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S3: Hello, welcome to the whyever Republicans being so mean.
S2: Vision of sleep money, your guide to the Business and Finance News of the Week. I am Felix Salmon of axios. I’m here with Emily Peck of HuffPost. Hello. I’m here with Anna SHYMANSKY of Breakingviews. Hello. I am not here with Richard Florida from the University of Toronto, who had to drop out, but we are very much hoping to get him on very soon to talk about density, because the whole density question in the age of Cauvin is a really fascinating one. And we have lots of questions for him or someone else who can talk about density. Do stay tuned for that. Also, if you haven’t listened to it, do listen to the episode which came out on Tuesday with Dan Barber from glew Hill, which is my favorite episode of the year. Pretty much talking about local voyeurism in regional food chains and stuff. It’s awesome. So check that one out. But this week, we’re going to talk about the oil price. We’re going to talk about the next tranche of PBB. We’re going to talk about Mitch McConnell. And why is he being so mean? I’m going to talk about fiscal stimulus and lots of exciting things all coming up on Slate Money. So let’s start with too. Or stimulus, too. Or I think we’re now on three. Right. And that’s going to be a four. I’ve kind of lost track. They’re calling it 3.5, 3.5. OK. It’s like a star. I don’t know. It’s a prequel sequel. So we started with the 2.2 trillion dollar bill, which included $350 billion for BPP and small business. And now we have a four hundred and eighty billion odd bill, which includes twenty two billion for BPP and small business, which by my math brings the total for BPP and small business up to 672 billion or thereabouts. It’s not going to be enough, is it?
S4: No. No, it’s not Feliks, it’s not going to be enough. I mean, the first package of of peopIe the payment protection program in the Kahrizak Act stimulus ran out of money in less than two weeks, just shy of two weeks. And people are now predicting that the second tranche of hundreds of billions of dollars probably will run out even faster. Some are predicting because the banks can process these applications a little faster, presumably. So they’ll run out a little faster.
S2: I mean, people are saying it could be as little as 48 hours because so many banks who if you didn’t make it in the first time, like, well, keep on working on your applications and you’ll just push them through as soon as they reopen. There’ll be this. And it could just literally be like, you know, LCD Soundsystem at Madison Square Garden. You know, everyone just tries to buy tickets at once and then it’s just a lottery.
S4: Yes. Just like that Ticketmaster debacle. Just like that. And the Congress didn’t really change the fundamentals of the program very much. They did one little tweak to set aside money for small banks specifically to land, because it’s believed that small banks and community banks are a little bit better at getting money to smaller businesses.
S2: Is that the rationale? Well, different people have been gathering knives, different rationales, silly. And the rationale that I have seen is not so much that smaller businesses are more likely to bank with smaller banks so much as there’s a couple of other things. One is that if you are dealing with if your normal bank is just utterly craptastic, then there will be a 60 billion pot of money set aside for smaller banks. So maybe you can go up to the smaller banks and do it through them and they might accept people who are pre-existing clients. And then the other one is just that they don’t have everything lined up and ready to go the minute it turns on. So this gives them like an extra maybe a week or two to be able to get the applications through. And it’s not a crazy rush for them.
S4: Yeah, but I think also they do have smaller clients like I think it will slightly be to the benefit of smaller businesses and minority owned businesses.
S1: Yeah, I think badly the Democrats were pushing to try to get carve outs for, you know, minority owned businesses, female owned businesses and such. And I do think that this was kind of the way that they were able to get that somewhat. Not exactly. And I I if I’m not mistaken, there’s also money in here that is set aside for businesses that are under a certain size. Yeah. Which I just don’t see that. Yeah, I think you’re right. And we can double check that. But I’m pretty sure and I believe that there’s also been some news coming out about firms that have, you know, large publicly traded firms that took money. It you know, they may now have to pay that money back. It may not become a grant.
S2: So this was this huge, like weird storm in a teacup, which started when we found out that Ruth’s Chris Ruth’s Chris Steakhouse, which no one can ever pronounce, had managed to get 20 million dollars. And then there was 150 odd other public companies which also had applied for and received money. And people were very upset and very angry, weirdly, at the companies. The real problem was just there wasn’t enough money to go around and no one would have been that angry at the companies if there hadn’t been enough money to go around. And the total proportion of the money that they wound up getting was like zero point one percent of the 350 billion. It was not that much or point one 5 percent. It really wasn’t that much of the total. But because there was this weird artificial constraint of 350 billion, any penny that went to one big company was considered to be a penny that didn’t go to a more deserving smaller company. And that’s just a dynamic which is going to create a bunch of resentment in unhelpful ways. And it’s one of the reasons why limiting these programs to an amount that’s clearly less than demand is going to be is just so fundamentally misguided. Yeah, I completely agree. I do think that in the second round they have actually made it pretty clear that public companies should not apply projects, but they are, but they haven’t put that in into the law.
S4: So public companies can still apply. Are dissuaded from doing it because they don’t want to be publicly shamed.
