Federal Reserve Funds 165% Of Record Pandemic Deficit Spending Through Monetary Creation

Two extraordinary and unprecedented actions are being taken in the attempt to contain the economic damage from the national shutdown, and thereby attempt to prevent a depression. Each are on a scale we have never seen before, and each are almost certain to be very long-lasting.

Even if the actions are "successful" - a depression is prevented and a severe recession is shortened - these radical actions occurring over a matter of months and years are not only likely to dominate our investments, savings and retirements throughout the rest of the 2020s, but they are likely to still be changing our lives decades from now, long after the COVID-19 pandemic has been forgotten by most.

Between the economic damage to the nation, the lost earnings and careers for individuals, and the costs of the containment of that damage, the shutdowns being used to "flatten the curve" are likely to be the single most expensive event in U.S. history. How the expenses of attempted containment are funded - will change everything, and the effects will stay with us for the rest of our lives.

As can be seen in the graph above of the preceding weeks, an explosive increase in the national debt is being used to fund an array of emergency programs that are throwing hundreds of billions of dollars at corporations, smaller businesses and individuals. At the very same time, all of that money - and quite a bit more - is coming from the Federal Reserve creating the money, almost entirely through a process of reserves based monetary creation.

This analysis is part of a series of related analyses, which support a book that is in the process of being written. Some key chapters from the book and an overview of the series are linked here.

An Unprecedented Increase In The National Debt

We have the fastest increase in the national debt coming up in 2020 that we have ever seen, and this is on top of a national debt that was already rising very rapidly with trillion dollar a year deficits. There is a great deal of weekly variation, but that works out to a round number average of about $20 billion a week or $80 billion every four weeks.

Even in late March, deficits were already running well above that range, as can be seen with the green bars in the graph. There was $67 billion in net new public debt issued in the week ending March 18th, 2020, and another $30 billion the next week, for a two week total of $97 billion, or about 4X the pace of a government running $1 trillion a year deficits.

Then another $299 billion was issued the week ending April 1, 2020, and another $276 billion the following week. That brought the four week total to $672 billion - which vastly exceeded any deficit run up over an entire year by the Federal government before 2009.

The previous annual record had been a $459 billion deficit in the year 2008 (fiscal years), and that total was exceeded in just four weeks by almost 50%. Indeed, if we just look at the latter two weeks, the deficit spending by the government in just those two weeks was equal to almost twice the highest annual deficit ever incurred by the government prior to 2003 (and yes, inflation plays a role, but the current rate of increase is off the charts).

The extraordinary, fantastic, almost incomprehensible increase in the national debt over four weeks is half the picture. The perhaps even more important event - though even less understood by the public - is the orange bars, which represent where the money came from to buy the newly issued debt.

The Federal Reserve effectively created the money to purchase $118 billion in Treasury debt in the week ending March 18th. This rose to a staggering $455 billion the next week, $818 billion the third week, and the Fed had cumulatively purchased over $1.1 trillion in federal debt in the four weeks ending April 8th, 2020.

Almost all of the new money spent by the United States government came from the Federal Reserve using a process of reserves based monetary creation (not money printing). Now, these were not direct payments from the Fed to the Treasury, but that is more or less the whole point. By purchasing the Treasuries through the markets, from participants who had just bought them from the government, the Fed not only funded the U.S. government but ensured that interest rates would remain at extreme lows.

Indeed, as further explored below and in previous chapters, the Fed has been buying far more Treasuries than just those needed to fund deficit spending.

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Two extraordinary and unprecedented actions are being taken in the attempt to contain the economic damage from the national shutdown, and thereby attempt to prevent a ...

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