This is a Transcript of The JeffEffect podcast from April 17th, 2020.
The Government Has Passed the CARES Act Dropping More Than $2 Trillion Stimulus Into the Economy
What does this all mean?
[0:23] Wow, holy crap, boys and girls. There is money falling out of the sky. It's raining cash, and the question is — is that a good thing or a bad thing? We're going to talk about that exact thing on this episode. Welcome to The Jeff Effect, episode seven: “Money for Nothing” and your checks for free.
What This Episode is NOT
[1:08] If, like me, you are older than 40, you know that the name of that tune is “Money for Nothing” by Dire Straits. If, on the other hand, you are under the age of 40, you probably still like '80s music anyway. Notably, and importantly, that cut is less than 30 seconds long, and therefore included under fair use in related editorial non-commercial content such as this. It's hard to imagine a more appropriate tune for today's topic, but let's start for a second with what this particular podcast is not. We are not going to be talking about the national debt. National debt was the topic of one of my biggest research papers in macro-econ and I know a lot about it. I have a handle on that topic. I got a high A on that paper from a professor who serves up high A grades with an eye dropper and a set of tweezers, but that is not our topic today. We're not going to be talking about national debt.
We are also not talking about politics, not now. We might in the future. I am approaching the topic of money creation like a scientist. This can be really confusing to folks and I want to get a few ideas into your head here to help you understand the world and what's going on. There's just no room for politics. And likewise, I need some wiggle room, editorial-wise. I am explaining things here — to not be construed or considered to be my agreement or condoning of any policy that's been undertaken. I'm just explaining stuff.
What’s Really Going On Here With the COVID-19 CARES Act Stimulus
[2:56] So, what's going on here? Well, from an economic and financial standpoint, in order to address the severe potential impacts of the shutdown and Covid-19 pandemic, the government is injecting a ton of cash into the economy. Normally, I record these podcasts at the top of my head. I'm recording this way too early in the morning, and I haven't even finished my first cup of coffee, so I need you to work with me on this. I normally just roll off the top of my head. Normally it's just you, me, and a microphone discussing the incredible, interesting topics of messaging, economics, and more. This time, I jotted down a few notes because I wanted to get the direction correct, but I'm going to talk in round numbers and generalities, really understand the idea. We can just get lost in the weeds. We can get caught up in basis points and sub-fractional modifications at the margin. We can get caught up in all that stuff and it just doesn't help us understand. That is for trying to optimize outcomes. We're not trying to do that right here; we're trying to understand things. I need you to work with me, understand that I haven't finished my first cup of coffee, and understand that I'm talking in round numbers and generalities so that we all are on the same page and we understand the ideas and the numbers.
[4:32] Now, about those numbers. The numbers are astounding. When you do economics calculations, you’re doing macroeconomics work, you get accustomed to seeing numbers with lots of commas in them. And because they’re abstract concepts at this point, it's just math, it's just calculus, it's just statistics, it's just stuff that happens inside your statistical analysis applications and you just work with it and you get accustomed to it, and you can kind of numb to it. I don't even think really economists understand the real size of the numbers we're talking about. We're talking about numbers like a trillion dollars. How do you understand as a person, a real person, not a pointy head academic, as a real person? How do you understand what a trillion dollars is in real life, because the number is so freaking large?
A Trillion Dollars Is a LOT of Money … Picture This
[5:46] See if you can imagine this. Every single one of us would love to have $100 bill stuffed in his pocket right now, right? Every single one of us. It's a cool thing. You see a $100 bill, you see Ben Franklin — one my favorite Founding Fathers. You see Ben Franklin's smirking face peering out from you on a $100 bill. You feel like you got some money to spend. It's meaningful; it's impactful in your life. $100 to the average person is a nice meal out with his wife or his spouse. It is Christmas gifts for the kids. $100 bill is a couple of tanks of gas. $100 bill takes the family to movie and popcorn, and then some. $100 bill has meaning. That's why I'm using a $100 bill because it means something to just about everybody. You see a $1 bill, you stuff it in your pocket. You forget about it tomorrow. $10 bill, you might get a smile on your face, but hey, it's a couple of lattes at Starbucks. $100 bill — it’s meaningful in some way, so we're going to use that as an example.
If you took US $100 bills and laid them end to end, a trillion dollars in $100 bills would stretch all the way from the Earth to the sun with 400 million bucks to spare. It would stretch 97 million miles. I did the math. 97 million miles. That's a lot of money. That's just one trillion dollars, which brings us to the current stimulus plan that is all around the news today. What about that stimulus plan?
[recording of Donald Trump:] Together this 2.2 trillion dollar legislative package is bigger than anything, I believe, ever passed.
[recording of news:] The two trillion dollar relief package is said to be distributed to struggling Americans.
[recording of news:] Two trillion dollar lifeline to struggling workers and companies.
[recording of news:] The US Senate has unanimously approved what is essentially two trillion dollars of economic triage for the economy.
[8:03] How much was that again?
[recording of Donald Trump: Together this 2.2 trillion dollar ….]
I heard it correctly. It's between 2 and 2.2 trillion dollars and that's just one of the phases they're talking about. There's going to be four phases. This is the biggest one. The total amount of government involvement in the economy during this crisis and around this crisis is estimated to be close to 4 trillion dollars. It's going back and forth to the sun more than four times if in $100 bills.
How Can We Print Money from Nothing?
I hear the voices. Some of them have reached out to me in direct messaging and some of them have reached out to me in email because people know that I'm interested in Economics and I've studied Economics and I've got a background in macro. They say … "How can we possibly just invent money from nothing without destroying our economy with inflation?” The follow up question, this one came on Twitter. “If we can just print money from nothing, why do we need to collect taxes at all?”
[9:24] Both of those are really good questions, right? They’re really good questions. I get it. The best way to talk about this from a whole …. Why do people have those questions? Those are natural questions popping in your head, but we have those questions for a reason. One of the reasons is that it's been a long history of governments monkeying around with the money supply and destroying their country, at least their country’s economy.
Is the United States Becoming Venezuela?
Fortunately for us, we have a real-world case study example that's playing out before our eyes right now here in the Western Hemisphere. Let's talk about that case study and economic tragedy. Let's talk about Venezuela. Venezuela was a very rich country; it was an OPEC nation. It has a lot of oil. Ironically, look this us up, they're sitting right there, and there's a reason for this. The meteor impact 63 million years ago, that supposedly killed off all the dinosaurs, struck Venezuela — just there on the coastline of Venezuela. Some of that disruption trapped a lot of free radical carbon, if you will, in the soil. This is my opinion and the opinions of other people. That geologic upheaval took and … trapped a lot of oil in the ground, and they have it. It's a source of great wealth for them, and it has been for decades.
Hugo Chavez came to power in 1999. At the time, Venezuela was one of the most modern and wealthy countries in South America. It was doing really, really well. But like all countries, there's a very old saying in scripture that says the poor, they shall always be among us. There were arguably poor people in Venezuela, too, and there's some very rich people in Venezuela. Hugo Chavez came to power in 1999 with the promise of balancing out that equation. He was elected successive six-year terms. In 2005 upon his re-election, he implemented the plan that many of us think he had all along. Once he had cemented his power for the first six years, he took the second six years and proclaimed Venezuela a socialist utopia. He nationalized (read that as confiscated) all the oil industries, the finance industries, and a few other things, and to control the military. Things got bad.
He's about to transform that economy in to a socialist system. Industries were taken over. Then the printing presses for currency started running at full speed. This is the thing about money supply and this is why people are concerned. When you first inject money supply, there’s a period of euphoria. Prices don’t move right away. There’s always a lag. So, initially, everyone just feels like they're getting richer because there’s just money everywhere and lots of people are investing money. Lots of people are spending money and the economy hums along for a year or two doing really well. But underneath, there's a wearing away, a dissolving of the economic structure. You just can't see it at first.
[13:20] Then Hugo Chavez, things are starting to get a little bit bumpy, a little bit dicey. There's warning signs. There's cracks. Things are not being maintained properly. Oil wells are breaking down. The price of oil goes up and down and they can't sell as much. And then, Hugo Chavez dies in 2013, and then he's replaced by his hand-picked socialist successor — a guy named Nicolas Maduro. Sure enough, as any economist who's even cracked open the most basic macroeconomic textbook knew would happen, in 2015-2016 Venezuela enters a period, not just of inflation, not just the 5 to 10% inflation that the US had in the 1970s. They entered a period of hyper-inflation.
Hyper-Inflation Come to Venezuela
"Venezuela’s monthly inflation rate drops for the second straight month in June, but the annual rate remains well over 400,000%. The latest rate nearly halved from over 800,000% in May. According to an opposition lawmaker, Wednesday, worker salaries are still not nearly enough to cover the rising cost of consumer goods in the collapsing South American economy. The official minimum wage is 40,000 Bolivar a month, equivalent to less than 6 US dollars."
