It’s the debt stupid, not the virus

The Coronavirus Economy: When Washington Takes Over Business

Georges Ugeux
4 min readMar 30, 2020


The Coronavirus Economy: when Washington Takes Over Business. The $2 trillion aid package is expected to save jobs and bail out companies, but it reorders the relationship between government and the private sector, states the New York Times. It is a nationalization in disguise by a penniless government that will need to be financed by its Federal Reserve.

As we are in the middle of the extreme measures taken by governments worldwide; as unemployment grows, companies have to close, and the economy is falling. But this is only the “first shoe” of what they will call the coronavirus crisis. It is in fact a tsunami for which the public sector, central banks and governments together, will be responsible for: the sovereign debt crisis. Ten years of fiscal indiscipline and central banking complacency has a cost. We will now have to foot the bill.

Fifty years of U.S. policy come home to roost, writes Rana Faroohar in the Financial Times. Decades of bad choices have relentlessly favored the interests of the private sector. Bernie Sanders is right.

Saving shareholders and management — a story of equity and bonuses

Source: Financial Times

This table below shows the distribution of this celestial manna. About one trillion dollars is to cover losses directly provoked by the virus: the cash payment to individuals, the unemployment benefits, the coronavirus response (?) and the hospital sector.

The other half will go to large corporations for $500 billion and $300 billion for SMEs.

The U.S. government has protected a rare species: the shareholders. During the Lehman crisis, the bailouts were made in the form of injection of equity that was reducing the shareholders to the residual value of their investments. There is a reason why the market reacted so positively. The shareholders will not be penalized except in the form of non-distribution of dividends. It is the least one could expect. That money, however, will be distributed later and remains in the company.

At least they will not be allowed to purchase their own shares with these loans.

During the Lehman crisis, the management could not get bonuses finance with federal money. Here, there is no such restriction. The U.S. Federal Government will finance bonuses.

Compared to what happened in 2008, shareholders and management have been seriously sanctioned. Not under Donald Trump (especially in his favorite sector called real estate).

Where will the money come from: the taxpayers’ debt?

Of course.

In the form of $2 trillion more in Federal debt (three times the amount of TARP in 2008), needed to pay those amounts, it is effectively the debt of each and one of us that will be reduced.

Are we absolutely sure that we agree to see this dislocation that will put on the shoulders of the taxpayers the consequences of the mismanagement of public finance of the past ten years? Are we willing to pay for the fragility of some sectors and companies who artificially boosted their stock price by buying them back returning money to shareholders, often with debt?

The taxpayer is now in a catastrophic situation. Can we afford this?

A sovereign debt crisis is looming as rating agencies hesitate to downgrade the U.S.

The denial of governments and central banks of their joint support to public indebtedness over the past five years has been fueled by wars, social expenses, tax reduction and increased expenses.

The forecasts of the US government of its receipts were based on a growth rate of 3% now down to 0%. These assumptions are now unlikely. Taxable income will therefore go down.

The new $2 trillion aid program will be financed by debt. A minimum increase of the U.S. Federal debt will be $ 3 trillion, reaching now $ 26 trillion. It is fascinating to read New York Times contributor Neil Irwin falling in the trap of the fact that this is a one-off expense. This spending is meant to last only as long as needed to get the economy on track after the containment of the coronavirus pandemic, meaning it should be a one-time increase to public debt, rather than an increase to permanent deficits.

This assumes that the Federal Reserve will purchase this additional debt through its unlimited purchase program.

The recession

The Federal Reserve Chairman admitted that the United States might already be in recession.

The Washington Post could not be more clear. The coronavirus crisis is exposing how the economy was not strong as it seemed. A record-long expansion and years of ultra-low interest rates could make it harder to recover from a recession, economists said.hen we will wake up from the coronavirus crisis (and even if the virus lasts, we eventually will), how much of the economy will have been destroyed already? Not only small shops and restaurants, but whole sectors like airlines?

The continuation of a U curve recession leads us until at last 2023 before we see the economy recover. Unemployment will increase. Households will be facing the same nightmare on their mortgages as they did in 2008.

The time has come to reassess the situation. The market has not yet integrated the recession risk. The Federal Reserve Chairman, Jerome Powell still believes (or needs to believe) that the economy will bounce back after the coronavirus is under control. I sincerely hope he is right, but investors corporate executives and households better prepare for the worst. Hopefully the forecast of a Great Depression by Noel Roubini will not materialize.

Could Donald Trump be right in trying to relaunch part of the economy at Easter?

Lives or livelihoods? Or, as the Fund of Bill and Melinda Gates is named, Lives and Livelihoods.

In 2018, according to the World Health Organization, 1.5 million people died of tuberculosis, and we have the vaccine: 87% of them from emerging markets. Do those lives count?

A terrible ethical question.



Georges Ugeux

CEO at Galileo Global Advisors and Adjunct professor Columbia Law School.