Introduction

I’m writing this piece to paint a better picture as to exactly what happened to the economy during the Covid crash, and what the Fed did to support the economy. It’s a bit long, quite complicated, and also I’m an idiot with zero formal economic background so take everything you read here with a grain of salt. Some bits of this are stolen from Stanley Druckenmiller’s talk with USC. Other parts are stolen from random websites that I stumbled upon during my Google searches. I am a thief.

Things were pretty ugly during Covid. But how bad really?

Covid ended the longest economic expansion in US record, running from 2009-2020.

Cumulative fiscal deficit from start of the recession was larger than all other recessions from 1980-2007 combined.

US Q1 GDP was -5.1%. US Q2 GDP was -31.2%.

9.4 million Americans filed for unemployment during the first two weeks of Covid, and unemployment peaked at 14.8% in April. Pre-pandemic Feb 2020 had a 3.5% unemployment rate.

I could go find more official stats for a lot of things illustrating the negative impact of the pandemic on the economy but I don’t want to do that because I’m lazy so here’s a rapid fire bullet point list.

• Global supply chains came to a massive halt
• Lots of people lost their jobs
• Increased food insecurity
• Lots of households behind on rent
• Increase in consumer debt to deal with above issues
• Massive initial drop in consumer spending
• Lots of businesses went bankrupt (small businesses especially)
• Some industries (tourism, transportation) were hit extremely hard

So how did the US Government respond to this?

Pretend you are the US federal government. Your citizens are currently stuck inside their homes due to a deadly pandemic. Your economy is currently in the dumpster. If you’ve ever played a 4X strategy game in your life, you know that an unproductive economy is a death sentence. What do?

Here’s what the Fed did.

The CARES Act was passed on March 27th, which provided $2 trillion in relief.

• $290 billion in direct payments to eligible taxpayers (stimmy checks)
• $260 billion in expanded unemployment insurance
• $150 billion for state and local governments
• $510 billion in expanded lending for businesses and local governments
• $377 billion in new loans and grants for small businesses (PPP scammers had a field day)
• $127 billion for hospitals for ventilators and other equipment

A lot of measures to improve liquidity.

• Federal funds rate, the rate which banks pay to borrow from each other overnight, was cut to 0% in March 2020. These rates have a sort of trickle down effect on other interest rates, and the move helped support spending by lowering the cost of borrowing for businesses.
• Lowered capital requirements for banks. Typically banks are required to hold some amount of free capital on hand as an emergency measure. The Feds said the liquidity must flow and told them to lower that amount temporarily.
• Lending to 24 large financial firms. These firms put up various securities up as collateral, and the government lent money to these institutions so that the credit market could safely continue. Liquidity crisis averted.
• Expansions in repo operations. The repo (repurchase agreement) market is essentially the big boy financial borrow/lending market. Firms can put up collateral and borrow cash. Pre-Covid firms could borrow up to $100b overnight and $20b for two weeks, if I’m reading this correctly it got cranked up to $500b overnight.
• Foreign and International Monetary Authorities (FIMA) Repo Facility. This is a lot of words to say that the Feds set up a new repo facility with foreign banks so foreigners could sell their US Treasuries to their respective foreign central banks and not disrupt money markets. There’s a tradfi equivalent of MEV that involves arbing the shit out of markets, and this pretty much stops that for US Treasuries.
• International Swap Lines. The Feds made US dollars available to foreign central banks to improve liquidity. The Fed received foreign currencies and charged interest on the swaps. Banks that already had direct access (Canada, England, the Eurozone, Japan, and Switzerland) had interest rates lowered and swap maturities extended.
• Backstopping money market mutual funds. Essentially, a lot of investors were holding private securities, aka corporate debt. Investors panicked when the pandemic hit, and everyone tried to withdraw their money, leading to a spiral downwards in these private securities. The Fed bought these to stop the spiral down.
• Lending to large corporate businesses. The Fed bought newly issued corporate bonds from eligible issuers, allowing companies to lever up and go 10x long. Just kidding, they were restricted to paying employees and suppliers. They also bought existing ones too.
• In June 2020, the Fed set its rate of purchases to at least $80 billion a month in Treasuries and $40 billion in residential and commercial mortgage-backed securities until further notice. In Nov. 2021, the Fed judged that the economy has recovered enough and that purchases would be tapered at a rate of $10 billion in Treasures and $5 billion in MBS. In Dec. 2021, the rate of the taper was doubled, so a reduction of $20b and $10b per month from then on out.

Essentially, the Fed handed out a fuck ton of money to a lot of different parties to make sure nothing blew up. Typically economies have to work to create something of value. Goods need to be produced, investments need to be made, new technology needs to be discovered, etc. During the pandemic, this was reversed. A lot of money was pumped into the economy, and the Fed told the world to go make something of value with it.

Did it work?

Yes, and a little too well if anything.

The wide range of aggressive measures the Fed took were very successful in making numbers go up. The US economy rebounded in record breaking fashion.

Unemployment spiked up close to 15%, and recovered 70% within 6 months. Previous recessions took an average of 25 months to recover.

Stock markets recovered strongly. Maybe a little too strongly, since the initial crash was reversed by September. Can you guess where the rate hikes started?

A lot of the rapid rise in markets was because money was cheap and a lot of risk-on money was being funneled into companies that reached insane valuations off the pandemic environment. My personal favorite was Peloton. The entire period reminded me of altcoin season, except meme stocks.

Yes, a company whose main product was an exercise bike with a tablet attached was worth 46 billion dollars at the end of 2021.

Crypto markets performed extremely well. The small red candle at the bottom left is the March 2020 crash. Bitcoin hit 4k on that day. You sold at 69k though right? It’s okay if you didn’t, me neither.

Anyways long story short, the pandemic hurt, then the US Fed turned on their printer, and now it turns out they printed maybe a little bit too much so it’s time to rate hike and erase your gains from 2020-2021. Inflation is the new big bad so we must fight that too. Also I find it amusing that we thought we might have bottomed when the Ukraine crisis broke out. Turns out that we are all just puppets dancing on a string, the US Fed is the puppet master, and everything else is simply a distraction. When the rate hikes inevitably get paused, the down only will be reversed.

Markets are forward looking and things might be bad in the short term, but markets are really just bets on various parts of humanity, so you should probably long the fuck out of it (without getting liquidated). If it goes to zero we’re all dead anyways, so you might as well.