Americans have more confidence in Jerome Powell than any Fed chair since Alan Greenspan but the mood will change when it's time to pay up.
America has a soft spot for Federal Reserve chairman Jerome Powell. The central banker has gained popularity due to his quick actions in mitigating the effects of the coronavirus pandemic.
But it’s easy to love the man whose nine emergency support packages will total more than $2 trillion.
The idea of paying this money back hasn’t been uttered out loud in America.
In the U.K., chancellor Rishi Sunak has continuously made it clear ‘we all have to foot the bill‘ for his country’s rescue packages.
But what is Powell, or his successor, going to do?
The likely answer will be to raise taxes. Of course, the chair of the Fed doesn’t have a direct say over taxes but is likely to party to discussions about how to repair the country’s balance sheet.
Some commentators have suggested a wealth tax that could reap $2 trillion.
Consumer-related levies, such as value-added taxes or carbon taxes, could help support the federal income tax to recoup the money spent.
And changes to how estates are taxed upon death could also prove lucrative for America’s coffers.
According to economists polled by Bloomberg, near-zero interest rates in the U.S. will remain until 2023, and the Fed’s balance sheet will surpass $10 trillion.
So will Powell, or his successor, be so popular when the generosity ends?
It seems unlikely.
Howard Gleckman, from the Tax Policy Center, has suggested a $2.5 trillion stimulus splurge would mean a tax hike of 1 percent of GDP over the next decade.
This is equivalent to a 10 percent increase in individual and corporate taxes, he claims.
Ben Bernanke, a predecessor to Powell, gained the nickname ‘Helicopter Ben’ after a 2002 speech.
In it, he endorsed Milton Friedman’s idea of dropping money from a proverbial helicopter as an extreme way to combat deflation.
Bernanke spent $4 trillion on his rescue package for the U.S. economy to battle the global financial crisis in 2008/09.
Powell hasn’t spent as much – yet – but his measures have had a more direct impact, perhaps explaining his popularity surge.
Bernanke’s rescue money went to the banks, Powell’s is going to the people, including those $1,200 checks President Donald Trump wants to sign.
There could be a way for Powell to maintain his new-found star status, though.
Star bond fund manager Jim Leaviss, of UK-based M&G Investments, recalled on his podcast this week how after the global financial crisis, the UK wrote off billions of pounds in debt.
Given that the Bank of England had printed money to buy UK gilts from the government, nobody would mind if these bonds were canceled.
Such a move reduces debt-to-GDP ratios, there are no defaults, and credit ratings remain undisturbed.
The U.S. is already engaging in unconventional monetary policy – something other central banks are also flirting with – so why not go the whole hog?
Powell could spend what he likes, write most of it off, and leave Bernanke and his predecessors choking in his dust.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:53 PM