How Uncle Sam Will Spend $2.3 Trillion on Coronavirus Relief

How Uncle Sam Will Spend $2.3 Trillion on Coronavirus Relief

Before the coronavirus pandemic and the response to it triggered an economic meltdown, the U.S. federal government was planning to spend nearly $4.8 trillion in its 2020 fiscal year. Last week, President Trump signed a $2.3 trillion relief package aimed at mitigating an economic disaster.

How the government will be spending such a gargantuan sum of money via the CARES Act of 2020, and identifying who will benefit from it, are tough to visualize in a meaningful way. Hopefully, the chart below, which builds on analysis provided by the Committee for a Responsible Federal Budget, makes it easier to follow how panicky politicians have chosen to divvy up trillions of borrowed dollars in the largest aid package ever approved by the U.S. Congress.

How the U.S. Government Will Spend $2.3 Trillion for the Coronavirus Relief Package (CARES Act of 2020)

How the U.S. Government Will Spend $2.3 Trillion for the Coronavirus Relief Package (CARES Act of 2020)

Each of the boxes in the chart above contains a lot of details that will take time to unpack, but there is one main takeaway that all Americans should understand about what this spending means. Because all the $2.3 trillion being spent in this bill will be borrowed, which is coming on top of the $1+ trillion deficit the government was already going to run in FY 2020, the tax burden on Americans will be going up and government-provided benefits are going to be reduced.

Moreover, all that will happen much sooner than any politician or bureaucrat in Washington, D.C. will ever acknowledge.

As a case in point, consider that the CARES Act of 2020 was intended to prevent Americans from being laid off from their jobs because of government-mandated business closures aimed at slowing the spread of coronavirus infections. By providing loans and grants for both large and small businesses, as well as federal government-supported entities, the idea was to keep them paying Americans who have been blocked from earning incomes because of the government’s actions.

The bill provided $25 million to the Kennedy Center for the Performing Arts, which hours after President Trump signed the bill containing the provision bailing out the Kennedy Center into law, chose to lay off all the members of the National Symphony Orchestra anyway.

Kennedy Center President Deborah Rutter told the 96 musicians who make up the orchestra on Friday that their last paychecks were coming on April 3 and that they will not be paid again until the center reopens. The Kennedy Center has so far canceled performances through early May.

“This decision, from an organization with an endowment of nearly $100 million, is not only outrageous—coming after the musicians had expressed their willingness to discuss ways to accommodate the Kennedy Center during this challenging time—it is also blatantly illegal under the parties’ collective bargaining agreement,” Ed Malaga, president of the Local 161-710 of the American Federation of Musicians, slammed the move….

The payroll for the National Symphony each week is $400,000. Rutter said the $25 million would go toward “essential personnel to ensure we can reopen the Center.”

The CARES Act of 2020 also provided $260 billion in expanded unemployment insurance benefits for Americans who have been furloughed from their jobs. How likely is it that the bureaucrats of the federal government-supported Kennedy Center’s compared that line item in the spending bill to theirs and thought “we should have been given more” before deciding that since the money is all coming from the same place, they might as well provide their orchestra members the opportunity to collect unemployment benefits? They might also reason, “it’s not like they will be able to get such high paying jobs anywhere else anytime soon.”

With the federal spending spigot now fully open, will the Kennedy Center’s directors have the chutzpah to go back to Congress to demand more money to keep such high cost musicians on its payroll? If they do, will the musicians and their union change their tune and join them in supporting the effort? In the past, it has been hard for politicians to resist such joint efforts, which explains why we came into 2020 expecting to have a trillion dollar deficit.

Emergencies have a way of prioritizing what’s really important in a way that bureaucrats looking after their fiefdoms cannot. The question that must now be asked is whether Americans will be willing to pay higher taxes to pay off the money that’s been borrowed and will continue to be borrowed to support the Kennedy Center? Or might ordinary Americans look at the whole situation and ask, “What do we need a Kennedy Center for Performing Arts for in the first place?”, making it an excellent candidate for the chopping block.

Either way, it comes down to a choice between having to pay higher taxes or having fewer benefits provided by the government. The massive borrowing just unleashed by the coronavirus epidemic ensures those choices will be made.

How Excessive Federal Spending Sparked a Liquidity Crisis

How Excessive Federal Spending Sparked a Liquidity Crisis

Since mid-September 2019, the U.S. Federal Reserve has been fighting to contain a liquidity crisis in the nation’s money markets that was caused in large part by excessive spending by the U.S. government.

That surge in spending was prompted by “the worst budget deal in history” in late-July 2019, which forced the U.S. Treasury Department to begin borrowing massive amounts of money to provide the additional funds that a bipartisan majority of U.S. politicians authorized to spend. Consequently, the public portion of the national debt has been increasing to keep pace, reaching crisis levels in mid-September 2019.

The chart below shows the increase in the publicly-held portion of the U.S. national debt from the end of July 2019, through December 11, 2019.

Federal Government Borrowing Since The Worst Budget Deal In History

Federal Government Borrowing Since “The Worst Budget Deal In History”

There was only so much of this new government borrowing that the nation’s money markets could sustain before something broke, which is exactly what happened in mid-September 2019 as the Federal Reserve was forced to intervene in the nation’s money markets to fill a critical shortage of money by making emergency overnight cash loans, called “repos”, to cope with the developing liquidity crisis caused by the national debt growing too quickly.

Lee Adler of the Wall Street Examiner provides a colorful explanation of what happened between late-July 2019 and mid-September 2019:

The only way the market could finance all that Treasury issuance was through repo borrowing. That, folks, is margin debt plain and simple. The dealers and the banks were buying up Treasury issuance on 90% margin. In September, they said, No mas! They’d had enough.

The Bank for International Settlements (BIS), which is the central bank for central banks like the Federal Reserve, has pointed to the heavy reliance of U.S. repurchase, or “repo”, markets on just four banks to supply marginal lending, echoing events that occurred at the onset of the Financial Crisis of 2008.

The Federal Reserve has responded to the liquidity crisis by sharply increasing the amount of money it lends directly to the U.S. government. The chart below shows how much the Fed’s holdings of U.S.-government issued debt securities have increased in the almost-three months from September 18, 2019 to December 11, 2019.

Federal Government Borrowing Since The Repo Market's Liquidity Crisis Began

Federal Government Borrowing Since The “Repo” Market’s Liquidity Crisis Began

During this period, the U.S. Federal Reserve has become the dominant lender to the U.S. government, providing over 46 percent of all the funds the U.S. government has borrowed since the repo market liquidity crisis struck, with the central bank’s balance sheet expanding at the fastest pace it has recorded since the 2008 financial crisis.

The Federal Reserve’s role in sustaining the U.S. government’s excessive spending will continue well into 2020, where projections indicate the Fed will loan money to cover 40 percent of the U.S. Treasury’s net issuance of debt throughout the year.

But between now and 2020, the Fed may be forced to fund even higher percentages of the growth in the U.S. national debt, because the repo market still hasn’t recovered from its liquidity crisis.

All in all, the Repo Liquidity Crisis of 2019 may be both the most predictable and the most unnecessary financial crisis ever in American history. It could all have been avoided, if not for a bipartisan coalition of spendthrift politicians who put their election campaigns ahead of any concept of fiscal restraint.

Craig Eyermann is a Research Fellow at the Independent Institute and the creator of the Government Cost Calculator at MyGovCost.org.

Reprinted from The Independent Institute.

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