Millions of US individuals and families are receiving their federal gifts, in the form of $1,400 ‘stimulus’ checks ($2,800 for married and joint tax-filers) thanks to the passage into law of the American Rescue Plan Act of 2021. If they are a family of four and have two qualifying dependents they could be getting $5,600. These ‘Biden bonuses’ will go to anyone who earns less than $75,000 (around £54,000) a year; in 2019 that was about 53% of Americans.
Can the US afford to give away $1.9 trillion? An absurd question – the answer is clearly both yes and no. It can because the government controls the printing presses and can obviously just churn out more dollar notes. It probably shouldn’t because the US national debt is now more than $28 trillion, with a per citizen debt of some $85,000; the federal debt-to-GDP ratio is now almost 130% – in 1960 it was some 53%. The US spends about $365 billion a year on interest payments on this debt; in 10 years that interest payment will have doubled at least.
The US government has been hyperactive in giving away money in the past year. In total there have been five stimulus-and-relief packages since the pandemic began to make itself felt in March 2020. This latest, called the American Rescue Plan Act, 2021, which will distribute $1.9 trillion in a confusing multitude of ways, follows the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020, which gave $2.2 trillion to businesses, states, municipalities and individuals. The Consolidated Appropriations Act, 2021 (all 5,593 pages of it, the longest Bill ever passed by Congress) gave out $2.3 trillion. Altogether the largesse has been staggering – about $8.5 trillion.
This is a mind-boggling sum. Some are worried that as much as $30 billion will find its way into the US stock markets, pushing asset-price inflation even higher. American day-traders playing the stock markets could put almost $3 billion into equities when they receive their latest cheques.
Modern Monetary Theory
What is the point of doing this ‘stimulus’? Is it to raise the poor out of their poverty? Or to kick-start economic growth? Or both?
In the US, anyone who has an income of $13,011 a year is defined as living in poverty. Total welfare costs have risen from $722 per person in poverty in 1964 to $22,740 per person in 2019. Yet despite the increase in spending, the poverty level ‘status’ has remained fairly constant at between 11% -15% of the population.
It would be churlish to argue that those who are truly poor should not be helped by the state, but living in ‘poverty status’ – which is about 12% of Americans – is very different from the number actually living in poverty, which one source puts at about 3%.
Proponents of Modern Monetary Theory (MMT), who now seem to be in the driving seat of governments and even international institutions, argue that such state largesse doesn’t matter, and especially doesn’t matter at a time of crisis such as in the Covid-19 global pandemic.
MMT argues that governments can spend as much as they like without worrying about paying for it with higher taxes or increased borrowing – they can pay using new money created by their central bank. The only limit is if inflation starts to rise; in which case the solution is to increase taxation and raise interest rates. But those actions would hamper economic growth – hence the dilemma facing the US federal government, and why it is currently taking a relaxed view about the prospects of inflation.
Bubbles getting bigger
Signs of economic and financial bubbles now surround us. In the US, daily stock trading volumes – which averaged 10.9 billion in 2020, more than three billion up year-on-year – are averaging 14.7 billion so far this year. The total value of SPAC (special purpose acquisition companies) deals rose by 400% between 2019 and 2020. Real estate prices are rapidly rising outside of major cities. While many low-end service workers have lost their jobs, higher-paying professional jobs were unaffected and even prospered. Low-skilled jobs such as warehousing, grocery stores, and delivery services have boomed.
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000… this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios”. So said Jeremy Grantham, co-founder of GMO asset management, at the start of 2021.
It’s clear that much of the ‘stimulus’ money is going into speculative fervour. A good example is the rise of Bitcoin, which has hit a new record of $60,000. Governments think that giving away money encourages people to buy stuff and get the wider economy moving again; but vast sums have been ploughed into financial assets, or legitimised gambling. This does not drive real economic production, the production of goods and services actually serving a human purpose.
The mission of the US Federal Reserve is to ensure maximum employment and stable prices. With 10 million jobs still lacking from where we were in February 2020, this latest US ‘stimulus’ may not be the last. ‘Stable prices’ however may fall by the wayside.
No-one can tell when or how this bubble will pop. No-one can tell how it will affect the overall economy. No one can tell the future for fiat money (although if the past is any guide the purchasing power of fiat money has only one direction – down). The uncertainty is profound. Of course, at Glint, we understand that the value of gold against fiat currencies doesn’t always increase and right now we are experiencing a dip, but despite the fall in the gold price by some 15% since its peak last August, we believe that gold remains compelling. Twenty years ago, gold traded at around $275 an ounce; even at today’s lower-than-peak price gold has risen by more than 500% over those 20 years.