Permanent distortion, p.17
Permanent Distortion, page 17
In addition, Congress has proven across generations that it is barely able to agree on what kind of infrastructure or building package is needed to modernize the country, let alone determine its size, scope, location, or even which projects deserve attention and which don’t.
In theory, if government money truly flows to the most productive forms of real economic and fiscal investment, MMT could work. But it is a theory that works best, and perhaps only, for major, developed governments and their respective economies. That’s because they do not have to worry about currency risks, devaluation, or considerable financial instability.
Ever since the 2008 financial crisis elevated the power of central banks, in the most highly developed economies that power often went on to supersede the power of the respective governments and even the most influential private banks. Without cheap money acting as a quick-drying plaster to fill in surface gaps and hide what’s behind them, financial markets’ recovery would have been less rapid. Without the supply and deployment of artificial liquidity, funding for real economic growth could have been more strategically placed, innovative, and equal. The valuation of the financial assets unleashed would at the very least have been based on true price discovery, or what’s called “fundamental” analysis. Instead, it reflected the turbo-boosted monetary stimulus, and market reaction to the cheap money bonanza 2.0 was fast and furious. As the first half of a turbulent 2020 came to an end, the Dow posted its best quarter since 1987. The S&P 500 index rose by more than 18% during the second quarter of 2020, showing its best percentage gain since the last quarter of 1998.18 The Nasdaq experienced its best single-quarter performance since 1999.
On the other side of the permanent distortion divide, as one CNN article noted, “Inequality in America was huge before the pandemic. The stock market is making it worse.”19 On Main Street, businesses from bars to concert venues to restaurants were forced to stop operations, reduce volume, or reroute their entire businesses. Domestically, many working families had lost wages, and in the healthcare, grocery, and service sectors many families had lost loved ones to the rampaging virus. The ace in the hole for Wall Street was knowing that it would reap the benefits of monetary aid come what may.
Throughout the world, stock market recoveries far outpaced economic ones. Developed-country and emerging-market indices jumped by 17% during the second quarter of 2020, according to MSCI’s All-World index.20 MSCI’s Asia-Pacific index rose by 15%. The MSCI EM index rose by 17.7%, indicating that emerging-market stocks had their best quarterly performance since September 2009.21 Those gains followed a 24% drop during the first quarter of 2020. The financial world was first to escape the storm, while dark clouds and devastation would not relent for those trying to stay afloat in the real economy.
There were some global bright spots in places where economies had not been shut down entirely or for as long as others. Taiwan’s industrial production, for instance, rose by 1.5% in May 2020 in relation to May 2019.22 This was a stronger economic showing than most other countries in Asia, on the back of tight COVID restrictions and border controls working to ensure that case counts remained low. A similar dynamic took place in Vietnam, which had recorded no COVID-19 deaths among its 96 million population by mid-June 2020. The nation’s economy expanded at a 2.9% growth rate for 2020, beating China’s 2.3% rate.23
Those two countries proved that loose monetary policy was not the only way to drive an economy back to life. Instead, it was an adherence to lockdowns followed by a quick removal of those restrictions as soon as it was safe to do so. Whatever the exact efficacy of using lockdowns to fight COVID-19, an opened economy was a better path to economic health than a multitrillion-dollar artificial money injection into the financial markets.24
Perpetual Economic and Financial Divergence
In 2015, Nobel laureate Joseph Stiglitz argued that “quantitative easing was yet another instance of failed trickledown economics—by giving more to the rich, the Fed hoped that everyone would benefit. But so far, these policies have enriched the few without returning the economy to full employment or broadly shared income growth.”25 His words were prophetic.
What was true in 2015 was even more apparent in the COVID world. The Fed bailed out the investor class and markets first and foremost. The agency deployed the same policies (on steroids) that had saved Wall Street over Main Street in the century’s first crisis. Central bankers perpetuated the idea that the financial markets and the economy were the same. They leveraged a financial bully pulpit and pitched the theory that to save people the Fed had to rescue Wall Street’s high-risk investments above all else. The benefits would trickle outward throughout the economy eventually.
