With great distress, each and every person in America is watching public health and economic catastrophes unfolding daily. As a country, we are terrified by the way the COVID-19 virus kills both people and economies, and, as with people, economies with preexisting conditions are at greater risk. It’s become clear, in a mere matter of weeks, that addressing this issue will take time and thought on a level unprecedented in human history.
It’s also become devastatingly clear that this catastrophe was, in many key ways, a preventable one. The current challenges to the economy presented by this outbreak would not be so devastating if every CEO in America had not spent decades stripping their companies of its rainy-day capital and replacing its equity with debt in the interest of self-enrichment. We have taken risk to levels where even a 30-day interruption of the flow of payments could collapse the global economy.
I want to add my voice to the chorus of those pleading for a 30-day quarantine to eradicate the virus, but I want to emphasize that this is also the best course of action to begin to address the “pre-existing conditions” it’s exposed in our economy. A thirty-day moratorium on all interest (except interest on US treasuries), rent, mortgage payments and taxes, coupled with assistance to make sure citizens can access the essential services, is the only way to have any chance to tackle a problem so complex and so long in the making.
Right now, most people are viewing the current crisis as a “Black Swan” event that is precipitating an unprecedented economic event. The administration and leaders on both sides of the aisle are fighting to throw money at a problem without a true understanding of its actual size, or the folly of modern economic and corporate management that led to it.
Decades of cheap money and a system that rewarded boosting earnings per share has led to a ballooning of corporate debt at unprecedented levels. There are $3 trillion in bonds rated BBB or lower that mature and need to be refinanced in the next 2 years – an unprecedented amount. Government officials have also long maintained that deficits don’t matter and have taken treasury supplies to limits beyond demand. Consumers and their monthly payments have been valued way above their worth, and consequently, companies have found ways to stuff consumers with credit to buy an ever-expanding array of products beyond their means. This 3-pronged attack on the stability of our economy and our nation has finally come home to roost.
The monetary response to various financial crises, from the crash of 1987 to the 2008 housing crisis, has been creating cheaper money by injecting more and more liquidity into the system on the back of an ever-expanding Fed balance sheet. This cheapening of money created an environment where CEOs could amass massive personal fortunes by converting equity to debt. Companies would buy back stock, lever up and shrink the float of their companies to manufacture higher earnings per share, higher stock prices and ungodly wealth for CEOs and shareholders.
Those who would not follow this playbook would be replaced with someone who would. Steve Jobs, for instance, always resisted calls to do so because he knew it was fundamentally unsafe. While Apple’s balance sheet remains strong, under pressure from corporate raider Carl Icahn, Tim Cook eventually relented and joined the party. Private equity firms would buy entire companies, strip out their wealth, and send them out into the world saddled with massive amounts of debt on small slivers of equity. It is the need to feed this orgy of debt that is making the economic impact of the Coronavirus such a catastrophic event for global economies.
Months before the current crisis began, the markets were already seizing up under the weight of this debt. While the mantra on CNBC and elsewhere is that “the banks have never been stronger or better capitalized,” the fact that the Federal Reserve had to begin unprecedented Repo activities to give liquidity to US banks — which were stuffed to the brim with US treasuries and other debt — belies that assertion. Initially, we were told that those injections were only necessary to add liquidity for April 15th tax payments, but after that deadline was changed, those Repos continued to grow, demonstrating that a deeper problem was afoot.
When the virus came along, it caused a run on the US treasury market. Every large corporation began drawing down whatever contractual leverage they had available, causing banks to sell treasuries. Sovereign nations had to fund domestic stimulus plans, and they began selling treasuries. The US treasury market, the largest and most liquid in the world, began to fail. Spreads began to widen, and the Fed was forced to do the unthinkable, to intervene to save the US the treasury market as the buyer of last resort. Without their offer to buy trillions of dollars of paper weekly and now daily, the US treasury market would have failed. They have since been forced to intervene in numerous other money markets and debt markets with more to come.
Thus we find ourselves in a bizarre and untenable position as a country, wherein policy makers are currently conflating two separate crises at the same time: the financial crisis that was already unfolding in the debt markets, and the public health crisis that threatens to topple a financial system whose strength was merely an illusion created by debt.
The only solution is to solve these issues separately. The idea of a Month of Sundays is to pause the economy in the same way you would need to stop a person’s heart to do surgery, or turn off the water to fix the plumbing. If these companies don’t have to service their debts, and consumers don’t have to make their payments for a month, we will be able to focus on eliminating the virus. We can use those thirty days to craft a plan to deal with a debt problem that was decades in the making. The crash of 1929 did not cause the Great Depression, the response did. The federal government does not have the resources to prop up this entire tower of debt indefinitely, and trying to do so will squander the nation’s few remaining resources, potentially to the point of failure.