Totally Inexcusable, Wholly Predictable

“Let me be clear: Things are going to get worse before they get better,” Joe Biden said Thursday afternoon, in the course of outlining a revamped strategy for tackling America’s COVID-19 epidemic.

He reiterated a series of statistics that are all too familiar to those who’ve kept themselves apprised of the pandemic’s evolution. The US accounts for a disproportionate share of global virus deaths, a fact that’s totally inexcusable and wholly predictable all at once.

Inexcusable because the US theoretically has unlimited resources. When you issue the world’s reserve currency and virtually every other advanced economy on the planet is borrowing, spending, and engaged in various manifestations of fiscal and monetary easing, there’s no plausible excuse for not allocating the necessary resources to protect public health.

Of course, viewed through a Modern Monetary Theory lens, this debate makes no sense in the first place. Output gaps and labor market slack are likely to be a fixture of the economy for the foreseeable future, inflation is low, and there’s plenty of crucial work that needs doing. If you forget about the deficit and stop thinking of the national debt as “debt,” the idea of holding back in the face of a once-in-a-generation health crisis is madness. Here’s Stephanie Kelton with the short version:

How they report it. How I'd report it. pic.twitter.com/m5gFYIsDJ3

— Stephanie Kelton (@StephanieKelton) January 19, 2021

My point in citing what’s going on in other advanced economies (as I did above) is simply to say that you don’t have to view the world through an MMT lens to understand there’s ample scope for stimulus. Rates are zero (or below) across the developed world, and every advanced economy is similarly beset when it comes to both the virus and the “worsening” of public finances.

The notion that a world united in red ink, government debt, and ZIRP, is going to suddenly turn its back on the US out of disgust for a lack of budgetary rigor is just about the silliest contention imaginable.

Yes, bearish dollar bets are all the rage right now and the greenback is at a two-year low. But remember, a weaker dollar is generally a good thing on all manner of fronts.

People are fond of waxing hysterical about dollar weakness presaging a currency collapse, but that’s a straw man. If the dollar were to truly “collapse,” where that means it became worthless, we’ll all have bigger problems than exchange rates and our P/L. In the absence of that, the real danger, as often evidenced during panics, is sudden bouts of dollar strength accompanied by higher US real yields. That tightens financial conditions, throws sand in the gears of global trade and commerce, and, in acute cases, can tip the system into a self-feeding, dollar-funding crunch. That’s what we saw in March of 2020, for example.

The figure (above) is as simple as charts get. But it tells an important story. Find me an asset that performed well in March when the dollar and US real yields were surging. You’ll have a difficult time.

The point is that there’s no excuse for the US not to spend on stimulus. It’s totally inexcusable, and you needn’t be an MMT adherent to understand as much.

Note above that I also called America’s unfortunate predicament vis-à-vis the virus “wholly predictable.” Over the past — I don’t know, let’s call it five years, although it’s probably more like a decade — Americans have demonstrated a disconcerting propensity to couch everything in terms of “liberty.”

I’ve been over this point before.

It’s not a new phenomenon, but it turned deadly during the pandemic, when measures needed to curb the spread of the virus were characterized by opportunistic politicians and pundits as an infringement of “rights” and an affront to the kinds of “liberty” the Founders fought for. Never mind that most Americans couldn’t list any of the Founders other than maybe George Washington and Thomas Jefferson, and couldn’t name a single Libertarian thinker if their lives depended on it.

Read more:

“The Patients Are Sick”: CNBC’s Dangerous Cosplay

Vaccine Push Faces Test In America, Where “Freedom” Is “The Gateway Drug To Pseudoscience”

Between that kind of pernicious tendency to false equivalence, the worsening plague of conspiracy theories, and gross federal mismanagement under the previous administration, it’s hardly surprising that America is where it is when it comes to the virus.

Supposedly, the country is turning the page. In addition to Biden’s remarks Thursday and his plans to streamline and accelerate the top-down response, Anthony Fauci held a press briefing where he took questions and elaborated at length. New cases, he said, may be plateauing.

Most people will be vaccinated by the middle of the year and so far, the vaccines still look effective against new variants, Fauci added. He also promised that this White House will be “completely open, transparent, and honest.” (No more bleach injections.)

The media, still shell-shocked from the Trump era, will probably need to get used to snappy rejoinders and witty punchlines again. On Thursday, a reporter asked Biden if his goal of 100 million vaccinations in his first 100 days in office is “enough” to contain the surge. Biden laughed. “When I announced it, you all said it’s not possible,” he reminded the press. “Come on, give me a break, man. It’s a good start, 100 million.”

It is a good start. That particular reporters’ suggestion that it might be insufficient notwithstanding, the consensus is still that 100 million in 100 days is optimistic. So if Biden manages to get it done, that’ll be quite the feat, whether it’s enough to end the epidemic in the US or not.

In any case, US equities closed little changed on Thursday. Tech was higher, and Treasurys bear steepened, mostly as a byproduct of losses in EGBs, which appeared not to like the notion that the ECB may not use the full PEPP envelope. The US 10-year hit 1.12%. 10-year breakevens rose above 2.16% at one juncture.

“The back end of the Treasury market sold off on Thursday in a bout of price action very consistent with the ‘it’ trade of the year; i.e. reflation or bust,” BMO’s Ian Lyngen and Ben Jeffery said Thursday afternoon.

“We’re cautious against oversimplifying the move as a return to the trend, particularly given the sharp rejection of 10-year yields close to 1.20% and the post-refunding outperformance of duration,” they added, referencing last week’s action, when bonds easily digested supply. “We remain solidly of the mind that 1.0% 10s will be reached before 1.25% and we have proximity on our side at this point.” As ever, their commentary is extraordinarily incisive considering the frequency with which they write.

The bottom line (and regular readers have heard this a thousand times if they’ve heard it once) is that it’ll continue to be a tug of war between the “here and now” reality of the virus and the associated economic impact of containment protocols and the promise of better days at some indeterminate point in the future.

Fauci on Thursday said it was “liberating” that science is finally getting to “speak.”