If Congress fails to pass another economic rescue bill soon, the United States is likely to experience a resurgence of financial and economic stress that will lead to a severe economic downturn, bankrupting the US financial sector and destroy millions of additional jobs.
Government fiscal support saved the economy during the first half of this year. However, extreme risks still remain if no new economic package is passed in a timely manner.
US Government Debt jumped by a record-shattering $3.3 trillion during the first half of this year. It was that surge in Government Debt that enabled the Private Sector to remain solvent. The $2.8 trillion increase in Government Debt during the second quarter was four times larger than the previous record, which was set in fourth quarter of 2008.
Drawing on data from the Financial Accounts Of The United States for the second quarter of this year shows that without the Government support from the CARES Act, Households, Corporations and SMEs would have defaulted on their debt on such a large scale that the entire US banking sector would now be in a severe crisis.
The banking sector’s extreme vulnerability explains why bank shares are down 37% year-to-date, underperforming the S&P 500 by nearly 40% (as of Sept. 25th). Bank regulators are aware of the banking sector’s distress. That explains why they have banned banks from wasting their capital on share buybacks and on excessive dividend payments.
Our economic system has been driven by credit growth for many decades, and especially since Dollars ceased to be backed by Gold in 1968. If Credit contracts there will be a severe Depression, just as there was when Credit contracted in the 1930s.
Once that is understood it becomes clear why economic policymakers have been forced to run trillion-dollar budget deficits and to create money on a multi-trillion-dollar scale in order to make Credit expand.
Since this pandemic began, Congress and the Fed have done what was necessary to keep Credit expanding. Going forward, if they fail to do what is necessary to make Credit continue to expand, then the economy will collapse into a Depression and the banking sector will be wiped out.
Therefore, the Government must continue to spend whatever it takes to hold the US economy together. That means Congress must pass a new economic rescue bill SOON. It also means that the Fed must create as much money as necessary to finance the resulting government budget deficits at low interest rates.
If policymakers follow this path (and they most probably will), then the only thing we have to fear is fear itself. However, if they do not, we will have plenty to fear – in the near-term, in the medium-term and in the long-term.
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