According to Mark Warner, the US senior Democratic Senator for Virginia and one of the politicians pushing hard for new legislation to provide another trillion dollar stimulus to the US economy, it would be “stupidity on steroids if the Congress doesn’t act” to pass the legislation. The president-elect, Joe Biden, is backing this proposed new stimulus, with the twist that he wants to include some ‘helicopter money’ (money dropped from above) in the form of further cheques (checks) for $1,200. The actual figure under consideration is $908 billion but a billion here and a billion there counts for little these days. One can see why Biden wants this ‘free’ money handed out – some 10 million more Americans are out of work than compared with February. Almost 37% of those have not worked in half a year or longer; Christmas will be tight this year in many US households. The US unemployment rate is about 8%, 2% higher than the average over the past 30 years.
Biden is due to enter the White House in January and – understandably – doesn’t want to start his term in office with a limping economy. But the “stupidity on steroids” cuts two ways – the more borrowed or newly created money put into the monetary system the bigger the longer-term problem of the debt mountain. By the time you read this the US national debt will have reached $27.5 trillion, about $83,000 per citizen.
Keep taking the Valium
Rather than steroids the preferred drug of the moment seems to be Valium. Central bankers keep injecting new money in the hope (vain, it must be said) of keeping their economies from heading off a precipice. In Japan, the government has just announced a fresh stimulus package equivalent to about $708 billion, which – if approved by the cabinet – would bring the combined total of Covid-19 stimulus to some $3 trillion, about two-thirds of Japan’s economy. In the Eurozone government debt has rocketed as a result of actions taken to compensate for the collapse in economic activity following Covid-19 lockdowns. The Eurozone’s debt-to-GDP (gross domestic product) ratios have increased from about 66% in 2007 to more than 100% this year. Italy’s government debt will go up from about 135% of GDP last year to around 160% in 2021. The European Union’s fiscal rule which required member state governments to keep deficits below 3% of GDP and overall debt below 60% of GDP was tossed aside earlier this year.
It’s perhaps no surprise therefore that in the portals of the European Central Bank (ECB) and no doubt others too, that talk of debt relief on sovereign (government-issued) bonds is now being heard. We are approaching financial fantasy-land.
Who will pay the debts?
Fiscal discipline – keeping a balance of revenue and spending – is something which good parents try to instil in their offspring. Fiscal discipline was given no better definition than by Mr Micawber in Charles Dicken’s David Copperfield: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”.
Two authors published in 2007 under the aegis of the International Monetary Fund (IMF) a book on fiscal discipline in which they (correctly) wrote: “Lack of fiscal discipline generally stems from the injudicious use of policy discretion… discretion can be misused, resulting in persistent deficits and procyclical policies, rising debt levels, and, over time, a loss in policy credibility”.
It may be the case that governments in 2020 had no choice but to throw out all previous efforts at balancing the books, but they are definitely now headed for Mr Micawber’s state of “misery”. Most governments have maintained a precarious stability by exercising their sovereign powers to issue sovereign debt in the form of bonds – and bond holders (fellow governments and private sector creditors) have shown remarkable appetite for these bonds, even at low-to-zero interest rates, on the basis that governments normally repay their debts. No doubt these long-dated bonds will be rolled over, extended far into the future, thus making questions about how and if they will be repaid something for future generations to tackle.
For now we can enjoy this fiscal fantasy, where levels of government debt can – it appears – just go up with little care about tomorrow. The danger is, as the IMF authors identified, a loss in policy credibility, which is just a polite euphemism for bond-holders losing patience and demanding higher rates of interest. It’s difficult to see this happening at the moment, as central banks are keeping markets well supplied with credit.
But if interest rates rise governments will be faced with uncomfortable choices, such as seeking debt forgiveness or debt restructuring (and the lengthy wrangles over negotiating Argentina’s foreign debts show how difficult that is); or pushing for inflation to reduce the cost of the overall debt levels.
In this situation of fiscal uncertainty – a kind of money no-man’s land – where the value of fiat currency threatens to be undermined by such huge debts, the wise decision is to hold on to physical assets, not least of which is gold, which is beyond any government’s credibility – lost or otherwise. One of the easiest ways for people of all types – the wealthy and the not-so-wealthy – to access gold is via your Glint account.