On the 2020 dumpster fire and who is going to pay for it? (COVID-19, Inflation and MMT)
2020 was a year that really took the trash out of us. It was a smelly, smoky mess that didn't give us the clarity of 20/20 vision we were hoping for. The Coronavirus brought fear, economic hardship, and uncertainty to many people and businesses. The death of George Floyd sparked protests and further upheaval. And to top it all off, the US presidential election was a painful spectacle that left many feeling uncertain about the future. In short, 2020 was a real dumpster fire of a year. What could be worse?
Americans face a real risk of inflation in 2021. Below are some economic viewpoints that I expect to be prominent in 2021. My uncle Martin was the first person to teach me about the political implications of economics. He explained to me some time in the late 1980s how the President was pushing interest rates higher to keep the wealthy rich at the expense of the poor. Martin had very little formal education but was well read and persuasive. Since that time I have viewed economics as the study of a game with winners and losers. The Coronavirus has great economic implications.
To put the question simply, who pays for all of the additional costs that the government has incurred to fight the Coronavirus? The government paid for testing, personal protective equipment, emergency medical care. The government is paying for vaccines. Likely most costly, the government is paying to keep people at home and to keep businesses alive in the meantime. The government is also providing some assistance to foreign governments. These measures are expensive and it remains unclear how they will be paid for.
Even before COVID-19, the Western World was struggling under various demographic pressures from an aging population. Economists argue that hat the base economic conditions are sluggish, weak and would be worse without intervention.
The American economy’s growth has been based significantly on consumption.(Tymoigne, 2007). After decades of neglect, America is now saddled with a rapidly aging and increasingly obsolete stock of productive capital. (Roach, 2020) Competing currencies, especially the Euro, along with other stores of value, like Gold and Bitcoin are set to strengthen by 35% against the US dollar in 2021. The United States to have avoided the consequences of deficits and inflation by recourse to its exorbitant privilege of being the world’s reserve currency. (Roach, 2020)
Though some analysts suggest things are going to get better in 2021. Business Insider anticipates a 25% increase in stock prices while also acknowledging a 24% increase in money supply in 2021. (Graffeo, 2020) Stock price are set to increase in spite of an increase in money supply. Whether this is due to a strong value for productive capital or due to the everything bubble is still to be determined.
You will hear about inflation as soon as you start experiencing it.
If you want to plan for it consider these two opposing tendencies - Modern Monetary Theory (MMT) and Monetarists. Both are echoes of the long running battle between economists following either Keynes ie Friedman. Each is rooted in the contrasting views on what makes the world work. To over simplify, the MMT view weighs Demand as the key to progress. Monetarists place more weight on the Supply side, with a focus on investment and productivity. These viewpoints have real-world political proponents and economic impact. Monetarists argue that the only appropriate policy is one that encourages efficient investment based on market mechanisms. While all economics owe their theoretical origins to Adam Smith, the Monetarist viewpoint holds that the greatest good comes by way of private initiative with the minimal possible government interference. The unfettered market liberates the invisible hand. (Smith, 1789)
MMT proponents suggest that they see the world as it is. MMT does not propose a future utopia but describes the current state without the ideological blinders of Monetarism. It asserts The government has more power than it allows itself to recognize. A government that recognizes MMT's power will create full employment, eliminate poverty and fight climate change. The Green New Deal concept is underpinned by MMT. MMT was created by amateur economist Walter Mosley in partnership with Randall Wray and Australian Bill Mitchell in the 1990s. Mosley's intent was to make available a technical view of currency and fiscal policy rooted in the current floating fiat monetary system, rather than the classical or orthodox fiscal theories that were founded in a world of fixed exchange and the gold standard.
