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The US Federal Reserve warns of the „tragic“ consequences of an unsupported crisis. What are the consequences?

While Democrats and Republicans continue their political confrontation, the economy hangs by a thread.

The Republicans in the US Congress have decided to block the new round of stimulus, defending a policy of austerity in the midst of a major crisis. In other words, there will be no more aid cheques for those most in need. The liberators are celebrating, because the government finally decided to do nothing during the crisis. The longed-for „temporary pain“ has arrived.

Donald Trump wanted a generous stimulus package before the elections, but his party turned its back on him. The Republicans attribute the decision to a matter of doctrine. Well, conservative doctrine is not that complicated. In fact, it is extremely simple. Government subsidies hurt people’s morale because they promote laziness. They also increase the power of government, which is, by nature, oppressive. The individual must seek self-sufficiency and not depend on external aid.

According to conservative ideology, crises should not be managed. The market regulates itself and solves all its problems. Conservatives do not deny the existence of crises. However, they accept „temporary pain“ as a necessary evil that promotes market efficiency. It is something like „What doesn’t kill you makes you stronger“.

Of course, this is what the doctrine says. And many believe that this is a sacred truth. In fact, all these ideas are very popular in the crypto community. Many bitconers, in fact, have adopted the libertarian philosophy in economic matters and spread it as a gospel. Since the beginning of the crisis, many in the crypto community have criticised the stimuli as an abuse of power and an artificial devaluation of the dollar. I assume that now the Conservatives (Bitcoiner and not bitcoiners) are happy with this victory in Congress.

However, many economists are very concerned about the tragic consequences of abandoning the population at this difficult time. One of the mourners is Jerome Powell, head of the Federal Reserve. Powell has the numbers in his hand and knows full well that this conservative doctrine is a disaster for the economy. Of course there is also a humanitarian issue here. At the moment many families are in a desperate situation and a cheque could be a lifeline. Many studies have shown that unemployment benefits do not encourage laziness. This idea is a myth. The truth is that timely aid reduces poverty. From an economic point of view, helping is productive.

From a macroeconomic point of view, doing nothing is also very harmful. The truth is that monetary expansion stimulates economic growth. On the other hand, deflation makes the currency too strong and generates unemployment. In other words, stimuli are needed. Otherwise, this crisis could last for many more years. That is basic economic knowledge. However, the Conservatives continue with the same old story. This is a doctrine that has not changed in centuries. In fact, this doctrine is more a dogma than an economic policy supported by economic studies.

However, the Republicans insinuate that placing the issue of stimulus in limbo is primarily a matter of doctrine. But that is hard to believe with an election just weeks away and the Democratic candidate winning the polls by several points. This is not like the usual ideological struggle. Firstly, until a few days ago, President Trump himself was very interested in the approval of this package. And the Republicans always approve a stimulus package when they feel pressure from the public. This could be an indication that this blockade is a vulgar political sabotage.

The Republicans are acting like a wounded animal. And now Trump has admitted that his party has turned its back on him. But he cannot accept defeat because it would be seen as a weakness. So he has joined the blockade. In other words, „there will be no discussion about stimuli until after the elections“. This means that this setback is political. And, apparently, it is temporary. If Trump wins the election, surely the stimuli will eventually be approved. And if Biden wins, they will also pass.

The Federal Reserve, in theory, should stay away from politics. Similarly, it cannot afford to fall into dogma, because it must be an essentially scientific body. This, in practice, is not easy to achieve, but at least an attempt is made. However, the Fed is a very limited institution. It has only a very limited number of tools at its disposal. It can, for example, buy financial instruments, but, beyond that, it cannot do much more. In other words, the effectiveness of the Fed depends on the cooperation of the government. The Treasury Department is of vital importance.

The Government is indeed a political institution that is constantly affected by the political climate. Here the „science“ of the Fed is not very relevant. Party passions, ideologies, myths and public opinion play a central role. This could explain the irrationality of some decisions.

At the moment, there are families with young children who do not have the means to pay the rent, or put food on the table. Meanwhile, discussion of the aid package is at a standstill thanks to conservative congressmen. The Fed can buy bonds from Apple and Amazon, but cannot send a check to families in need. That is the role of the government. Temporary pain“ is defended as a necessary evil. Hard currency is spoken of as the great solution. But pain is not the same for everyone.

Frankly, something in this whole story does not add up. Checks to billionaires are always good for the economy, but checks to the neediest are subject to the doctrine of austerity. The consequences of not passing a new stimulus package are clear. Without new stimulus, this crisis will be longer and more painful. The Conservatives will get their long-awaited strong dollar, but it will come at a cost. The cost will be economic decline, deflation, unemployment and poverty.

The good news is that after the elections the discussions will resume. And the stimuli will eventually be approved. There are doctrines that are always better in opposition. In opposition, everything is perfect and true. But if we apply them, they will lead to disaster. In the words of Jerome Powell, there are doctrines that have „tragic consequences“.