What’s the Exit Strategy??
As the coronavirus lockdown drags on and governments at every level enact more and more draconian measures, nobody seems to have an answer for what I believe is a most crucial question.
What’s the exit strategy?
Because clearly, we can’t go on like this forever.
The dirty little secret is that COVID-19 isn’t going to just go away. There will always be a risk of catching the virus. Trump health advisor Dr. Anthony Fauci said the world may never get back to “normal,” even if scientists find an effective vaccine. He said gradually, we’ll be able to “function as a society. But you’re absolutely right, if you want to get to pre-coronavirus, that might not ever happen in the sense that the threat is there.”
Are we going to lock down the entire world every time virus cases surge?
If so, at what cost?
That’s another key question policymakers have completely ignored. Every decision comes with costs and benefits. A good decision-maker balances both. Politicians are not good decision-makers. They have rushed headlong into shutting down the entire economy with virtually no consideration of the ramifications. And the economy is life-sustaining.
Somebody needs to step up and count the cost.
But it almost seems as if people don’t believe this massive intervention into the economy, and the very fabric of society itself, will have any long-lasting ramifications. We live in a strange world where government officials tell us we must sacrifice, but promise we’ll feel no pain. People still seem to believe that President Trump will snap his fingers one day and the economy will just roar back to life.
That’s not going to happen.
The economy isn’t a race car. It doesn’t stop and start on a dime. It’s more like a long freight train. It will take months for it to get rolling again. This would be true even under normal economic circumstances. And we didn’t have normal economic circumstances before COVID-19 reared its ugly head.
The economy was a big, fat, ugly bubble blown up by Federal Reserve monetary policy. It was already showing cracks long before the coronavirus lockdown. The Fed was already engaged in extraordinary monetary policy before coronavirus. We had three interest rate cuts in 2019. We also had repo operations and the quantitative easing they dared not call quantitative easing last year. The coronavirus popped the bubble. Most people continue to stare at the pin even as the bubble deflates in the background.
Meanwhile, the Fed doubled down. It has put the policies that blew up the ugly bubble on hyperdrive in a desperate gamble that they can reflate it. In just the last two weeks, the central bank expanded its balance sheet by $1.14 trillion. The total size of the Fed’s balance sheet now stands at $5.812 trillion – $1.296 trillion bigger than it was at its previous peak in 2015.
And we’ve only just begun to see the impact of this massive monetary stimulus program.
What’s the Federal Reserve’s exit strategy? How will the Fed ever shrink its massive balance sheet? It couldn’t do it after the 2008 financial crisis. What makes anybody think it can do it this time around?
As the crisis unfolded in 2008, the pundits all insisted that the extraordinary monetary policy was temporary. They swore the Fed had an exit strategy. The day the central bank took rates to zero in December 2008, most of the mainstream pundits insisted that it was temporary. Former Federal Reserve governor Wayne Angell was on CNBC that day insisting that “the Fed is taking the action that it needs to take” and “Bernanke will not be a Greenspan who will leave the ease on too long.” He didn’t say what the exit strategy was, but he insisted there was one.
When the Fed launched quantitative easing, Federal Reserve Chairman Ben Bernanke himself swore that the central bank had an exit strategy. He told Congress the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent source of financing. He said the Treasury bonds would only remain on the Fed’s balance sheet temporarily. He assured Congress that once the crisis was over, the Federal Reserve would sell the bonds it bought during the emergency.
But there was no exit strategy then. And there isn’t one now.
This time, we don’t even hear anybody considering an exit strategy. Or the lack thereof.
There are so many questions that aren’t even being asked, much less answered.
How will businesses and individuals taking out all these loans ever pay them back? How much will the massive federal budget deficit drag down future economic growth? How will all of the borrowing impact the bond markets? Are we all going to wear masks every time we go outside forever? What happens to the stock market when the Fed starts trying to raise rates and shrink the balance sheet? How will social distancing impact society over the long term? How will all of the debtors survive if and when the Fed tries to normalize interest rates? How many businesses that governments forced to shut down will never reopen? Who will hire the millions of unemployed? How many people on the margins will be pushed into poverty? Will all of this money-printing crash the dollar? How many “temporary” government powers seized during this crisis will never go away? How long will the extraordinary monetary and fiscal stimulus last?
And for god’s sake, what is the exit strategy?