In the depths of the 1930’s Great Depression, British economist John Maynard Keynes came into vogue espousing the heavy hand of Government to counter consumption contractions with massive deficit spending. While WWII had more to do with our eventual exit from the deflationary 1930’s catastrophe than Keynes’ deficit spending, the winds of worry shifted to inflation in the 1970’s when the US moved the world off of the checks and balances of the Gold Standard. In the free floating currency shock of the 70’s, Nobel winner Milton Friedman dominated the scene with his insightful analysis of Money Supply and Velocity to adjust aggregate demand and consumer prices. Keynes and Friedman had their own aggressive approaches to resolving the decade long crises of their times, but they seemed myopic regarding demographics, unique shocks of beggar thy neighbor trade wars and fiat currency systems embraced in those decades. From the late 70’s until 2008 our policy was an amalgamation of Adam Smith, Keynes and Friedman using deficit spending and interest rate management to keep capitalism in balance with inflation. The controversial but inevitable transition to Modern Monetary Theory (MMT) has been tacitly adopted since 2008 as a last ditch effort to stave off another deflationary Depression during the Mortgage meltdown in the Great Recession. MMT essentially ties Monetary and Fiscal policy tightly together to print whatever digital currency is required out of thin air to lower interest rates and transfer consumption money to the masses until normalized growth, unemployment and income goals are attained. The MMT story is still being written as we move from the Financial Bubble recovery decade since 2008 to the Covid comeback of the 2020’s. The greatest worry is that ever more money supply growth and deficits will be required with each ensuing Greater Recession and will eventually lead to uncontrollable asset bubbles that create a secular crisis of confidence in Government currency.
The pattern of the past 5 decades with free floating fiat currencies has been that ever greater Macro stimulation from our quasi independent Central bank and Federal Government is required with each decennial crisis. In the 2008 Mortgage Bubble meltdown it seemed Global Governments and their Central Bank partners threw everything including the kitchen sink at the economy to prevent an intractable panic. Yet, as we can see below, the US and other countries have used MMT to attack the Government mandated pandemic panic lockdown with far more stimulus and liquidity than in 2008.
While the nominal debt creation coming out of each economic Recession is multiples above the previous panic, the percentage expansion of money and debt is about the same. The 20 to 30% growth rates in our debt coming out of major downturns appear to be the norm. Total debt was 60% of our annual economic output (GDP) in the 1990’s and peaked near 100% this past decade. However, in just the past year during a single quarter Federal debt has spiked to 130% of GDP in an effort to counter a deflationary economic implosion. Now that the Central Bank and our Fiscal leaders have been battle tested by the 2008 and 2020 panics, investors can be assured that overwhelming shock and awe tactics will be used as soon as an economic panic can be identified as in March of 2020. The Fed and Government no longer care about debt or inflation when the economy is hobbled. The unique situation in dealing with a Government mandated partial closure of the economy is that we can be 100% certain that the Fed will continue asset purchases to suppress short term rates and fuel investor buying at least until the economy is fully open and small businesses and the leisure travel are in clear recovery mode. Thus, despite the excessive stock market speculation today, modest corrections can continue to be purchased with confidence until at least the middle of Q2 when stimulus fever will be running out of steam. An April – May peak and May – June low may prove to be the deepest correction of this young Bull market as investors begin to realize the Fiscal budget stimulus measures and Fed liquidity injections are in their final innings as post pandemic travel begins to return.