In response to COVID-19, Congress has been on a remarkable spending binge.
Congress passed its infamous Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March. Ostensibly marketed as a relief for Americans who have had their livelihoods disrupted by shutdowns implemented to contain the spread of the virus, this legislation ended up handing out $2.2 trillion in financial relief. However, as Republican Congressman Thomas Massie pointed out, this bill was filled with all sorts of pork and handouts to special interest groups that clearly do not need government help.
This spending binge wasn’t complete without its fair share of Federal Reserve action. The Federal Reserve loaned over $4 trillion to businesses in order to keep the economy intact. On top of that, the Fed lowered the fed funds rate — the rate which banks borrow from each other — to practically zero. The Fed also injected $1.5 trillion to repurchase-agreement operations.
That’s a hefty amount of money that the Fed is handing out. In an interview for 60 Minutes, Minneapolis Fed President Neel Kashkari was candid in his assessment that “there is an infinite amount of cash at the Federal Reserve.” This came at a time when the Fed bought $650 billion in treasury securities.
Although “quantitative easing” is marketed as a “temporary measure”, there is always a strong temptation for central banks to pursue loose monetary policies further down the line. Politicians are addicted to artificial economic growth for electoral purposes. Ideally, they would love to be in the boom phase. On the other hand, tightening the money supply would lead to economic contractions and economic malaise, which is a political death sentence.
Given how massive the national debt has become — now standing at $24 trillion — there’s an even stronger incentive to continue pushing for easy money. History has shown that heavily indebted governments will try to devalue their currencies in order to make their debt payments more manageable. Unfortunately, in this quest to eliminate debt, increased currency devaluations will lead to hyperinflationary scenarios. At that point, people’s savings are eviscerated and living standards have lowered dramatically.
The Fed’s current partnership with the U.S. Treasury is beginning to cast doubt on the independence of the central bank. Now, the Fed can be relied on to buy up assets from corporations that have made suspect business decisions during the last few years. Under normal circumstances in the market, these actors would be punished and potentially replaced by more accountable competitors.
Such central bank activism will create massive economic distortions. America may soon be entering new territory where its monetary malfeasance will finally manifest, not only in stock market collapses, but also in increased inflation. In this inflationary environment, Americans will suffer both decreased job prospects and wholesale reductions in their wealth.This would be a drastic shock for many Americans who have been accustomed to improving living standards over multiple decades.
Policymakers should heed the wisdom of the Founding generation and view the Fed with more skepticism. If freedom advocates had their way, the Fed would be abolished and replaced with a free-market monetary system.
In a time when the U.S. is wading into economic uncertainty, granting central banks so much power is simply too risky of a proposition.