The Fed—an organization established by elite bankers and led by unelected government officials who faced minimal accountability for their decisions—deployed experimental policies based on gung-ho self-confidence and a belief in “QE infinity,” which made losing in the world of big finance nearly impossible. No longer were large corporations and Wall Street banks simply “too big to fail”; they were “too big to lose.”
Though the coronavirus pandemic was not triggered by the banking system, as the 2008 financial crisis was, the Fed’s relentless effort to push up Wall Street during the pandemic meant that major investment banks stood poised to reap record revenues in their trading arms due to the frenzy of market activity.26
On June 22, 2020, former New York Fed president Bill Dudley wrote an op-ed for Bloomberg about the risks inherent to quantitative easing.27 “By reducing the supply of safe assets and increasing the deposits that the private sector must hold,” he said, “the Fed generates a demand by the private sector for more risky assets. The result is a rise in financial-asset valuations and an easing of financial conditions.”
What Dudley was implying was that QE had indeed spurred speculative behavior. The problem QE created was that money could exit just as fast as it had flowed in. At any sign of volatility in risky assets or riskier markets, such as emerging markets, the financial flow could reverse course.
No central bankers admitted they were contributing to market distortions, and they certainly didn’t change policy. They were one-note wonders. In an interview with Bloomberg in June 2020, Bank for International Settlements (BIS) general manager Agustín Carstens, a former leader of Mexico’s central bank, explained that central banks were acting on their mandates.28 He stressed that “there’s plenty of room” ahead for central banks to act proactively. He conceded that in asset markets, “prices are, shall we say, ‘misaligned.’”
When asked whether central banks actually help the real economy, not just the top 10%, Carstens replied, “Many of the monetary policy actions have worked for asset prices, which is part of the solution, but the final objective is to preserve jobs and working.… The emphasis is not to control artificially asset prices.”
Though he did not say it explicitly, Carstens was acknowledging that whatever their intent, central bank policies were more focused on financial markets than on the economy. Central bankers might not control asset prices or the artificially inflated bubbles, but their policies impacted them considerably.29 Central bankers were playing with fire, yet it was Main Street that would get burned.
By July 2020, the United States had seen a total of 4.5 million COVID cases and more than 150,000 lives had been lost due to the coronavirus.30 Spikes in various regions prompted governors in some of the more populous and economically critical states, such as Florida, Texas, and California, to reconsider variations of their reopening policies.31 The 32.9% contraction in the US economy during the second quarter of 2020 was the worst quarterly decline on record.32 It was amplified by business shutdowns, loss of jobs, and declines in consumer, local, and state government spending. Yet markets were soaring as the second half of the year began.33 As the US struggled to navigate the domestic and election-year hurdles that emerged with the pandemic, the rest of the world remained on edge.
The virus had effects beyond public health. Political isolationism was rising because of physical isolation. Diplomatic relations between the United States and China sank to their lowest point since their establishment in 1979, according to China’s foreign minister, Wang Li.34 A set of reciprocal consulate closures in the US and China, initiated by the Trump administration, increased existing tensions. After three and a half decades, the American flag was lowered over the consulate in Chengdu, China, in retaliation for a US order to close the Chinese consulate in Houston.35 The move followed months of pandemic-heated tit-for-tat responses by the superpowers.
As the pandemic continued, the chasm between the real economy and financial worlds was greater for emerging-market nations relative to developed countries. Brazil’s treasury secretary announced that Brazil’s economy could contract by 7% for 2020, a worse prediction than forecasts had initially feared.36 A new worry about rising COVID-19 outbreaks spread across the world. In India the number of COVID cases suddenly began growing at a faster rate than ever before, causing shortages of hospital beds and ventilators, as the virus spread through rural areas.37 Yet, with its economy staggering, India’s government decided to lift its seventy-six-day lockdown.38 Meanwhile, in Brasilia, Brazil, protesters staged one thousand crosses on the lawn in front of Congress as a tribute to COVID-19 victims, accompanied by a banner reading “Bolsonaro, stop denying!” While the coronavirus plagued Brazil’s economy and society, Brazil’s leaders remained focused on advocating for austerity measures.39 Leaders, aware that their governments were under pressure and their citizens were under threat, still obsessed about how they might squeeze out tax dollars and cut social programs at a time when so many could afford so little.
Budget cuts levied by local and federal government programs to recoup losses caused further damage to people’s financial stability at the most micro levels of their lives. Political leaders looked to solutions that would hurt the most vulnerable citizens—delaying public school funding, cutting billions of dollars in funding to state workers, slashing critical social services, reducing funds for housing programs, and raising taxes.40 It would take years for the poor to attempt a recovery.41
In the United States, California proved an unlikely petri dish for this great economic shift. California’s was the largest state economy in the country, equivalent to the fifth-biggest economy in the world.42 Before COVID-19, California had expected another multibillion-dollar surplus for 2020. It was approaching its tenth year of economic growth and boasted record low unemployment.
But like other states and regions, California faced extensive budget shortfalls due to depleted tax revenues. By late June 2020, California was running a deficit of $54.3 billion.43 Its state legislature began discussing austerity measures. Unfortunately, three months into the pandemic, more than 6.7 million Californians filed for unemployment benefits as businesses shut down and employees got sick.44 The move coincided with reports of waning business confidence sweeping the country.
Despite the economic contraction felt at the local, state, and small business levels, the stock markets remained resilient. The two men most responsible for that and for crafting the CARES Act package stood ready to explain how things were going after three months. Both Federal Reserve chair Jerome Powell and US treasury secretary Steve Mnuchin reported their observations to the US House Financial Services Committee on June 30, 2020.
In his opening remarks, Mnuchin emphasized the glass half full. He said that the US economy was “in a strong position to recover because the administration worked with Congress on a bipartisan basis to pass legislation and provide to markets in record time.”45
The liquidity Mnuchin touted had been inhaled by the markets, while ordinary workers remained gasping for breath. What Mnuchin didn’t point out was that other countries were responding somewhat differently.
While scores of American workers were struggling to put food on the table, for example, European workers were receiving a portion of their salaries on a regular basis. European governments provided a direct path to subsidize wages to mitigate the effects of rampant joblessness through the overall economy.46 Japanese QE mechanisms also had more direct objectives and were subject to judicial control. In contrast, in the United States, QE was administered without clear public supervision.
Fed chairman Powell’s glass was half full too. He claimed that the US economy had entered a new phase sooner than expected. However, he also admitted that the Fed was “keeping in mind that more than 20 million Americans have lost their jobs, and that the pain has not been equally spread.” He emphasized that the path forward for the economy remained “extraordinarily uncertain” and that it would depend on policy actions at all levels.47 When speaking about the eleven facilities the Fed had either established or resurrected from the 2008 financial crisis period to provide money to banks in return for their securities as collateral, he said the Fed would use them “forcefully, proactively and aggressively.”48 He stressed that “these are lending not spending powers.”49 Powell did not point out that while the Fed could create electronic money, it couldn’t control where the money flowing into banks’ books went afterward.
In practice, the Fed was buying corporate bonds from companies that either had previously borrowed from the capital markets or already had plenty of cash on hand during the pandemic. The Fed’s top holdings of corporate debt spanned well-known domestic and multinational companies, such as Toyota, Volkswagen, AT&T, Apple, Verizon, GE, Ford, Comcast, BMW, Microsoft, GM, and BP.50 The Fed was buying bonds not only of struggling companies hit by the pandemic but also of major American companies such as Visa, Coca-Cola, and Home Depot. That was despite the fact that, combined, those firms had also raised approximately $1 trillion in the bond market on the back of the Fed’s pandemic support—double the pace of debt growth the prior year.51 The Fed had used its power to subsidize firms directly and indirectly even though the firms had ample access to other avenues. How this was supposed to help Main Street was obscure. Perhaps just the comfort of knowing the Fed was “keeping them in mind” was supposed to uplift the spirits of all the unemployed Americans.