S2: Also, Treasury has come out and said. As Steve mentioned, now it’s it’s toothless. So it’s kind of not toothless. I mean, I think it’s there. There’s a bunch of weird dynamics going on here. And one of the things is that in the law you can apply for these things. But then what you have is people like Marco Rubio and Steve Nation basically saying you shouldn’t be applying for these things if you’re a public company, because the whole point about being public is that you have access to the capital markets. And there are other programs that we have for people who have access to the capital markets, and that is reasonable. And then the hidden stick that they have in terms of enforcement is that. Treasury can just decide, in the case of all of the public companies, that presumptively they have access to the capital markets and therefore they are not going to agree to. Forgive the loan if they’re not going to agree to forgive the loan for public companies, then that really mitigates against those public companies applying for the loan in the first place.
S4: Yeah, I think it’s I mean, that’s cool. But like in the lore, like there’s still nothing to stop the public companies from getting the loan. Like it’s still allowed. And Rubio has also explained that they purposely made it so that franchises like Ruth’s Chris or was pot belly that have individual stores with fewer than 500 employees. They they wrote the law purposely to allow those kinds of companies to get the loans. That hasn’t changed.
S1: I just would say that. I mean, I think we can all agree that if we’re gonna pretend there’s a limited amount of money, then it should obviously go to real small businesses that have no other options that really should be getting grants, not loans first. Totally. And that if you are truly a publicly traded company, it does in fact make more sense for you to get money in other means. However, I do feel like this isn’t necessarily the totally correct argument in the sense like we don’t want any of these companies to go bankrupt. We don’t want any franchises to go bankrupt. We want to keep as many people employed because if you start letting a lot of firms go bankrupt, then you are going to make the ultimate recovery a lot harder and it’s going to take a lot longer.
S2: So, right, and we were going to talk a little bit more about bankruptcy later. There is a lot of talk about whether and how the bankruptcy code can preserve most, if not all of the jobs involved. I will say we’ve got two franchises, a bunch of franchises did a play for peopIe did receive GBP, not facing any anger with respect to BPP. If you’re actually an independent franchisee. That’s fine. What we’re talking in terms of companies like Ruth’s, Chris and Potbelly is not individual franchisees are playing, but actually the parent companies are playing for locations which are owned by subsidiaries of the company, which is different from a franchisee. And those companies do have access to capital markets and those capital market solutions are always going to happen kind of in the shadow of if we don’t find a way of lending you the money on the capital markets or issuing equity on capital markets, then there’s always a higher probability that you’ll wind up in bankruptcy proceedings and will end up with less money. And that’s part of the purpose of bankruptcy in some weird way is to encourage lending from the capital markets to companies in situations like this where you where they need the money to continue to operate.
S4: There’s another flaw with the program, which is I think that the companies taking out the loans aren’t the companies that are in most danger of going totally belly up because those companies that are, you know, facing the that have already like laid off, a lot of people are in danger of totally closing or are in locations where the lockdowns are probably going to go on for a really long time. A lot of those companies feel like they can’t take out these loans because they’re not going to be able to meet the requirement to keep people on payroll. So I think I mentioned this last week, but if you look at the then the industry is that they’ve got the most loans. Construction did better than the restaurant industry and it’s not clear exactly why. But that may be one reason like the really, really dire strait companies aren’t doing this because of the requirements which have not changed.
S2: Right. And if you read the essay by Gabriel Hamilton, who runs the restaurant Prune Inn in New York City in The New York Times, this essay she wrote, she was like, yeah, I looked at this BPP thing and it was like, well, in order to get the loan forgiven, you need to re-employ everyone you had on payroll. And I’m closed and I can’t re-employ anyone because there’s nothing for them to do. And she basically considered and rejected it in the space of a few minutes. The idea the businesses, especially in the restaurant, small restaurants, will just bring people on payroll to do absolutely nothing. It looks like there are a bunch of businesses which have just. Yeah. No, that doesn’t make sense. I’m not going to do that. And then on top of that, you have the other dynamic, which was the. As The New York Times reported, somewhere like JP Morgan Chase, the corporate customers all got their phone, all got their loan. So it’s a smaller, you know, retail relationship. Small businesses were very unlikely to get their funds. And again, the corporate customers are more likely to be bigger, more likely to be well connected and at the margin, more likely to not need the money.
S1: I mean, this is this kind of goes back to, I think, what we probably said since we first we started talking about the first version of this program, which is that, you know, this is the problem when you setup a program as loans that are going through private banks, like obviously if your private bank, you’re your you know, this is all being done on the fly. You have no idea what’s going to happen after this. It makes perfect sense that you’re going to first go with the clients that you know, that, you know, this is part of the reason that this program was probably not well structure. Now, at the end of the day. We have the program. We have. Hopefully we’ll get better moving forward. But if we could go back in time, obviously we probably wouldn’t structure that kind of code.
S5: Right? I mean, that was like we had things the second the second tranche we. This is a do over. It could have gone back.
S6: We could have done. You can go back. Didn’t do. And you can’t go back to where we are. We’ll go back.
S4: But they could look, they just passed a new law. They could have made it different. They did. It’s still bad, right. But I would just say that like like that. Well, end of the story. I mean, more companies will get loans. Good. Right. There’s more money. One of the problems was there wasn’t enough money. Now there’s more. So I guess theoretically, you could say they fixed the big problem. But like all these other things have not been solved for.