He's about to transform that economy into a socialist system. Industries were taken over. Then the printing presses for currency started running at full speed. This is the thing about money supply and this is why people are concerned. When you first inject money supply, there’s a period of euphoria. Prices don’t move right away. There’s always a lag. So, initially, everyone just feels like they're getting richer because there’s just money everywhere and lots of people are investing money. Lots of people are spending money and the economy hums along for a year or two doing really well. But underneath, there's a wearing away, a dissolving of the economic structure. You just can't see it at first.h with the same hundred bucks. If you had a thousand bucks, this is very simple. If you had a thousand bucks in January, it would only feel and purchase stuff that felt like $950 by December. That would be 5% inflation.
[15:46] So now in 2016, Venezuela enters their hyper-inflation and the inflation rate in 2016 was 274% — not 5% — 274%. In 2017, it was 863%. If you think I'm making this up, double-check me. Fact check me. In 2018, the inflation rate in Venezuela reached 130,000%. That's unimaginable. From 2016 until today, the overall inflation has increased 53, almost 54 million percent in Venezuela. 54 million percent. Even in the middle of all that, they did a big currency reset. They called all the old currency back. They reset their currency. This started in the middle of 2018. But instead of stabilizing the Bolivar, 2018, as you can see, 130,000% in a single year, it became the worst inflation year ever.
Let's talk about what that would mean. At its peak in 2018, that's when they had that huge inflation bubble. At 2018, if you had a $1000 in January, it would feel like you had 78 cents in December. How would you feel if you're sitting there and you're feeling good and you have a $1000 in the bank account you're keeping for a rainy day? Then a year later, that same $1000 you saved in the good times is now only worth 73 cents.
Why Did Venezuela have Hyper-Inflation?
[18:06] Why did it happen? What caused that incredible inflation in Venezuela? It was like all major inflation swings. There's multiple factors that influence these things. We can talk about that in detail, but we’re talking about money supply right now because it's related to what we're doing here in the United States. The money supply in Venezuela, broadly …. Their currency is called the Bolivar. So when I say Bolivar, it was their equivalent of the dollar. The supply of currency in Venezuela went from 727 billion Bolivar in 2013 to 4.9 quintillion Bolivar in January of this year. That’s more than 6 million times more money in an economy in just seven years. The supply of money, the money that was provided electronically or literally in printed paper currency, increased 6 million times in seven years. This is an important thing — during roughly the same period, and I got to tell you, getting accurate numbers out of Venezuela is almost as hard to get numbers out of China. Communist and socialist dictatorial governments, authoritarian regimes lie about stats all the time, and they usually lie in their favor, not against themselves, right?
We are doing our best to get the right information. This is what we know. During that time when they were increasing their currency so much, the GDP (the GDP is the sum total of value of all the products and services produced by the economy) peaked in 2011 at 334 billion. Two years later, it was a little bit lower, but still around 300 billion. Last year, the estimate is just over 70 billion. My heart bleeds for these people. The productive output of the Venezuelan economy has been cut by three-quarters. It's now just a quarter of what it used to be, and tragically, they're not done going down yet. The GDP forecast for this year is 63 billion. The forecast for next year, 2021, is just 60 billion.
[21:00] Look at what happened. The money supply has been multiplied six million times while the productive output, the value of all goods and services produced by the country, has been decreased by 75%. This complete decoupling of the value of the real need for money, is decoupled from the actual things that are being valued in money, and that is what causes inflation like this all the time. It's why our hearts bleed. My heart breaks for Venezuela. Those are great people. A lot of the best business people, most educated people have fled the nation, but there's no mystery here. Aside from the general suckiness of socialist dogma, a rapidly increasing money supply in a rapidly falling economy with no mechanism to curtail or contain that money supply, that causes inflation.
How Is the Current Situation Different that Venezuela?
So, what causes that hyper-inflation? Again, our target inflation rate here in the United States was at one point, argue with the details later, we like to keep it around to 2-2.5%. There’s reasons for that. We need to do a whole podcast just explaining inflation and deflation. I may touch on that in the end of this podcast if we have time just a little bit to give you an introduction to it. Let's talk about the US money supply.
We have to talk about our money supply in conjunction with our GDP. We know Venezuela’s problem — complete decoupling. Now, the US money supply currently, M2, that's a semi-broad good functional number for us to work with to talk about the money supply available because the Fed has M1, M2, M3, and M-4 and it goes on and includes different things. Let's just work with M2 for a second. The M2 money supply in the US right now is about 15.5 trillion dollars. The US GDP is bigger than that. It's 22 trillion. You might ask yourself, "How do you do that? How do you have less money than you have transactions going on?” That's a good question, right?
