Good News and Bad News

As of yesterday, nearly 15 million Americans have tested positive for COVID-19, while over 281,000 people with the virus have died.

Caseloads are actually higher than they were in April (although fatalities are not as great because of improved treatments and new therapeutics).

The U.S. registered over 4 million infections in November alone, more than double October’s record 1.9 million infections. But here’s the good news:

Several highly effective COVID vaccines are already approved for use or are expected to be approved shortly.

The major pharmaceutical companies are geared up to produce billions of doses (and several billion doses are already produced, just waiting for the final approvals).

This vaccine campaign will start slowly and take time to have an impact. In the U.S., these vaccines will go first to health-care workers and nursing home patients. Gradually, the injections will be available for those over 60 years of age and those with comorbidities such as asthma and diabetes.

By late next year, most of the U.S. population that wants the vaccine should have it. Similar efforts are underway in Europe, Japan and Australia. Russia and China have their own vaccines. We don’t know much about them, but they are gradually being used on their own populations.

So, that’s the good news. The bad news is that vaccines won’t rescue the U.S. economy in time.

Lockdowns Aren’t Effective

Lockdowns are to be reimposed as the only remedy in the meantime (in addition to the basic advice of washing hands, social distancing and masks). Unfortunately, the evidence is clear that lockdowns don’t work well. The virus is highly contagious; it goes where it wants.

But, politicians don’t know what else to do, and they’re driven by the need to appear to be doing something, so lockdowns are the answer.

Lockdowns may not be effective against the virus, but they are very good at destroying economies.

The same pattern we saw last spring is repeating itself.

Businesses will not only lock down; they will also go bankrupt or close for good. Job losses will not be temporary; they will be permanent. There will be no pent-up demand if the lockdowns abate. A missed meal is a missed meal; I won’t order ten dinners next time I go out, I’ll order one.

The U.S. economy will probably tip into recession in the first quarter of 2021. This will mark the first “double-dip” recession since the 1980-81 period when a new recession began just one year after the prior recession ended.

This time the gap may be just six months since the last recession ended on June 30, 2020. Stock markets have not yet corrected for this coming recession. They will soon.

Meanwhile, assuming Joe Biden will be the next president, his administration will have to confront this recession. How might his economic team try to stimulate the economy and restore growth?

Get Ready for MMT

It could be telling that Janet Yellen will be the next Treasury Secretary.

Economist Stephanie Kelton has called for merging the Fed and the Treasury into a single spending/monetization entity to implement Modern Monetary Theory (MMT). She has gained influence in Democratic policy circles.

Investors need to pay attention to it, whether they agree with it or not because it will influence fiscal and monetary policy in a new Biden administration. Putting former Fed Chair Janet Yellen as the new Secretary of the Treasury is a clear sign that that’s what a Biden administration plans to do.

What better way to achieve that merger than to appoint the former Fed head as the new Treasury head with her former Deputy still in place back at the Fed? With a former Fed head as new Treasury head, I’d say Mission Accomplished.

For those unfamiliar with MMT, it says that the U.S. can spend as much as it wants, borrow to cover the deficits and monetize the debt with Fed money printing.

The “theory” is not much of a theory because it lacks evidence, and there’s nothing “modern” about it because it has been around for over 100 years. Still, it is all the rage in Washington, D.C. these days.

Three Main Tenets of MMT

MMT has three basic tenets. The first is to treat the Treasury and the Fed as a single entity with a single balance sheet. Legally the two institutions are completely separate, but MMT insists that government can operate as if it were. This means merging Treasury and Fed operations into a single engine for spending, borrowing and printing.

The second idea is that citizens must accept dollars (whether they like it or not) because you need dollars to pay taxes, and if you don’t pay taxes, you’ll go to jail. In effect, the dollar is supported by the barrel of a gun, to paraphrase Mao Zedong.

The third idea is that there is no practical limit to how much debt the U.S. can issue. The U.S. debt-to-GDP ratio today is about 130% (up from 106% last year). But, MMT cheerleaders point to Japan’s ratio, which is over 250%, as proof that the U.S. can borrow a lot more.

These ideas are all badly flawed. Japan is not a good test case because the Japanese buy their own debt (the U.S. relies on foreign investors), and the Japanese economy has barely grown for 30 years (try that in the U.S.).

You can operationally merge the Fed and Treasury, but once it becomes apparent to markets that you are monetizing all the new debt, confidence will erode, rates will climb and this pyramid scheme will collapse.

And, once confidence is lost, citizens can turn to land, gold, silver, natural resources and other hard assets as dollar alternatives. You don’t owe taxes on unrealized gains, so the MMT tax police will have nothing to keep them busy.

Disaster in the Making

MMT is a disaster in the making (although it may take a few years to play out). It’s OK to borrow money if you invest in highly productive assets. But, if you just spend the money to support a stagnant economy with handouts, you’re simply digging a deeper debt hole for yourself.

Multi-trillion dollar deficit spending plans will emerge soon from the new Congress. The Treasury will spend the money. The Fed will buy the Treasury debt with newly printed money.

Eventually, you end up with default, inflation, higher interest rates, higher taxes or all of the above. The U.S. will go broke. It’s not quite the rosy scenario that the MMT crowd would have you believe. Still, it may be coming soon.

And, a clueless Janet Yellen will supervise the entire operation.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning