By Michael Every of Rabobank
Treasury Secretary Yellen was doing media on Sunday as an alternative alternative to the Superbowl’s ‘Puppy Bowl’, stressing the need for Congress to back the proposed USD1.9 trillion fiscal stimulus package. Her stance is in stark contrast to that of Larry Summers, who despite talking about “secular stagnation”, just wrote an editorial arguing USD1.9trn stimulus is too large (a stance he held, wrongly, back in 2008-09 too of course).
Even though key details of the fiscal package are still not clear – e.g., where the income cut-off point for the USD1,400, not USD2,000, cheques is, and if children should get a separate USD3,000 sum – in Yellen’s view, if the stimulus is passed, “full employment” can return in the US as soon as next year. If not, it will take until 2025: and President Biden late last week suggested it would be a decade until this goal was achieved. The White House’s political imperative, understandably, is just to pass it rather than quibble, more so after the disappointing underlying details of Friday’s payrolls report.
Markets need to quibble though: is this bill going to be a reflation game changer? It’s very long, but will it be soft or strong? Yellen stated that without stimulus there will be economic scarring that will impact low-income groups, minorities, and women (short-hand: the working class). Although some in markets – who already got their bailouts – disagree, there appears more economic consensus behind this view than in the past. Yet is “full employment” achievable in under two years via a single bill?
Consider the structural changes to the post-Covid economy: with some vaccines now appearing relatively ineffective against new strains of the virus, who knows when, or if, the pre-2020 world can return? A USD1,400 cheque does not change that fact for many. Also recall “full employment” is the goal of public spending financed by central banks under MMT. Yellen admitted that the stimulus bill does not create any jobs directly. In a vanilla sense, as she put it, “the spending it will generate will create demand for workers”. But at what wage rate (given the minimum wage does not look set to rise to USD15), and in what sectors? What if the USD1,400 is spent on imported goods rather than something made in the US? And what if it is spent on stocks that end up dropping in price as a transfer of wealth to the deep pockets of a hedge fund owner who is shorting them? Does this get us back to “full employment”?
Also important for markets, MMT explicitly promises to deal with inflation if it arises. Yellen stated there are inflation risks; that “I have spent many years studying inflation” (as Fed Chair, usually the absence of the right kind of it); and that “ I can tell you we have the tools to deal with that risk” if it happens. So Treasury has the tools? Not unless there is an unwritten promise to raise taxes or cut spending to choke off inflation, which there surely isn’t. The guys who have the tools to fight inflation are the Fed, which Yellen was probably still mentally thinking of with her royal “we” – which is about as MMT as this stimulus bill actually gets.
So markets have to decide if another fiscal stimulus package, absent structural measures, is enough to rapidly push the US economy back to “full employment” of the kind that raises wages such that inflation goes up and *stays* up, and what the Treasury and Fed would then do about it if so. Does that dog hunt or not?
If one thinks this spells inflation, for example because commodity prices are surging, then one wants to be short bonds and duration, because the Fed is clearly on hold for now. One might not want to be short the USD, however, because unless we get yield curve control (which does come with MMT), then the short-squeezed dollar could be as hot a ticket as the US economy itself. That naturally risks crashing a whole lot of risk parties in EM, however.
If one thinks the stimulus bill will help in the next six months when base effects are most helpful for raising inflation, one might also want to see it the same way – tactically. However, if one thinks this stimulus boosts short-term spending and savings, yet does nothing structural on labor vs capital or to encourage on-shoring, then it might be smarter to look past the above trends.
At the same time though, muddying those ‘structural’ waters, President Biden appears determined that the US is going to “out-compete” China: how, if so? And is it really going to be “Main Street over Wall Street”? And does that mean short bonds and duration and long USD….or just long MMT? The first call between Secretary of State Blinken and his Chinese counterpart had the former saying the US would continue to confront China’s “attack on human rights, intellectual property and global governance”. Yet at the same time, China’s Global Times argues that while it expects the Biden White House to talk tough, it also believes there is room for cooperation. So which is it to be: a “Reunited States First” White House policy stance (to get all Springsteen), or tough talk and a more open economic policy? Markets will very much have to factor this all in too.
The underlying problem here is that instead of this all being a Superbowl, where the market understands the rules of the game, and the players, coaches, tactics and strategy, and so can plan out probabilities of victory with some degree of certainty, our current world is closer to being the Puppy Bowl in many ways. Most players are intently focused on what they are doing right here and now without being able to join all of the dots to the bigger picture and game and stakes – and the result is pretty chaotic (and messy).
It’s a serious dog-eat-dog world out there in many dimensions, as the Biden team seems to acknowledge (if not the EU, which based on Borrell’s recent disastrous trip to Moscow seems to think the real world is the Puppy Bowl: if only life were about eating, walks, playing with the ball, and long sleeps!) For markets too – if one gets this next big shift wrong. Serious discussion is required, not just “Team Ruff earned a 73-69 win over Team Fluff, but everyone involved was a winner at the 2021 Puppy Bowl.”
Indeed, not everyone involved is going to be a winner. Not by any means.