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Investment Insights, Inc.

Trillions of Dollars?! What? Really? Where Did That Come From?

“A billion here, a billion there, pretty soon you’re talking real money!” - Senator Everett Dirkson.

Ted Turner was an Atlanta broadcaster that started CNN, TNT, TBS and others. He sold them all and walked away with about $3 billion, and gave $1 billion to the United Nations. When asked why he gave so much, he said, that spending a billion dollars was really hard.

He took his measly $2 billion and became the largest land owner in the United States. And he still has more money left over than he can spend.

But Jeffrey Bezos, the founder of Amazon, has a net worth that is 70 times that of Ted Turner.

Now that I have your head in the clouds, consider that $1 trillion is 6.8 Jeffrey Bezos’s and it’s 475 Ted Turners.

The CARES Act totals $2 trillion.

And while our heads were all spinning over this unfathomable amount of money, the Federal Reserve Bank jumped in with another $2 trillion of stimulus.

No one can be blamed for thinking we all just went through the looking glass together. But let’s go past the shock and awe here and look into some of the details.

Shortly after Trump became president the Congress passed his promised tax cut, which increased the annual Federal budget deficit to a little over $1 trillion. So for the last couple of years we as a country have been spending $1 trillion a year more than we are collecting in taxes. That $1 trillion a year comes from borrowing money.

Just to be clear, the Republican House, Senate and president, all members of the party that bills itself as the party of fiscal responsibility, enacted a policy that drove us deeper into debt than ever, with no end in sight.

And then came the pandemic and between the president’s appointed Federal Reserve President Powell, the president, the Republican Senate and the Democratic House, we borrowed another $4 trillion just for this year.

From who? I mean isn’t the whole world reeling in a deep recession from the pandemic? Yes, of course we are. The answer is somewhat complicated, but a lot of this money will eventually be paid back by future generations. In other words, we just borrowed a ton of money from people who aren’t even born yet. We indebted generations of Americans to come and they had no voice in the matter. They have no choice. They will have to pay back our loan. I’m not sure if there is any way that I can think of this as being right, moral or just. But that’s for another day. Today we’re just trying to understand what happened. Yes, we created money out of thin air, but there is a consequence. It’s a loan and it has to be paid back.

And, to be clear, while I am incensed about borrowing from people who have no say in the matter, the fact is, it was very necessary. I really have no problem with borrowing in times of emergency. What I have a problem with is not paying it back in good times. Borrowing this year to get through this crisis is not immoral. The Trump tax cut that created larger deficits in good times is immoral. For this whole thing to ultimately work, we have to pay down the debt in good times, not increase it!

But we are in a crisis and we just borrowed a ton of money. What are we going to do with it? There are two different kinds of money we have created. One was created by Congress in the CARES Act and the other by the Federal Reserve. The money from the Fed is for the financial system. It keeps the system liquid and working and keeps financial institutions solvent. These are extremely important things. In the 1930’s all those runs on the bank were because when a bank went insolvent, you lost your deposit. We don’t have these fears today and a large part of the reason we don’t is because the Fed steps in during times of trouble and makes sure the system has enough money to function.

That’s extremely important. It keeps the system from failing. But it doesn’t do much to help things get going again. In the end, a lot of the money the Fed puts into the system ends up as assets in the hands of wealthy people and institutions. It keeps things solvent, but it also increases the disparity between rich and poor.

This was mostly what happened as a result of the financial crisis, where most of the response was to shore up the financial system.

The CARES Act is quite different. Forgivable loans to small businesses, grants made to individuals, additional unemployment benefits, all of these put money into the hands of people that need it. The difference is dramatic. When you put money into hands of people that don’t need more money, such as when you give tax breaks to people that already have a lot of money, the money generally doesn’t get spent. It gets saved or invested in stocks, bonds, real estate, etc. In other words, it goes into assets.

But when you give money to people that need money, it gets spent. And that is far more stimulative.

Spending money on food, car repairs, rent, etc directly benefits businesses of all kinds, and their employees.

Giving money to people that already have enough money is much less stimulative. If you already have enough money for everything you need and maybe even everything you want, then getting more money does little or nothing for the economy because you are unlikely to spend more money.

In the long term, meaning over the course of the next decade or more, we are going to have to make plans to pay back this money. But in the short term, the CARES Act, which I promise you has many flaws, is still much more promising in the effects I believe it will have than anything we did back in 2008/09.

The recession was sudden and shockingly bad. But tiny beginnings of recovery may already be happening. Please stay safe. I don’t like wearing a mask either, but sometimes it’s important. Protect yourself and others and we’ll get through this.

Hal Masover is a Chartered Retrement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securiees offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated.

Comments and questions can be sent to hal.masover@emailsri.com

These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.

 

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