Right now, not including the stimulus we're going through right now. We're cutting this off, saying late January, early February, we had 15.5 trillion. Things are changing now rapidly. The US money supply was 15.5 trillion with a GDP target about 22 trillion, just under, like 21.3 or something like that was 2019. It’s supposed to be a little bit lower this year, but not much. How do you do that? Well, it's because money is spent over and over again. The key is that not how much we have overall, it's if we have enough money to support all the transactions being occurred. You go to the store, you buy a gallon of milk, but then the store buys another gallon from their supplier, and they buy the raw milk from the farmer, and that money’s spent multiple times, so you don't need to have as much money as you think you do in actual money supply.
No … the US is NOT Venezuela
[24:47] So, what does that tell us? It tells us that we're not Venezuela. It tells us that we are a ton heck of a lot better off than Venezuela and that we have no danger any time soon of becoming a Venezuela. You have to embrace that as a truism. We are a hell a long distance away from having hyper-inflation. We had an inflation problem. Again, I'm over the age of 40. I remember the 1970s really, really well and I remember the inflation we went through there. People thought that was bad inflation, and nothing compared to Venezuela. It's 5%, 6%, 7% here and there, spiking up and down, going sideways. That's why they called it the stagflation era. In that situation, we were increasing …. and we talked about this in a previous podcast, what caused that is that we were increasing money supply faster than money demand but not radically so, just marginally so, and enough to spur inflation. Then Paul Volcker was appointed by Jimmy Carter, and then when Ronald Reagan came in, Ronald Reagan said, "Go fix it, Paul” and Paul went and fixed it and we cut off the money supply. We reduced the money supply in the economy. The shock cost us a brief recession, but then we got everything back on track and inflation was stymied.
How Does the Federal Reserve make Money from Nothing?
How does the Fed do these things? How does the Federal Reserve and the treasury — how do they even create money? We imagine things. The average guy imagines literally printing presses, sitting there running day and night with government minions in black overcoats running these printing presses cranking out bazillions and bazillions of dollars. Yeah, that's kind of how it works, but not really. When we talk about money supply, we have to think about it completely different than money, in currency. Currency — there's not that much out there. There's probably less than a trillion dollars of actual printed money. Printed paper and minted coins — there's probably less than a trillion out there right now. A few years ago, I looked and it was 857 billion. I am going completely off of memory. The actual physical jingly and foldy money in your pocket that's out there in the world is probably less than a trillion dollars right now, so where's the rest of it?
Well, lots of different ways. How is the best way to do this? The Federal Reserve has the power to make digital money when they need it, but they always try to do it in a way that doesn't change the overall value of the economy. Try to stick with me on this. I know it's a complicated topic; I know it's hard. Heck, most people who have economics degrees get kind of befuddled and their eyes glaze over when they talk about this, but they can take and do this. They can go out and they can buy an asset. They can buy a treasury bond. Believe it or not, one of the largest holders of treasury bonds in the world is the government itself. The government holds its own bonds and the Federal Reserve takes these open market actions to take and stabilize interest rates.
So when the federal government is issuing treasury bonds to finance government activities …. again, no comment yet on deficit spending. That's a whole separate topic. When your government sells a bond, they sell a lot of them, they are using that money to finance government stuff. It’s deficit spending. If the interest rates are getting out of whack, the Fed can step in and buy some by electronically printing the money. The point, though, is that the Treasury Bill exists, the Treasury Bill still exists, and the government swaps out cash for that treasury bill. It seems like a little bit of black magic occurring behind closed doors in a secret Star Chamber, but it works.
The Biggest Pawn Shop In the World
[29:30] Another way …. This is what the government has been doing a lot of for the last year and is doing a heck of a lot of it right now. Banks, major financial institutions, and major pension funds have access to working directly with the Fed. Sometimes they need a short-term loan, so there's what's called the repo market. To the average guy, when you hear the word ‘repo’ you look for your car keys and try to hide your Camaro because you're thinking that somebody thinks you didn't make your car payment and they're going to take your car back. The bank’s going to take your car back. That's not what this means. In this case, repo means repurchase. Repü is what it should be, repurchased, repü should be it but that sounds just like a South Park episode. So, we won't use repü; they use the word repō. What that basically means is …. think about it this way. The government is acting like a big pawn shop.
