not saying the virus itself is a hoax.  I am saying the hype is a hoax.

• “Find out just what any people will quietly submit to and you have the exact measure of the injustice and wrong which will be imposed on them…”  ~ Frederick Douglass

• On the coronavirus, I am listening to my doctor.

• My initial line weeks ago was that I am not paranoid about the virus.  I am paranoid about the paranoia.

• Politicians love power.  When people are fearful and dependent, politicians will be more than happy to exert their power over their subjects.

• It is not surprising that the most totalitarian crackdowns are coming from mostly leftist cities and states.  Illinois, San Francisco, and New York City are good examples.  These are places where you have people who worship the likes of Fidel Castro.  The politicians aren’t enslaving the people.  The people are enslaving themselves.

• According to the White House, we are looking at some kind of student loan deferment program, company bailouts, and direct cash payments to Americans.  Who needs Bernie Sanders?

• The government will spend more money while collecting less in taxes due to the major slowdown in economic activity.  It won’t surprise me if the deficit exceeds $2 trillion this year.

• If the government wants to hand out money to everyone, why stop at $1,000?  Why not one million dollars for each person if it will help so much?

• If the government hands out “free” money, then maybe it is best to just instantly buy gold with it.

• This whole thing gives some vindication to the prepper community.  I think we’re all in trouble if there is ever a major breakdown in the division of labor, but there is something to be said for having a couple of weeks extra in supplies.

• The government and Federal Reserve will blame the bad economy on the virus. Unfortunately, many people will accept this explanation without realizing that the economy would have been in trouble anyway without the virus.

• If the Dow ever goes below the 10,000 mark, maybe I will buy a stock index fund.

The FOMC had another surprise meeting today (March 15, 2020) after just having a surprise meeting less than two weeks ago.

The Federal Reserve is lowering its federal funds target rate to a range of 0% to 0.25%.  It slashed its target rate by 50 basis points less than two weeks ago, and it just cut another 100 basis points to go up against the zero mark.  In order to achieve this, it reduced the amount paid on bank reserves to 0.10%.

The Fed will also purchase $700 billion in new assets, with a breakdown of $500 billion in Treasury securities and $200 billion in mortgage-backed securities.  It didn’t give a specific timeframe except to say in “coming months”.

It is not surprising to see an official return to quantitative easing (QE).  It is not completely surprising to see a return to a zero-interest rate policy (ZIRP).  The speed of it is a bit surprising.

It is also surprising that the Fed is including mortgage-backed securities (MBS) in its asset purchases.  This was more easily explained in the fall of 2008 when the housing bust was already well underway.

I don’t know if the Fed is going to purchase MBS as an attempt to prevent a big fall in housing, or if it is much worse than this.  It makes you wonder if some of the major banks are in a lot more trouble than we are being told.

The loose monetary policy from the Fed is no surprise given the events that have unfolded in the last few weeks.  Again, the speed and degree of the reaction from the Fed is a bit surprising.

The other interesting thing is that the Fed is supposedly dropping its reserve requirements for banks, which was typically 10%.  I am not sure what to make of this at this point, and also whether it will have any impact in the near term.

It is hard to know how this will ultimately play out.  The Fed nearly quintupled its balance sheet from 2008 to 2014, yet we saw relatively tame consumer price inflation.  This is largely due to the fact that the commercial banks massively increased their excess reserves.

As I write this now, the stock futures are down big, but it is hard to say how much of this is due to the FOMC surprise meeting.  Volatility has been high, to put it mildly.  I expect stock prices to fall much more before this is all over. We were already in a massive bubble without fear of a virus.

Investors will continue to flee to long-term government bonds.  This means yields will go down to near zero.  Maybe we will see negative yields just as we have seen in Japan and parts of Europe.

Bitcoin has shown that it is a speculative bubble.  People are not buying Bitcoin for safety.  We’ll see if this bust is the end of cryptocurrencies.

I am still bullish on gold in the long term.  With a bad recession, it may go down more, as people look for liquidity and safety.  But if the Fed keeps printing digital money – and there is no reason to think it will stop any time soon – then gold will likely do well in the long run.

If we eventually have a return of significant price inflation, then I believe silver will boom as well.  But silver is going to be far more volatile and less certain in the short run.

I have been waiting for the bust.  I just didn’t think it would happen so dramatically and so quickly.  This is just the beginning.  Even if the virus goes away, this bear market is not going away any time soon.