How COVID Lockdowns Primed The Current Financial Crisis
The economy is addicted to financialization, and it's a crisis waiting to happen.
Inflation was driven by the need for stimulus and lockdowns. The Fed then raised interest rates. All hell broke loose...
Silicon Valley Bank (SVB), died Friday, March 10, 2023 from Covid. It's not so simple. However, Covid lockdowns and massive government stimulus played a crucial role in the bank's demise.
The massive pile of low-interest, high-interest debt issued at the height of the pandemic is at the root of the crisis. Private-sector debt such as corporate bonds rose, but US government debt like Treasury bond soared.
The government issued $4.2 trillion worth of very low-interest government debt during the pandemic. Investors are now dumping low-interest government debt that they no longer need. The resale value of old debt decreases as they dump it. Investors will want to dump more debt the more it falls. Thus, panic sets in.
The question of US government debt must be viewed in the larger context of the pandemic response.
The 2 Year Treasury bond was offered at 1.64% interest when the news about the Covid virus broke in December 2019. The 10 year was at 1.80% and such bonds were strong on secondary markets. In March 2020, Covid deaths and cases spiked and the US started to shut down its economy. Panicked lockdowns were used to 'flatten' the spread of the virus, slow it down, and protect hospitals. The lockdowns were then extended to cover Covid, which was later politicized.
The US economy started to fall as the lockdowns continued.
Record-breaking annualized rate of shrinkage
During the second quarter 2020 fiscal year.
The federal government was established to avoid economic total destruction.
Trump signed the $2.2 trillion economic stimulus bill, the CARES Act, into law in March 2020. This is Coronavirus Aid, Relief, and Economic Security. In March 2021, Biden signed into law the American Rescue Plan Act, which provided $1.9 trillion in additional Covid relief. In April 2021, another trillion dollars of Covid relief was added to the Consolidated Appropriations Act.
These laws allowed public money to be distributed to all industries and most people. The government provided increased and extended unemployment benefits, as well the so-called "stimmy checks" or stimulus payments to anyone earning less than $75,000 per year (roughly half of the population). Paycheck Protection Program spent nearly a trillion dollars. The Provider Relief Fund contributed $178 billion to the health system.
All of this debt spending helped keep millions of people in their homes and feed, employ, care for millions more.
These measures enabled hundreds of thousands of businesses, while thousands went under, to remain afloat. The spending had a positive impact on Americans' well being. The US child poverty rate fell to 5%, and for a brief moment it was reduced by half.
The economically damaging lockdowns weren't necessary and didn't work. Covid skeptics claim that lockdowns were necessary because the virus is so dangerous. This is a misunderstanding. Last year, I detailed how the
The Covid crisis was wrong. None of my facts have been challenged by anyone so it is unnecessary to repeat them here.
People who supported an alternative to ham-fisted locking downs, such as the authors of The
Great Barrington Declaration
The 'focused protection' of elderly and vulnerable groups was called for by the.
reputation destruction campaign
Covertly orchestrated and directed by Francis Collins, former director of NIH, and Anthony Fauci de facto Covid czar.
It was not a surprise that the document's authors were three highly qualified scientists: Jay Bhattacharya (professor of Theoretical Epidemiology, Oxford University), Sunetra Gupta (professor of medicine, Stanford), and Martin Kulldorff (professor of medicine and biostatistics, Harvard). They were depicted as extreme-right cranks, who wanted to see millions of people die. They have now been vindicated.
The federal government ultimately spent
The economy was being supported by trillions of dollars, while it was being smothered in lockdowns. These two contradictory forces laid the foundation for recent bank failures. The economy was hit hard by government-mandated lockdowns. Small businesses closed down, factories shut down, ports and logistics hubs cut operations, and approximately 2 million older workers resigned. However, the federal government also injected large amounts of purchasing power into our economy, thereby boosting consumption.
These contradictory government actions put almost unbearable stress on supply chains. Prices began to rise as a result of the growing shortages. Simply put, inflation is the result of stimulus and lockdowns.
This is the single most critical bottleneck in the entire economy. Many commercial driving schools were shut down during lockdown. This led to a shortage of approximately 80,000 drivers' licenses.
Trucks that do not transport supplies will cause prices to rise if they don't.
Initial, the Lockdown Left's official line on inflation maintained that inflation was a 'transitory' phenomenon. It was not. At, the inflation reached its peak.
