In Jim Cook's Archive


Every morning the newspaper chronicles huge financial losses suffered by an array of public and private entities. Colleges, hospitals, municipalities, state governments and corporations are losing billions and even trillions. The University of Minnesota reports that its athletic department alone will lose $75 million and overall losses will be $4 billion. Another article claims that airlines are continuing flights with almost no passengers while their losses mount catastrophically. This is not a recession of the 2008 variety; this is a national disaster. Multiply 30 million unemployed by $600 a week for a quarter and you get a sense of the financial scope of this raging problem. The amounts required to prop up the economy and hold the damage at bay are unfathomable.

If the pandemic can’t be controlled and the economy brought back to life soon, we will confront a financial holocaust. As it stands now, the Federal Reserve has created trillions of dollars to keep the bond market from collapsing and to maintain low interest rates. All sorts of government bailouts, grants and loan guarantees are propping up failed corporations and entities who would otherwise bite the dust. In past recessions, the government and the Fed quickly stepped in with a flood of newly created money to postpone the apocalypse. In a sense, they created a false market that inflated asset prices far above what they would be in a truly free market.

To illustrate this phenomenon, we must go back to the mid-1980s and visit a California coin dealer who developed his own system of grading and pricing collectible U.S. gold coins. He used his capital to keep the price of his coins above the free market price. He had a good run selling these coins, but eventually succumbed when he ran out of money to buy the coins back and could no longer hold the price up. In a sense, that is what the Fed does with their massive injections of dollars. They hold the values of assets higher than what they would be without their propping them up. The Fed buys trillions of dollars of dubious assets to hold the prices of them up including zombie corporations and municipalities that would otherwise go bankrupt.

Now the amounts required to hold things together are formidable. It’s just not weak companies, it’s almost everybody. The suspicion arises that the dollar requirements of a continuous shutdown are so astronomical they cannot be met without fomenting another kind of crisis. That would be the destruction of the purchasing power of the dollar. Beyond that event, it gets terrifying. We can only hope for a vaccine and soon.

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