S2: And I just want to jump in here and say that there’s another looming problem here in terms of running out of money that no one seems to have been concentrating on. This stimulus bill obviously had three main planks to it. It had the twelve hundred dollar stimulus checks, which we’ll talk about in a bit. It had the PDP and then it had the enhanced unemployment insurance of an extra $600 a week for people who are filing for unemployment. Now, it turns out that was funded as well with 250 billion dollars. And I just did some like back then that can cut calculations on what happens if you have 50 million people filing for unemployment for 17 weeks as $600 a week. And it’s more than two hundred and fifty billion dollars that the six hundred a week unemployment checks could run out. There’s so much of this stuff can just run out of money and no one knows what happens if it does.
S1: Yeah. I mean, the problem is, you know, what’s going to likely end up happening is that they’re going to do like eight versions of this. They’re just gonna keep coming back. And it’s not the most ideal way to set it up, because this is everything here is political. Every single thing that’s being done is political. And the more times you have to go back, the more the longer it’s going to take, because everyone’s going to want to make more political arguments. And so if you adjust from the beginning, had a much larger program that could have also stemmed before people were laying off people before potentially firms were closing, that obviously would have made a lot more sense than what we’re doing now.
S2: So I think that’s a perfect segue way to talk about a slightly different political question, which is basically how are the Republicans reacting to this crisis and why are they being so mean to use a technical term? There was this amazing exchange this week where the Democrats basically said we really need to give money to the states and municipalities. But look, especially at the states, all of their revenues have fallen off a cliff. The sales tax revenues are obviously down. You know, transit authorities there, revenues are down. Income tax revenues are down, you name it. The revenues are down. Meanwhile, their expenses are all up and they have to balance their budgets and there’s no way they can balance their budgets. That’s going to be this enormous pain at the state level. And the states need hundreds of billions of dollars in terms of liquidity in order to make it through this crisis. And they put this to Mitch McConnell in the Senate and Mitch McConnell. I swear to God, he says, well, why don’t they just declare bankruptcy? And like. And this is related to, I think, this whole idea of, well, we will give 350 billion dollars to small businesses, even though we know it isn’t enough, because we shouldn’t spend money on that. We shouldn’t spend money. And then when they wrote we up, it is just another three hundred twenty two billion. We know it won’t be enough. And they’re very stingy with federal money in a way that I’m not seeing in basically any other country. And I’m trying to work out what’s going on here and why they like doing it in this way. If, as you said, and then needing to eke it out from the eight different bills and one will be for the states, one will be like part 17 of the BPP, one will extend the unemployment insurance. What is the reason for that? Listen to me.
S1: Well, one thing I would say is you could argue that we are seeing the Subbarao. You could argue in the way that northern Europe is treating, say, Italy is kind of not dissimilar. But I would argue, number one, I think politically, the reason they’re doing that is because the Republicans and Trump have clearly decided that their strategy for November is to blame everything on the states because they know where things can be a mess. That’s their strategy. And I think this is part of that. Also, obviously, a lot of the states that are involved here are blue states. So I imagine that’s part of it as well. However, this is idiotic for about 18 different reasons, like the first of which is which Mr. Kyl obviously knows, which he indicated we don’t actually have a bankruptcy proceedings for states. It doesn’t work like that. So what you gonna set that up? I mean, like we have a quasi bankruptcy for Puerto Rico that’s gone exceptionally well. So no one that doesn’t make any sense. And also, if you think about it, what we’re getting from the federal government is a lot of stimulus or at least stabilization and hopefully stimulus. If you force the states to cut all their budgets, well, what does that mean? It means you’re gonna have this little contraction. You’re gonna have to either raise taxes, you’re gonna have to cut benefits. That is going to counteract what you were doing on the federal level. So it is literally counterproductive. And one other thing, and then I’ll stop talking is that he had the gall to talk about pensions, because I would just like to point out that Kentucky has one of the lowest funded pensions of any state. And unlike most of the other states that have poorly funded pensions. Kentucky also takes money from the federal government, unlike, say, Illinois, which granted has a messed up pension system, but at least they give money to the federal government in terms of overall taxes. So that’s my spiel.
S4: Yeah. Andrew Cuomo actually made that point very nicely. I thought on Thursday when he was like New York gives money to the federal government and Kentucky takes money from the federal government. And it was just in his very calm, his new Cuomo calm vibe. It was a great point worth repeating. So, Anna, states don’t declare bankruptcy is the bottom line. It has never happened. And there is no process.
S2: It has has no chapter. And there’s no that there’s no chapter in the bankruptcy code. And this is something which people have been talking about for for decades this late. Should it be possible? What would state bankruptcy look like? Obviously, it doesn’t look like corporate bankruptcy, where you do a debt for equity swap and the, you know, bondholders become the new owners because states don’t have owners, you know, so you have to work out some other way of doing it. And it’s very complicated. And there are ideas for how to do it, but it doesn’t exist. And like, honestly, there’s no way in the middle of this completely chaotic pandemic. This is the worst possible time to try to put together an entire state bankruptcy code on the fly.