I don't know if you've ever been needing money and had to pawn something. A pawn shop works this way. You walk into a pawn shop with something and they give you two numbers. They'll offer you one number to give you cash to purchase your item directly. Let’s say you walk in with a barbecue and you say, "Hey this is a $100 barbecue. It's still new in the box. I never used it.” The guy behind the counter is going to say, "Okay, I'll give you 40 bucks to buy it from you, or I'll give you 30 bucks on pawn.” Now, what does that mean — 30 bucks on pawn? That means if you sell it to him for 40 bucks outright, he now owns the barbecue and can do anything he wants with it. If he gives you 30 bucks on pawn, you take the 30 bucks and then you have the right to come back and purchase it back for 30 bucks plus interest. Do you understand that? Maybe you’ve had to use a pawn shop in your life once or twice or never, but that's how the pawn shops work. You either can sell it to them and then they're going to resell it for a profit, or they can loan you money against this physical property.
That's what the repo market is. The Federal Reserve is the world's greatest financial pawn shop and it's really important. It allows banks to get short-term loans and promise to repay them at an interest rate. The short-term loans are always against an asset. By doing it this way, the Fed does not inject new money into the economy. He's taking an asset, replacing it with money, and then sometimes it's overnight. The Fed can set any rules about when that pawn is due. When you actually pawn something, let's say you’re pawning that barbecue, every pawn shop has their own rules. Sometimes it's 90 days, sometimes it's 6 months. Whatever it is, they have a rule. I’m going to give you $30 on pawn. Here's your 30 bucks and you have 90 days. In 90 days, we're going to charge you 10% interest on the 30 bucks and then any time at the end of that 90 days, you can come in and we will sell it back to you for the 30 bucks plus 10% interest for 90 days. That’s how they make their money.
[32:49] That's exactly what the Fed does a lot of the time, and they're doing a lot of it right now. Banks have assets. Banks own mortgages, they own stocks, they own bonds, they own real estate, they own these things, and so they come in and they say, "Look if we can't sell this fast enough and if we have to sell this portfolio of stocks that we’ve got, it’ll do two things. First of all, the portfolio is big. So just the fact that we're selling it, it's going to drive the prices down, and we don't have time. We need capital to pay our taxes next week. We need to do something and we need that money now. Let's have a repo agreement.” And so the Fed says, “Okay” and they have defined terms. “Here's the deal. You can get up to a billion dollars. I see a billion dollars of asset. I’ll loan you a billion dollars on that for 14 days and your interest rate’s 1% or 2%” or whatever their prevailing rate is. Then what happens is the Federal Reserve has the asset, and the money is now available to the bank to use for whatever their stated purpose is. The bank is obligated to come back in 14 days and buy it back plus interest.
[29:30] Another way …. This is what the government has been doing a lot of for the last year and is doing a heck of a lot of it right now. Banks, major financial institutions, and major pension funds have access to working directly with the Fed. Sometimes they need a short-term loan, so there's what's called the repo market. To the average guy, when you hear the word ‘repo’ you look for your car keys and try to hide your Camaro because you're thinking that somebody thinks you didn't make your car payment and they're going to take your car back. The bank’s going to take your car back. That's not what this means. In this case, repo means repurchase. Repü is what it should be, repurchased, repü should be it but that sounds just like a South Park episode. So, we won't use repü; they use the word repō. What that basically means is …. think about it this way. The government is acting like a big pawnshop.
Straight-Out Loans from the FED
[35:01] Another thing that the Fed does is just straight out loans, overnight loans to banks on a regular basis. This is in normal monetary times, normal economic times. They'd just give out straight loans and they have what's called the overnight window. The banks can come in …. Why would a bank need to do that? Why do we help? We're bailing out the banks. Well, it's not quite the same. Some of this is actually consumer protection stuff. There's a big consumer protection element in all of this that you really have to kind of embrace. It sounds like the government's playing shenanigans and just favoring the banks, but not really.
Having a secure and stable banking system, this is why we're not going to have a great depression now because we learned this lesson in the Great Depression 100 years ago. We learned this lesson. We're not going to repeat this lesson. A stable, secure banking system is vital for our running economy. What we do is we put regulations on banks, and this is .... I'm a free-market guy, but having good banking regulations keeps my money safe when it's in the bank as a consumer. I’m just a consumer guy, like you, having good sound, secure, non-onerous banking regulations. What kind of regulations are those?
