The Covid Spending Spree

I will pick January 1, 2020 as the beginning of the Covid fiscal response. Makes sense to me as it was just a month later when I first caught Covid.

The fiscal response to Covid by Congress was dramatic, and as you will see, the numbers more or less all are in sync, they tell the same story.

Let’s start with the M2 Money Supply, which since January 1, 2020 has increased by about 5.5 trillion dollars, a 35% increase.

These extra dollars needed to be created, so no surprise that during the same period, as it monetized various debt, the total assets of the Federal Reserve increased by about 4 trillion dollars.

As the value of the dollar is set by supply and demand, it should be expected that if the supply dramatically increases, there will be significant downward pressure on the value. While the supply increased by 35%, the change in demand for the dollar is harder to compute.

What we do know is that over this same period, as computed using the CPI, the dollar lost about 19% of its value, suggesting that the demand increased as well, but by less than the increase in supply.

Where was this newly created money spent? You can check the details here, but what is known is that between business support, income support, direct payments and health spending, about 6 trillion dollars was spent in direct response to Covid.

Summary:

- The Federal Reserve monetized 4 trillion dollars’ worth of debt.

- The Federal Government spent an additional 5.5 trillion dollars.

- 6 trillion dollars were spent in direct response to Covid.

- The dollar lost 19% of its value.

Not a coincidence that these numbers are relatively in sync, and thus we can conclude, confirming one the largest involuntary transfers of wealth in history. Everyone paid via the hidden inflation tax, while some benefited more than others.

Transfers of wealth take place all the time, that’s what economies are for. But the requirement for a healthy, wealth-producing economy is that these transfers of wealth are in response to actual supply and demand, with rates of exchange, i.e. the price, established by a free market. This encourages economic productivity at all levels, resulting in the net creation of wealth.

On the other hand, in an overly centralized economy, where transfers of wealth are mandated and legislated, such transfers of wealth will result in the overall destruction of wealth because those who are being economically productive are rewarded less, while those who are not being as productive, or not working at all, are rewarded more.

Are we done with this experiment in an overly centralized economy? Probably not, because even as the excessive fiscal response to Covid is winding down, an equally excessive fiscal response to climate is winding up.

Fear is a powerful political tool.

Yes, we needed to respond to Covid, and yes, we must respond to a warming planet, but an overly centralized economy will always result in less wealth, and the associated reduction in the standard of living for all. Putting us in a disadvantaged position to solve the next problem.

The growing number of politicians calling to spend trillions more on green subsidies, deniers be damned, should be met with a healthy level of skepticism. If there truly is a crisis that requires a massive reallocation of wealth from all to some, at least be transparent and honest about it. Say something like “as your elected representatives, we have decided to devalue the dollar so that we can reallocate more of your wealth to address problem X”.

Instead, such a legislated reallocation of wealth was called the “Inflation Reduction Act”.

Very 1984’ish