S1: Oh, no, it makes no sense. And also, if you just think about it like, OK, states, even even the most low, the states with the lowest credit rating like Illinois or Kentucky, they their their cost of debt is not very high. Right. So A the whole idea that we’re talking about bankruptcy or is silly. But then on top of that, if you look at obviously the amount of what it costs for the federal government to raise debt, it’s essentially nothing. So it’s. Makes no sense that a state would have to go bankrupt. However, this isn’t to say that we don’t want states to post crisis or precrisis have managed their books well. I mean, that’s a completely separate issue. But it and this is the other thing that I think McConnell was doing is that he was kind of melding these issues like what we’re talking about now and what a lot of these governors are talking about now is simply we are having massive hits to our revenue because obviously we have massive shutdowns. That is not something we could’ve prepared for. There’s literally nothing we can do that would meet that whole without like just completely destroying our budgets. So it just simply makes sense for the federal government to do this. So it’s just it’s a it’s completely asinine.
S2: Okay. So I want to use this opportunity to bring up a slightly related talking point that we’re hearing from especially the Republicans, which is number one, this six hundred dollars a week unemployment benefit is a terrible idea because it discourages people from working, because if they would be earning less than $600 a week in their job, they’re better off being unemployed and taking the unemployment benefit. And therefore, we are reduced, artificially reducing the number of people who are employed. And then number two, which is similar. Is we shouldn’t be giving states money because it discourages them from reopening and we want to get the economy going again. And so what we want to do is give states a financial incentive to reopen, because if they reopen, then they’ll get more tax revenue. And if we let them stay closed by subsidizing being closed, then that’s just going to hurt the entire economy even worse than it needs to be hurt. All of which kind of makes sense in bizarro world, but kind of seems to ignore the whole point that we want people to be staying home and not and not working and not reopening, because ultimately that’s what’s best for the economy.
S1: If Colvert, 92, didn’t exist. Sure.
S4: And the worst part? Yes. The $600 a week is so that people without jobs will stay home instead of just trying to get another job. And then there’s this like whole sub genre right now of irresponsible reported pieces where journalists go to like owners of small cafes and shops. And these owners say things like, I was forced to fire all my workers because none would work because they wanted the better paying unemployment insurance. Poor me. I wish the government hadn’t done this to me. The stories. There was one on CNBC. NPR had one. And the stories never. No one ever talks to the employees just to like fact check. Hey, did you quit for the unemployment insurance? No one ever bothers to do that. And it always turns out that these people needed to close their stores because. Why? Because there’s a pandemic. They need to close anyway. It’s just it’s an infuriating line of argument that maybe at best is is true in the sense that business owners can’t pay like slave wages. So people anymore. And the unemployment insurance kind of keeps a little floor on wages that maybe otherwise wouldn’t be there. But again, that is specifically the point of it, especially right now, to keep people out of the labor market.
S1: It’s so batshit and again, it goes back to this kind of like shooting themselves in the foot. Even Republicans shooting themselves in the foot because ultimately, like we’ve seen this with the Great Depression, we’ve seen this with the Great Recession, we’ve seen this with literally every single met massive economic crisis. If you allow people to, you know, really get in serious financial troubles, you don’t have unemployment and no money coming in to keep them able to continue to pay their bills. You allow companies to go under. Your ability to recover is so much harder. And the recession or depression will be so much worse. So this is just seems like idiotic political posturing. That is really I and I agree with you. I mean, I think it’s just completely irresponsible both from the people who are doing it as well as any media outlets that are covering that in that way.
S2: And the other thing it reminds me of is the debate of universal basic income and people saying, well, if we have universal basic income, that’s going to discourage work and discourage economic activity, which is a pretty common argument from people who know nothing about universal basic income. And you never hear it from people who do know about it because they’ve actually done the studies and they’ve looked at places where people do get a UBI and then like what is their effect on what is the effects of having that income on your presents? Marginal propensity to get a job like two people with UBI work more. Do they work less? They earn more than they earn less. And the answer is they work more and they earn more. That having that safety net actually gives you the ability to go out and get a job. It’s something we have seen over and over again. But it’s a talking point that refuses to die.
S6: And it’s made by like rich men who actually don’t have to work but are working. Do you mean like these are millionaires? Like Jeff Bezos has no incentive to work? But but there he is working. Why is he why is Jeff, why is this get covered 90? Why does he work? I just.
S4: It’s very it’s it’s ridiculous. People work because they want to work. And for months of unemployment insurance isn’t going to keep people from getting. Because people know that there are more than four months left in their well.
S1: And that’s actually signs that maybe lastly and I think that’s a good point, is that because the arguments I know they were making when they were first negotiating this is they’re saying, well, but if you annualize this and you say, oh, but these people are making so much more money than they would if you’re like. But people are going to work more than six months or a year. Like, I mean, I feel like most people are going to think that, you know, it’s just stupid.
S4: It’s very silly. Everything seems very silly right now. It’s like really DiMauro.
S1: We’ve reached that stage. It was like terror and like sorrow. And now it’s just everything’s insane.
S4: We’re all at home living off our unemployment insurance, injecting Clorox, her veins or something.
S2: I want to move on here and I’m going to call in the queen of the spreadsheet, Miss Anna SHYMANSKY. What are the results? Now, as I recall, I was like, what were the numbers that we predicted? I know one of you guys said it to be about 10 percent of the listeners may actually get their stimulus checks. That was Emily. That was me. I was more around the 50 percent number, which I say only knowing what a.k came up with. I think if we go back to the tape, I was saying about 50 percent. And what’s the actual number of Slate money listeners? And how many did receive their checks? Highly unscientific, which is how we like it here on this show.
