‘Once People Start Missing Payments’: Bedlam, Bullion, And The Risk Of Doing Too Little

[Updates with outcome of Tuesday’s negotiations]

Just a “little bit” of headway on fraught stimulus negotiations in Washington was all it took to push spot gold above $2,000.

The yellow metal extended its record-breaking surge as Steve Mnuchin described talks with Nancy Pelosi as having made “a little bit of progress”, while Chuck Schumer mused that both sides want “to get something done as soon as we can”. Later, after another meeting, Mnuchin said the White House and Democrats aim to have a deal by the end of the week.

The prospect of another $1 trillion (plus) in government spending is partially behind gold’s relentless rally. Treasury said Monday it expects to borrow $947 billion in the July — September quarter, $270 billion more than announced in May. The statement, which came ahead of the quarterly refunding announcement Wednesday, cited an assumed $1 trillion of additional borrowing “in anticipation of legislation being passed in response to the COVID-19 outbreak”.

Needless to say, $1 trillion vis-à-vis funding for more stimulus seems like a pretty conservative “placeholder” (as one Treasury official described the figure). That’s the amount Republicans are prepared to spend on the new virus relief package (some GOP senators don’t even want to spend that). Democrats, on the other hand, would spend $3.5 trillion if they got everything they wanted out the bill. By definition, a “compromise” falls somewhere between those figures, thus larger than $1 trillion.

In a testament to the scope of the gold rush, total known ETF holdings surpassed Germany’s official reserves this week.

Mnuchin continued talks with Pelosi and Schumer on Tuesday afternoon after speaking to GOP lawmakers — it must be an exhausting process for Steve, but everyday Americans won’t have any sympathy for this particular “devil”, that’s for sure.

“We’re going to try to reach an overall agreement, if we can get one, by the end of this week, so that legislation could then pass next week”, he said.

“We have to have an agreement. And we will have an agreement”, Pelosi told PBS.

Both sides have made concessions, Schumer remarked, although Mark Meadows insisted that the White House has given “far more” ground than Democrats.

Mitch McConnell indicated he’ll begrudgingly support whatever Mnuchin and Pelosi manage to cobble together. “I’m prepared to support [it] even if I have some problems with certain parts of it”, he told reporters Tuesday.

While Senate Republicans fret over the cost and analysts marvel at the scope of the global stimulus already delivered, it’s entirely possible (indeed, it’s likely) that in hindsight the new package (assuming one comes together) will be seen as insufficient. Consider the following useful trip down memory lane from Politico:

The last time Washington debated how much stimulus to inject into a moribund economy, the mantra inside the White House was: The more, the better. It was 2009, the nation was reeling from the mortgage meltdown and President Barack Obama’s top economic adviser, Lawrence Summers kept telling colleagues that worrying the government would spend too much money was like worrying he would lose too many pounds.

“There’s not much danger that I’ll become anorexic,” Summers quipped.

In other words, the risks of undershooting during a crisis far outstripped the risks of overshooting. Obama agreed to go big, and in his first month in office, he signed an unprecedented $800 billion economic recovery bill–twice as large as a public request by hundreds of liberal economists, four times as large as Obama’s own campaign plan.

In retrospect, most economists agree, more would have been better.

Obama’s Recovery Act helped end the Great Recession and launch a decadelong recovery, but today even his former aides believe that the recovery was weaker and slower than it should have been because the stimulus was insufficient. There’s a broad consensus in the economics profession that despite the administration’s anxieties about undershooting, Washington still undershot.

And now, in an even more severe crisis, it may be poised to undershoot again.

Summers spoke to Politico for the linked article. “Once again, big picture, the risks of doing too little far outweigh the risks of doing too much”, he said. “This time, the hole is even bigger than it was in 2009, but I’m not sure that lesson has been learned”.

While it’s understandable that market participants would spend their time fretting about the inflationary effects of trillions upon trillions in stimulus funded at (barely) arm’s length by central banks, when juxtaposed with the scope of the deflationary shock delivered by the virus, it’s entirely possible that enough will never be “enough”. That goes double when you consider how the changes that many expect to see with regard to consumer behavior play into deflationary themes tied to technology. And that’s to say nothing of what will surely be a temptation for corporate management teams to put more resources into automation once liability protections for employers expire (and that assumes the GOP manages to get those protections included in the bill in the first place).

It’s true that there are a number of inflationary aspects to the pandemic. And I’ve been over this debate in these pages ad nauseam. But at the end of the day, it’s difficult to escape the notion that the risks are skewed heavily towards deflation, especially when you consider the “zombie” dynamics that accompany heavy intervention in capital markets.

Commenting last week during an interview with The Hill, Stephanie Kelton — whose “The Deficit Myth” became a bestseller over the summer — summed things up pretty succinctly.

“The idea that we’re going to cut that significantly, now, while we’re still in crisis, is simply going to mean millions of Americans missing that rent payment, missing that mortgage payment, not being able to feed their children, not being able to stay current on their bills”, she said, referencing the idea of reducing the $600/week federal unemployment supplement to as little as $200, as the GOP plan envisions.

“And once people start missing payments and defaulting on credit card payments, then you have the capacity for this thing to spill over into other parts of the economy, into the financial system and then things can get even uglier than they already are”, Kelton added.

I imagine that’s one thing Kelton and her critics can agree on.

Coming full circle to gold, the irony is that in the current environment, it could just as easily rise further if stimulus talks were to break down. After all, that would entail bedlam on Main Street and Wall Street. And there’s no bedlam asset like bullion.

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