As a society we have been moving at 80mph most of my adult life. There is endless stimulation from people, meetings, media, business, religion, socialization, travel, sports, entertainment, literature, the stock and bond markets, internet and iPhones.
Sometimes we are moving so fast we never have time to process what is happening. The only silver lining of Covid-19 is we now have nothing but time at home to process. One of my business partners sent me a really stimulating article from “The Marginal Revolution” by Tyler Cowen called “World 2.0.” The caption knocked me out:
“THERE ARE DECADES WHERE NOTHING HAPPENS, AND WEEKS WHERE DECADES HAPPEN”
The Author’s List of Then and Now
This is from a very able and perceptive correspondent:
|World 1.0||World 2.0|
|110 successive months of job growth||10 million jobless claims in 2 weeks|
|10 year bull market across sectors||Winners and losers with extreme outcome inequality|
|Full employment||30% unemployment|
|Base rate thinking||First principles thinking|
|Office by default||Remote by default|
|Office for work||Office for connection, community, ecosystem, makerspaces|
|Suit, tie, wristwatch, business card||Good lighting, microphone, webcam, home office background|
|Commute + traffic jams||Home + family|
|Last mile||Only mile|
|Restaurants||Groceries + delivery|
|$4 toast||Sourdough starter|
|$100k for college||Not paying $100k for a webinar|
|Internal issues||Exogenous shock|
|Lots of little problems||One big problem|
|Stupid bullshit||Actual issues|
|Too much technology||Too little technology|
|Assume some government competence||Assume zero government competence|
|Trusted institutions||Trusted people|
|Tail risk is kooky||Tail risk is mainstream|
|Boomers most powerful||Boomers most vulnerable|
|Productivity growth collapse||Economic collapse|
|Social services Democrat||UBI Communist|
|Corporate debt||Government debt|
|Techlash||Tech a pillar of civilization and lifeline to billions|
|Break up Amazon||Don’t break up Amazon!!!|
|Avoiding social issues||Avoiding layoffs|
|Phone is a cigarette||Phone is oxygen|
|Resource depletion||$20 oil, $0.75 watt solar, <$100/kwh batteries|
|Low volatility||High volatility|
|20th century||21st century|
Coronavirus has also created several “forever” changes, foremost of which are changes we see right now to business interactions, education and our homes and family.
Modern Monetary Theory
The one change, however, that will alter our world more than the entire list taken together is the shift from fiscal responsibility to Modern Monetary Theory. Only recently did I get exposed to “MMT” for the first time in a series of articles about Ray Dalio and The End of the Debt Super-Cycle.
MMT’s main concept is governments can print money with impunity because they can never default in their own currency. The printing of money may lead to inflation, but MMT presupposes the ruling class will have restraint when inflationary risks are too high. Proponents are Bernie Sanders and Alexandria Ocasio-Cortez. Counting on restraint from them is like Trump using two syllable words or Biden completing a sentence.
The accounting is simple; the government’s deficit (debt creation) creates a private sector surplus thus unlocking the productive energy of the nation. Central banks have been doing this since 2008, but they have pretended it is short lived, and more importantly, reversible.
I have never believed in the printing press or helicopter money as a solution to an over levered economy. At best, these moves forestall panic selling and kick the can down the road. This is how Reuters summarized our predicament on April 6, 2020 in a post on Yahoo Finance.
“The ECB, Fed and Bank of Japan have a combined $14 trillion worth of assets on their balance sheet, largely bought since the financial crisis of 2008 to complement interest rates already stuck at zero or lower, Datastream data shows.
But so far, they had maintained that this so called “quantitative easing” (QE) was temporary and policy would one day go back to normal, with positive interest rates and lean balance sheets.
Not any more. All major central banks are now more or less openly talking about permanent QE, which would mean governments and companies, whose bonds have been bought by the central bank, could roll over that debt indefinitely.
The BOJ, for one, already owns 43% of Japan’s government debt, and the ECB did away with a cap on owning more than a third of any one euro zone country’s bonds.
Some economists are calling for even more extreme measures, such as cash handouts to all households, known in economic parlance as helicopter money, or debt cancellations, which were urged by former ECB President Mario Draghi.
Some forms of debt forbearance… may be needed—for instance by extinguishing private sector loans vacuumed by the central banks,” said Gilles Moec, chief economist at French insurer Axa.”
The Debt Jubilee is Coming
MMT is for sure the next big thing and its political ascendance is unstoppable. Whether it is the New Green Deal proposed by AOC, or forgiveness of student loans proposed by Bernie Sanders, Modern Monetary Theory will be cited as the “high-brow” rationale for allowing politicians to write unpayable checks against the world’s wealth.
There is another domino that has to fall, however and I think it is coming soon. I will write in my next blog about the debt jubilee and what it means for our monetary system.