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The Far-Side Of Stimulus And The "Loan" No One...
ValueSide
 May 27 2025 at 12:57 pm
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The Eccles Building is the headquarters of the Federal Reserve. ** For most of us, COVID feels like a thousand years ago. Vague memories of lockdowns, social distancing, and mask-wearing haunt our memories. Something we would as soon forget. But for the financial world, the lingering effects of COVID remain very real, impacting our finances on a daily basis. When first reported in late 2019, COVID-19 seemed out of nowhere, and most of us paid little attention. It seemed like a disease far away from our shores. However, by the first quarter of 2020, COVID-19 was already impacting America. By mid-year, our national leaders had imposed some of the most draconian restrictions and quarantines the country had ever seen, including the aforementioned mask-wearing and social distancing. However, for businesses and institutions, the restrictions were far more rigid; some enterprises were labeled as "non-essential" and ordered to close their doors, many of which were closed for the last time. The result was the most severe drop in GDP in history, more severe than the Great Depression of the 1930s. Our twin financial managers, the US Treasury and the Federal Reserve leaped into action with their strongest fiscal and monetary tools. Interest rates were lowered to essential zero, bank regulations relaxed, and other esoteric strategies adopted, all to keep the nation afloat (I.e., financially solvent). But in the end, the catchall term "Stimulus" encompassed their activity. Banks were given special access to newly created funding programs, and large institutions were likewise provided with sources of capital. And, in the most visible action, taxpayers had funds deposited in their checking accounts. The stimulus became the most aggressive injection of funds into the financial system ever. Much of the Stimulus was a novel "Hail Mary" passed to save the economy. Strategies that heretofore were just the speculation of economists and regulators were put into action. No one knew what the results would be. It's those "novel" results that we are living with today. When the dust settled and the Government declared the COVID-19 pandemic over, the nation's central bank, the Federal Reserve, reported that we had borrowed an incredible $8.965 trillion from the Fed. This Fed loan is in addition to the $5.690 trillion of new bonds, notes, and bills issued to support the Federal Government's Stimulus (Federal Government Debt). We hear so much about this second debt, the Federal Government's borrowing. This has driven the Government's interest payments to rise above the $1 trillion level per annum, and Wall Street and the Financial Press continue to bemoan this $1 trillion payment. But that's only half the story. Many have forgotten the nearly $9 trillion in borrowing from the Federal Reserve (almost twice the level borrowed by the US Treasury). It's this Federal Reserve Stimulus Debt that no one talks about. Although the Fed's debt repayment does not draw the public's attention, it still has a very real impact on the financial system. Over the past 37 months, the Federal Reserve has withdrawn $2.2 trillion from the economy. Imagine what that added liquidity could do to boost private enterprise spending. Put another way, when all those pundits and reports tell us how oppressive our Government debt is, they're only seeing half the story. While it's true that Federal Government Debt payments now exceed one trillion dollars, another $920 billion is being taken out of the economy to pay for the Federal Reserve's loan. That's the amount the Fed, at its discretion, has removed annually from the financial system. You can track the Federal Reserve's Balance Sheet (the amount owed to the Fed): here:https://fred.stlouisfed.org/series/WALCL Each week, the Federal Reserve reports its new balance. Put these two loans together, the securities (bonds, notes, and bills) issued by the US Treasury and the direct "loan" by the Federal Reserve (as reported in the Fed's Balance Sheet), and the complete picture emerges. Together, these two "loan" payments add up to nearly $2 trillion annually and help explain why the economy is facing a financial headwind. Follow me here on ThinkSpot for more stories from the ValueSide.
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