tl;dr: The last few months of Federal Reserve monetary stimulus exacerbated the problem. Big time.

We’re more than 5 months post-Covid now and have had a running faucet of money creation by the Federal Reserve.

The result?

10% of Americans own 84% of all of the stock in the market. And just 5 companies make up 20% of the total value of the market.

In other words, we took a bad situation when it came to wealth and income inequality and made it orders of magnitude worse.

Deficits and Inflation

My friend, David, just finished reading Stephanie Kelton’s book, The Deficit Myth, which is the leading argument for Modern Monetary Theory (MMT).

David summarizes:

“the sign of problematic fiscal policy isn’t what happens to the deficit but what happens to inflation. In other words if the government is pumping billions (or trillions) into the economy and running huge deficits but inflation is mild then, according to MMT, no cause for worry.”

I guess the question is: what constitutes “mild inflation?”

• If you look at your grocery bills today vs. last year, you have seen some inflation.
• Housing prices, in many places, are inflating (though I suppose you could argue that they are deflating elsewhere).
• Stock prices, at least for the “big 5” are totally inflating.
• We’ve seen child care cost explode over the last 10 years (can’t find source now, but have it).
• And the Fed has stated that it is “relaxing” its inflation targets.

So, how will we know it’s mild? And if we don’t know if it’s mild, how will we know if it’s hot?

Spend or….Spend

The challenge, at least from a policy perspective, is that I’m not really sure what the alternative is.

The Fed has to keep interest rates low and money cheap so that the “market” can get investors into companies, even if their profits aren’t there (e.g. Hertz).

In theory, that gives the companies the working capital they need to hire workers and invest in production.

Of course, with the pandemic being what it is, for many that’s not an option, since there’s no “real” economy taking place.

So the jobs are not going to get created at the rate they need to to provide income for people to buy food.

And, I would guess, many of the people who are unemployed right now are not necessarily a great fit to work in a white collar job at Amazon or Microsoft.

Queue government stimulus programs, funded by deficits and debt, to hand out direct payments to citizens.

And the cycle continues.

How does it play out?

As my dad says, “the monthly checks are to prevent food riots.” He’s right.

The question is: how long does that policy work? And by the time the pandemic is “over” (i.e. vaccine), how transformed will the economy be?

Some non-zero percentage of people are NOT going back to their offices, which means lunchtime delis and coffeeshops will suffer, as will parking attendants.

And some non-zero percentage of people are NOT going back to stores/restaurants/movie theaters…all of those jobs are gone.

In a Schumpeter-like “creative destruction,” this is how it works, but the destruction that he spoke of was driven by innovation.

Now, it’s driven by unabated money creation.

David says “MMT isn’t as crazy as it sounds” and he might be right. There may be a way that it does work.

I’m not so sure only because I can’t think of any example in the history of the world where a government printed its own currency in unlimited amounts and was able to maintain supremacy.

America is different in many ways. Perhaps this is one of them.

And here’s the kicker…