GFC and QE and MMT and GDP and CPI and SP and me

When stock market valuations went “too high” (relative to historical standards) I sold short. That was around SP 2000.

In the old days that would have been the prudent thing to do. But we entered a new systemic era after the Great Financial Crisis (GFC) of 2008.

* * * *

Governments used to strive to balance their budgets.

The Great Depression of the 1930s was a shock to the system. After that governments started to use deficit spending to buoy the economy. Keynesian theory said there was no problem running deficits as long as the national debt did not increase on a percentage basis relative to GDP (in which case the debt service would remain manageable, affordable).

The Great Financial Crisis of 2008 was a shock to the system. After that governments started to use radical monetary policies (“Quantitative Easing” … in addition to deficit spending) to buoy the economy. Modern Monetary Theory (MMT) said there was no problem increasing the money supply as long as inflation didn’t spike.

* * * *

National debt as a percentage of GDP is a straightforward metric. It’s easy to see if the debt is growing too fast.

The rate of inflation is not such a straightforward metric. After the implementation of QE there was hardly any increase in consumer price inflation (CPI) for ten years. So the governments saw no reason to be worried about a radically increasing money supply.

Inflation actually was spiking, but it was inflation in the price of financial assets (stocks and bonds). Consumers were not complaining. And the holders of financial assets certainly were not complaining.

I was complaining. Inflation in the price of stocks was anathema to those, like me, who prudently sold short when the market started going “too high” … around SP 2000. According to historical measures of valuation the market should have gone down from there. Instead the SP went over 3000. And then over 4000. That’s crazy high.

Rich people (that’s not me) got crazy rich due to QE-radical-modern monetary policies. The crazy-radical-modern increase in the money supply finally did bleed into the CPI in 2022 … and so the QE policies finally were terminated.

The artificial elevation of the SP to almost 5000 figures to be reversed to some extent. But likely not to below 2000. My poor shorts might languish forever.

* * * *

“Let’s say that we run large budget deficits and have the Federal Reserve Board buy up much of the debt. To people who have been alive in the last 15 years, this policy goes under the name “Quantitative Easing.” To my knowledge, none of the current or past members of the Fed consider themselves followers of MMT, but they basically followed an MMT prescription. They had the Fed buying up large amounts of debt [thus increasing the money supply] to keep interest rates low and boost the economy. When the Fed buys up bonds, guess who gets the interest on the bonds? It goes to the Fed. And the Fed refunds it to the Treasury. So our crushing interest burden ends up being a simple accounting transaction where the Treasury essentially ends up paying interest to itself. Okay, but how long can this go on for? The short answer is forever [if CPI inflation does not accelerate too much].”


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Steven Welzer

The editor of Green Horizon Magazine, Steve has been a movement activist for many years (he was an original co-editor of DSA’s “Ecosocialist Review”).