Any of you who are fans of the popular TV show Friends, will likely remember the episode where Joey, Chandler and Monica went to the beach. To help pass the time and burn some energy, Joey decided to dig a hole in the sand as you can see in the picture below.
Like Joey, the economy also dug a hole. From an all-time record level of $21.7T of GDP at the end of calendar year 2019, the economic lockdowns, quarantines, and social distancing requirements of the initial phase of the COVID-19 coronavirus epidemic caused the economy to collapse. During this time, the economy contracted by approximately $2.2T, or 10.1% in the first two quarters of 2020, reducing GDP to $19.5T.
As fans of the TV show know what happen next, the waves and the tide came in and overfilled the hole that Joey had dug on the beach, completely overwhelming the deficit that Joey had dug.
As life sometimes imitates art, there was a massive effort, on both the fiscal and monetary sides, to fill in the hole that the economy had dug during the first two quarters of 2020. The Federal Reserve Bank and the Federal Government have filled that $2.2T economic hole that was created with more than $6.5T of combined stimulus.
This includes the recent $908B of additional stimulus passed by Congress and signed into law by President Trump in early January. This brings the total of fiscal stimulus passed by the government this year, to more than $3.5 TRILLION with a “T”. In addition, the Federal Reserve Bank has seen its balance sheet balloon from $4T to $7T due to purchases of over $3T of bonds, mostly Treasury bonds and mortgages to, backstop liquidity in the bond market and provide support to the banking system.
Over time, this should be additive to asset prices in the stock market, real estate and commodity markets. We also believe that there could be near term impact rising inflation. All of the money that has been spent has been authorized by the Treasury and created by the Federal Reserve Bank. This has increased our federal debt from $22 trillion at the beginning of last year to more than $27 trillion now. President Biden has now recommended an additional $1.9 trillion American Rescue Plan, with MORE promised.
The Fed has promised to keep interest rates low while the government continues this deficit spending binge. All of this could have negative implications for the value of the dollar and could increase the value of foreign assets.
We will continue to watch and monitor these trends. We think it is important to understand both the current and historical context of what is happening in order to help you, our trusted friends and clients. There will be intended and unintended consequences of these actions, just like there has always been throughout history. We will do our best to walk with you through and navigate the roads ahead as we continue “Moving Life Forward”.