by Gary Alexander

July 21, 2020

I’m beginning to hate the phrase “Perfect Storm,” since everyone uses it for nearly every tempest nearly every week, but this is the Year of Perfect Storms. As we careen toward the end of the Federal Fiscal Year on September 30 and Election Day November 3 – all amid Hurricane Season – we’re spending money like a sailor in port before the storm he knows may spell his last sailing into Davy Jones’ locker.

The U.S. federal deficit ballooned to $864 billion in June alone – more than the entire ANNUAL fiscal 2019 budget, bringing the nine-month total to $2.74 trillion, and the full year estimate to $4+ trillion, three times the previous worst in history. Congress has authorized $3.3 trillion in new spending since March, and President Trump has instructed the IRS to delay 2019 tax filings until July 15, even though most Americans are working or are receiving relief and have time to file a tax return or an extension.

Monthly Cumulative Deficits Chart

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

It’s as if they don’t want our money and don’t care about any deficits – and that’s almost true, because a new book tells them they don’t. “The Deficit Myth” by Stephanie Kelton uses Modern Monetary Theory (MMT) as a platform to calm today’s financial fears: “Uncle Sam doesn’t need dollars. When he collects taxes from us, he’s just subtracting away some of our dollars. He doesn’t actually get any dollars.” Hmm!

In her opening pages, she assures us that “the idea that taxes pay for what the government spends is pure fantasy,” since “there are no constraints on the financial budget” (emphasis hers). She criticized Obama for being a “conservative” in 2009 for only going for a $787 billion stimulus package. What the nation needed, she implies, was a bigger crisis. Well, here’s one! Writing of the COVID scare, she says, “In the months ahead, the most fiscally responsible way to manage the crisis is with higher deficit spending.”

The Deficit Myth and Modern Monetary Theory Image

Dr. Stephanie Kelton is a professor of economics who has served on the Senate Budget Committee, and her recent book is very readable, serving more like a populist manifesto than a boring textbook. It should gain a lot of traction. MMT basically argues that sovereign governments can and should run large deficits, as long as inflation remains subdued, after which they may raise taxes on us to help squelch inflation.

One fetching argument in MMT’s favor is that every surplus or deficit entry has an equal and offsetting entry in the accountant’s ledger, so that every dollar of deficit spending becomes an asset somewhere else in the economy – in one of three buckets: the public sector, private sector, or foreign sector. “Fiscal surpluses,” she says, “suck money out of the [private] economy. Fiscal deficits do the opposite” (p. 96). By printing money and creating deficits, Uncle Sam creates an equivalent asset in someone’s account.

She, of course, favors more social spending along the lines of the Green New Deal, wealth redistribution, and universal health care, not more military spending or trade protectionism, so it boils down to how these deficit dollars are spent – i.e., whose side you’re on. (What if the “wrong” Party gains power?!)

Another BIG problem is the dreaded inflation – the primary bogeyman of all fiat money schemes. In 2020, we face a deflationary threat due to COVID fears, closed businesses, high unemployment, and other recessionary indicators, but inflation is likely to return next year, when we fully open up. What then? Inflation has risen after every historic war or massive infusion of new fiat (unbacked paper) money.

What if interest rates rise, amid inflation, at a time when the federal debt is $30 trillion, not $20 trillion, so the annual debt service is $1.4 trillion (4% of $30 trillion), not $200 billion (1% of $20 trillion)? Combine that with raised taxes, and that’s a proven formula for another, deeper recession in our near future.

Last year, before COVID, the CBO projected deficits of over $1 trillion per year every year from 2020 to 2030, but the Virus has now pushed those estimates much higher, to $4,275 billion in 2020 and $2,194 in FY 2021. We may suffer from the aftereffects of COVID into 2030 with a deficit of $2.6 trillion in 2030.

2020 Budget Deficit Bar Chart

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

On Monday, March 23, the Federal Reserve single-handedly turned the market around by seemingly surrendering to the advocates of MMT, by announcing QE4Ever, an open-ended commitment to buy Treasuries and mortgage-backed securities. That same week, President Trump signed the $2.2 trillion CARES Act, which provided $450 billion for the Fed to support $4 trillion in loans to Main Street.

Then, in his April 29 press conference, Fed chair Powell said, “[T]his is the time to use the great fiscal power of the United States … to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible.” He implied that the Fed would do everything possible to enable more fiscal stimulus, and Congress is doing the same.

This sounds like a victory for MMT. It should provide short-term relief. We’ll see about the morning after.

One More Key to Economic Growth: “Don’t Fence Me In…”

“Oh, Give Me Land Lots of Land Under Starry Skies Above
Don’t Fence Me In.”

– Cole Porter

I live on a remote island. Good planning, it turns out.

The latest jobs report said that we added 4.8 million jobs in June, the best monthly jobs number since the government started keeping records in 1939. The unemployment rate was still high, 11.1%, in June, but that was better than the 13.3% jobless rate in May. We’re on our way back down to single digits, but a closer look at the state-by-state numbers comes out in the middle of each month – and it is eye opening.

The July 17th state-by-state jobs report from the Bureau of Labor Statistics found that the states with the lowest employment are mostly “red” states in the middle of the country. In May, they were Nebraska (5.2%), Utah (8.5%), and Wyoming (8.8%). In May, states with the highest jobless rates were Nevada (25.3%), Hawaii (22.6%), and Michigan (21.2%), but that changed with a partial re-opening in June:

The Four States with the Highest and Lowest Unemployment Rates Table

“Big Sky” states that never locked down – like Montana, Idaho, and Wyoming – had the lowest COVID death rates as a share of population, while states with the strictest lockdown policies, like New York, New Jersey, Connecticut, Rhode Island, and Michigan, had death rates three to eight times the national average.

The lesson in the low jobless and COVID infection rates in June is: Go Northwest, Old Men (& Women)!

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 Bull Market in U.S. Bonds is Dead

Sector Spotlight by Jason Bodner
The Biggest Sector of Them All

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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