May 14, 2020
Pick Your Poison

It’s worth reading Federal Reserve Chairman Jerome Powell’s comments from yesterday. 

He focused on the severity of the unfolding crisis and the federal government’s response to it, including $2.9 trillion in fiscal support already enacted by Congress.

The response has been timely and appropriately large, Powell said. It also may not be enough, “given that the path ahead is both highly uncertain and subject to significant downside risk.”

He concluded by calling for even more support from Congress.

“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he said. “This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”

The crux of the matter is the national debt. 

If we borrow too much, opponents of fiscal support say, we’ll debase the dollar. If we borrow too little, proponents say, we risk descending into a depression.

How much is too much?

No one knows. 

Yet, we do have guideposts.
The U.S. dollar is the leading global reserve currency. It’s where countries, institutional investors and individuals stash their cash. No capital markets are deeper or safer than those for U.S. debt.

If investors lose faith in the dollar, in turn, the implication is that they’ll take their money elsewhere. There is no such thing as money purgatory; if people sell dollars, they must buy something else.

Would they buy Japanese yen? Not if debt is their concern — Japan’s debt-to-GDP ratio is more than twice that of the United States.

Would they buy Chinese yuan? That isn’t likely given China’s strict currency controls.

Would they buy euros? Again, if fiscal health is the barometer, that seems unlikely.

What about cryptocurrencies, precious metals and wampum? People may move into these on the margins, but that’s not where Saudi Arabia is going to invest its $500 billion in currency reserves.

To be clear, this doesn’t give the federal government a license to issue an infinite amount of debt. 

But that’s not what Powell was talking about. 

Even the most aggressive bill under consideration by legislators right now contemplates another $3 trillion in fiscal support. That’s a lot of money. But as Powell laid out in his comments, it’s probably cheaper than an economic depression.

• John J. Maxfield, executive editor of Bank Director