Covid-19 has halted economies around the world. In response, the federal government has instituted extreme fiscal and monetary policy measures. The chart below shows M2 and M1 money supplies; note that recent blip is more drastic than during the great recession. The US spent all of that in a month and our government is still spending!

In this article, I will describe deflationary pressures, inflationary pressures, the state of our economy, and the consequences of fiscal policy.

Deflationary Pressures:

People’s balance sheets have taken a huge hit. At one point, the stated value of stocks was down $11.5 T [1]. With much less in savings, people are disinclined to spend.

The currencies of other countries are falling in value faster than the U.S. dollar. In response, there is significant desire for citizens of those countries to convert their currencies into the historically more stable USD. The figure below shows the normalized exchange rates for several currencies in economically distressed countries. You see a large increase during the last two months.

The velocity of money is dramatically reduced to historic lows. Note that it has decreased since the beginning of the great recession. This effect will be exacerbated during the Covid-19 shutdown since businesses that offer products and services cannot do so. This means that there are fewer dollars circulating.

So people are holding onto their USD and other people want it. This reduction in supply and increase in demand are deflationary pressures.

The price of oil is dropping dramatically. This is largely because cars are not on the road (large segments of our society are under house arrest, euphemistically called shelter-in-place), and planes are flying much less [2]. This reduction in demand has caused a dramatic fall in the decrease of the price of oil. Since oil is such a fundamental cost to our economy, this may lead to a reduction in prices for many products. This appears like deflation, but is an illusion [3]; this effect will likely be reversed once the economy is opened.

Inflationary Pressures:

There are very few fiscal conservatives left in the Federal government. (I can only think of three: Rand Paul, Thomas Massie, and Justin Amash.) Republicans, which have always touted responsible spending, have completely given up on that idea. The federal government has run ever increasing deficits the entire time that Trump has been in office. Now, with the state of emergency to excuse any amount of spending, the federal government is unrestricted.

In 2019, the US deficit (the amount spent minus the amount brought in) was nearly $1T [4]. With the initial 2020 $2.2 T bailout package plus the increase in deficit already expected, the federal government would end the year with a deficit of $3.8T [5,6]. However, the federal government is already planning another bailout package [7].

In Monetary policy, the Federal Reserve (which had started bailing out banks before the Coronavirus created an economic catastrophe [8,9]) is now printing $1 M dollars per second [10]. Whereas just a year ago, Powell said that the economy was in a good state and that the Federal Reserve was going to let their balance sheet evaporate with time, they have now purchased a record $6T of debt. The Federal Reserve has begun purchasing junk bonds and collateralized loan obligations of highly leveraged sub-prime corporate loans [11,11.1]. And they have pledged to spend endless amounts to support the market [12]. Additionally, the Federal Reserve has set the fractional reserve requirement for banks to 0% [13].

Federal Reserve loan amounts in $thousands.

Already we see evidence of inflation. The current price of gold has not been seen since 2013. And gold ETFs have purchased a historic 3,185 tonnes of gold [14].

The Shiller PE ratio, a metric quantifying the price of stocks compared to their value, has been increasing since 1980 (see figure below). Historically, it has nominally been around 14; it is now 26.43. The recent drop corresponds to the Covid-19 shutdown. Its recent trend, though, shows increasing prices of stocks.

We are seeing lots of signs that the economy is weak. The GDP was already decreasing before the Coronavirus pandemic [15].

The Federal Reserve began pumping money into the repossession market before the Covid-19 pandemic.

60+ day defaults of auto loans have risen to 5.8%, the highest level since 1996 [16].

22 million people have filed for unemployment in the last month [17]. Large companies have started investigating bankruptcy (24 Hour Fitness, Nieman Marcus). More will come.

Trading prices dropped so dramatically that automatic trading halts were triggered [18]

Universities, which employ a large segment of the public, are not getting the foreign (high income) enrollments this year that they’ve gotten in the past [19].

The consumers of the U.S. are currently in debt approximately $14 T [19.1].

Boeing, a major producer in the U.S. and a purchaser of much of the goods produced in the U.S. killed two planes full of people through extreme incompetence. With the Max 8 still not cleared to fly, countries have stopped purchasing Boeing planes [20].

The US postal service will be bankrupt in a month [21].

So we are printing many more dollars in a weak economy and enforcing limits on production of goods and services. More dollars and fewer goods will create a strong push for inflation.

Economic Outlook:

There are a spectrum of possibilities of what will happen bounded by the two following scenarios:

A cure for Covid-19 is found. The economy turns back on and everything goes back to normal. The 22 million unemployed get well paying jobs quickly. The government immediately turns fiscally responsible and begins paying off all of this new massive debt. And the Federal Reserve contracts the money supply. This will prevent significant inflation. If timed just right, it may keep people employed as well. The economy turns back on slowly due to risks of Covid-19 transmission. Much of the unemployed remain unemployed. The Federal Reserve keeps printing at ever-increasing rates and the Federal Government keeps spending. Income distributed to individuals becomes commonplace and is used to placate the public while enormous distributions to wealthy conglomerates with political ties are made (already done with the first 2020 bailout). The Federal Reserve, already having invested largely in junk bonds and having put the tax payer on the hook for their success, keeps giving those companies loans to keep them solvent. With many more dollars and fewer goods, the prices of those goods increase. This is exacerbated by any increase in the velocity of money.

