The Destructive Effects of the Coronavirus Relief Package

by Thorsten Polleit

Governments and their central banks have put together mega–bailout packages. In the US, President Donald J. Trump has signed off on a $2 trillion “virus relief package” amounting to around 10 percent of the US gross domestic product. It is meant to provide massive financial support—in the form of loans, tax breaks, and direct payments—to large and small businesses as well as individuals whose revenue and income have been destroyed by the politically dictated “lockdown.”

What is more, the US Federal Reserve (the Fed) has provided a colossal “backstop” to financial markets. It injects ever higher amounts of central bank money into the financial system by buying up all sorts of credit instruments—not only government bonds, but also mortgage debt, corporate bonds, commercial papers, etc. The Fed thereby props up financial asset prices, keeping the cost of credit artificially low and, most importantly, avoids payment defaults on a grand scale.

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