Suffering from COVIDepression
The Coronavirus pandemic has left a laceration that will permanently scar the U.S. economy. Everything from a spike in debt to lost jobs, the virus outbreak touched every part of America. The next major but unsurprising development is the jump in the number of companies declaring insolvency.
According to new data from S&P Global Market Intelligence, the number of businesses filing for bankruptcy has hit a ten-year high of 424 as of August 9. Researchers analyzed public and private firms with debt, and they discovered that all sectors had been affected, particularly retail, industrial, and energy. Some of the biggest names on the list were Brooks Brothers, Chesapeake Energy, Lord & Taylor, Hertz, J.C. Penney, and Neiman Marcus. Thirty-five organizations had liabilities north of $1 billion.
By the end of 2020, this number could top 500 as many consumer-focused companies face tremendous balance sheet pressure. Could they survive until the U.S. gets to the other side of the pandemic? Unlikely.
The report makes a crucial point that a lot of these businesses had been hurting even before COVID-19 forced the government to place everyone under house arrest. Liberty Nation has reported in detail about the ballooning levels of corporate debt in America, as well as the increase in private-sector bond issuance that occurred leading up to the financial crisis.
Should the nation be thrust into another shutdown, you can say goodbye to many of the firms that are hanging by the skin of their teeth. In the post-Coronavirus economy, businesses are permanently closed, companies owe billions in back rent, zombie companies are overleveraged, and mortgage delinquencies are steadily rising. This is the new normal that the country has been told to get used to by bureaucrats.
Fed an Apple
The Federal Reserve has attempted to alleviate the financial pressures private business is facing today. Although the U.S. central bank has promised not to stampede “like an elephant” through the corporate bond market, it has been scooping up millions of dollars per day in individual bonds and exchange-traded funds (ETFs). The Fed has decreased its daily purchases from $180 million in May to about $21 million as of last month.
But while the amount is concerning for inflation, the companies receiving a bailout is befuddling. Some of the largest companies in the world are being bailed out by the most powerful institution on the planet. The purpose behind this strategy, according to the smartest men and women in the room, is to ensure companies can focus on recovering from the downturn and begin growing their operations.
The one problem with that logic is that the Fed’s top holdings are doing extraordinarily well. For example, Apple added billions to its market capitalization in just a few weeks, but the central bank owns at least $50 million of its bonds. The Fed owns between $50 million and $60 million in Toyota Motor Corp. bonds, despite the automaker possessing a market cap of nearly $200 billion. Overall, the Fed has holdings – directly or secondary – in Microsoft, Coca-Cola, Walmart, BMW, and Walt Disney – all companies that have done well since the market meltdown.
With the Fed about to embark upon an accelerated inflationary campaign, you can expect even more significant asset inflation, benefiting these same firms. Indeed, a decade ago, Corporate America received a direct bailout from the taxpayers. A decade later, Corporate America has been given another bailout, but the tax implications have been shifted to a later date and behind the shadows.
Is it any wonder why the magic money theory (MMT) is gaining momentum? Millions of people are out of work and could be kicked out of their homes, but the Fed is giving multi-billion-dollar multi-national corporations a handout. You can sympathize with MMT supporters, despite the concept being foolish.
Republican’t Balance the Books
Even before the public health crisis, the Republican Party waved goodbye to fiscal responsibility, returning to $1 trillion deficits. Today, the nation could only dream of going back to the good old days of September 30, 2019, when the fiscal year came to an end, and the federal government reported a budget gap of around $900 billion.
Because President Donald Trump and the GOP failed to save for a rainy day, Washington is drowning in red ink. It is so bad in the federal government – more than usual! – that politicians spent 100% more than it collected year-to-date. In the first ten months of the fiscal year 2020, the U.S. has burned through $5.631 trillion – and counting – and received $2.824 trillion in taxes. With simple arithmetic, you can learn that the federal deficit stands at $2.807 trillion. And this does not count the next round of stimulus spending that Republicans and Democrats will concoct.
So far, the U.S. is issuing record amounts of Treasurys to help cover the cost. Will it be enough? Probably not. Eventually, future generations will need to foot the bill for this astronomical amount of outlays. Should the electorate put former Vice President Joe Biden and Senator Kamala Harris (D-CA) in the White House, Americans of tomorrow will need to pay for the trillions more the Leviathan will spend.
Is it time to say hello to century bonds? Higher inflation? Tax hikes? These are the only possible solutions to alleviate the dire fiscal conditions. Who would want to govern in this environment?
Read more from Andrew Moran.