S1: Yes. So it was 53 percent of our Slate respondents. And thank you for so many of you for responding. I think it was maybe like a total 157. I think. Or something something about or maybe did you have to look it up? Because we had some additional ones. But but. Yes. So thank you guys very much for responding. And I think I mean, I honestly do remember what I said. I think it was somewhere in the 40s, but I could also be wrong. But I’m curious your guys have thoughts on this, because I think what it comes out of, you kind of think about it makes sense. And I would also think diving into the data a little bit. A lot of the reason that people didn’t. If they if they said that they didn’t get it. It was very often because they made too much money, which or they aren’t American or they are un-American. Exactly. Now, we do have a surprisingly high percentage of people who said that they should get it and weren’t getting it compared to what? Like the government is reporting. But obviously, this is an incredibly unscientific, you know, poll. So that was a little discouraging.
S2: A lot of people are falling through the cracks. And I have a feeling that this is going to be one of those schemes where a lot of people will just sit there trying to wait for and or fight for that. Twelve hundred dollars for some time. And some people will eventually get it. Some people won’t. But there’s really no easy way of making sure that everyone gets it automatically. And so, yeah, I feel for everyone who deserves it and isn’t getting it. And there are literally millions of Americans in that boat.
S4: That’s true. And there are flaws with this program to you.
S2: I guess I’ve been thinking all the programs that have flaws. But what it was that was the biggest flaw was the biggest flaw with this one only.
S4: I mean, I think this is a pretty good one. I think first, obviously, you know, that I think that we should be doing this every month, just sending out these check. You’ll be fine. Yeah. Set that aside. I guess the after that, the Trump that the government isn’t sending checks to couples that where one isn’t a citizen or one in documents. Yeah. Is documented. So if there’s someone undocumented in your household, no one gets a check, which is obviously cruel. And then a third problem I think is that if you’re a single parent, you get less money, even though it’s it’s harder financially right now for a single parent than a dual, you know, a dual parent household. Right. Like, if there’s two parents in the household, you get 24 hundred dollars if you’re under. Yeah. But if you meet the income requirement. But if you’re single parent households, you’re only going to get twelve hundred. But like you could argue that that single parent needs just as much, you know, the need to. One could make that argument. Yeah. So a lot of big flaws as P.P..
S1: I mean it was only like maybe trying to be like somewhat positive. It’s just, you know, even the fact that we’re having all these arguments, these programs are extremely flawed. They should have been structured differently. We know that. But, you know, if you compare to what has been done in previous crises, I will just say at least, you know, if you had asked people two months ago if the Trump administration was going to be sending, you know, checks to everyone would’ve said, like, you’re nuts. Granted, if you would have to extract any of this two people two months ago, they would’ve said, we’re nuts. But look, I mean, it’s not it’s a little bit. But I feel like with everything so horrible right now, it’s maybe also good to focus on the fact that, like, look, at least we are doing far more than has been done in the past.
S4: That’s true. And I’ve spoken to, you know, families that are like, we got our check, we’re buying groceries, we’re paying our rent. Like it’s really for those people. It’s really, really, really, really good and important and wonderful. It’s like a lot of money.
S1: Yeah, but it should also be clear and I would actually agree with you that you’d like through the crisis or through a certain level, people should know that they like. I would actually argue that like they should just it would be tough to do this, but it should be structured so that this money will keep coming until a certain something is met, whether it’s a certain number of states are open, whether it’s a certain economic metric, whatever. Because I actually think what you cause the problem, what happens with recessions and this is a lot of it’s psychological if you know, even if you know, you’re getting money this month, if you’re like, well, then I’m not gonna get money after that. Going to massively impact your behavior far more than if you felt like, look, I know it’s kind of a little bit goes back to UBI, but if I know that while this crisis is going on, I’m an at least be kept afloat, you know, that could actually diminish the overall depth of the crisis.
S4: Yeah, that’s really interesting. And there are all these proposed, not all these, but there are proposals out there going forward long term for I think Claudia Sam calls them automatic stabilizers when you know, so that we don’t have to go through this like political rigmarole when we have a recession, that just if the unemployment rate, you know, is a slur at a certain level, it triggers certain things. So you fund packages and fiscal stimulus automatically and you take it out of the political realm. And it’s much more efficient, basically, and keeps the recession from from being really, really, really bad. And it’s so it’s just kind of bad.
S2: So I have a proposal for the automatic stabilizer, which is that it should be linked to zero dollars on the oil price. Negative 40 below zero. Then all manner of automatic stabilizers fall. And we’ve touched on this a little bit on Slate. Money in the past, but it actually happened this week, so we do need to talk about it. The May futures contract for West Texas Intermediate oil for delivery in Cushing, Oklahoma, closed finally at minus $37 and 63 cents, I believe was the final price, which is something which was pretty much inconceivable even like the day before. People were saying oil prices might go negative and when they said might go negative. They were saying like they might be like minus a dollar or minus $2 or maybe minus five dollars. But minus $37 was I think pretty much no one thought it would get that, but it got there. And so we should mention that I mentioned that, yes, there were a bunch of weird futures market technicals involved. And that’s not just like all oil everywhere in the world has a negative value, but. Remember when we were talking about how, like the price of oil rebounded from the from the plunge of the Saudis and the Russians refused to come to an agreement, there was a rebound. This is so much this is just like a complete collapse in oil. And I’m not quite sure maybe you can help me here. Was there any news that caused it? Or is it just like things finally happened?
