The Continuing Cost Of Covid - How The Pandemic Affects Our Finances Today

Those first few months of 2020 were dire times. A new, “novel” virus had been discovered in China months before; on January 20, 2020, the CDC confirmed that a strain of this “Novel Coronavirus” had been detected in Washington State.

From there, things began to explode. Daily, the mortality rate among the Chinese began to climb while, at the same time, the number of newly infected here in the United States also accelerated. For months, no one seemed to know how to handle this increasing pandemic. Eventually, state and local officials would utilize the most draconian methods ever employed in peacetime, mandating mask-wearing and social distancing, and they would also shut down all “non-essential” businesses.

The economic impact of all this was devastating, with many unsure where or when their next paycheck would come. Under President Donald Trump, the concept was initiated to send a “stimulus” check to all taxpayers. Labeled “Economic Impact Payments,” $1,200 in checks and bank deposits were made to each account, with slightly more for families with children.

After the election of 2020, President Joe Biden continued the stimulus program by sending $600 and later an additional $1,400 to all taxpayers. Nearly 500 million checks and deposits were made to Americans nationwide, totaling almost $1 Billion.

The good news: it worked!

There can be no doubt that the “Stimulus” Program saved the country from an economic catastrophe. That dreadful second quarter of 2020 saw the economy (GDP) drop further and faster than at any time in our history, including even the Great Depression of the 1930s. Without Stimulus, we would have been in a world of hurt.

But, as anyone familiar with finance will tell you, there’s no “free lunch,” to quote Milton Friedman. Unfortunately, no one will tell you that Stimulus created a debt that should be paid off someday. It’s become a game in Washington to see how our Government can cover up the debt created by Stimulus.

Isn’t it ironic that the same Government that passed the “Federal Consumer Credit Protection Act” and created the “Consumer Protection Bureau” fails to inform us, the taxpayers, of our legal obligation to pay back the Stimulus?

If a commercial bank, credit union, or other lending institution implied that any loan didn’t have to be repaid, they’d find themselves shut down in a hurry. Yet, that’s how the Stimulus Program is being portrayed. Look at any of the .gov websites, and you’ll find endless repetitions of how to get your check, but there is no notice that those checks came as a loan.

Three ways Stimulus Impacts Us Today:

Before we launch this part of our discussion, here is a caution. I’m not suggesting that the Stimulus was wholly wrong — far from it. It was a necessary part of our eventual recovery. (While I disagree with some policies that led to our economic woes).

Now, let’s discuss where we are financially and how we can achieve a better financial future for our country.

Here are three significant results of the Stimulus and how they impact us now.

Dollar Devaluation

The first and most obvious impact of the Stimulus was to devalue the dollar. M2, one of the most common measures of the supply of dollars, exploded after those Stimulus Checks hit everyone’s bank account. M2 is one of the economists’ favorite measures of the dollar. The M2 float (number of dollars in the economy) went from $15.6 Trillion (at the end of Q1 2020) to $21.7 Trillion (at the end of Q2 2022). That’s a 39% increase in money supply in just two years.

The dollar would have declined by nearly 39% in a static economy with no growth. Fortunately, the United States economy entered a recovery mode, and that dire consequence did not happen.

Nonetheless, the dollar exhibited the worst bout of devaluation we’ve experienced in 40 years. You undoubtedly read about it in the headlines and felt it in your wallet.

Oh yes, what economists call dollar devaluation, you and I call inflation. (Things cost more because the dollars we use to purchase them are worth less.)

Cash Flow

The first thing that any credit counselor looks at is “cash flow,” which refers to the ability to pay your bills and maintain your standard of living. Today, America is not meeting that standard; we are borrowing money just to pay our bills. It is a red flag, and the Stimulus pushed us over that line. In Q1 2020, our national debt per person was $91K; today, it’s $104K, an increase of $13K for each of us. Not too bad, our growing economy reduced the impact of that Stimulus Package.

However, we’re getting killed on the interest payments. Are you listening to the Federal Reserve Board? During these same four years, the Fed raised interest from a mere fraction to the current 5 1/2%, the most significant percentage hike in the Fed’s history. (The Fed has hiked to a much higher level, but never from near zero to 5.5%.)

When computed for each of us, this means that our national interest expense has gone from $6.8K to $18.0K per year, which is nearly triple the interest expense of four years ago. As anyone who’s tried to pay off a high-interest credit card will tell you, it is this interest expense that is the most critical and difficult to surmount.

As interest rates have increased, the interest on our national debt is now nearing $1 Trillion per year. While that’s good news for US Treasury Bondholders, it’s terrible news if we, as a country, want to get out of debt.

These high-interest rates should bring an entirely new dimension to our national discussion on interest rates.

Dependency

Finally, we come to the saddest of all the measures of life after Covid: dependency. Dependency is admittedly a problematic measure to get your arms around. It includes a broad range of programs, including Social Security, Medicare, and Food Supplement (SNAP Program). This category also contains specific Unemployment Insurance.

However, despite their amorphous nature, these social programs represent the largest expense for the Federal Government and are increasing dramatically. Government Transfer Payments have seen a 40% increase in the four years since Covid began. Of course, much of this increase is due to the Boomers’ retirement and social security payments. This post-World War II generation has created a demographic surge throughout their lives, and retirement will be no different.

But beyond the Boomers is a generation of people who have been regretably affected by the changing economy brought about by COVID-19, and specifically the lockdown that accompanied it. Its the “non-essential” small businesses that shortsighted politicians shut down. Remember, small businesses hire more new employees than any other sector of the economy.

Covid also created the new Work From Home (WFH) trend today. Meanwhile, while the WHF might have welcomed staying home to work via the internet, it left a gaping hole for the service workers who toil at the local coffee shop, cleaned the high-rise buildings, provided security, or drove the taxis and busses to transport those stay at home employees. In considerable measure, these less skilled workers are being forced onto government subsidies. If current trends continue, we will pay nearly $4 trillion in total Government-funded transfer payments next year.

Conclusion

We are a far different country than we were just four short years ago. The quicker we recognize that reality, the easier our transformation into this new economy will be. The first step is to recognize that “Stimulus” was not free. That its the private sector, not the government, that has made this country the strongest economy in the world. And it is free enterprise that will lead us back to prosperity.

Epilogue

Reading today’s financial press is like watching a debate between pessimists and optimists. To the pessimist, the glass is half empty, and the US Economy is about ready to fail. To the optimist, the glass is not only half full but nearly overflowing, with nothing but good times ahead.

So who’s right?

The answer is both. If we continue on the path we’re on now, the pessimist is likely to prevail. Endless free-spending by anyone, even America, is not sustainable. On the other hand, with just a few adjustments, we could be back on track as the world’s economic leader.

To our political leaders, we say: stop this nonsense that all innovation must come from Washington. Reduce regulation and taxes, and let our native free-enterprise system flourish. Undoubtedly, America can retain its promise of prosperity for all, but economic freedom is critical.