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COVID19, PPP & the Federal Deficit

While the US & the world continue grappling with the Coronavirus outbreak, a question many have asked is, “What About the Deficit?”

The US is at/on track to add about $4T to the deficit from Corona-relief spending, and in our opinion, throwing money at the problem is a) a highly valid course of action, and b) very necessary for short-term small-business and employee relief.

In the United States, with our employer-based healthcare system, keeping a relationship between employers and employees during these economically devastating times is very, very important to seeing a successful economic rebound. Policymakers have (rightly, in our opinion), endeavored to help support that relationship via Small Business Association (SBA) loans known more commonly PPP (Payroll Protection Program) forgivable loans. In these cases, businesses receive cash from the SBA/Federal Government, and the intent is for that cash to help a) meet essential operating expenses and b) keep employees on payroll. Phase 1 of the congressional relief package made this a priority, and we applauded the effort. Unfortunately, the next Phase has stalled in the Senate and it appears we are at least a few weeks, maybe months, from the next round of stimulus.

The concern from the Senate is coming from two places. First, liability protection for businesses that re-open and have employees get sick at work; and second, the ballooning federal deficit. In this post, we will focus on the second point.

The US deficit has had plenty of ink spilled for the last decade-and-a-half. During that time we have had 2 massive tax cuts, two wars, massive expansion of the US healthcare system, and the Great Recession of 2008 (and the Recovery). Federal deficits are absolutely something that should not be taken lightly. The attitude of Modern Monetary Theory (MMT) economists that the Federal Reserve can never print enough money because people will always want to buy Treasuries is likely to be tested by what we are experiencing right now. Interest rates will likely stay low in the short term, as investors are still flooding to own Treasuries and therefore there is little pressure to raise rates. But as we come out of this economic downturn and into recovery, and as stocks and other tools become more attractive, there will be pressure on the Fed to a) raise rates to keep Treasuries attractive, while simultaneously b) keep rates relatively low to keep the interest on US federal loans that are supplying this massive round of deficit spending.

Like many other conversations happening right now, there is not an easy answer here. Spending is CRITICAL to keeping the US economy in stasis until businesses can re-open and get back to 100% – that may take another 12 months (some businesses will never recover). And we are nowhere near certain that those structural supports will continue as they have over the past few weeks. It is fine to take the responsible, long-term view that this level of spending is unsustainable, but the alternative may be uglier. We will be watching closely!

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