January 21, 2021

The Conundrum Continues

The Conundrum Continues
The Conundrum Continues

Just how bad are things for the U.S. economy anyway? If you just finished reading the financial news headlines the past few days, you can’t be blamed for being just a little confused.

From the government side, you would swear that the sky is falling. Not only is the COVID-19-fueled financial crisis ongoing, but it might also be getting even worse. Last week, we heard it from Federal Reserve Chair Jerome Powell and this week from his predecessor, Janet Yellen, President Biden’s nominee for Treasury Secretary.

“The economy is far from our goals” of full employment and sustained 2% inflation, Powell said at a webcast sponsored by Princeton University. Therefore, he said, “Now is not the time to be talking about exit” from easy money policies. “When the time comes to raise interest rates, we will certainly do that,” he said. “And that time, by the way, is no time soon.”

Yellen painted an even bleaker picture. “Economists don’t always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now—and long-term scarring of the economy later,” she said in prepared remarks for her confirmation hearing before the Senate Finance Committee.

While not dismissing the concern that “further action” would add to the already humungous federal debt burden – now at $21.6 trillion and expected to grow even more under Biden – Yellen was more worried about the possible consequences of not spending enough.

“Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden,” Yellen said, according to the Financial Times. “But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”

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Yet, at the same time, we saw the largest banks in the country take the opposite tack, releasing billions of dollars they had earlier put aside against possible loan defaults – thus adding to their net income.

JPMorgan Chase (JPM) led the way with $2.9 billion of reserve releases, followed by Citigroup (C) with $1.5 billion and Bank of America (BAC) with $828 million. Even Wells Fargo (WFC) released $757 million, although much of that was due to its student loan portfolio’s earlier sale.

While not pronouncing the crisis over and the battle won, the banks’ actions nevertheless speak volumes. While not minimizing the pain and suffering millions of people and hard-hit businesses are still going through, it’s clear that the worst of the crisis is behind the economy at large. The banks must see something positive in their loan books. If things were still getting worse or staying the same, they would not be releasing reserves – they would be adding to them. Nor would they be announcing multibillion-dollar stock buybacks, as approved by the Fed.

At the same time, we know, the U.S. savings rate has skyrocketed since the crisis began, to nearly 13% in November, the latest figure available. That’s up from the 7-8% range before the COVID-19 lockdowns started. Of course, the reason for the spike is the enormous amount of stimulus money the government sent out last year in two installments – and now a third and even larger one is presumably coming if Biden gets his way.

One could reasonably conclude that the savings rate jumped because many people simply didn’t need the money – although assuredly, many people desperately do. Overall, however, it’s obvious that the government is spending money it doesn’t have to, or at least a lot of it where it isn’t needed. Granted, hurried government relief programs like this are going to miss the mark, but by this much?

This begs the question: Why do our fiscal and monetary authorities feel compelled to speak and act like the crisis is still getting worse, and the banks and many consumers are acting like we’ve turned the corner?

While some observers say this is the result of the so-called K-shaped recovery, I think it shows a new philosophy of the government’s role in the economy. I’ve talked before about how the Fed has adopted Modern Monetary Theory as its guiding principle. The Treasury spends trillions of dollars it doesn’t have, which the Fed happily buys, with no harm to anyone – on the contrary, stock and bond prices keep rising.

Now we find that MMT isn’t just meant to deal with actual crises, but as the normal day-to-day functioning of the U.S. economy.

Back in the bad old days of communism, this was called a planned economy; only then was it reducing everyone except the party elite into poverty. Here, though – at least so far – we’ve managed to make everyone wealthier in the process. So the longer the news is bad – or the government says it is – the better for everyone.

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George Yacik
INO.com Contributor – Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.