J.P. Morgan is often recognized as one of the biggest bankers of all time. Under his watch, the House of Morgan became the most influential bank in the United States and Britain, having businesses in other parts of the world too.
In times of crisis, like the one the world lives today, we often look back to other crises and search for examples, precedents, that might offer guidance. As this is the biggest economic shock the world has seen since the Great Depression in the 30s, the words of J.P. Morgan come back forcefully. When bankers, scared of lending money to the population and businesses, came to J.P., he directed them to use the bank reserves. But they are emergency reserves – the bankers argued. J.P. Morgan’s response made history: “this is why you build reserves in the first place – to use them in times like these”.
Which brings us to the much debated topic of borrowing now and not worrying what the future generations will have to do to pay for the debt. However, as Morgan suggested, desperate times need desperate measures, and the decisiveness to act is critical in managing the market’s expectations.
Making Money Available to Masses
The United States champions the debt levels in the world. It is the most indebted nation and continues to live on debt. At the same time, it has a monopoly on the world’s reserve currency and the most proactive central bank in the world.
The Fed did not hesitate a second as the pandemic reached America. It cut rates to zero, expanded the QE program, and made money available to small businesses and the population. However, the Fed has its hands tight in the sense that it can only provide lending facilities. Direct checks or stimulus are the government’s job.
So the Treasury issued more debt, built an impressive account balance at the Fed, and delivered stimulus. Now, it gets ready for the second round. Despite the ongoing political negotiations, there is little or no doubt that some sort of stimulus will be released again. There is simply no other way, unless the world miraculously finds a way out of this health crisis overnight.
In Spain, the government approved a 54% current spending increase in 2021 with 12% estimated deficit. Rich countries with current account surplus, like Germany, were not shy in spending either. But overall, the developed world needs to borrow to get out of this crisis.
As Fed’s Powell put it recently – now it is not time to worry about debt. Like J.P. Morgan said almost a century ago, now it is time to solve the problem with the tools that we have.