“It is always sound business to take any obtainable net gain, at any cost and at any risk to the rest of the community.” – Thorstein Veblen
1 – LIQUIDITY
On March 26, 2020, during a week when most countries were just beginning to go into COVID driven lockdown and quarantine, the G20 announced that member nations would inject more than $5 trillion into the global economy to limit job and income losses and “do whatever it takes” to tackle the pandemic. The next day, March 27, CNN Business reported that $7 trillion was being spent by G7 governments and central banks to “save the world’s economy.”
Federal Reserve Bank, Houston, TX (Image courtesy of Random Sky at unsplash.com)
By April 29, the Center for Strategic and International Studies calculated that the G20 were on track to spend not $5 trillion, but an upwardly revised total of $6.3 to $7.4 trillion in stimulus, noting that the “…largest component of fiscal support is intended to provide financing to businesses and loan guarantees.” (See note 1)
In the US, the IMF “stimulus tracker” listed $3.1 trillion in fiscal stimulus that was publicly known at that point. The stimulus comprised $483 billion for the Paycheck Protection and Health Care Enhancement Act; $2.3 trillion for the Coronavirus Aid, Relief and Economy Security Act (“CARES Act”); $8.3 billion for the Coronavirus Preparedness and Response Supplemental Appropriations Act; and $192 billion Families First Coronavirus Response Act.
On April 15, 2020, the Washington Post reported that in addition to the $3.1 trillion in fiscal stimulus. “[T]he Federal Reserve’s efforts…are harder to measure but seem likely to blow past the $4 trillion mark.”
These early estimates quickly went out the window as money continued to flow.
As of June 18, the Committee for a Responsible Federal Budget reports $3.6 trillion in direct US fiscal stimulus and more than $5.8 trillion in monetary stimulus from the Fed. The total to date is a minimum $9.4 trillion, with trillions more under discussion.
In addition to probable significant overlap between G-7 and G-20 stimulus figures, there is also some overlap of US figures with G-7/G-20 estimates. It is incredibly difficult to find figures that break down this overlap. The IMF stimulus tracker is neither accurate nor up to date. But total US stimulus is already $9.4 trillion, with another $2 to $3 trillion in process. Fed programs remain open ended and are almost certain to increase. If currently known stimulus in the G-7/G-20 nations is $7.3 trillion, which is likely a minimum, the global total is already approaching $20 trillion even with allowances for overlap.
(NOTE: This total does not include China’s $1.425 trillion in fiscal and monetary stimulus as of June 18. China’s stimulus programs and overall role in the global economic picture will be examined in greater detail in Part 5 of this series.)
Although money is still being spent, preliminary estimates indicate that in the US, only $560 billion of total CARES Act funds of $2.3 trillion will go to individuals, primarily via $1,200 direct payments, with nearly 40% going to large and small corporations and only 1% to safety net programs.
Matt Taibbi of Rolling Stone says of the CARES Act, “It retains all the cruelties of the free market for those who live and work in the real world, but turns the paper economy into a state protectorate.”
In the US, another $2 to $3 trillion in direct stimulus is likely to be approved in the coming weeks via an election year deal between Congress and the Trump administration. The Fed, with its labyrinthine array of stimulus and loan programs and a commitment to “maintain market liquidity” at any cost, is a complete wild card because it operates largely unaudited.
A Time magazine analysis of the historic change underway in the Fed’s role in the US and global economies is worth quoting at length.
It is difficult to describe the Fed’s interventions without sounding hyperbolic. The Fed has printed money at a scale that dwarfs all previous efforts. Back in 2007, the Fed’s balance sheet was about 6% of the size of the entire national economy. By the end of this year, it is expected to be about 40%.
Behind all the numbers and complex programs, the Fed is quite simply rewriting the rules of American capitalism. In just months, the bank increased the size of its footprint in the economy by more than two-thirds and proved to investors that it would step in to buy entirely new kinds of things that it had never bought before, like corporate junk debt and Main Street business loans.
As often happens with the Fed, this is all presented under the rubric of crisis management, but history shows that the Fed’s interventions are very difficult to withdraw once a crisis is over. The actions it took from 2008 to 2010, presented as temporary, remain largely in place.
No one should be under the illusion that this money is being spent prudently. A June 19 report from the Brookings Institution on the Fed’s COVID related actions makes it clear that the rules are being waived for large banks.
The Fed eliminated banks’ reserve requirement—the percent of deposits that banks must hold as reserves to meet cash demand… The Fed also relaxed the growth restrictions previously imposed on Wells Fargo, as part of an enforcement action related to widespread consumer protection violations, so that the bank could increase its participation in the Fed’s lending programs for small- and mid-sized businesses.