According to MMT, A sovereign government that issues its own currency is actually nothing like a household or a corporation even though we hear this analogy all the time. It proposes that a government that issues its own currency, imposes tax liabilities in that currency, spends only in its own currency and issues debt in its own currency then it basically will never run out of money. (Wray, 2019)
Classical economists, followers of Hayek and Von Mises, or Milton Friedman and the Chicago School, view government spending as equivalent to household spending. If you can cover your debts with a surplus you are solvent. An insolvent household is vulnerable to collapse. For example an unemployed worker who misses their rent will end up in a homeless shelter. An insolvent government may put its sovereignty in jeopardy. Brad Thor's novel Act of War is fiction but presents a worst-case scenario the US government has sold so much debt to China that China has leveraged the US to cede American territory. The household-government linkage suggests that irresponsible behaviour will be punishing for a government as it would for a household.
This raises the core question, how we are going to pay for it? are they going to tax us today? are they going to borrow the money? which means they're going to tax us even more tomorrow because now we have to pay the taxes to cover the interest, or is the federal reserve going to monetize the debt are they going to print more money which means we pay for government through debasement of the currency through inflation. now we have not felt the full weight of the inflation tax because we've been able to export it because the dollar has functioned as the world's reserve currency. we're able to run these massive trade deficits and we could export all the money that we're printing and we can get products in return. (Schiff, 2020)
I would like to share with you some insights from an out of print book from the 1970s, Robert Lekachman's Inflation: the permanent problem of boom and bust examines the American economy from the Great Depression to Nixon's exit from the Gold Standard in the early 70s. Lekachman wrote for the layman. His insights are worth your time. Recognizing that you will not want to buy an out of print book on a dry topic like inflation, I am hoping that you will instead take the time to listen to my audio rendition of the first chapters by clicking the image below.
2020 was a dumpster fire. Yes. But if 2021 includes an economic collapse we may find ourselves nostalgic for the time before.
As the Led Zeppelin song goes:
The pain of war does not exceed,
the woe of aftermath.
Sources:
MITCHELL, BILL. "A Cause for Celebration: A Paradigm Shift in Macroeconomics Is Underway." AQ: Australian Quarterly 91, no. 4 (2020): 18-29.
RACHEL, ŁUKASZ, and LAWRENCE H. SUMMERS. "On Secular Stagnation in the Industrialized World." Brookings Papers on Economic Activity, 2019, 1-54.
Summers, Lawrence.“The Left's Embrace of Modern Monetary Theory is a Recipe for Disaster.” The Washington Post, March 4, 2019.
Roach, Stephen. "The Fall of the Almighty Dollar." Horizons: Journal of International Relations and Sustainable Development, no. 17 (2020): 122-35
Tymoigne, Eric. A Hard-Nosed Look at Worsening U.S. Household Finance, Challenge, Vol. 50, No. 4 (JULY-AUGUST 2007), pp. 88-111
SMITH, ADAM, An Inquiry into the Nature and Causes of the Wealth of Nations , 1789
Graffeo, Emily. JPMorgan sees $1 trillion flowing into the stock market in 2021 amid ‘one of the best environments' in years,Business Insider, Dec. 10,2020, https://markets.businessinsider.com/news/stocks/jpmorgan-sees-1-trillion-flowing-into-the-stock-market-in-2021-2020-12-1029883167?op=1
Lekachman, Robert. Inflation: the permanent problem of boom and bust. New York: Vintage Books. 1973
Coats, Warren, Modern Monetary Theory: A Critique,Cato Journal Vol. 39 No. 3,Fall 2019 https://www.cato.org/publications/cato-journal/modern-monetary-theory-critique
PAGE, Jimmy, and Robert PLANT. n.d. The battle of evermore. Led Zeppelin Complete.