S1: I think it’s a it’s a combination of things. Number one, it’s that the demand destruction here is simply so extreme that even a, you know, 10 million barrel a day cut, it’s just a one day a drop in the bucket, but it’s just not enough. And I think people just realize that essentially there is simply almost no amount of cutting that is going to offset the demand destruction. And so that is a big reason why overall in many different oil prices, we’ve seen this massive decline. And this is also because just you know, you look at PMI numbers out of Europe. You just look at all of these different economic indicators outside of the stock market. And they’re so awful. And with the idea that we’re gonna be getting demand coming back very shortly, like any type of significant demand is, is obviously very low. Right.
S2: So you tend to just like to jump in and explain this a little bit. What we had before was global oil demand on the order of 100 million barrels a day and we had double. Oil production on the order of 100 million barrels a day. And so they, you know, matched each other as they normally do. And you had a price in the market clearing price. Right now we have global oil demand probably closer to 75 million barrels a day. It’s gone down by about 25 percent. And you have global oil production, which is also coming down. But as you say, it’s not going to come down by 25 million barrels a day. And so you have production exceeding demand. And when you have production exceeding demand, what do you do with all of the oil that is being produced? The only thing you can do is store it and storage is full and it’s not going to get emptier anytime soon. It’s certainly full in Cushing, Oklahoma.
S1: And this is filling up elsewhere as well. Yeah, definitely. I mean, and I think just, you know, I won’t I won’t go to too much of this because I don’t feel like so, you know, it’s too confusing. But I do think it’s important to remember that the reason we did see map specific May contract was A because it was going to expire. And B, because WTI is settled in Cushing, Oklahoma, it’s settled physically. So like if you had that contract and it expired, you myfriend own a barrel of oil. And if you never knew where to put it in Cushing, Oklahoma. You know, you’re screwed. So now and there are some storage other places. But overall, yeah, this this is an issue. We not only are we getting storage full like throughout the country. We know you’re having shipping containers that are just being filled with oil, which then affects the price of other oil baskets that normally are shipped.
S2: You know, and we have oil tankers. This is really interesting. Oil tankers have become essentially floating storage devices. And and you can. That works until it doesn’t. And it’s really, really not at all clear what happens when the storage is filled up. And right now, we’re very much in the in the realm of the amount of oil being stored. It’s just going up and up and up. And eventually you just have to start capping wells. But that’s very expensive.
S1: It’s expensive. And as we’ve talked about the past. You know, it’s not always easy to just turn them back on. And also, you you have all of these people who have lots of debt and they’re trying to make any money they can. This is a it is this is a very, very complicated process.
S4: So on the one hand, I completely understand what’s going on. There’s reduced demand. There’s a lot of oil building up. No one wants it. But on the other hand, and I I read so many explainers this week about the oil futures market. I don’t understand. Can you can one of you explain to me in real English words? Because I read explainers in the times, I read in the journal, I read F.T. Like, here’s what the oil futures market is. And I will explain to you why oil is negative. Thirty seven dollars. And I was like, OK. And I read it. And at the end, I just I lost it. They lost me every time.
S2: So I knew very, very simple terms. It’s a game of musical chairs. There are. Seven people running around in a circle and there are six chairs. And when the music stops. Six people get to sit down in a chair, and what we are talking about when the music stops is the single physical delivery of oil in Cushing, Oklahoma. So seven people are going to wind up with expiring contracts and those expiring contracts mean they have to take delivery of oil physically in Cushing, Oklahoma. There are six chairs, which means there are six storage facilities. There’s enough storage to. Accommodate six of those people. What does the seventh do they need to take delivery of the oil? There’s nowhere to put the oil. There’s nowhere to store the oil. Oil is a big, heavy, smelly, toxic, nasty thing, which you can’t just, you know, keep in your backyard. Storage is expensive and highly regulated. And so no one wants to take delivery of the oil because no one wants to be that person taking the seventh barrel of oil and having no way to store it. So what they will do is they start selling. They still sell that contract, that futures contracts. So they don’t have to take delivery and they’ll sell it. So it goes down from $20 to $10 to zero dollars like even a $0. I’m still selling it because I have no way to put it. It goes down to minus 20, $10, minus $20. And they’re still selling because they would rather lose $20 than take delivery of that barrel of oil, which they have nowhere to put. Does that make sense?
S4: I think I don’t understand something before the musical chairs starts. I guess I didn’t realize that people are buying and selling oil that never wants the oil. Yeah.
