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Perhaps this is a simple question but as a non-US citizen I don't understand how the US government is going to finance the $2 trillion stimulus package to combat the economic damage due to the Corona pandemic. Is the government going to somehow delegate this to the FED and if yes, how?

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I believe that the government is going to encourage the financing of the $2 trillion dollar stimulus to the FED and this will take place through the FED purchasing US treasuries.

It is also in the best interest of the FED to do so in order to foster the stability, integrity, and efficiency of the nation's economy (Federal Reserve Bank mission).

This is actually taking place now as The Federal Reserve Bank of New York will purchase $37 billion in Treasury bonds to boost liquidity in the crucial government debt market, announced on the 13th. (https://thehill.com/policy/finance/487427-ny-fed-to-accelerate-bond-purchases-to-keep-treasury-market-flowing)

The New York Fed will also offer $1 trillion in short-term loans to banks and brokers in exchange for Treasury bonds. The Fed will eventually be repaid with interest on the loans it offered to banks and brokers in exchange for returning the bonds it purchased. The government and the FED are going to be working together to help jump start the economy, according to the article.

During the Great recession the US government used the American Recovery and Reinvestment Act to help jump start the economy while the Central Bank used quantitative easing (QE), zero interest rates, buying US treasuries, and other tools to as well.

On a side note:

A stimulus package can either be in the form of a monetary stimulus or a fiscal stimulus. One of monetary stimulus tools involves cutting interest rates to stimulate the economy. When interest rates are cut, there is more incentive for people to borrow as the cost of borrowing is reduced.

Which is what the Fed is doing now.

An increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend. Lowering interest rates could also weaken the exchange rate of a country, thereby leading to a boost in exports. When exports are increased, more money enters the economy, encouraging spending and stirring up the economy.

Fiscal stimulus refers to increasing government consumption or transfers or lowering taxes. Effectively this means increasing the rate of growth of public debt, assuming that the stimulus will cause sufficient economic growth to fill that gap partially or completely.

When a government opts for a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive the economy. When taxes down, people have more disposable income . An increase in disposable income results in more spending to boost economic growth. When the government increases its spending, it injects more money into the economy, which hopefully decreases the unemployment rate, increases consumer spending, with the hopes to counter the impact of a recession.

A potential problem of fiscal stimulus is that to increase public spending the government has to increase its borrowing. There is a chance/rick that people may actually choose to save the excess disposable income instead of spending it, which could render the stimulus package ineffective.

American Recovery and Reinvestment Act (ARRA),February 2009, is an example of economic stimulus package. It instilled the confidence needed to boost economic growth. It also aimed to restore trust in the financial services industry.

ARRA cut taxes by 288 billion dollars. It spent 224 billion in extended unemployment benefits, education, and health care. While also creating jobs using $275 billion in federal contracts, grants, and loans.

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  • $\begingroup$ So, just to see if I understand the fourth section of your answer The New York FED buys BACK long maturing T-bonds which is method (1) of increasing the liquidity of the corporations which requires the FED to increase the monetary base. Method (2) is to offer $1 trillion in short -term loans to the corporations. which further increases the monetary base. Since the money supply is already quite high due to the extremely low interest rates of the last decade, his feels like a recipe for super inflation especially if production has come to an halt due to the corona virus lowering supply. $\endgroup$ – Aris Koning Mar 29 at 10:58
  • $\begingroup$ The section "An increase in borrowing means there’ll be more money in circulation..." is only a sensible mechanism if we don't close into the liquidity trap right? I.e. it remains to be seen if the loans coming from the FED actually end up power charging the money circulation. Edit: I see you also mention this risk in the last part of your answer. $\endgroup$ – Aris Koning Mar 29 at 11:01
  • $\begingroup$ Do you know if the ARRA fiscal stimuli are still in effect or have been undone with fiscal policies befitting a stronger economy, i.e. increased taxes etc. at least up to the point before the Corona crisis? $\endgroup$ – Aris Koning Mar 29 at 11:05
  • $\begingroup$ According to some government documents the ARRA ended on September 30, 2015. $\endgroup$ – Mike J Mar 29 at 19:56
  • $\begingroup$ CBO released its final analysis of the results of the law: cbo.gov/sites/default/files/114th-congress-2015-2016/reports/… $\endgroup$ – Mike J Mar 29 at 19:58
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What we seem to know for a fact is that the $2T stimulus (CARES act) is going to be financed through government debt:

The CARES Act will raise U.S. debt substantially relative to a scenario where the economy did not have coronavirus. But, of course, that is not a relevant counterfactual. When the alternative scenario is an economy with coronavirus but without the CARES Act, the new legislation will have a much smaller impact on debt, because it will help prop up the economy, reduce the severity (and possibly the duration) of the recession, and leave the economy in a stronger situation to bounce back after the virus has been neutralized. And with interest rates staying low, we have an enormous amount of fiscal space to focus on the economy rather than the budget. The economy is more important than the budget, and people’s health is paramount. Deficits will have to take a back seat to preventing a Depression and supporting public health.

I'm not sure I've seen clear evidence/statement that the Fed is expected to buy that debt. See https://economics.stackexchange.com/a/34655/6210 for discussion on the scope of the latest "unlimited" QE. What the Fed has announced in terms of clear treasury/bond purchases actually came before that QE announcement, according to the Guardian

The Fed has previously announced it would purchase at least \$500bn of Treasury securities and at least $200bn of mortgage-backed securities but will now buy bonds in “the amounts needed to support smooth market functioning”.

According to some reports by Friday, March 27 the Fed had already completed half of that \$500bn purchase of Treasury securities (and a third of the announced purchases of "agency" [Fannie Mae, Freddie Mac and Ginnie Mae] mortgage-backed securities).

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