The Chinese virus is bringing Modern Monetary Theory to life
In a nutshell, Modern Monetary Theory (MMT) is a policy whereby the federal government can print money with abandon. Under MMT, there’s little concern of the debt level or how, if ever, the debt will be paid off.
The Chinese virus is accelerating America’s embrace of MMT whether it is called that or not. Prior to China’s viral gift to us, the debt level of the federal government was $22.5 trillion dollars which is 106 percent of our gross national product to which another trillion was projected to be added each year.
Things are moving faster now, however. Congress has just passed and President Trump signed a historic $2 trillion stimulus bill to counter the Wuhan epidemic. Included in the stimulus package are direct payments to millions of Americans, an unprecedented expansion in unemployment benefits and $350 billion is soft loans to small businesses. The political consensus is that this will be far from adequate to save the economy. Accordingly, additional trillion-dollar stimulus packages are now actively being drafted. This is helicopter money. Here’s what it looks like.
This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track. It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term. It basically denotes a helicopter dropping money from the sky. Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”Under such a policy, a central bank “directly increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation.”
Even should the economy revive from this forced government shutdown to the level that optimists like President Trump predict, it will never be able to generate enough tax revenue to pay off this newly incurred debt let alone the previously accumulated debt. Economists Ken Rogoff and Carmen Reinhart have shown that at low debt ratios, a dollar borrowed and a dollar spent can product $1.20 in GDP. However, when the debt-to-GDP ratio is greater than 90 percent, this multiplier goes into reverse — the more you borrow, the more the GDP decreases. This is the reality behind the saying government can’t borrow its way out of a debt crisis. No matter how you cut it, America’s debt load does not bode well for the future
As for the economy’s revival, it is hard to be optimistic. Aside from the debt overhang, many small businesses will simply not make it back. Others will be crippled. On the individual level, an untold number of careers have been stunted by the shutdown and some even destroyed. And consider how the budgets of the states have been hurt by the shutdown. In Ohio for example, over one-third of the state’s revenue comes from a combination of the sales tax, income tax and business taxes.
All these revenue sources will be significantly impacted by the shutdown. With looming budget shortfalls, major states will not be able to raise taxes high enough to make up what they’ve lost. So, they’ll turn to Washington for a bailout.
It will be the same for pension funds, many of which were severely underfunded before Wuhan came to town. With the stock market down nearly 20 percent and interest rates at record lows, pensions funds will find it next to impossible to generate enough revenue to meet their obligations to retirees. As with the states, they will turn to Washington for relief, and Washington will be hard-pressed to say no.
There are other second-order effects to this epidemic as well. There will be increased pressure throughout the Third World to migrate into the U.S. and Europe. The question will then be can Western leaders finally find the will to secure their borders or will they continue to cave into political correctness and the greed of the globalists? And if the will is not found, how will the influx of these unskilled illegal aliens affect Western economies and their culture? Also, many foreign countries will face severe depression as demand falls. This cannot but impact the U.S. as well.
To avoid a severe economic slowdown and possible social disorder at home, Washington will practice MMT whether it is through quantitative easing or helicopter money or a combination of both. Anyone calling for a balanced budget will be politically stoned to death. It cannot be said with any certainty where this all leads. But it is hard to imagine we’ll be in as good a shape as we were in just, say, the beginning of this year for the foreseeable future. Also, in this uncertain environment, Americans will have to fight like never before just to maintain what remains of their constitutional republic. The more you look at it, the more this Chinese virus looks like the catalyst to our Fourth Turning.