We need to drop money from helicopters – Part II

  

Note from Tom: I haven’t been putting my posts about the pandemic on Tom Alrich’s Blog recently, because I thought there were more important things to talk about on the NERC CIP/Executive Order front. However, I – and the chairman of the Federal Reserve - feel the economy is now at a very critical point, where decisions made in Washington in the next 2-3 weeks could determine whether the US ends up in a years long depression or starts to turn around this year. This is my modest contribution to that discussion.

In yesterday’s post, I pointed out the fact that my old economics professor, Milton Friedman, would undoubtedly say the federal government and the Federal Reserve shouldn’t make the same mistake they made in the period 1930-1933: Letting the money supply drop by a huge amount (33% then), instead of keeping it on the 3-5% growth path required for an expanding economy. Essentially, they let the economy starve due to a lack of money.

So what would Friedman be saying today? I’m sure it would be this: We need to do everything we can to get the money supply growing again! And that means dumping a lot of money into the economy. Of course, this doesn’t mean actual physical currency, since that’s actually a very small part of the money supply – so I’m being facetious when I talk about dumping money from helicopters. It does mean getting money into the bank accounts of individuals and companies as quickly as possible, before businesses start liquidating – and temporary layoffs become permanent ones.

But there’s a big difference between today and 1930: We’re deliberately suppressing business activity with lockdowns, because the long-term danger to the economy of not getting Covid-19 infections under control will be much more severe than the shorter-term danger of (mostly) staying in lockdown for maybe a couple more months – whatever it takes for us to have control (which we decidedly don’t have now). During this period, we need to support individuals and businesses – in kind of a medically-induced coma. We need to give them whatever they need to survive, period.

Of course, this sounds like a lot of money and debt – and it is. And this is why there’s still a lot of opposition in Congress (mostly from Republicans, but also from some Democrats) to the idea of another big “stimulus” package (which really isn’t stimulus. “Life support” would be a better term).

A living economist and former vice chairman of the Federal Reserve, Alan Blinder, addressed those fears in a very good op-ed in the Wall Street Journal last Thursday. Since you probably won’t be able to access the article if you’re not a WSJ subscriber, I’ll summarize it:

1. He gets two questions all the time nowadays: The first is “Is running up a lot more debt sustainable?” The second is “Can the Fed create new money without limit? Won’t we run into uncontrollable inflation in the future?”
2. On the debt question, he proffers five arguments why lots of debt is very much sustainable, but the most important is that the Federal Reserve is committed to buying essentially all of the debt that the US Treasury (who issues government debt) needs to create in this crisis. We don’t need to sell it to China, Europe, or even the US public.
3. But where will the Fed get all the trillions needed to buy that debt? They’ll create money, simply by crediting the Treasury’s account with the amount needed to buy the debt. Which brings us to the second question.
4. To answer that question, Mr. Blinder points to the 2008 financial crisis. Over seven years from 2008 to 2015, bank reserves (which are held by the Fed, and form the “base” of the money supply) expanded 280-fold. And what did that do to inflation? Over that entire 7-year period, the Consumer Price Index rose just 9% (i.e. “.09-fold”) – that’s not 9% per year, that’s 9% over seven years. Obviously, this huge expansion didn’t cause any new inflation.
5. Is he sure this time won’t be different? He points out that he can’t be sure, but he also points out that the Fed has the tools it needs to soak up this extra money it’s created: It just has to sell the bonds it bought from the Treasury. Instead of creating money to buy bonds, it will bring in money by selling the bonds. That is, it will withdraw the money from the economy and pass it through to the Treasury as a “bonus” to do whatever it wants with, such as pay down some of the national debt. These are the kinds of “open market” operations the Fed conducts all the time, as it tries to keep the money supply and the economy growing at a reasonable rate.

He concludes by saying “Today’s profligate monetary and fiscal policies would be irresponsible in normal times. But given the urgent problems we’re dealing with, they are badly needed today. There will be plenty of time to worry about the public debt and the money supply (in the future).”

Amen.

