Trickle-Up Economics

Michael Roberts says nothing but the truth. Comparing our current pandemic-recession with that of 2009, he writes,

But so far, [unlike in 2009--ed] there has not been a ‘financial shock’.  On the contrary, the stock and bond markets of the major countries are at record highs.  The reason is clear.  The response of the key national monetary institutions and governments was to inject trillions of money/credit into their economies to bolster up the banks, major companies and smaller ones; as well as pay checks for millions of unemployed and/or laid off workers.  The size of this ‘largesse’, financed by the ‘printing’ of money by central banks, is unprecedented in the history of modern capitalism.

With massive money-printing one would expect inflation, perhaps even hyperinflation. And there has been considerable food inflation, likely due to a severe food shortage in China.

Cost of food in the United States increased 3.70 percent in November of 2020 over the same month in the previous year. source: U.S. Bureau of Labor Statistics (Source)

On the other hand, energy prices have declined sharply, and other prices have trended down. The net result is inflation for 2020 is near a record low--despite the Fed's desire to hit a 2.0% inflation rate.

(Source)

So what happened? All those trillions of dollars in stimulus and bail-outs had to go somewhere! They obviously didn't get spent. Some of the money is sitting uselessly in the Fed's vaults, and much more of it is tied up in assets. As Mr. Roberts points out, there's no problem with liquidity--we're drowning in it.

In short, while the quantity of money has increased dramatically, the velocity of money (the rate at which money changes hands) went through the floor.

(Source)

Still, it's all a little weird. Lots of money has been printed, but it's all been "sterilized", that is somehow taken out of circulation. But here's the catch: many people were forced out of the labor force in March, 2020, as shown below. While there has been some recovery, as of last month there were nearly 10 million fewer employed people than there were a year ago. That inevitably means that fewer goods and services are being produced today than were produced in 2019.

(Find more statistics at Statista)

It's easy to identify the missing product: restaurant service has been severely curtailed if not shut down entirely, airlines are flying a small fraction of last year's customers, hotels are empty or closed, theaters have gone dark. It's now very difficult to spend money on any of those items.

So not only is there way more money being printed, but there is less stuff to spend it on than we used to have. If this isn't a recipe for massive inflation, then what is? But all we've got is crickets.

There are three kinds of inflation. One measures the cost of consumer items, often reported as the Consumer Price Index (CPI), shown above. Despite all the liquidity, consumer prices ain't budging. Why not? Likely because automation and globalization have made manufactures cheaper. As I believe Raoul Pal put it, a Domino's Pizza made by robots isn't going to cost more. Or, another example, today's cars contain fewer parts put together by fewer workers built from globalized supply chains. There's no way cars are going up in price (unless they also go up in quality, e.g., from an econobox to an SUV).

The second kind of inflation is commodity inflation. I refer here to the industrial sort, not the scarce stuff such as gold. And at least some commodity prices are going up! I've already mentioned the price of food. Copper prices (often referred to as King Copper, since it's often indicative of the health of the industrial economy) are also up dramatically.

Copper price ($/lb), 2019-20

Industrial metal prices have gone up this year, though not as much as copper.

(Source)

So that's a partial solution to our problem--there is inflation in commodities--certainly in food and industrial metals. So Mr. Pal's "Domino's Pizza" example isn't entirely apt--while the assembly and delivery of the pizza now costs less, the raw materials surely cost more today than they did a year ago.

The third kind of inflation is that of scarce commodities. These are items they're not making any more of, or at least not a whole lot more. Gold is the premier example--gold mines add only 2% annually to the existing supply, and the price has gone up nearly 22% in 2020. Silver has done even better, rising 37% so far this year.

The stock market is also a scarce commodity.

Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes.

The number of stocks available is about half of what one could buy in 1997. So needless to say, the price of shares gets bid up, and all the more so when the Fed is printing money. The S&P 500 is up 65% from its low last March, despite the fact that corporate earnings are expected are expected to decline by nearly 14% in 2020. People are buying stocks because they have no place else to put their money.

All kinds of scarce commodities are getting more expensive: real estate (esp. luxury), fancy/antique cars, famous art, one-of-a-kind baseball cards, and indeed, collectables of all kinds. The most famous scare commodity today is bitcoin, which nearly tripled in price in 2020.

I'll suggest that inflation in scarce commodities has been dramatic, and is where most of the excess money is flowing. This is great for those households with investable assets, i.e., the those in the top 10% of the wealth distribution. It doesn't really help anybody else.

In light of this, what are the appropriate goals of fiscal/monetary policy?

First and most important, those ten million unemployed people need to get back to work. This is not just for their own benefit, but if we can't increase production then the economy has to shrink--no amount of money-printing can change that outcome. This will be bad not just for the unemployed, but for everybody. So getting them back to work in productive jobs (i.e., not government-funded, make-work jobs) is crucial.

Second, financial and (most) corporate accounts are liquid. Accordingly, lending money to money center banks is not helpful, and neither is lending money to most corporations.

Third, many institutions are not illiquid, but rather insolvent. This means that they're not just short on cash, but instead their entire business model is broken. Indeed, what we face in this country is not a liquidity crisis, but rather an insolvency crisis. Insolvent organizations must be allowed to go bankrupt, however painful that is in the short term.

For example, the airlines are likely insolvent. Their business model--flying business people around from meeting to meeting--has been permanently disrupted by Zoom software. So at least one or more of the big three airlines probably has to go out of business. Neither the Fed nor Congress should bail them out.

Likewise, the states of Illinois and New Jersey (among others) are bankrupt. They need to fail--i.e., default on their obligations. The bondholders should take a big haircut, along with other state creditors such as pensioners (for whom an expansion of the welfare state will likely be necessary). Once the debts are wiped clean (bankruptcy does that) then the states can be reorganized along fiscally responsible lines.

Politically and legally, state bankruptcies will be really hard to pull off. But under no circumstances should they be bailed out.

Finally, it is my hope that the ten million unemployed are not insolvent, but merely illiquid. In other words, I'm suggesting that they can all be reemployed over the next year, and that there will be no increase long term unemployment. They need a bridge loan--aka bailout--to tide them over in the meantime. This means a longer extension of unemployment benefits, albeit at a level that doesn't keep them from seeking employment.

Think of it this way. Because of the bailout, our friendly waitress can pay her rent. Which means the landlord can pay his mortgage. Which means the bank can pay its depositors who want to withdraw money. Which means the financial system remains both liquid and solvent. Eventually the waitress--because she's solvent--will be reemployed productively, making us all richer.

It's called trickle-up economics.

So beyond extended unemployment benefits (and something comparable for small businesses), I'm against any other bailouts. Nothing for the banks. Nothing for the corporations. Nothing for the bondholders. Nothing for the corruptocrats running states like Illinois. These bailouts--unlike that awarded the waitress--will do nothing but inflate asset prices and make bitcoin investors rich.

Further Reading:

• Austerity Comes to Campus
• Trotskyists on the Economy
• Let Them Eat Little Bits of Green Paper