As the northern hemisphere transitions into shorter days, we find ourselves enveloped in pre-dawn darkness each morning. The evenings are marked by an early descent into night. Despite the changing light, the stock market continues its volatile dance, fluctuating between fear and greed.
At the beginning of the week, optimism ruled the sentiment. With President-elect Kamala Harris stepping into Washington, accompanied by hopes for a promising coronavirus vaccine, a bright future seemed possible. On Monday, the Dow Jones Industrial Average (DJIA) almost touched the 30,000 mark, and by Wednesday, the price of WTI Crude Oil briefly surged past $42. Chevron’s stock also enjoyed a brief period of growth. Yet, this optimism was fleeting, as fear soon took hold.
As individuals cautiously emerged from their isolation, they confronted a disheartening reality. What greeted them?
They encountered discussions of ‘Lockdown 2.0’ from Dr. Michael Osterholm, an advisor on COVID-19. They faced the unsettling prospect of Janet Yellen’s probable appointment as Secretary of the Treasury, along with Elizabeth Warren’s radical suggestions for canceling vast amounts of student debt.
By Thursday, grocery stores had begun limiting toilet paper purchases, and the DJIA experienced a decline of over 300 points. In contrast, Bitcoin made gains, surpassing $16,000, while calls for additional stimulus checks heightened.
Concerns about Long-Term Viability
The demands for another coronavirus relief package seem to echo daily. Advocates argue that since the vaccine won’t be widely available until summer 2021, Congress must act quickly to guide the nation through the upcoming nine months of anticipated hardship.
According to Robert Pozen, a senior lecturer at MIT and a former Fidelity Investments president, as reported by MarketWatch:
“Despite this week’s announcement indicating progress on a coronavirus vaccine, the pandemic will remain a significant burden on the workforce and economy until at least next summer. The U.S. is currently seeing daily new infection rates exceeding 100,000 as the virus spreads further. Even with FDA approval for a vaccine by the end of 2020, deploying it will take a minimum of six to nine months.”
Pozen advocates for:
“Another fiscal stimulus bill to support the vulnerable sectors of the U.S. economy through next summer.”
While Pozen may believe he understands Americans’ needs, at Economic Prism, we maintain that such judgments should rest solely with individuals themselves. However, it’s crucial to clarify what Americans do not require: more stimulus. They’ve experienced quite enough.
Remember, stimulus is funded by fictitious money printed at will. This money lacks any genuine value creation, rendering it a mere illusion. Printing money leads to several detrimental outcomes. It burdens future generations with debt, diminishes the value of past savings, skews prices in harmful ways, and fuels endless government spending.
Continuing this charade of printed money isn’t a pathway to lasting prosperity, but rather, a journey toward chronic deficiency.
Fiscal and monetary policies have resulted in what seems like perpetual stimulus over the last decade. But where will this lead us? To uncover the answer, we must examine the credit market.
The Unpopularity of the Stimulus Period
Interest rate cycles can extend over several decades, typically ranging from 25 to 35 years. U.S. Treasury yields peaked in 1920 before gradually declining until the mid-1940s. They then surged again alongside inflation, leading Franz Pick to famously assert that “bonds are certificates of guaranteed confiscation.”
Little did Mr. Pick know that an inflection point had arrived. Following early 1982, yields climbed once more, dwindling down to historic lows by August of this year, when the 10-Year Treasury note yielded around 0.5 percent. Although yields have increased slightly since then, they still remain below 1 percent.
The Federal Reserve is intent on sustaining low interest rates, pledging to keep the federal funds rate near zero until 2023. But can they maintain this course?
While the Fed might succeed in keeping 10-Year note yields under 1 percent as long as the economy struggles and inflation remains subdued, eventual economic growth or inflation will disrupt this scenario. The Fed aims for price inflation to persist above 2 percent, and with dedication, they will achieve this—and then some. As prices increase, the dollar’s value will drop.
Initially, rising prices may be misinterpreted as signs of prosperity. However, after decades of government intervention, true prosperity is out of reach for America. Consequently, the nation cannot afford to accommodate rising interest rates.
As the dollar declines, interest rates will inevitably rise, regardless of the Fed’s intentions. This situation will choke off both struggling corporations and households, as well as cripple Washington.
Currently, around 8 percent of the federal budget is allocated for interest payments on debt that exceeds 100 percent of GDP. But this is under present historically low Treasury yields. What happens if the yield on the 10-Year Treasury note spikes to 15 percent, reminiscent of September 1981?
The burden of debt servicing could consume half, or even more, of the federal budget, stifling economic growth and obliterating entitlement programs.
In essence, the era of stimulus will likely leave a legacy of bitterness for generations to come.
Sincerely,
MN Gordon
for Economic Prism
