Every week, we hear that the Fed’s goal is to keep markets functioning after they had previously seized up in fear. But, the way they are doing it is – virtually “printing” money and injecting it into the commercial banking system. By the end of the year, the Fed is projected to have purchased $3.5 trillion in government securities with these newly created dollars, one of many tools it is using to help prop up the ailing economy during the COVID-19 pandemic. But, the practical result of the Fed’s bond purchases is that it creates money to finance the gigantic debt run up by Congress. In the age of a nearly $25 trillion national debt, one wonders if it is wise to keep adding to the national debt?
Future Wealth’s View
The Fed’s mandate from Congress is to maximize employment and stabilize prices. In doing so, it effectively steps on the gas during times like this and hits the brakes when the economy appears to overheat and prices rise too fast. Yes, in times like this, it is good to have the Fed support the recovery in the economy. But, in good times, one wonders why are we not reducing the debt? Printing money is a slippery slope and it just kicks the can down the road. Ultimately, someone (most likely our children and grandchildren) will pay. Currently the national debt is about 80% of GDP, its highest level since the period after the Second World War. In time, when the economy recovers, the debt burden could come down thanks to a combination of economic growth, tax increases and spending reductions.
If that does not happen, high levels of debt will push up borrowing costs and interest rates way up. If any of our readers remember buying a home in the 80’s and early 90’s, when interest rates on mortgages were north of 10%, you know the pain. Our kids and grand-kids will not appreciate what we are leaving behind for them.