Say a bunch of us get together and we all deposit our money in our checking account and it’s a million bucks. Well, the bank, they need to make money and how they make money is they either invest or they loan that money out to other people. If they invest or loan it all and then we want our money back, there's nothing to give us. When I write my checks, my checks are going to bounce because the bank doesn't have the money. They invested it or loaned it to somebody else and they don't have it. So, banks are required to keep a certain amount of reserves on hand. They always have to keep a certain amount of money in reserves by law, the law of regulation.
Congress doesn't know anything about this crap. They're out golfing and drinking martinis, but the Federal Reserve and the treasury monitor this stuff and they are saying to themselves, “Okay, what's the right amount of reserves that a bank needs to have to be to be solvent?” Then they regulate what the bank does with the money. They say things like it needs to be a balanced portfolio. You can't speculate with that money. You can't put it in derivatives or hedge funds, or you can only put 5% in derivatives and hedge funds. You can't invest it in cryptocurrencies — nobody should. You can't put no more than 15% into stocks. There's a set of regulations so that there's a reasonable certainty that that money is going to be protected over the long term and the bank will still make some sort of a profit. They balance these things out. Then they watch the banks like a hawk to see if the bank’s getting in trouble.
[38:14] In dicey economic times, banks can be totally safe and secure. They can have plenty of assets. What happens if, like right now, people aren't working, so they're not depositing a lot of money? The amount of money that's being direct deposited from your employer — for a lot of people, that's just stopped. Instead, people are taking money out as they still pay their bills. Income is stopped. They need to still pay their bills. They're writing checks. Picture the bank's position on this, and it's because of regulations. Their reserves are drawing down. Not as much money that they predicted was coming in is coming in. More money is going out.
In order to maintain the proper reserve levels — this is just an example. It's actually a very complicated series of transactions, but I'm distilling it down to a simple idea. In order to make sure there's enough money all the time in the bank, they're going to have to sell some of their assets. Perfectly fine. That happens all the time in normal economic times. Banks say, "Hey, reserves are low. We’ll sell a few stocks. We'll sell some of these government bonds. We’ll sell some of these real estate holdings and we'll just sell them and then we'll get the research back up. Everybody's happy.” But when you're in an economic crisis, the stock market dropped 30%. Nobody wants to spend. The market for real estate is …. everyone's waiting. That's all on pause right now for a bit.
Unusual Stimulus for Unusual Times
What the Federal Reserve knows is they look at this and they say, "Okay this is unusual times. The markets for those securities, which is normally very liquid, there's always a buyer at some price out there for these things, but the market has dried up. If we force the bank to sell those assets to maintain their reserves, they're going to drive the market even lower. As a country, we want them to hang onto those stocks for a little bit. We want them to hang on to those mortgage-backed securities for a little bit.” It prevents the bank from taking a loss.
Something else, too. I’m distracting myself because these ideas are like brain candy for me. Not only are we forcing them to sell those securities because of our regulations, which they can do. We see a bank is well-capitalized, it means they've got enough assets … and reserves. That means they're financially solvent. That's what that means. In order to meet the regulations and to make sure that these things are all in order, if they have to force to sell the assets and if we're in a rocky asset condition, all the banks having to sell their assets at the same time will cause more panic on the stock market, more panic in the real estate field, more disruption in the treasury market because there's just more supply. There are already not enough buyers of stocks right now. That's why the stock market dropped 30%. It will exacerbate the problem by not doing that.
[41:31] Conversely, if they sell those assets at a loss, in other words if they sell the assets for less than they paid for them, which is a possibility in this market, then they get to write it off in their taxes and the banks will pay less taxes, as well. There's just so many reasons. These are just a couple of the reasons why the Federal Reserve, in times like this especially, steps in and says, "We're going to bring some stability and we're going to buy those assets from you. We’re either going to directly loan you money so you have plenty of reserves, and/or, probably both of these things, we're going to purchase those assets from you, as well. Or, loan you 90-day loans and 180-day loans against those assets so you don't have to sell them. Then when that period’s up, we are going to re-sell them back to you.”
So in reality, a lot of the things that you see going on in the economy right now, especially the actions of the Federal Reserve, are things that will in the medium term, not in the short term, in the medium term, in the next 2 to 5 years, have less of an impact on the money supply than you might otherwise think. The headline monkeys over at the mainstream media, they're not going to present it this way. They're going to hammer you with Fed injects 2 trillion dollars in the economy. It's just not that simple, and it's not that easy, and it's not just a big corporate bail-out. It's something more. They're doing something to help us have a stable economic system. This is a problem on both sides of the equation because you have some, I'll say extremist libertarian-minded people who are .... I like them; they're on Twitter a lot, and I like to have intellectual conversations with them. They're going to hate me when I say this, but they have a dogmatic idealism that should be no government intervention.
