As the government buoys the markets with MMT, there are three issues
Periodically the economy and the markets start to sink. Now Modern Monetary Theory offers a justification for the government to print money and the Federal Reserve to buy financial assets to an unprecedented extent.
There’s a question in regard to how powerful their measures can be vis-a-vis market forces. No one knows. For the last forty years they’ve been able to buoy the economy and the markets after every downdraft. But market forces are measured in tens of trillions of dollars.
The Fed keeps going to extremes . . . such that we’ve arrived at situation characterized by:
* Unprecedentedly low interest rates:
The basic federal funds interest rate was historically in a range of 3% to 7%. It’s now barely above zero.
* Unprecedentedly low bond yields:
The yield on the benchmark 10-year treasury bond was historically in a range of 4% to 10%. It’s now below 1%.
* Unprecedentedly low stock dividend yields:
The full-market average of dividend yields historically has ranged between 3% and 6%. During the period 1870–1990 there had been only five years where it fell (slightly) below 3%. But it has been well below that for most of the last thirty years, and below 2% for much of the most recent period.
* Unprecedentedly high Federal Reserve asset purchases:
Historically, in a severe recession, when the Federal Reserve felt it necessary to go above and beyond the usual stimulation “tools” (lowering interest rates and increasing money supply) it occasionally would resort to buying bonds. The added demand for bonds would cause prices to rise. Support for the bond market was an additional method of supporting the economy as a whole. Such bond purchases would increase the asset levels on the Fed’s balance sheet. The total value of those assets had never exceeded $1 trillion prior to the Great Recession. Between 2009 and 2014 it rose to over $4 trillion. Now it’s over $7 trillion.
* Unprecedentedly high levels of debt:
Adjusted for inflation, Gross Domestic Product was about $4 trillion in 1970. The total of public and private debt in that year was $2 trillion, half of GDP. By 2018 the GDP had gone up by a factor of five to $20 trillion. But the total of public and private debt had soared to over $60 trillion, more than three times GDP. Debt increased by a factor of 30 over that span of time! Sound extreme? Well, the deficit spending during 2020 will cause that soar.
* Unprecedentedly high federal budget deficits:
Ross Perot made an impact in the presidential election of 1992 by pointing out that the federal budget deficit had increased from $41 billion in 1979 to $269 billion in 1991. After that, for a while, spending was reigned in and the government ran surpluses during the period 1998 to 2001. The Iraq War pushed the deficit all the way back up to $248 billion in 2006. It was alarming when emergency spending to lift the economy out of the Great Recession produced a deficit of over $1 trillion. It’s now on its way to $4 trillion.
Theoretically the government could print money without limit. Theoretically the money could go toward helping “Main Street” rather than Wall Street. Good luck with that. More likely the money tree will benefit the financial markets first and foremost. There are three consequences to wonder about:
1) Obscene levels of inequality (because the already-rich own the lion’s share of stocks and bonds). The national share of after-tax income of the top one percent rose from about 10% in 1960 to almost 20% when the stock market peaked in February. The top five individual fortunes now equal the wealth of the bottom half of the entire population. Does it matter? There are complaints, occasional protests and even some mass movements (like the Bernie Sanders phenomenon) but, so far, none seem to result in egalitarian governmental policies.
2) Asset valuation measures relative to the real economy (GDP growth, profits growth) have become unprecedented. Does it matter that the price/earnings ratio historically was around 15 and now is around 25? Is there any force that would induce reversion to the mean?
3) Is there some limit to how low returns can go? It would seem that bond yields have an objective lower bound: zero. Who would buy bonds if the return was 0.01% (next to nothing)? Who would buy stocks if the dividend yield dropped to just 1%?
We are in the middle of a managed capitalism experiment of forty years duration that, so far, has been successful. But it seems to keep requiring more and more in the way of governmental intervention. Keynesianism was the theoretical basis early on. Now it’s becoming post-Keynesian Modern Monetary Theory. Will that take us through the next forty years??
