To Bailout or not to Bailout, That Is the Question

Dear Rich Lifer,

Lawmakers have been frantically trying to come to an agreement on a massive bailout bill – one that could potentially exceed two trillion dollars.

So who should get the money?

Businesses?

Unemployed individuals?

Student borrowers?

Maybe all of the above and everyone else?

I don’t pretend to know exactly how (or even if!) the economic fallout should be attacked.

But I would at least like to start by sharing some thoughts on the matter today…

Take a Look at the Numbers

First off, two trillion dollars is a lot of money … especially when it’s coming on top of essentially unlimited Federal Reserve market intervention.

We hear a lot of talk about government debt and the federal deficit.

If you’re one of the people who’s concerned about such things – and I certainly am – then a few numbers should help frame this new stimulus package.

According to the Peter G. Peterson foundation:

  • The federal budget deficit for February 2020 was $235 billion.

 

  • The cumulative fiscal 2020 deficit through February 2020 was $625 billion.

 

  • And the total national debt held by the public at the end of February 2020 was $17.4 trillion, up about $1.2 trillion from the same period last year. (These numbers do not include another $6 trillion owed to other government agencies like Social Security.)

 

In other words, this single stimulus bill could take the national debt up another 11% in the blink of an eye… and almost twice as much as it jumped from 2019 to 2020.

That raises one of the deeper concerns we should all have about any stimulus package…

Money Doesn’t Grow on Trees 

The bailout money is just money being borrowed from the future and given to us right now.

People love the idea of getting a check in the mail. And I’m not denying that many people pretty much need to get a check in the mail to get them through this sudden economic disruption. (More on that in a minute.)

But does anyone stop to think about where the money is coming from?

It is not sitting in a government bank account just waiting for an emergency like this.

It is just an IOU from the American people to the American people (or small businesses or corporations or anyone else getting the bailout money).

At some point, it is a debt that will have to be settled.

That might mean higher taxes – on you, me, and/or someone else.

It could also mean a devaluation of our money – i.e. inflation – especially with ideas like “modern monetary theory” starting to gain more traction.

The point is we will be paying any stimulus money back in some way and I sincerely doubt future economic growth will be enough to cover the tab we’re running up.

In my view, these ideas argue for a greater allocation to things like gold and silver but we can talk about the investment implications in a separate article.  

For now, let’s stick with the topic of who should get the bailout money this time around…

Starting with the Companies Asking for Federal Money

Some people argue that companies create and maintain jobs so giving them a lifeline is the same thing as bailing out individual workers.

Others say it’s problematic, especially when you’re talking about big corporations that paid out fat executive bonuses, bought back shares, and used profits for other activities rather than preparing for bad times or supporting regular workers.

The airlines are a great example, of course.

The minute this crisis began they were already running to Washington begging for money.

At the same time, they haven’t even been willing to refund any of us for cancelled travel!

To illustrate the point:

I had a trip to Colorado planned for this week.

My hotel at a Marriott property was automatically cancelled and refunded to me. No questions asked. And no penalties imposed, even though the original terms would have allowed for them.

American Airlines also cancelled my flight. But rather than a refund, they are merely waiving their usual (usurious) change fees and letting me apply the credit to a future flight.

Meanwhile, I have friend who cancelled an award flight with a different airline and was charged $75 to have the miles deposited back in her account.

This is how the airlines are treating taxpayers while asking for a government bailout? C’mon!

There are compelling arguments to be made that bankruptcy is a far more viable option for plenty of big companies that end up failing because of this crisis.

In many cases, they can continue operating as they go through the process and the losses will reside with investors. Plenty of major airlines – including American, Delta, Frontier, United, and U.S. Airways – have all done it before (all since 2002, in fact).

After all, it’s a strange world when investors and owners get all the upside but none of the downside.

Of course, it’s equally hard to let ill-prepared individuals off the hook completely.

The Individual Bears Responsibility as Well 

Yes, businesses should have been preparing for a downturn and some of their decisions were driven by pure greed.

At the same time, individuals should have been preparing as well.

At the risk of sounding harsh, the very fact that anyone needs a bailout after a week or two is evidence of our country’s systematic underappreciation of risk and complete disregard for saving.

I mean, we’ve gone through several major crises in the last two decades…

We’ve dug ourselves out each time and created new levels of total wealth…

And yet the vast majority of people and companies have never altered their behaviors in any major way in the wake of any of those past events!

Consider the fact that a 2019 survey conducted by Bankrate found that only 2 in 5 American adults had enough emergency money saved to pay an unexpected $1,000 expense!

This was after many years of a solid economy with record employment figures!

Now I know there are some people who are truly living paycheck to paycheck out there, through absolutely no fault of their own.

At the same time, I fail to believe 60%  of our country has been truly unable to sock away $1,000 over the course of the last five or ten years.

Meals out. Bar tabs. Expensive cellphones and other gadgets. New cars on a regular basis. Expensive haircuts.

I can keep going as long as you like. The reality is that a lack of emergency funds is often a choice that was made – whether consciously or not.

Me? I grew up listening to my dirt-poor grandparents talk about the Great Depression. So while I’ve always tried to enjoy the good times, I’ve also always put away plenty of emergency money in the bank. And not just once I started making serious money, either. Always and from the very beginning of my career.

Which brings me to this idea of forgiving student loans (again).

The Student Loan “Solution”

Both sides of the aisle continue to politicize the crisis, but one of the more glaring examples are proposals being floated by House Democrats to forgive student loan debt in the wake of the coronavirus crisis.

For example, House Representatives Ayanna Pressley (MA) and Ilhan Omar (MN) want to cancel at least $30,000 in outstanding student loans for every American tax-free and have the Education Department “immediately assume responsibility” for people holding federal loans. 

Separately, Joe Biden recently tweeted his support of forgiving at least $10,000 per person in federal loans because “young people and other student debt holders bore the brunt of the last crisis.” and “It shouldn’t happen again.” 

Well, no, not really.

I think anybody looking at the situation honestly would say homeowners and mortgage holders suffered far more damage during the last financial crisis than student borrowers did.

In fact, much of the current student loan bubble inflated in the wake of the last crisis.

Don’t believe me?

According to data from the Federal Reserve Bank of New York, student debt stood at $671 billion at the beginning of 2008. Today it stands north of $1.5 trillion.

I’ve given you long-winded arguments against this type of bailout back when Senator Warren was pushing her plan so I won’t go into great detail here.

Let me simply say that there are other more reasonable ways to deal with any hardships being encountered by student borrowers right now – some of which have already been put into place.

Even completely pausing repayments for borrowers under duress would be totally acceptable.

But if you’re going to completely forgive this type of debt, why not mortgages? Or credit cards? Or car loans? Or small business loans? Or debt of any other type?

After all, an educational degree is a product just like any other. Or perhaps an investment just like any other.

Someone could have easily used the same amount of money to buy a house or start a small business rather than go to college.

So we end up right back at square one – picking and choosing winners and losers, based on various biases… which is why bailouts pretty much always suck.

To a richer life,

Nilus Mattive

Nilus Mattive

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Rich dad defined money as “What we agree it is.” In the Information Age, money is increasing exponentially. A few individuals are getting ridiculously rich from nothing — just ideas, and agreements. Today, the modern forms of money are gold, paper, and the new kid on the block…Bitcoin. I have always found money — in all of its forms and functions — fascinating, and today the more invisible it is, the more fascinating it is than ever before.

Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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