Bailouts forever?

The government’s reaction to the coronavirus has caused financial problems of monumental proportions.  With the shutdown of businesses and  massive layoffs, states and municipalities suffered huge losses in revenue.  Two-thirds of state revenues come from income taxes or sales taxes.

By some calculations, state budget deficits will reach a quarter of revenues in the coming fiscal year.  Because states must balance their budgets, they will have to make savage cuts to public services.

Louisiana saw tax revenues drop by 43% in April compared with April 2019.   New York’s were down by two-thirds, and California’s income-tax receipts plunged 85%.  Further, restaurants that are being frequented are not seeing near the visitors compared with a year ago.

Revenues may recover somewhat as the economy improves, but by one estimate state tax revenues will fall by $150 billion between April 1 and June 30. The same estimate expects taxes to fall by half and sales taxes to fall by 44%. This decline is larger than during the Great Recession, when state tax revenues fell by $100 billion from peak to trough in three years.

One estimate has the gap being be around $75 billion in fiscal 2020 and $125 billion in fiscal 2021. Yet another estimate forecasts still bigger deficits: $120 billion in the current fiscal year, $315 billion in fiscal 2021 and $180 billion in 2022.

These are deficits for states, not fedgov.

Another problem created by the shutdown: businesses learned that many employees can work as effectively from home as from offices.  This will result in lease cutbacks that will hit commercial real estate hard, meaning bankruptcies and still more reduced taxes for municipalities.

However, federal help is on the way.  Already there is talk of a Phase 4 coronavirus relief package.  The Fed, of course, will furnish the money by buying the bonds that the Treasury issues to provide funds for the bailout. The Congressional Budget Office has forecast a record setting $3.7 trillion budget deficit for the current fiscal year, and that’s without Phase 4.

Already the money creation is greater than what we saw in the Great Recession—and it’s just getting started.  When then Fed Chairman Ben Bernanke turned the printing presses loose, gold responded well.  It went from sub-$700 to intra-day more than $1900 between August 2007 and September 2011.  Silver responded even better, climbing from the $12 area to just shy of $50.  Gold and silver can be expected to see similar price action in the wake of this massive money creation.