Fed: The Piper Must Be Paid for Massive Govt Support Bills

Vito J. Racanelli

The message from the Federal Reserve Bank last week was twofold: First, with a bit of luck, the U.S. economy might pull out of its swan dive by the end of 2020. Well, ok, that’s something the team here has been suggesting was possible. Secondly, the Fed wants you to know the U.S. government has incurred a lot of debt with these trillions of dollars of stimulus. And guess what. Somebody’s going have to pay it back. Sometime.

Both messages came through loud and clear in an intellectual full court press, with various Fed representatives making these points in speeches last week. For example, Fed Bank of Richmond leader Thomas Barkin noted that at some point the piper must be paid for the huge government debt incurred. U.S. government debt-to-gross domestic product percentage will likely go to over 100% by year’s end, compared to just 30% in 2007.

Last week, the U.S. Treasury noted that it plans to borrow nearly $3 trillion between April and June to bankroll the federal response to the coronavirus pandemic. Didn’t someone once say a trillion here, a trillion there and pretty soon you are talking about real money? U.S. deficits are on track to hit $4.5 trillion in the current fiscal year. Other Fed folks pointed out that nations like Japan have debt-to-GDP ratios above 200% without yet suffering adverse consequences. Japan also has had little or no growth for many years, so it’s not a comparison I like.

The big question is will the government’s borrowing crowd out other borrowers? Not a good thing for the economy. As Tom Lee has said, so far there is no evidence for that.

I like what St. Louis Fed leader James Bullard said: “This is not manna from heaven. We’re borrowing and we’re going to have to pay that back in the future, so our future tax burden is that much higher,” he said. The current shutdown of much of the economy has a limited window before even deeper damage starts to happen, he said.

Dallas Fed leader Robert Kaplan said that on an annualized basis economic activity is likely to fall by 25% to 30% in the second quarter before turning positive in the third quarter, amid a “very gradual and very phased in” reopening of the economy. Today’s 14.5% unemployment rate will likely jump to around 20% before falling back to a still very high 8% to 10% by year’s end, he said.

On the economic front, Federal Reserve Vice Chairman Richard Clarida said Tuesday he is looking for the economy to begin recovery from the coronavirus crisis in the second half of this year. All Fed policymakers were clear that rates will stay low “until we’re confident the economy has weathered these events and is on track to achieve maximum employment and price stability.”

The yield on the benchmark 10-year U.S. Treasury note was 0.69% vs 0.62% one week previous.

Upcoming FOMC meeting on June 9-10. More talk, no action?

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Vito J. Racanelli
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