By Gary Alexander

March 31, 2020

The market makes no sense anymore – The Wall Street Journal proclaimed “a new bull market” last Thursday after the Dow rose 23% in three days after falling 38% in 40 days, so we may be beginning the shortest-ever bull market after suffering the shortest-ever bear market…after the longest-ever bull market!

Index Futures

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Politics and economics are equally confusing. Bernie Sanders and Elizabeth Warren are out of the race, but we’re spending trillions on emergency healthcare by adopting the deficit spending they proposed, using the tenets of Modern Monetary Theory (MMT), which Wikipedia calls “the practical uses of fiat currency in a public monopoly from the issuing authority, normally the government’s central bank.”

The shorthand version of this process is “printing money,” or “helicopter money,” although the mechanics are more complex. It usually involves issuing commercial paper, which we deposit as cash in the bank.

Wikipedia adds that, “MMT advocates argue that the government could use fiscal policy to achieve full employment, creating new money to fund government purchases.” MMT’s main tenets are that:

  1. Governments can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases.
  2. Governments cannot be forced to default on debt denominated in its own currency.
  3. Government is only limited in its money creation and purchases by inflation. (Source: Wikipedia)

Even former Fed Chair Alan Greenspan admitted, “The United States can pay any debt it has because we can always print money to do that, so there is zero probability of default.” And if short-term interest rates stay at zero forever, there will be no costs servicing the national debt. It sounds like a perfect solution, no?

Modern Monetary Theory Pictorial Image

Last week, Congress passed and the President signed into law a bill which authorized the creation of $2.2 trillion (the 0.2 is often forgotten, as if $200 billion is a rounding error) to alleviate the pain of businesses and persons in their first wave of forced joblessness and closed business activity in the coronavirus crisis.

That amount of money is equal to 10% of annual GDP or 10% of the public debt or 50% of the 2020 federal budget. That’s 36 days of GDP. It amounts to over $6,500 per American, or $26,000 for a family of four, and some say that it won’t be enough money, so we’ll need another stimulus package later on.

It could work out OK if the economy comes back like Gangbusters within a month or two, but consider that most families and businesses are also delaying tax payments, and those payments will be lower due to lower income, so the deficit could quickly balloon to a record $2 trillion or more this year and stay over $1 trillion next year and for the remainder of the decade, as fiat money becomes the expected norm.

The Wall Street Journal has gotten the ear of the President for promoting a re-opening of the economy in a limited way sometime in April, as early as March 20, the Journal penned this editorial:

“In a normal recession the U.S. loses about 5% of national output over the course of a year or so. In this case we may lose that much, or twice as much, in a month. The politicians in Washington are telling Americans, as they always do, that they are riding to the rescue by writing checks to individuals and offering loans to business. But there is no amount of money that can make up for losses of the magnitude we are facing if this extends for several more weeks.”

If all this – stimulus packages, virus threats, bailouts – sounds familiar, it is. It happened in 2009 too.

This Happened Before – But 2020 is Triple the Strength of the 2009 Bailout

Less than a month after President Barack Obama took the oath of office on January 20, 2009, he signed the $787 billion American Recovery and Reinvestment Act (ARRA) on February 17. Like the current bill, it was designed to save existing jobs and provide temporary relief to those most affected by the current crisis, of which his chief of staff Rahm Emmanuel famously said, “A crisis is a terrible thing to waste.”

That money was to be spent “quickly” on “shovel-ready projects,” leading to what Vice President Joe Biden labeled a “summer of recovery,” which never happened, as the unemployment rate continued to rise from 8% in February to over 10% in October. Tens of billions went to special interest groups.

Then, in April, swine flu (H1N1) entered America from Mexico. The CDC estimated that between April 2009 and April 2010 there were 60.8 million cases of H1N1 in the U.S. causing 274,304 hospitalizations and 12,469 deaths. In the middle of the year, there was also “Cash for Clunkers” and other stimulus plans.

In the beginning, 2009 jobless benefits were to expire after 26 weeks, but that was extended to 99 weeks and into 2013 in many cases, delivering $1+ trillion deficits each year (2009-12), with millions more on welfare, but we also got a “sugar high” in the stock market, just like we saw last week during the progress of the bailout bill through Congress. (Maybe Wall Street likes Modern Monetary Theory and fiat money!)

Understandiing MMT Image

Like 2009, you can bet that this first stimulus package won’t be the last one, but this time, the initial relief package is nearly three times bigger – $2.2 trillion vs. $787 billion. This one increases jobless benefits for all workers by $600 per week for the next four months. Even the liberal Economic Policy Institute says this would provide “100% replacement of wage income for the bottom half of the workforce” and some will earn more by not working than working, even while many delivery services are seeking new workers.

We’ll see how this fire hose of new money works out, but this single bill has multiplied the money supply by a magnitude never before seen. We will see the results of that act on the national debt in future years.

Enjoy (or tremble before) this new and audacious Real-World Experiment in Modern Monetary Theory.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Fed Added $1 Trillion in March Alone

Sector Spotlight by Jason Bodner
Sentiment Still Stinks, but a Bottom Has Formed

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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