Federal aid is sustaining the American economy

By MATTHEW BEDELL
On April 22, 2020

Photo courtesy of U.S. Government, Wikipedia

On April 15, the Federal Reserve decided to inject 2.3 trillion dollars into the economy minutes before the stock market opened in order to aid the devastating number of Americans who had filed for unemployment benefits. This is one in a long list of moves the federal government has done as a whole to boost the American economy.

Since the crisis began, the federal government has injected six trillion dollars into the economy. It has virtually cut interest rates to zero, and it has also offered what some have dubbed “infinite QE.” But what do all of these things really mean?

To start, when any part of the federal government announces economic aid and where they are going to spend money, they have to take a loan. The Federal Reserve, which is the central bank of the United States, has the power to print money, set interest rates and issue bonds as well as securities.

The Federal Reserve borrows money in the form of bonds and securities, which allows it to turn around and print money. Since value is not created, inflation is not an issue. The action, however, is technically borrowing from the future as interest must be paid back for the investments. This is how the government maintains its budget deficit. 

The 2.2 trillion dollar stimulus package created into law by Congress and signed by President Donald Trump follows the same basis, as the government was already running a one trillion dollar deficit. This flourished the economy and prevented it from seizing up, especially by granting money to Americans no longer earning an income and providing relief to businesses in need.

So what moves are the Federal Reserve making and what is “infinite QE?” 

The “infinite QE” refers to quantitative easing, and is the process in which the Federal Reserve buys its own treasuries to increase liquidity. This is essentially the government buying its own currency to print more currency.

It is a tool to devalue the dollar and inflate it to let more money into the market. The Federal Reserve has foremost been cutting interest rates and injecting money into various sectors of the economy to prevent it from collapsing.

Cutting interest rates allows banks to borrow from the Federal Reserve which can then lend out to businesses, all at reduced rates increasing liquidity. It also reduces the risk from the investment, since low-interest rates mean low-interest payments. 

The infinite part comes from the Federal Reserve expanding its asset purchasing program from a 700 billion dollar maximum budget to what is now unlimited. This allows the Federal Reserve to buy its own assets and print out money at an unlimited rate.

With this, the Federal Reserve has moved to buy up corporate bonds, mortgage securities and other forms of debt from big business. In addition, it has a high appetite for risk, as purchases are made not under the assumption that there will be a return on investment but to make sure that money is moving through the economy. Using this program, the Federal Reserve has made an additional two trillion dollar investment in various sectors of the economy.

The costs to these sorts of programs come in the form of an inflated dollar, which weakens current purchasing power. In addition, anything added to the deficit will translate into a larger national debt, which is already more than 20 trillion dollars. Interest payments for the national debt are currently 373 billion dollars, a substantial number in the federal budget.

While it is possible that the actions on the economy were preemptive during a time where both businesses and people are not earning an income, these actions have helped prevent a total collapse of the US economy. 

There are arguments to be made on social welfare versus corporate welfare, as the vast majority of aid money is going to businesses and corporate America. Regardless of one's stance on current corporate spending, if many companies collapsed because of the lack of liquidity due to the shutdowns, the American economy as a whole would have difficulty digging itself out of this slump.

 

mbedell@ramapo.edu

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