S1: So this is actually really you know, that’s a really that’s a really good point, because oil you have you have the physical market and you can kind of think you have the financial market. Right. And the related, obviously. But the futures market is just saying in the future, I’m going to pay this price for oil. Now, you might do that because, you know, you need oil and you want to know that in this period of time, I’m going to buy it for $60, which would be very nice. Right. However, you know, however, you also people who are just they’re hedging. They’re just speculating, you know. And now there’s many different types of oil. Right. And if you normally hear about oil, you hear about WTI and hear about Brent. Brent is what you hear about the global benchmark. Brent tends to be for a lot of financial contracts because Brent is settled in cash. Right. So you don’t necessarily have that. You don’t have to take a barrel oil, just settling it in cash. That’s not the case in WTI. So that’s why WTI, when you see that negative number with that negative number really means that is the storage and transportation cost.
S2: So this is this is my question for you, Anna. WCI is physically settled. Brent, is cash settled? That explains why WTI went negative when Brent did not go negative. My question for you is, does that mean Brent will never go negative? Is it still actually possible for Brent to go negative, too?
S1: It’s not impossible, but it’s incredibly unlikely. Right. Because of that. Because of that aspect. I mean, like. I guess if you are totally right at the end of the day, there does still have to be oils for these contracts to be in some way connected to, right. So is it impossible? Yeah, but it is incredibly unlikely.
S2: I’m going to take the other side of that one. I think I think that Brent can go negative. I think cash settled like heavy oil futures can certainly go negative. Brent is slightly lighter, but like. Yeah, I mean, that’s the other thing is the oil on its home isn’t really worth anything. You need to crack it. You need to refine it. You need to turn it into things like gasoline, all of that expensive. If you’re filling up your tank for less than a dollar a gallon, which you can do in parts of the country now. That’s, you know, the cost of refining and transporting and all the rest of it. That’s basically implies a negative price for the underlying oil.
S1: I mean, as I said, it’s not impossible. It’s just unlikely. But you are right. I mean, you are right in terms of you know, it’s just fascinating to see like the all of the ramifications of this. Right. Because you think of like moving forward. I mean, like going back to that idea. Like there’s no price of oil. Right. There is price of different baskets of oil. And they’re all you know, they’re all. Then they can be very different. Right now they are very different. And what we’re doing right now is just messing with all of these prices. And then they’re connected to all of these like derivative products. There was this ETF that kind of exploded a little bit larger next year.
S5: So you sold me. I would love to talk about you as I wished, but that was in Slate. Plus, we’re going to do a little geeky dive into USA because U.S.O. is one of the most hilarious holes in the world. Yes, but for the time being, I think we should probably just move on to a numbers round.
S2: And I’m gonna kick off with eight trillion dollars, which is the number that Bloomberg totted up, adding up all of the fiscal response by governments around the world to kove it. And this is not including things like, you know, all of the Fed’s bond buying and that kind of stuff. But just the actual money that governments are spending to try and get us through the crisis, whether it’s in terms of PPV loans or stimulus checks or small business guarantees or whatever you want to call it, we’re already at a trillion dollars, six weeks into this thing. I have no idea. Where we’re going to end up, but it’s going to be a lot higher than that. And the the concerted global fiscal action, even if it’s not coordinated, is absolutely unprecedented. You know, I vividly remember the financial crisis and the various different fiscal responses to it, and none of them were anywhere close to that level.
S4: Yeah. No, it is. And we’re not even halfway over. We’re not even halfway through this. Right.
S1: Yeah, and and you also, unfortunately, have a lot of countries where it is a lot harder for them to spend because they don’t have they’re not the reserve currency. They don’t necessarily have any, you know, fiscal space or they could potentially have more negative consequences. So, yeah, it’s gonna be interesting of that 8 trillion I think, too.
S4: We have Congress has allocated 2.7 trillion. So that’s America is a big chunk of that. We’re number one, America. My number is three. That’s a number of extra hours per day. People are working according to a VPN service that tracked when people are logging on and off and a story in Bloomberg. That’s sort of about the people who are still working, the privileged people like us, like us, who we are working from home. We’d be happy for a heavy band of people are working more than ever, apparently, because you are always at the office now and it never shuts off. And the story is sort of chock full of, you know, a JP Morgan bankers who are logging on at midnight or like running out of the shower to get on Xoom calls and things like that. There’s just sort of interest.
S2: Does it count as working if you log onto the VPN and then you have to chase around after your child for an hour and a half before you can get any work done?
S4: Yes, I think so, because there’s that mental there’s the mental labor of like balancing those two responsibilities at the same time just counts as work.
S1: I think that that’s true. Also, though, I will say as someone who is granted obviously having kids is harder, but as as as summer without kids who lives in a studio, I will say all I do is work just it’s like I work in that I run with enormous facemask. That’s that’s essential. And baking cookies. It’s so uncomfortable to run with the facemask on. It really is. It really is. I did a half marathon in one last week because I had it scheduled and I was like, I’m doing it. Oh, my God. With other people. No, no, no. Myself at 5:00 in the morning.
S2: But it’s called the gentleman and the SHYMANSKY, the kind of woman who wakes up at 5:00 in the morning to run a half marathon with a mask on, even when there’s no one else running the half marathon just because it was in her calendar.
S1: Would you say that it makes me sad and say it was your number? My number is $66 billion. That is the amount of foreign currency, foreign law debt that Argentina has come with a restructuring.
S5: Argentina default? No, I can’t even remember how many I know which which. Granted, we will talk about this later on, especially because this this is not going to end anytime soon. But it was one of those things where like with everything that’s going on, like everything.
