Week 28 of the Quarantine
Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet.
– Steven Mnuchin, U.S. Secretary of the Treasury,
September 14, 2020
SAN MARTIN, ARGENTINA – If not now, when? If not us, who?
When is the right time to fix the leaking roof?
The sun was shining in 2017 when Mr. Mnuchin joined the White House team as Secretary of the Treasury. Then, unemployment was low… and U.S. GDP had been growing for eight years straight.
At this point in the cycle, Keynesian theory tells us that the prudent thing to do is to run a budget surplus and pay down your debt. That is the essence of contra-cyclical policy; as if taken directly from the Old Testament, it seeks to flatten out the booms and busts by running deficits in the lean years and surpluses in the fat years.
Instead, the deficit for the 2017 financial year was $665 billion (inherited from the Obama team).
In other words, the feds were doing the exact opposite of what Joseph recommended to Pharaoh and what Keynes recommended to policymakers. They were exaggerating the trend, not moderating it.
In 2018, when the Trump team was fully in charge, unemployment went even lower. The boss said the skies had never been clearer.
But instead of taking advantage of the good weather to repair their balance sheet, the feds cut taxes… and the deficit rose to $779 billion.
And in 2019… it still didn’t rain. What a gift!
But nobody got up on the roof. And the deficit rose to almost $1 trillion.
Time to Normalize
The gist of the following words is that the feds will never fix the damned roof. This house will fall down first. Here’s how…
During those 10 sunny years from 2009-2019, instead of fixing the leaks in federal finances, Mr. Mnuchin and his predecessors punched more holes.
You’ll recall that by 2015, the Federal Reserve was getting out its ladder and strapping on the tool belts. Since 2009, it had maintained that its zero interest rate and vast bond-buying scheme were “emergency measures.” The emergency over, it was now time to “normalize” its policies.
But when Mr. Trump arrived, he fiercely opposed any attempt at normalization. He saw, correctly, that “normal” was a thing of the past. He wanted abnormally low rates and more printing-press money from the Fed to keep the “recovery” going.
By then, it was obvious that the whole shebang was in trouble. The crisis of 2008-2009 had been followed by the most aggressive money-printing campaign in U.S. history – in which the Fed added $3.6 trillion to its balance sheet.
But this produced the weakest recovery in history.
A thoughtful person might have wondered, “How come? What’s wrong with this money-printing scam?”
But neither the Eccles Building (Federal Reserve headquarters) nor the White House is a safe place for thinking people. They are now places for action figures – cartoonish characters, who take action without thinking.
In 2017 and early 2018, Mr. Trump repeatedly insisted that it was a big mistake to try to “normalize” interest rates or reduce the Fed’s balance sheet. He and Mr. Mnuchin hoped to extend the boom further – at least through the 2020 election.
But the Fed continued its timid baby steps up the ladder toward “normalization”… until October 2018.
Then, with the federal funds rate barely above the official inflation rate… under pressure from the Trump team… and with a 3,000-point sell-off in the Dow… the Fed decided to climb down. It never got close to normal.
Four months later, the stock market crashed… the feds shut down large parts of the economy… GDP fell 32% in the second quarter… and the Fed cut rates back down to zero, and then went on another money-printing spree.
And now what? Now, there are clouds everywhere – cumulus, cirrus, and an occasional killer funnel, too.
We saw on Friday that nearly 100,000 businesses have closed their doors – permanently.
As for jobs… millions have been lost. Eleven million? Thirty million? The numbers are fishy.
But if these jobs come back at the same rate that they did after the crisis of 2008-2009 – 1.6 million per year, on average, over five years – it will take until 2027… or to 2038, if we base our calculations on the 30 million figure… to get them back.
Most likely, many are gone for good. An economy evolves. It finds new ways of doing business. It needs new skills… new businesses… new people.
The old ones are left behind… each one with a cloud over his head.
“It’s amazing what’s happening out here,” said friends calling from Deer Valley, Utah. “People are buying houses sight unseen. The realtors say they’ve never seen such a hot market. Everybody wants to get away from the big cities. They’re coming in from California… New York… Baltimore…”
Wealthy people are enjoying their new digs. The rest are standing in lines waiting for handouts from the government. Or, they’re waiting for the helicopters.
In 2019, U.S. GDP was $21.7 trillion. This year, the Federal Open Market Committee says the final tally will be about 6.5% less.
Rents are not being collected. Mortgages are not being paid. There are still some 30 million Americans on unemployment… and 44 million with student loans totaling $1.5 trillion.
Senators Chuck Schumer and Elizabeth Warren now propose forgiving $50,000 of student loans per person… (This must make students who didn’t borrow really feel good!)
The clouds are not going away any time soon. And no matter who is in the White House, he is not going to get out on the slippery roof any time soon, either. Heck, he might get struck by lightning!
8 million people lost their jobs in the crisis of 2008-2009. And while the economy recovered over the following decade, the feds never had the brains or guts to return monetary policy to “normal.”
This time, as many as 50 million people signed up for unemployment benefits.
And there is almost no chance – in the next 10 years, anyway – that deficits will be reduced and interest rates will be normalized.
So, the money-printing goes on…
And it inevitably leads where it always leads – to a drop in the value of the money itself.
And then, people will look for alternatives.
Traditionally, in the “sh*thole” countries and banana republics, they found it readily – in the U.S. dollar.
But what happens when you can’t trust the greenback either?
That is what we will look at tomorrow…
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