The numbers

These numbers are updated every day, based on reported US Covid-19 deaths the day before (taken from the Worldometers.info site, where I’ve been getting my numbers all along). No other variables go into these numbers – they are all projections based on yesterday’s 7-day rate of increase in total Covid-19 deaths, which was 13%.

Note that the “accuracy” of the projected numbers diminishes greatly after 3-4 weeks. This is because, up until 3-4 weeks, deaths could in theory be predicted very accurately, if one knew the real number of cases. In other words, the people who are going to die in the next 3-4 weeks of Covid-19 are already sick with the disease, even though they may not know it yet. But this means that the trend in deaths should be some indicator of the level of infection 3-4 weeks previous.

However, once we get beyond 3-4 weeks, deaths become more and more dependent on policies and practices that are put in place – or removed, as is more the case nowadays - after today (as well as other factors like the widespread availability of an effective treatment, if not a real “cure”). Yet I still think there’s value in just trending out the current rate of increase in deaths, since it gives some indication of what will happen in the near term if there are no intervening changes.

However, it’s 100% certain that deaths won’t stop at the end of June! They might decline some more this summer, but Drs. Redfield (CDC head) and Fauci both predict there will be a new wave of the virus in the fall, and one noted study said there was a good probability the fall wave would be greater than the one we’re in now, as happened in the 1918 pandemic.

Week ending	Deaths reported during week/month	Avg. deaths per day during week/month	Deaths as percentage of previous month’s
March 7	18	3
March 14	38	5
March 21	244	35
March 28	1,928	275
Month of March	4,058	131
April 4	6,225	889
April 11	12,126	1,732
April 18	18,434	2,633
April 25	15,251	2,179
Month of April	59,812	1,994 (= 1 death every 44 seconds)	1,474%
May 2	13,183	1,883
May 9	12,592	1,799
May 16	10,073	1,439
May 23	11,370	1,624
May 30	12,804	1,829
Month of May	51,515	1,652 (= 1 death every 52 seconds)	86%
June 6	14,420	2,060
June 13	16,239	2,320
June 20	18,288	2,613
June 27	20,595	2,942
Month of June	76,272	2,542 (= 1 death every 34 seconds)	148%
Total March - June	191,657

Red = projected numbers

I. Total deaths

Total US deaths as of yesterday: 90,980

Increase in deaths since previous day: 867 (vs. 1,606 yesterday)

Percent increase in deaths since previous day: 1% (vs. 2% yesterday)

Yesterday’s 7-day rate of increase in total deaths: 13% (This number is used to project deaths in the table above. There is a 7-day cycle in deaths, caused by lack of reporting over the weekends from closed state offices. So this is the only reliable indicator of a trend in deaths, not the one-day percent increase.  Two days ago, this number was 13%).

II. Total reported cases

I no longer pay any attention to the reported case number. It is a huge underestimate of actual cases, which is at least 5-10 times what’s reported. This is because of the huge shortage of testing capacity. For reported cases to be anywhere near actual cases, we would need to be doing millions of tests a day. I believe the US has done fewer than 7 million tests since the start of the pandemic.

Total US reported cases: 1,527,951

Increase in reported cases since previous day: 20,153

Percent increase in reported cases since yesterday: 1%

Percent increase in reported cases since 7 days previous: 12%

III. Deaths as a percentage of closed cases so far in the US:

Total Recoveries in US as of yesterday: 346,389

Total Deaths as of yesterday: 90,980

Deaths so far as percentage of closed cases (=deaths + recoveries): 21% (vs. 21% yesterday) Let’s be clear. This means that, of all the coronavirus cases that have been closed so far in the US, 21% of them have resulted in death. Compare this with the comparable number from South Korea, which is below 3%. China’s is 6%. The reason this number is so high is that total reported recoveries are so low. I’ve been assuming since March 26, when the recoveries number was first published, that it would rise, so that this percentage (which was 41% on March 26), would be far lower than it is now. But it still has to drop a long way, in order for the US to have anything less than millions of death over the course of the pandemic – since we seem to have given up on controlling total cases in any meaningful way.

I would love to hear any comments or questions you have on this post. Drop me an email at tom@tomalrich.com