Blackrock and the Fed, an unholy alliance
The Fed is perhaps the most opaque financial entity in the US. The first (and only) audit of the Fed in US history since its creation in 1913 was conducted by the General Accounting Office (GAO) in 2011. The GAO report verified that a previously unknown total of over $16 trillion in credit and loans had been allocated by the Fed to corporations and banks internationally for “financial assistance” during and after the 2008-‘09 fiscal crisis. It may be years before the full extent of the Fed’s COVID related spending and loans is known.
Reporting on COVID stimulus spending by governments and central banks worldwide, Investopedia says of current US Fed initiatives:
The scale of the program is currently open-ended, with the Fed saying it will buy "in the amounts needed to support the smooth functioning of markets.”
In a clear signal of how Fed stimulus programs will work, Blackrock, the world’s largest investment fund managing over $7.4 trillion in assets, which equals 38% of US GDP and 8.5% of global GDP, has been hired to manage the ongoing purchase of junk bond funds to prevent their collapse, to provide “liquidity to corporate borrowers” and to oversee the Fed’s purchases of agency commercial mortgage-backed securities. The firm was used for similar purposes during the 2007-’09 financial crisis. Blackrock also manages a portfolio of investments in the largest US weapons manufacturers valued at more than $2.84 trillion.
After a 2013 report by the US Treasury Department’s Office of Financial Research (OFR) characterized Blackrock as a threat to the global financial system, Blackrock mounted an intense three year lobbying campaign to fend off an OFR driven effort to have the company designated as a “systemically important financial institution,” which would have subjected them to closer federal oversight under Dodd-Frank.
Today, having avoided meaningful regulation, Blackrock’s proprietary Alladin risk-management system is used to monitor over $30 trillion in financial assets for 200 financial companies in 30 countries. Under the terms of its COVID related contract with the Fed, Blackrock will manage the Fed’s unlimited purchases of Treasury bonds and mortgage-backed securities. In an extraordinary move, the Fed has written new COVID rules for Blackrock that make it legal for the firm to trade on information they’ve learned while managing the Fed’s $750 billion corporate credit facility.
Forbes has dubbed Blackrock the “Amazon of Wall Street.” Their CEO, Larry Fink, is considered an indispensable advisor, a kind of shadow cabinet member in the Trump administration, yet because of the depth of the company’s management of Fed programs, he is also on the shortlist to be Joe Biden’s Secretary of the Treasury should Biden win in November, 2020.
The Blackrock story offers a cautionary tale about the kind of oversight that can be expected across the board as COVID related stimulus money continues to flow for the indefinite future from the Fed and Treasury into the corporate and financial sectors.
Photo courtesy of Markus Spiske at Unsplash.com
Liquidity flows upward
Because so many stimulus programs are ongoing, or in the case of the Fed, open ended, estimating a final US total of direct, fiscal, monetary and loan stimulus in the $12 to $15 trillion range by the end of 2020 seems conservative.
Globally, as noted above, another $6.3 to $7.4 trillion in COVID related stimulus among the G7 and G20 nations appears to be a bare minimum based on public pronouncements and is likely to be significantly higher. As the world’s largest economy, part of this G7-G20 stimulus is being spent by the US, which has a vested interest in maintaining a dollar denominated global economy, but as in the US, the G7/G20 total is likely to grow significantly as spending on stimulus programs continues for the remainder of 2020.
While many of the long term impacts from this unprecedented financial engineering are difficult to predict, with stimulus totals globally potentially reaching $20 to $30 trillion or more by the end of 2020, the broad outlines of the new COVIDNOMICS are already coming into focus. Elite power is being consolidated by those already at the top in ways not seen since the Middle Ages, while a global economic system that before COVID was teetering on the verge of de facto bankruptcy is now awash in liquidity, i.e., cash and credit for banks, corporations and wealthy investors at the top.
Meanwhile, among a majority of the world’s population, a monstrous loss of economic and civil freedom has spread across the globe as rapidly and as lethally as the coronavirus, leaving a new kind of wired peasantry in its wake.
NOTE: Outline for the Covidnomics series, subject to revision:
Part 1 - Breaking up with TINA
Part 2 - Rescuing TINA with COVIDNOMICS
Part 3 - How COVIDNOMICS works - Liquidity
Part 4 - How COVIDNOMICS works - Labor Flexibility, Privatization & IMF Revival
Part 5 - How COVIDNOMICS works - Dramatis Personae & China’s Role
Part 6 - Revisiting Polanyi and Other Alternatives
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