9.1% June 2022
While wage growth was slow at around
During the worst lockdown in April 2020, the Federal Reserve's
Federal Funds Rate
It dropped to 0.5%. It had only risen 0.8% by February 2022.
Inflation was on the rise. Inflation had reached 7.9% by February 2022. In an attempt to reduce inflation, the Fed raised interest rates in February 2022.
The pace rate at which it has been moving throughout its history. Federal Funds rates were around
When SVB went bankrupt. A massive wave of taxation might have been able to absorb enough liquidity to cool down prices. But that was politically impossible. In Washington, the Federal Reserve raised interest rates to be more politically acceptable.
This is the problem.
Banks bought huge amounts of government debt during the height of the lockdowns. As the
Wall Street Journal
Simply put, "U.S. The Covid-era deposit boom left banks flooded with cash, which they need to put to use. FDIC data shows that domestic deposits at federally insured banks increased 38% between the end 2019 and the end 2021. The total amount of loans increased 7% over the same time period. This left many institutions with large cash reserves to invest in securities, as interest rates were at an all-time low. The banks purchased US government securities, despite having a lot of deposits and not enough loans. According to Wall Street Journal data, their purchases soared 53% between 2019 - 2021 to $4.58 trillion.
Due to the high amount of debt being issued, they were offered at extremely low interest rates. The 10 Year Treasury, for example, was offered at an interest rate of just 1% on July 27, 2020.
This is fine if your goal is to borrow money. However, if you're the lender (that is, a bank that gives the federal government money in return for Treasury bonds), you will see your income stream drop to a trickle. Inflation can cause your income stream to disappear.
The yield on new government debt climbed to 5%, and inflation held steady at 6.4%, so all that low-interest, pandemic-era, old debt began to look like trash and banks started unloading it. The less value of old debt that banks disposed of, the lower its value on resale market. The banks were more willing to sell it if its resale price was lower. SVB lost nearly $2 billion in selling Government securities. Their stock price plummeted by 60% after they disclosed the loss.
Many of SVB's clients were also withdrawing their money. In part, this was due to rising interest rates making borrowing money more costly and incentivizing the use of savings for day-to-day business operations. Inflation and higher interest rates made low earning bank deposits less appealing and forced depositors to move their excess capital towards higher-earning investments. Deposits were disappearing just like SVB required cash.
The panicked dumping pandemic-era debt by the four largest banks of the United States had cost them $51 billion as of the week ending March 10. State regulators shut down the New York-based SVB right after it was placed under government control.
The Federal Reserve announced that it had created a new lending facility to ensure that banks are able to meet all depositors' needs before the weekend ended. The Fed also stated that it is ready to deal with any liquidity problems that might arise.
The federal government seems ready to de facto nationalize the US banking system, as they did in 2008 with emergency 'cash injections' followed by the Troubled Assets Relief Program. Banks can avoid losses on low-interest debt in this crisis by not selling it before it matures. The banks will need money to make this happen. While the Fed claims it will pump huge amounts of money into banks, all relevant officials claim that the bank system will pay the rest. This will almost certainly lead to more government debt.
Already, the interest payments on federal debt are the largest single item in the US budget. They are expected to exceed $400 billion this fiscal year. This is nearly half the amount of the grossly underdeveloped military budget. Housing spending is, however, only 2% of federal spending.
It is important to save the banking system because it can cause economic collapse. The US financial system holds the Americans hostage, at least for the short-term. Government intervention in the financial sector without new taxes and regulations will only lead to more inflation and a larger financial bubble. The federal government refuses to tax the top 1% properly and also pledges more austerity to the many and greater welfare to the rich. Rising government debt means that a growing portion of taxes must be used to pay interest.
This system of hyper-financialized, crisis-prone capitalism looks more and more like a drug addict. It will collapse and die if it does not get its daily dose of public sector assistance.
Even if the federal government is able to end the current crisis, the global pandemic debt story will continue to be a problem for many years to come. As a 2021
The World Bank stated that the debt accumulation during the global pandemic-induced recession of 2020 was the greatest in many decades. This was true for all types debt: total, government and private; advanced-economy, EMDE [emerging markets and developing economies] debt; domestic and external debt. The total global debt rose to 263 percent of global GDP in 2020 and global government debt grew to 99 percent of global GDP. These levels were the highest they have seen in over 50 years.
The US intelligencesia and media elites are now beginning to recognize the negative effects of authoritarian and misguided lockdowns on student learning, as well as the psychological and physical health for millions of people. Despite all the talk about the bank run, lockdowns' central role in priming the crisis is still overlooked.