“It is important to put this on the table: This virus may become just another endemic virus in our communities”, WHO executive director Mike Ryan said, during an online briefing Wednesday.
In case that wasn’t clear enough, he drove home the point: “This virus may never go away”.
With each passing day, market participants and society more generally are coming around to the idea that the pandemic and the coordinated global policy response necessitated by the economic collapse it precipitated, have altered the course of human history.
That’s somewhat circular. Every event – large, small and in-between – alters the course of history to some extent. History is, after all, just a chronological series of events. So, perhaps it would be more accurate to say that COVID-19 accelerated society down several roads on which we were already driving.
Some of those roads lead to dark places. For example, the de-globalization push which found expression in the resurgence of populist politics in western democracies, will almost surely speed up as political opportunists exploit the epidemic, citing the coronavirus to support the contention that interdependence, open borders and a sense of shared destiny can backfire to disastrous effect. This is unfortunate, as de-globalization actually represents an effort to roll back the clock. Driving faster down that road is thus more accurately described as mashing the pedal to the metal with the car in reverse.
But some of the roads we were already on (and are now traveling faster down as a result of the virus), may lead to a better future, assuming we can steer clear of known potholes and keep the car between the lines, as it were.
As the crisis wears on (and really, it hasn’t been going on all that long, despite how tedious it feels due to mobility restrictions), more and more regular people are beginning to wake up to the reality of how fiscal and monetary stimulus really work in modern, advanced economies. It’s now apparent to most intelligent Americans, for example, that nobody is “paying for” the trillions upon trillions Congress is spending to provide virus relief to individuals, small businesses and families.
It’s also apparent (albeit still beyond the grasp of many everyday people) that the Fed can backstop and otherwise support any market that needs backstopping and supporting. All that’s required is a liberal interpretation of the central bank’s emergency powers and a thumbs up from the Treasury secretary.
This is a potentially earth-shattering development, assuming enough Americans take the time to appreciate what it means in terms of opening the door to policies with the potential to benefit regular people.
If Congress can spend trillions without paying for it, then what stops elected representatives from green-lighting massive public works projects? What keeps lawmakers from putting the jobless to work building bridges, tunnels and roads? More to the point: If not ostensible limits on spending, what is it that is holding America back from lifting the vast majority of the poor out of poverty, providing health care for the masses, funding a college education for everybody who wants one, and just generally promoting a better life for all Americans?
Yes, the front page of the financial section is plastered with headlines about the deficit and the national debt, but it’s surely occurred to anyone intelligent enough to pick up a paper (or read one online) that we did not wait to spend the money until we received funds from would be “lenders of dollars” (to paraphrase Lloyd Blankfein’s misguided tweet about America’s borrowing “needs”).
It’s also likely dawned on large swaths of the voting public that the Fed can effectively decide what the US pays to borrow. If that somehow wasn’t obvious, Donald Trump has brought it to voters’ attention with incessant tweets singing the praises of low (or even negative) rates, for the explicit purpose of reducing the cost of debt to zero.
Even now, debt servicing costs comprise just a tiny fraction of the ballooning deficit (see the figure). Besides, the Fed is absorbing much of the stimulus anyway. The arm’s-length arrangement that puts a primary dealer between the Fed and the direct monetization of government spending is, at best, a distraction aimed at obscuring the true nature of central bank bond-buying. At worst, the middleman is a beneficiary whose presence is totally superfluous other than as a facilitator of a system that effectively keeps regular people from enjoying the benefits of monetary policy accommodation.
Once the Fed embarks on yield-curve control later this year (which they will), the only thing standing in the way of the public putting the last couple of pieces of the puzzle together will be intellectual laziness or deficit doomsaying from any Republicans brave enough to rebuke Trump in an election year. One assumes that will be a small group, especially given the poor optics associated with holding up stimulus aimed at providing pandemic relief.
It’s true that there are limits to how much money we can spend without offsets. Eventually, inflation expectations will rise, and a self-fulfilling prophecy will be set in motion. As true as that is, it’s also true that nobody knows what the limit actually is – not really, anyway. There are plenty of people willing to venture a guess (usually by referencing the rate of economic expansion), but nobody knows for sure.
What we do know is that inflation can be tamed. Paul Volcker proved as much. Of course, “one” is a small sample size, and it’s possible that the next time America witnesses “big league” inflation (to use a Trumpism), it can’t be brought under control even with draconian measures. But it’s important to note that a hyper-inflationary outcome has a lot working against it between well-known structural factors and, at present, a demand shock the likes of which hasn’t been witnessed since the Great Depression.
Many attempts have been made recently to discern a “silver lining” in the crisis. An article that ran in these pages last week asserted that no such silver lining exists.
While that’s probably true as it relates the current economic reality – defined as it is by joblessness on a scale never witnessed and a coming economic contraction in the second quarter so anomalous as to elude language’s capacity to describe it in stark enough terms – there may be a longer-term silver lining.
That silver lining: That citizens in advanced economies which issue reserve currencies begin to demand answers from their elected officials as to why more isn’t being done to promote full employment in the absence of inflation.