Then you have the people on the left who want to take advantage of this opportunity for more government control. The answer is in the middle, and I'm not a middle of the road wishy-washy kind of guy. I am a principled guy, but I understand the math here and I'm telling you, we've learned lessons. We're not just doing this arbitrarily. It's not like some government official, although this does happen on occasion usually in the Senate in Congress, that where some government official is saying, “I'm just playing favorites here and I'm helping out my buddies. I'm going to give them a bailout.” That's usually not the case. Even if they fumble it, their goal is to bring stability to the market to protect all of us, because I got to tell you — Middle-Class America, we are the market. We are everything.
Not Enough Rich People in the World
[44:32] Quick aside here, everyone says, "Oh, it's the rich this, it’s the poor that.” I'm telling you, it's middle-class everything. No matter what anybody tells you, it’s middle-class everything. All taxes are paid by the middle class. Poor people don't pay taxes. They think they do, and they get kind of the illusion of paying taxes, but they get net benefit that exceeds their taxes. Rich people pay a lot of taxes, and by some measurements they pay way more than their share of taxes, but there's just not enough rich people. That sounds funny, right? There's not enough of them. You could take all the assets of all the billionaires and all the millionaires and it wouldn't pay for the government for more than a few months. Complete confiscation. Take every dime Jeff Bezos has. He’s one of richest men in the world, if not the richest. He's one of the top three, no matter which way you slice it. You could take all of his assets and it wouldn't run the government for a month. Take every penny he’s got. It wouldn't make a dent in the national budget, not really, a couple of weeks worth of bills. That's what we're talking about here.
Do You Remember the Last Trillion-Dollar Stimulus?
The point being, they’re working to take and bring stability. It seems like a long long time ago, but during the financial crisis of 2009, the government performed a trillion dollar program of market stabilization and stimulus. Again, round number, trillion dollar number, but much of that was in the form of loans. The next biggest part of that stimulus was the purchasing of securities. Since then, those securities have either reached maturity and been completely paid back, or they were re-sold back into the open market at a later date. Some of those transactions, the Fed was actually able to take money back from the money supply because the payment coming back exceeded what they put in. It was a pawn shop.
The people, the securities they purchased, in that case, a lot of them were mortgage backed securities. Those mortgages were either paid off by the homeowner, the homeowner has since sold his property and the loans were paid off, or the Fed has sold those securities back at the now higher market rate. The Fed made a profit, just like a pawn shop. It actually returned to the profit of surplus cash. It took the amount they paid and exed off the balance sheet, evened out the balance sheet, and took the excess cash and returned it to the treasury. It became government money. So believe it or not, the government actually made a profit as a whole, my understanding and correct me if I’m wrong. I know some of you will argue this point back and forth, but the government actually made a profit. I’m not saying the government should make a profit. Note my previous disclaimer. I'm neither agreeing nor disagreeing with any policy. I'm simply explaining things.
The government made a profit on that thing. The economy returned to normal. But during the time being, they provided the cash infusions and the liquidity that the economy needed. Importantly, and to our conversation now, the net effect was negligible against total money supply over the long term. That's why everybody said this huge inflation to the trillion-dollar stimulus back then, it was going to cause huge inflation. They said we were repeating the mistakes of the 1970s; we're doing it all again because we're total idiots, yada yada yada. But, inflation has been nowhere. That was more than 10 years ago. It was 11-12 years ago, and those extreme measures were done, and inflation has been tame largely because …. I got give him some credit. He wasn't perfect. A couple of specific mistakes I could point out, but it's not worth doing right now.
Ben Bernanke who was chairman of the Fed at the time …. We like throw this around. We like to say, "Hey, this guy, he wrote the book on being a quarterback.” What we're saying is, he’s an expert. But when I say that Ben Bernanke wrote the book on the Great Depression, he literally wrote the book on the Great Depression. He has a book out there and I have a copy of it called Essays on the Great Depression. He talks about the mistakes that were made, what should have been done, and he was the right guy. Holy crap, aren’t we lucky? He was the right guy for the job. He knew the causes of inflation and he structured, to the best of his ability, a couple of mistakes. Again, let's tip our hat, a couple of mistakes, but he did one of the best jobs of managing that crisis that we've had in our history. So I want to make sure I tip my hat to the guy. He wrote the book, and he arranged this, he aligned this because he was aware of the danger of too much money in an economy, and what that could do to the inflation rate. So, he structured his recovery, purposefully and with intent to avoid that. I think that's largely what we're doing right now.