Youtube:
Schiff, Peter,Economist Blasts The Fed, Stimulus, Bitcoin & Makes Bold Predictions, https://www.youtube.com/watch?v=mzDKHi-wEoc,Valuetainment, 2020
Mosler, Warren,How Modern Monetary Theory (MMT) Actually Works (w/ Warren Mosler), https://www.youtube.com/watch?v=W97s3zbFKvc,Real Vision, 2019
Wray, Randall,Everything You Want to Know About Modern Monetary Theory, https://www.youtube.com/watch?v=7sd-ElKMbPI&t=1s, Bloomberg Markets and Finance, 2019
Notes:
The impact of an aging population on public pensions, social security, liquidation of private securities to pay for retirement and health care will all contribute to a sluggish economy.
A close read of MMT does not bode well for US States, Canadian provinces or other debt issuing bodies that cannot issue their own currency. The EU member states may also be at risk.These jurisdictions do not have the benefits of MMT and risk suffering under severe debt servicing obligations.
“The burden of growth on households has reached unusual proportions. Indeed, while average economic growth has been only a little over 3 percent in the past fifteen years- the lowest rate since World War II- the share of that growth attributed to consumption is more than 70 percent. As a consequence, the financial position of consumers has worsened significantly.” (Tymoigne, 2007)
The net national saving rate averaged 7 percent over the 45-year period from 1960 to 2005. Although gross domestic saving in the first quarter of 2020—at 18.9 percent of national income—was also below its 45-year norm of 21 percent from 1960 to 2005, the shortfall was not nearly as severe as that captured by the net measure.
Meanwhile in Europe: the Next Generation EU plan will draw critical support from large-scale issu-ance of pan-EU sover-eign bonds. That finally puts the EU on the map as the backer of a new risk-free asset in a world that up until now has only known only one: U.S. Treasuries. (Roach, 2020)
The currencies of America’s continental trading partners, Mexico and Canada, both of whose currencies were hit es-pecially hard earlier this year by the lethal com-bination of the coronavirus shock and a stunning collapse in world oil prices. The plunge in the peso was exagger-ated by an unwinding of so-called carry trades during the near meltdown of the American equity market in late March. Barring a double-dip recession in the global economy, safe-haven plays into the dollar should unwind over the balance of 2020 and into 2021, reinforcing the negative case for the dollar. (Roach, 2020)
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry, provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal, or nearly equal profits, every wholesale merchant naturally prefers the home trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home trade, his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts; and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. ... Home is in this manner the centre, if I may say so, round which the capitals of the inhabitants of every country are continually circulating, and towards which they are always tending, though, by particular causes, they may sometimes be driven off and repelled from it towards more distant employments. But a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country, than an equal capital employed in the foreign trade of consumption; and one employed in the foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country. [Authors note: this is the section the Adam Smith worshippers do not talk about very much]
Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavours so to direct that industry, that its produce may be of the greatest possible value.
The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can in his local situation judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must in almost all cases be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or, what is the same thing, with the price of a part of it, whatever else they have occasion for. (Smith, 1789)
We're going to swallow this bitter tasting medicine because ultimately recessions is the free market's way of fixing the mistakes that the government and the central banks create (Schiff, 2020)
but this time we're gonna get a dollar collapse, we're gonna get a sovereign debt crisis, the party is going to end. all the inflation that they're creating now which is unprecedented in scale. we're about to find out the hard way that the most expensive way to pay for government is through inflation through printing money that's what we're doing and we're about to relive
the lessons of history. (Schiff, 2020)
We start the money story differently than other schools of thought they all start with people doing bartering you're using seashells or something and we're not saying that's wrong but this is the money story for the modern state begins with a state that wants to provision Itself. we begin with a tax liability we don't begin with the state collecting money and spending it because there isn't any. (Mosler, 2019)
Warren Mosler agrees with Uncle Martin: “ [higher interest rates are]...basic income for people who already have money”.
“the economy of the industrialized world, taken as a whole, is currently—and for the foreseeable future will remain—highly prone to secular stagnation. But for extraordinary fiscal policies, real interest rates would have fallen much more and be far below their current slightly negative level, current and prospective inflation would be further short of the 2 percent target levels, and past and future economic recoveries would be even more sluggish. (Summers, 2019)
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