Connect with us

Hi, what are you looking for?

Trillions - 19FortyFive

$900 Billion in Coronavirus Stimulus Won’t Save America

Coronavirus Stimulus Coming Soon.
Coronavirus Stimulus Coming Soon.

Congress has done the right thing in finalizing a nearly $900 billion coronavirus stimulus package. Welcome as that might be, it is another matter whether this coronavirus stimulus will spare the U.S. from tough economic sledding next year.

Against the backdrop of a slowing economy, an imminent dark Covid-19 winter, and a Federal Reserve that has run out of road, Congress had very little choice but to provide the economy with another boost. Such a fillip was all the more necessary to bail out those millions of households and small businesses now in dire economic straits. Absent another coronavirus stimulus round, those people could very well have gone over the edge at yearend.

However, it would be a mistake to think that this package will spare us from tough economic times in the months immediately ahead. It would also be a mistake to think that this time will be different and that down the road the very high rate of indebtedness exacerbated by the pandemic both at home and abroad will not cause serious U.S. and world financial problems.

This week’s troubling economic data raise the distinct possibility that the U.S. economy could very well be headed for another leg down. Over the past month, after trending down for six months, the number of people filing for unemployment benefits has now moved to a worrying 900,000 workers a week. Meanwhile, as states and local governments have been forced to roll back their earlier relaxation of lockdown measure, households appear to be scaling back their purchases.

Hardly encouraging too are the warnings now coming from our health experts about the course of the pandemic in the period until the effective vaccination of the population is completed by midyear. They are now suggesting that we will soon see mortality figures of around 4,000 people a day while the current dramatic surge in infections and hospitalizations will only peak towards the end of January.

Even before the expected dark Covid-19 winter’s onset, large States like California, Illinois, Michigan, and New York, all began rolling back their earlier lifting of pandemic related restrictions. As the US pandemic’s surge continues, more States must be expected to follow suit. If Europe’s recent economic swoon in response to its reintroduction of pandemic related restrictions is anything by which to go, a similar leg down in the US economy must be expected in the period ahead.

A highly indebted United States can ill afford another stuttering in its economy, which would exacerbate the country’s debt problem. Already as a result of the pandemic, the country’s corporate debt had skyrocketed to record levels while the budget response to the pandemic has place the country’s public finances on an unsustainable path. A stuttering economy would only add to our already troubling debt problems.

Next year, the fallout from our rising debt levels could constitute a major headwind for our economic recovery. According to Ed Altman, a New York University bankruptcy expert, we should be bracing ourselves for an imminent wave of corporate and household bankruptcies and debt defaults. That in turn could make banks more hesitant to lend and thereby support the economic recovery.

Yet another economic headwind could come from abroad as overseas economies struggle with their debt problems. According to the World Bank, it is only a matter of time before we have a record wave of emerging market debt defaults and restructurings. Meanwhile, the acute public debt problems in systemically important countries like Italy and Spain could lead to another round of the Eurozone sovereign debt crisis.

All of this means that next year the U.S. economy will all too likely need further policy stimulus if the economic recovery is to be sustained. With the Federal Reserve largely out of ammunition, Congress will have its work cut out for itself to keep the economic recovery going.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. 

Written By

Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and multilateral lending agencies.