LEDC Update

I hope everyone is continuing to do well as we band together as a nation to resolve this public health crisis.

Personally, I just wish the weather would make up its mind. It’s one thing to lose the ability to go out to eat or see a movie, it’s another when I can’t even go out for a solitary jog because it’s raining or we’ve had yet another cold snap.

Thankfully we have some heartening news out of Austin this week. Governor Abbot has issued three new Executive Orders to begin the process of reopening the state of Texas while revising hospital capacity and certain social distancing guidelines.

One particularly helpful caveat included in this package of executive orders is a new “Retail-To-Go” model for Texas retailers. This model will allow retail outlets in Texas to reopen beginning Friday, April 24 while being required to deliver items to customer’s cars, homes, or other locations to minimize contact. Any retailers considering utilizing the “Retail-To-Go” model should review the state’s guidelines located on the Texas Department of State Health Services’ website.

Additionally, I want to briefly mention here another great opportunity for small businesses to find funding. The U.S. Chamber of Commerce is offering $5,000 grants for small businesses that employ between three and 20 people. The business must be in an economically vulnerable community and must have been affected by COVID-19. Applications are going live today as I’m writing this (April 20, 2020). The application is available at savesmallbusiness.com.

Now, let’s return to the topic I left off on last week—the Federal Reserve’s (FED) response to the COVID-19 crisis and what we can reasonably expect the future to look like as the result of the recent decisions made in fiscal policy.

To accurately rationalize the direction I see the economy taking as a result of the FED’s actions, I think it’s first important to fully understand what those actions are. As I mentioned last week, these were (chiefly) the sudden and somewhat unexpected reduction of the federal funds rate on March 15th and the redeployment of quantitative easing as a fiscal practice.

The federal fund’s target rate is essentially a guideline issued by the FED that determines the rates at which banks charge each other on reserve loans in the “overnight” market.

To boil that down simply, it’s the commonly understood and agreed upon lowest possible interest rate in our given economic market. It serves as a baseline for many other lending rates accessed in the U.S.A—both domestic and international.

As a result, lowering the federal funds rate can encourage borrowing and investing by making capital available at more accessible rates. However, economic growth that is based largely on the availability of capital and with little to no basis in actual GDP expansion is ultimately “empty” growth with no basis in actual value.

It’s no secret to anyone that the U.S. dollar (in line with most other currencies) is a fiat currency—meaning that it is not backed by any physical commodity and is instead traded on an “understood” value. Fiat currency is not in itself a bad thing.

While some skeptics decry the institution as some sort of “house of cards” awaiting only a gust of wind strong enough to blow it down, fait currency has irreplaceable utility in modern markets and can maintain great strength in its value—should it be governed correctly by whatever centralized banking system oversees it. However, when more “value” than can be reasonably accepted is injected into the currency, inflation and a long-term reduction in the currency’s real value is sure to follow.

What we are seeing right now is just that. The FED has decided that, in a time of economic uncertainty, the value and the viability of markets as they stand today outweighs any implications that we could see from short-sighted fiscal policies tomorrow. At a time when actual economic output (shops being open for business, restaurants operating at full capacity, entertainment venues being regularly utilized, etc.) is at a historic standstill, fiscal policymakers have expanded the access to capital to a degree unseen since the great recession of 2008.

Next week, we’ll look at the act of quantitative easing and how it plays as a compliment to the reduction of the federal funds rate.