How the Coronavirus could topple America, the world’s greatest superpower — Part 1
Stress testing the system: government bailouts and the Mnuchin money printer
Throughout history empires have risen and fallen. The Egyptians, the Roman Empire, Ghenghis Khan. As they say, “nothing good lasts forever”. The USA has had a good run. For the last 100 years it has been the world’s superpower. We may just be witnessing the fall of the United States of America and a changing of the guard.
This is Part 1 in a series of articles where I’m going to set the stage as to what might be to come, the events that lead up to where we are now, and how, from a series of cascading events, the novel Coronavirus COVID-19 could be the catalyst the pushes the United States of America from being the global world superpower to China’s little brother.
Disclaimer: The following is an opinion piece backed by factual, historical information, which can be found throughout the articles in this series. I am not anti-establishment, or anti-America. I am a proud Canadian and global citizen that values transparency, is pro humanity, and is hoping for the best.
This is not investment advice.
Late last week the United States President Donald Trump and Steve Mnuchin, the US Treasury Secretary, announced that they intend to inject a Trillion Dollars into the American economy to help out individuals and businesses affected by COVID-19. Just a a couple days later they’re already talking about printing $4 TRILLION!
Guess what? The Price is Wrong, Steve! It’s going to end up being way more than that.
The US healthcare system is in bad shape. It has been for a while and now, with the exponential growth of the COVID-19 virus, it is going to be stressed like it has never been stressed before. Sadly, many will die. Last week I wrote about why people need to take COVID-19 seriously, and so have many others. Unfortunately, many still haven’t heeded that warning, which will further accelerate the viral spread.
If you haven’t been paying attention, you should.
Three weeks ago we saw the US economy have its first tremor. We’re only at the beginning. The inevitable lock-down as hospitals become overwhelmed by the large number of COVID-19 patients will only make this worse. If 1–2% of the US workforce dies or is on disability, this will have a massive effect on GDP alone. Now factor in the effect of having most businesses close their doors. At best, this would be temporary closures for weeks or months. At worst, many large and small businesses will close indefinitely.
I’m not going to sugarcoat this. The US economy is in bad shape. Markets are going to continue to drop off a cliff and a lot of people are going to lose their jobs without serious fiscal stimulus.
Typically a government would cut interest rates to promote economic growth, but this will not work. The Fed did that this week and it barely made a dent. Rates are already at 0%-0.25%. They can’t go lower without going into negative territory like Japan. Negative yield interest rates are not only unlikely to be passed by policy makers in the USA, even if the government was to approve that tactic, it won’t help. The intent of negative rates is to get people to use their cash instead of keeping it in a bank or saving. The people that need cash the most won’t have the means to save it anyway, and if things go the way they are continuing to go, they may not have places to spend it either.
The only other option the Fed has is to inject an epic amount cash into the economy and soon! Otherwise businesses are going to go under and people are going to starve. This, of course, needs to get passed through Congress, which is already proving difficult due to the partisanship in the House of Representatives and the Senate.
What most people don’t realize is that there have already been multiple shots fired from the Trump/Mnuchin money gun, as the Trump government tries to save the US economy from imploding. They already pumped $150 Billion in emergency cash into the repo market in September 2019, “when times were good”. Last week they fired another $1.5 Trillion into the repo market. This $2 Trillion stimulus package is bullet number three.
While I applaud the part about giving people money directly, instead of delaying its delivery by pushing it through the less efficient banking system, this helicopter money is only deferring the inevitable.
In order to save America the Trump government is going to have to empty the clip, and pump in Trillions more dollars into the economy. I expect it will require at least 5 to 10 Trillion, or more, over the course of the next year or two.
The overleveraged oil and gas industry in the US alone would need more than a $1 Trillion dollar bailout. Yes, that is a Trillion with a capital “T”. With record low oil prices and demand dropping off a cliff, this is far from fiction. And guess which banks the oil companies are over leveraged with? Many of the same ones that also hold the other $30 Trillion in corporate and household debt.
If you know anything about inflation and debasement, as necessary as it is, this level of money printing will obviously cause other issues. The US Fed can’t print $10 Trillion and deploy it all at once, but they are caught between a rock and hard place — either deploy an epic amount of capital rapidly and risk devaluing their currency, or let their economy implode and many people will suffer.
Nevertheless, COVID-19 has actually become a fortuitous turn of events for the Trump Presidency. Mnuchin has the printing presses ready, and together, him and Trump are emptying the US Treasury in an attempt to save the economy. A bonus side effect is that they are also able to buy the voters’ goodwill for the next election. It’s a brilliant political move. If Trump manages to minimize death, destruction and unemployment by printing metric tons of money, his victory in the 2020 election will be assured. But you can’t keep printing money forever…
What the US will really need is for every other G20 government to also print money at relatively the same rate so that their currencies don’t start to look like a stronger asset than the US Dollar. If that doesn’t happen, this is where the wheels of the US economy could really come off.
Luckily for the USA, most countries are also in a similarly precarious situation. However, some are poised to weather this storm much better than America, particularly China, who is nipping at the heals of America, in the hopes of overtaking them as the new global superpower.
A coordinated fiscal injection among multiple governments, is not only incredibly difficult at the best of times, during times of chaos, as Ray Dalio eluded to, “God help us all”. When Trump has already created tensions via trade tariffs, I don’t expect this to go well.
I predict this will go one of 3 ways:
- Every country essentially casts aside their debt ceiling, coordinated money printing is the new normal (kind of already is) and we possibly get into this weird state of pseudo Universal Basic Income (UBI) via social assistance; or
- The USA manages to maintain its supremacy because it is one of the largest economies in world and, as a result of the US dollar being the global reserve currency, they have lasting network effects. They’d need to manage to keep their money printing in check proportionate to GDP. It doesn’t look like this is going to be possible; finally
- The USA takes the biggest hit from Coronavirus, prints the most amount of money, and over time the US Dollar loses value compared to other currencies, causing a shift in world trade to a more stable currency. This results in a shift in power and likely a drastic shift in the what a day in the life of an American looks like, possibly forcing Americans to offer discounted labour and products in order to encourage economic demand.
None of these are ideal scenarios. As we saw from the 2008 financial crisis any blip in the US economy is echoed around the globe. Any one of these options is going to cause a massive amount of economic pain for billions of people.
At this point you might be thinking this sounds like a post-apocalyptic scenario that will never happen. I assure you its not. I wish this wasn’t true but we’re seeing this play out right before our eyes. Facts, history, and math paint a bleak short term future. Particularly for America, unless they make bold moves immediately.
You might need some background knowledge before you decide to accept this truth. Follow me down the rabbit hole. 🐇
Next stop is Moneyville, where we’ll learn about what money is and how we ended up with the US Dollar and financial system we have today.
About the author: Eric Kryski is a Canadian data & computer scientist and the CEO of Bidali — a financial infrastructure company that uses blockchain technology to provide better, cheaper and more transparent financial services. This year he spoke in Davos during the World Economic Forum on the future of money and is the chair of the Canadian Blockchain Consortium FinTech committee.