Whatever any of us thinks about the medical realities of the COVID-19 outbreak and government responses to it, these are the cards we’ve been dealt. Politicians left and right have turned pork-barrel politics into a pork freight train.
All this “spend like there’s no tomorrow” thinking ignores the fact that there is a tomorrow.
The spending will have to be paid for… somehow.
There are only two ways for governments to pay for things: directly through taxation; or indirectly, through inflation.
Debt doesn’t change this inflexible reality—it merely postpones the need to resort to one or the other of these methods of payment.
This is why there’s been an increasing call for taxing the rich from the left. Even they know that ultimately, there’s no such thing as a free lunch. Someone has to pay for all the stuff they want to give away for free. Unfortunately for them, it turns out that the rich can’t be plundered enough to pay for all the free goodies desired by the masses. Worse, “progressive” measures that punish wealth creation also slow an economy, hurting everyone.
Enter so-called modern monetary theory (MMT). As others have pointed out, there’s nothing modern about this theory, but it’s still music to profligate government ears. MMT provides intellectual cover for printing all the money they want.
Dan Alpert is an adjunct professor at Cornell Law School and a prominent MMT advocate. Given the current economic shutdown, he’s pleased to see almost all politicians jumping on the spend like there’s no tomorrow bandwagon. “We’re all modern monaterists now,” Alpert says.
Alpert argues that experience since the Crash of 2008 shows that governments—at least some of them—can print all the money they want with no adverse effects. Inflation has been low and is expected to remain low. We may even be entering a deflationary period. That makes the big-money bazookas a great thing, offsetting the scourge of deflation with healthy inflation.
There are several flaws in this thinking:
- There’s nothing inherently bad about deflation. It just means that goods and services getting cheaper—which means the cost of living is going down. That’s a good thing. In real terms, the Ascent of Man is basically a period of protracted deflation that started with the invention of the hand-ax.
- The MMT excuse for money-printing strikes me as very US-centric. Thanks to the US dollar’s status as the reserve currency of the world, no other country can just print money and use it to pay for stuff the way the US can.
- Even in the US—and despite the Fed paying banks to maintain excess reserves, reducing the velocity of money in the economy—there has been extraordinary inflation since 2008. It’s just been concentrated in the financial sector, which is where most of the money went. Hence the ridiculous valuations of high-flying stocks on Wall Street. This inflation was also visible in gold—another financial asset—the price of which has not returned to pre-2008 levels.
- This time, a great deal of the flood of new money is going directly to consumers. I think this makes it reasonable to expect inflation on Main Street as well as Wall Street.
- The COVID-19 disruption wasn’t just to jobs, reducing demand. It was to supply as well. Factories shut down, farmers plowed crops under, dairies poured millions of gallons of milk down drains, and mines producing the most basic raw materials shut down. Some of this production will never be replaced. More dollars chasing fewer goods is inflationary, by definition.
- The big question is how long it will take the printing presses to overcome the demand shock. We’ve seen in the past that it takes time for new money created by the state to percolate through an economy and produce price increases visible to average consumers. That time delay guarantees overshooting by the powers that be.
That last point is key…
Printing money to fight deflation is the siren’s lure for smart people who should know better, seducing them down the path to hyperinflation.
By the time central bankers realize they’ve gone too far—feeling all the while that they had no choice—it’s too late. High inflation shakes confidence, begetting higher inflation.
The USD, which has seemed invulnerable for so long to so many people, may be uniquely vulnerable to this endgame. The perception that this can’t happen to the greenback makes it all the more likely that the Fed will overshoot.
Once foreigners realize that the dollar is in trouble, there’s likely to be a massive rush to the exits. That would add to the inflationary pressure, as all those trillions of dollars held overseas flood home. The price of imported goods would also rise on the USD’s resulting weakness in foreign exchange.
History shows that once a currency enters a death spiral like this—even a currency as mighty as the USD—its days are numbered.
Whether—or when—the US dollar ends up going the way of the Zimbabwe dollar remains to be seen.
Regardless, it may be true of society writ large that “we’re all modern monaterists now.”
If so, one thing’s for sure. After a brief initial deflationary period (which seems likely to be far shorter than mainstream economists expect), we’ll see a multi-year period of record inflation ahead.
And that’s extremely bullish for monetary metals: gold and silver.
It’s even more bullish for related stocks, of course, as they typically offer substantial leverage to their underlying commodities.
If you agree… you know what to do.
Caveat emptor,
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