With Federal budget deficits now completely out of control – the last time I checked it was about $22 TRILLION – there is simply no hope of paying it back. Investors around the world understand this, but they have continued to purchase dollar-denominated securities. Why? Because the U.S. economy and its currency are still seen as safe havens, despite the budget deficit. The US, despite its recent insanity since Trump’s election, is still perceived as a stable culture rooted in freedom. Our Constitution and its system of “checks and balances” between the Executive, the Legislative, and the Judicial, is regarded as a rational and reasonable way (so far) to organize human activity.
In effect, the U.S. deficit is accepted globally as an aid in organizing the world economy. The US is allowed to carry huge deficits because our consumer market is still large enough to accept exports from everywhere in the world. Our balance-of-trade deficit has been necessary so that other countries can export here. We have been permitted to print fiat money to fund our debt so long as our economic activity remains strong, and financial markets are stable.
The world economy has become globalist, with much of the world’s supply chains originating in China.
All that has changed now with the coronavirus pandemic. Businesses and nations are realizing that to place manufacturing in one country can have devastating effects when that country is shut down. Rosemary Gibson, in her book China Rx, has stated that 85% of our pharmaceutical supplies come from China. We don’t make the active pharmaceutical ingredients that go into our antibiotics and other pharma products. Our industries have largely been handed over to the regime in Beijing. The US is now a service economy, with most of our workforce living paycheck to paycheck. That aint Trump’s fault though. If you want to blame someone, blame the Bushes and Obama – it has all happened during the past 15–20 years.
The U.S. Economy
Consider what was happening in the U.S. economy before the pandemic hit. We had pretty much full employment (3.5%) which traditionally should have produced a huge inflationary pressure as almost everyone was making money and spending it. Yet inflation was very low and interest rates were below 2%. The stock market was at an all-time high as people were investing; and this included foreign investment as well.
It is clear now that Trump and Powell, the Fed chairman, are applying Modern Monetary Theory to the economy. A $4T bomb by the Fed to support the capital markets, and another $2.3T relief bill. If the country is locked down for 60 days instead of 30, due to the pandemic, another relief bill will be needed.
MMT is an economic theory that says a government can use fiscal policy (spending and taxing) to achieve full employment, while at the same time creating new (fiat) money to fund government purchases. This is just what Powell, the Fed chairman, and Trump have done. In MMT, the public sector is the Treasury combined with the central bank. Essentially during this relief package and central bank assistance, the Fed has merged with the U.S. Treasury.
More important for progressives is the assertion that achieving full employment can be administered via a federally funded job guarantee. The idea is that when private sector jobs are plentiful, government spending on guaranteed jobs is lower, and vice versa. Moreover, MMT asserts that when the economy is below full employment, there is a "free lunch" to create (fiat) money to fund government expenditure to achieve full employment. In MMT unemployment is a burden; full employment is not. Creating money alone does not cause inflation; only spending it when the economy is at or above full employment can. So the goal of MMT is full employment. That’s why Trump was crowing about low unemployment rates before corona hit. This administration, along with the Fed, is applying the MMT concept.
MMT is a more worker-friendly economic philosophy. I never expected this during a Republican administration, frankly. Even a few hedge fund managers have proposed a ZERO tax rate for everyone making $200,000 or less! (At least until the end of 2020). Not even Bernie was willing to do that.
MMT is an economic philosophy whose time has come, mainly because a $22 trillion government deficit can never be repaid. My prediction is that the coronavirus will result in a complete reorganization of the world’s financial system and economy, to better suit a population that is rising in consciousness. After this is over, look for more cooperation and less irrational hating and competing in world markets.
You can read about MMT here:
Dr. Pavlina Tcherneva’s original paper describing MMT can be found here: