Friday we outlined three alternatives the federal government is kicking around to replace $600 stimulus payments — that end Jul. 31 — to laid-off workers.
Ohio Sen. Rob Portman proposes an incentive for workers returning to work, but a sharp reader notices the following:
“I see a problem with Sen. Portman’s idea, even though it’s probably the best of the three [options].
“Let’s imagine a restaurant that switched to take-out only for the pandemic, and is now opening up to dine-in again. All the wait staff were laid-off, keeping only a couple of cooks and delivery guys.
“Now they hire back the laid-off employees, and they get an extra $450 a week on top of their wages, while the ones who slaved away to keep the business open during the crisis have to continue to work for just their wages. And this after laid-off employees probably earned more income during the pandemic than those who kept working.
“I would suggest that the $450 per week for each hired-back employee be divided equally among all employees in the business. Thus, every employee who comes back adds to everyone’s bottom line, but there’s no income gap between the re-hires and the ones who stuck it out.”
Now that’s some common sense right there. The government will never go for it.
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Your Rundown for Monday, June 15, 2020
Speaking of federal bailouts, initial data suggests the federal deficit will be $4 trillion in 2020, or about 15% of GDP. (By year end, that number might be higher if a second stimulus bill is passed.)
To give you an idea: “Only in the First and Second World War deficits of this magnitude have occurred,” says an article at FX Empire.
So as the U.S. GDP declines and the federal deficit rises, the public debt to GDP ratio is scaling quickly. According to usdebtclock.org, that ratio stands at 130% versus 110% just a few months ago.
In fact, that ratio is eerily similar to what happened during World War II when the Fed imposed “yield curve control” — meaning “the Fed and the Treasury negotiated to peg bills (3-month bonds) at 0.375%, and long-term bonds (25-years) at 2.5%.
“To establish the pegs, the Fed purchased large quantities of Treasuries (government bonds of all maturities), which made the monetary base double from 1942 until 1945.”
The result? The ballooning monetary base caused consumer-price inflation at 20% by 1947, and real interest rates of negative 15%.
Similarities between the Fed’s behavior during World War II and the corona-crash — particularly when it comes to the Fed buying U.S. treasuries hand-over-fist — might be an indicator of what happens next.
Curve management, inflation and negative interest rates “will cause the gold price to sky-rocket,” says FX Empire. “U.S. real rates and the gold price have been (inversely) correlated for quite some years. When real rates are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds.”
The key takeaway: “Given the current economic environment in the U.S., real rates are likely to fall in the medium term, which is bullish for gold.”
Market Rundown for Monday, Jun. 15, 2020
The S&P 500 futures are down 47 points to 2,994.
Oil is down 3.6% to $34.94 for a barrel of West Texas Intermediate.
Gold’s down $27.60 to $1,709.70 per ounce.
Bitcoin is down $269.56 to $9,114.82.
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Hope your week gets off to a good start. We’ll circle back Wednesday.
For the Rundown,