[49:54] I need to just stop for a second because there's another aspect of this that's really, really important to understand. It's really important. It’s this: Yes, inflation is a worry, but deflation is worse. And when you have a financial crisis of any sort, the biggest risk is deflation. I've just decided this, I'm going to do a separate podcast. I want you all understand inflation, deflation, the difference between the two, why one is better than the other, and why it's important for what we're doing now, for the general economy, and why it argues against crypto-currencies, and lots of other things. I'll do a separate podcast on that later on.
So Where Are We Now?
Do You Remember the Last Trillion-Dollar Stimulus? stability. It seems like a long long time ago, but during the financial crisis of 2009, the government performed a trillion-dollar program of market stabilization and stimulus. Again, round number, trillion-dollar number, but much of that was in the form of loans. The next biggest part of that stimulus was the purchasing of securities. Since then, those securities have either reached maturity and been completely paid back, or they were re-sold back into the open market at a later date. Some of those transactions, the Fed was actually able to take money back from the money supply because the payment coming back exceeded what they put in. It was a pawn shop. ill argue this point back and forth, but the government actually made a profit. I’m not saying the government should make a profit. Note my previous disclaimer. I'm neither agreeing nor disagreeing with any policy. I'm simply explaining things.
The next thing he's doing, they're talking about doing for certain key industries, and President Trump said this whether you like him or not, I don't care if you like him or not, doesn't matter. We're talking about the problem at hand. They’re talking about supporting Boeing in exchange for stock and ownership of Boeing. On the surface, that feels like socialist takeover of the economy and nationalizing industries, this is terrible, we're Venezuela. No we're not.
They know that if they just give Boeing money, it can create a problem. It can create two things. It can create an anti-competitive, anti-trust environment where one business is favored. It can also create influx because we're talking billions of dollars just for them to keep them going, and we kind of need them. They make fighter aircrafts. We should always have that capacity on our own shores. If anything we've learned from this crisis is that we should have a certain percentage of our critical supply chains always manufactured here in the United States. If you've learned nothing, learn that lesson. Here you have Boeing. If they just give them the money, the sizeable money they're talking about giving them, it'll create a little bump in the money supply. But if they're trading stock, then the government has the stock and once the stock market stabilizes, the government can then resell that stock into the open market, likely for a return, but that's not the purpose. The purpose helps them control the money supply. It's not an increase in the money supply because they've sold the stock back. Whoever buys the stock, whether it is Boeing buying their stock back, or another investor buying their stock back, it doesn't matter at all because the money’s still coming back out of the economy. Does that make sense?
[49:54] I need to just stop for a second because there's another aspect of this that's really, really important to understand. It's really important. It’s this: Yes, inflation is a worry, but deflation is worse. And when you have a financial crisis of any sort, the biggest risk is deflation. I've just decided this, I'm going to do a separate podcast. I want you all understand inflation, deflation, the difference between the two, why one is better than the other, and why it's important for what we're doing now, for the general economy, and why it argues against crypto-currencies and lots of other things. I'll do a separate podcast on that later on.ney supply, it will not cause inflation. Are you reading me? Are you feeling that?e bump in the money supply. But if they're trading stock, then the government has the stock and once the stock market stabilizes, the government can then resell that stock into the open market, likely for a return, but that's not the purpose. The purpose helps them control the money supply. It's not an increase in the money supply because they've sold the stock back. Whoever buys the stock, whether it is Boeing buying their stock back, or another investor buying their stock back, it doesn't matter at all because the money’s still coming back out of the economy. Does that make sense?ic to my list. I like answering questions. Aside from that, make sure this podcast, even if I’ve bored the crap out of you, please subscribe and please give me a little review and just say, "Hey Jeff, way to go” because I do these things for free. Note: let me call your intention to something.
This is a podcast. You haven’t heard a single commercial. You’re not going to. I'm not selling anything, not yet anyway. I might put a t-shirt; that'd be nice, but this is just for you. This is to get information that's in my head and my understanding to get it into your head. Maybe I’ve done a good job, maybe I haven't, but I'm going to keep trying until I've given you all I got. I'm here for you. I love you. I care about you. I want you to be happy and successful. I don't want you to be scared. Things are going to be okay. Let me know if you need some help, happy to pitch in anytime at all. Thanks for listening. Talk to you soon.