The Fed had a go-between to execute those corporate purchases. With $10 trillion worth of assets under its management and a roster full of former Fed officials, BlackRock became one of the most influential institutions in the world.52 About 47% of the Fed’s purchases were executed by BlackRock, which used that money to buy shares of BlackRock ETFs that held corporate bonds.53 The Fed bought $8.7 billion worth of bond ETFs that way.54 For its role, BlackRock got a fee of 2 cents per every $100 of bonds purchased, up to $20 billion, after which the fee was reduced.55 Noteworthy was the fact that Fed chairman Jerome Powell had around $25 million of his own wealth, according to Wall Street on Parade, invested in BlackRock ETFs in 2020.56 A majority of the rest of his wealth resided with Goldman Sachs. The entire episode underscored that playing the inside game was apparently fine if done at the highest levels of finance.
By August, there was a new tangle of economic closings amid rising COVID-19 threats around the world. In India, a population that was already predisposed to buy gold as a store of wealth rushed to buy gold when bank liquidity dried up.57 In South Africa, the hardest-hit country in Africa, the rising number of COVID cases threatened the very possibility of economic recovery.58 Brazil’s health situation was a disaster, but its economy was reopening regardless.59 New Zealand imposed precautionary lockdowns in a country with hardly any COVID cases, which darkened the economic outlook.60 But everywhere, markets continued to march upward even as virus uncertainty did.
The COVID-19 cases in the United States were setting records for the sharpest flattening followed by the most dramatic acceleration of the infection curve.61 Each increase instigated another round of state and city restrictions, which worked to further politicize the virus.62 The rising case count prompted the EU to extend its travel ban to countries strongly affected by COVID-19, including the United States and Brazil, even as it opened its borders to sixteen other nations, including China, Japan, South Korea, and Canada.63 COVID-19 drove a shift in power dynamics as travel restrictions increased the separation between countries with fewer cases and those with growing caseloads. This distance served to compound economic turbulence globally as it strained supply chains as well as reducing travel revenues, whether from leisure travel or container shipping.64
The dynamic unfolded across the planet.65 Because of pandemic-related shutdowns and restrictions, global trade numbers shrank dramatically. Per capita income was forecast to drop for the highest percentage of countries in the world since 1870.66 During the second quarter of 2020, the total amount of merchandise traded around the world saw its steepest quarterly drop on record, diving by 14.3%.67 Much of that contraction was due to the breakdown of global supply chains and the disruptions impacting the distribution of food and medical supplies. This issue emphasized how dependent and globally connected countries had become. While some restrictions, such as those on travel, could often be dealt with through videoconferencing, physical assets and transportation required procurement, production, and delivery of goods. Not only were supply chains stopped or stuck, but production was significantly reduced because goods couldn’t be moved. Demand dropped due to economic shutdowns as well. Leaders, governments, and think tanks began reconsidering how local and domestic supply chains might require more stimulus or need reconfiguring in order to avoid such problems in the future.68
By containing its COVID crisis to fewer deaths per capita than the United States, Europe, and Latin America, or so it reported, China resumed its economic recovery sooner than the US did.69 While the US population received mixed messages about safety measures and saw polarized media stories, China strove to appear stoic and unified.70 Seeing the criticism of President Trump’s response to the pandemic, China worked to expand its influence. In the process, though, China also began to overplay its hand on the global stage. Newfound skepticism about China’s heavy-handed diplomacy with the European Union was emerging from the G7.71 This included Beijing being characterized as “bullying” key trading partners such as Australia, with which a tariff war over beef and other products was raging.72 Other regional trade partners turned critical of China’s method of lending money in return for access to resources or infrastructure development projects.73