S1: So it’s so insane and so abnormal. And they are like Argentina is still defaulting on their debt like that. Some things never change.
S2: The one thing I know from Ecuador and Ecuador being the one country which defaults on its debt even more frequently than Argentina is, if you’re going to default on your debt, defaulting on your debt in the middle of a global crisis is actually quite smart.
S1: Well, no, it’s true. And it’s interesting because like, honestly, you know, when it because I know obviously that well, a lot of people obviously is like, well, but how can creditors possibly, you know, expect them to pay anything and of a pandemic? And the reality is most readers probably wouldn’t expect them to pay anything in the middle of the pandemic. The question, though, was after the pandemic. And just to be clear, I think creditors should be lenient with Argentina during this crisis. But, you know, that’s separate from this kind of longstanding underlying debt issue.
S2: They do seem to be trying to do the opposite of what they did last time. Last time they spent a decade trying to restructure their debts. This time, at least, they’re making all the right noises of trying to restructure their debts pretty quickly.
S1: Yeah. So the only issue, though, is similar to the last time they initially they’re coming forward. No IMF plan. Could this kind of take it or leave it? They don’t actually have a tremendous amount of leverage. So I I don’t know if this was the best strategy.
S2: We will see. Will it be. Will it be Argentina won or will it be Ecuador? We will come back and give them a lesser grade when it’s a labor, which could be in another decade. Okay. I think on which note, we will wrap up sleep money for this week. Many thanks to all of you guys for writing in with your stimulus check status.
S3: Many thanks as well. To just me mean, Molly, for juggling this show. We will have a sleepless about USO and talk to you next week on Slate Money.
S2: So U.S.O. is. What a lot of people in with like Robin Hood accounts, normal retail investors think is basically an ETF which allows them to buy oil. And so they see all of the headlines about oil is really cheap. And then they look at the USO share price chart and they see it going down into the right. And they’re like, wow, I can buy oil for $10 a barrel or whatever it is. And so they buy USA because they think that the price of oil will go up because what goes down must come up. And that and then you’re going to explain to me is not exactly how USA works.
S1: Not at all. So in theory or a U.S.O. is not actually an ETF. Isn’t ETP? And I am being pedantic, but I’m being pedantic for a reason. And it’s because an ETF is, you know, like exchange traded share it. It really it’s related to the price on a bunch of assets. Right. A bunch of the fund this product. What it is, is a set of futures contracts. Basically, what U.S.O. does traditionally is that it invested in the what’s called the front month, the kind of expiring contract, and then a little bit in the next one. Right. OK. The reason that this matters is because what you have to do in a fund, in something like that, you have to rollover the contracts each month. The mechanics of that can be complicated, but just thinking of it is like you basically have to kind of like buy and sell to stay in your same contract. Right. So what happens when you have in commodities is that we call it we use the term like term structure. So you say, OK, we’re comparing the price now to the contract price in the future. Now, if the price now is lower than the price in the future, we call that contango. And if it’s what’s happening now, we actually call it super contango.
S2: So explain explain something to me very quickly here. Generally, what happens with U.S.O. is that when it rolls, it sells the current month, buys the future month. And most of the time oil is in contango. And what that means is it’s selling low and buying high. And in any case, the entire futures market, the entire global futures edifice, like all derivatives markets, is a zero sum game that no one just makes money by long term investing in futures. It’s just it’s like they’re always bets on some other price on. And then for every winner, there’s a loser. So given both of those things, how does U.S.O. ever hope to make money over the long term? Or as I suspect, is it really not designed to make money over the long term? It’s designed to be a hedge for short term bets. It’s designed to be something which you can go long or short over the course of a day or two. And anyone who tries to use it as a way of buying oil for more than a couple of days is completely bonkers and should not be doing that.
S1: So definitely the latter. Definitely the latter. And this is, in fact, a tool that is used quite frequently by hedge funds for shorting and other things, though I would just like to point out that oil is not always in contango. And just to say, like when you’re looking at your like when you’re trading, futures that return that you get is made up of another thing. When we’re talking about that rolling, that’s the ROE yield. But that’s only one part of the contract. Part of the reason that that’s such a big deal right now is because the difference in those prices is huge. So you’re losing so much money if you stay in this over a period of time that the the the product itself can’t exist long. It would just lose all its money, like this product was never designed properly. I would argue and I also would say it was and should never have been designed as a product that retail investors could invest in because retail investors are not going to understand how this works. Pull up the prospectus from U.S.O. and see if anyone can understand quite how this product works. So I think the S.E.C. was a little bit of sleep on the wheel and they proved this thing.
S4: So what happened? A lot of retail investors bought it and then lossl made a lot of money or something.
S2: Is that what I mean? So, again, there’s always going to be some of Wall Street bets crowd who see something volatile and think they can make money by buying it or possibly make money by shorting it. But basically, listen to this from manusky on this one. Do not touch U.S.O., do not even look at U.S.O.. Do not think of it as an investment vehicle. It’s something for highly sophisticated energy traders only. And for some reason it lives on the stock exchange where any old schmuck can buy it. And that’s not a good thing because any old schmuck should not be going anywhere near this particular vehicle.
S1: My public service announcement.