I think that something closer to scenario (2) is likely, and so the chance of inflation is very high. Our government can keep printing and spending dollars as long as inflation (already a hacked metric) remains low enough. However, if inflation rises too quickly, we’ll have stagflation. (Already, I believe we have had a good measure of stagflation for the past years, as I describe here.) The Fed will be forced to contract the money supply or risk extreme irreversible damage to the dollar. If that happens, that will be a terrible time for this country.

I suggested a purchase of gold on 1/1/2019. That investment has done very well; it has seen a 35% increase. In the same period of time, the S&P 500 has only increased 7% (and that’s with the recent bounce). I also suggested purchasing Tesla. And though it didn’t reach 360 the following March, like I predicted, it is currently $745, for a gain of 225% in the same period.

I’m still heavy in gold and Tesla. I’ve also purchased a good amount of CRSPR stocks (CRSP, EDIT, NTLA, BEAM). I’ve invested some into ARKK; they seem to be thinking very clearly and I love how they keep me informed. I expect gold will continue to rise. Whether or not the price of gold will increase faster than the inflation observed in stocks, I don’t know. I’ve sold most of my stocks (except for those mentioned, which are very long term investments) and purchased gold. I’m going to wait a couple of months to see if the stock market begins behaving sane again [22].

[1] https://markets.businessinsider.com/news/stocks/stock-market-outlook-2016-trump-win-gains-erased-coronavirus-risks-2020-3-1028991585

[2] https://cryptoprice.ng/en/blog/flight-disruption-to-cost-airlines-dollar314bn-revenue-at-least-50-percent-passenger-traffic-decline

[3] https://www.nasdaq.com/articles/investors-are-being-fooled-by-low-oil-prices-analysts-warn-2020-04-20

[4] https://www.cnbc.com/2019/10/25/federal-deficit-increases-26percent-to-984-billion-for-fiscal-2019.html

[5] https://www.cnbc.com/2020/02/12/us-deficit-swells-25percent-in-fiscal-2020-up-1point1-trillion-over-past-year.html

[6] https://www.reuters.com/article/us-health-coronavirus-usa-budget/us-budget-watchdog-group-projects-38-trillion-deficit-for-2020-idUSKCN21V1TA

[7] https://www.nytimes.com/2020/03/30/us/politics/coronavirus-stimulus-relief-congress.html

[8] https://www.wsj.com/articles/feds-100-billion-repo-intervention-falls-short-of-bank-demand-11583332932

[9] https://www.cnn.com/2020/03/09/investing/ny-fed-repo-injection-coronavirus/index.html?utm_source=twCNN&utm_term=link&utm_content=2020-03-09T18%3A50%3A02&utm_medium=social

[10] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

[11] https://youtu.be/Zebg-jBf3BE

[11.1] https://www.cnbc.com/2020/03/23/fed-announces-a-slew-of-new-programs-to-help-markets-including-open-ended-asset-purchases.html

[12] https://www.cnbc.com/2020/03/23/fed-announces-a-slew-of-new-programs-to-help-markets-including-open-ended-asset-purchases.html

[13] https://www.forbes.com/sites/bobhaber/2020/03/16/the-fed-fires-the-big-one/

[14] https://www.reuters.com/article/gold-etf/exchange-traded-funds-gold-stash-swells-to-record-3185-tonnes-wgc-idUSL8N2BW5IG?utm_source=reddit.com

[15] https://www.markiteconomics.com/Public/Home/PressRelease/2ea84928c5d74262bbe387ec2b19d337

[16] https://wolfstreet.com/2018/04/08/subprime-carmageddon-specialized-lenders-begin-to-collapse/

[17] https://www.federalreserve.gov/releases/h41/current/

[18] https://www.fxstreet.com/news/breaking-sp-500-hits-level-one-circuit-breaker-with-7-loss-202003161330

[19] https://www.theguardian.com/education/2020/apr/11/universities-brace-for-huge-losses-as-foreign-students-drop-out

[19.1] https://www.debt.org/faqs/americans-in-debt/

[20] https://www.cnbc.com/2020/01/14/boeing-posts-negative-commercial-airplane-orders-for-first-time-in-decades.html

[21] https://fortune.com/2020/03/30/usps-postal-service-stimulus-package-no-funding-post-office-mail-delivery-could-shutter-june-coronavirus-relief-bill/

[22] https://www.businessinsider.com/the-stock-market-is-detached-from-the-economy-2014-11