10 Jan America’s Economic Perpetual Motion Machine
America’s economy is running on a belief in perpetual motion …, the reason being that the U.S. government is printing piles oodles of Dollars with the expressed intention of continuing to do so indefinitely … using those Dollars to fund America’s lavish military and entitlement spending spree habits and to repay service Federal, State, local, corporate, student, and a variety of other debt. This spend, borrow-and-print cycle creates perpetual motion that supercharges amplifies further spending and borrowing. Physical scientists say that such perpetual motion is impossible to sustain. They rely on the first law of thermodynamics (Conservation of Energy) to conclude that consumption requires equal and offsetting creation … which for America means that the motion will end when the money runs out. America’s economic scientists politicians, however, believe otherwise. They assume that the money can never run out, that the consumption of Dollars – that is, government spending programs and debt service – can be satisfied by printing more and more Dollars … essentially forever … or, at least, until their terms-in-office expire. After all, the U.S. government owns the world’s reserve currency and runs the Dollar’s printing press! America’s government therefore is operating an economic perpetual motion machine where the laws of nature thermodynamics don’t apply … and, so far, that machine has been working.
The economic science counterpart of the Law of Conservation of Energy is Stein’s Law: “If something cannot go on forever, it will stop” …, an observation made by Herb Stein when he was Chairman of the Council of Economic Advisers under Presidents Nixon and Ford. America’s Federal Reserve, both of its Political Parties and its Federal government today are non-believers in Stein’s Law. Each has signed onto the perpetual printing of Dollars to fund America’s perpetual spending, increase its economic performance, and subsidize its citizenry, subscribing if not in word, but in deed to a much-maligned economic philosophy called Modern Monetary Theory (a subject previously discussed by TLR here). America therefore has been spending like a drunken sailor profligately extravagantly, running up enormous debts, and converting the private debt of State governments, American businesses and individual citizens into government debt, printing money at a furious rate, far faster than American productivity has been creating it – an economic violation of both the Law of Conservation of Energy and Stein’s Law. Can that continue in perpetuity?
Japan provides a revealing example. Japan’s long-term response to its debt-and-deficit bubble has been limitless money-printing and near-zero interest rates …, much the same as in America (and Europe) since 2009. Japan’s financial troubles began in 1989 and, unlike America in 2008 and 2020, its financial woes were not shared globally. It therefore could not coordinate its financial and monetary policies with other governments. The Bank of Japan accordingly was the first country – ever – to simultaneously experiment with massive money-printing, near-zero interest rates and associated financial engineering. The result has not been what was hoped-for: Despite expectations of an expanding economy, increasing productivity, and rising inflation, Japan has been saddled with exceedingly weak economic growth, moribund productivity, and persistent deflation …, also much the same as in post-Great Recession America. Despite the use by the BOJ of the same modern monetary strategies employed by the Fed, Japan’s awful poor economic performance over the past three decades continues (as discussed in “Japan’s Economic Wormhole”). Japan appropriately has seen its currency, the Yen, steadily depreciate relative to other currencies – versus the US Dollar, a decline from 157 in 1990 to 103 today – and it continues to weaken. Japan, however, is better protected from external economic turbulence than America. Japan is an island nation with a homogeneous population. It is insular, insulated, inward-looking and, unlike the U.S., doesn’t depend on foreigners to buy its debt and invest in its equities … or support its currency. Japan relies on the consensual actions of its people who work together to an extent quite different from divided diverse America. Japan, therefore, is better able to weather economic storms. Japan’s money-printing, like America’s, pumped up the value of its debt and equities – asset inflation. The Bank of Japan – one cog in “Japan Inc.” – now owns $5.1 trillion of Japanese government debt (and is purchasing 70% of all such issued debt), $434 billion of Japanese equities (making it the largest owner of Japanese stocks), and $59.4 billion in Japanese corporate bonds (43% of the total), as well as of a broad range of commercial paper and personal debt. The inevitable end of the Japanese monetary experiment will be for the BOJ to own 100% of Japanese government debt, Japanese equities and corporate bonds. It is at that point, when the money-printing “cannot go on forever,” that the music will stop. That point for Japan remains in the hopefully distant future. America is following an identical path, but America’s differences make the likely impact on America and Americans quite different … and more proximate.
The fate of America’s experiment with perpetual economic motion, like Japan’s, depends on the efficacy and success of Modern Monetary Theory. A crucial difference between America’s reliance on MMT and Japan’s, however, is that the consequences of the erosion in value of the Japanese Yen is nothing compared to the effects of the decline in value of the US Dollar, the reserve currency that provides the U.S. with an “exorbitant privilege” (discussed in “The Fracturing US Dollar”).
MMT posits that, because the U.S. government owns the printing press, the U.S. can spend as much money as it would like to amass virtually unlimited debt simply by printing Dollars. No matter how much debt the U.S. runs up, and no matter to what heights interest rates may rise, America can always pay-off its obligations simply by printing more Dollars. This perpetual motion printing press works, say MMT fans, not merely because the U.S. government owns the printing press, but because the Dollar is the world’s accepted medium-of-exchange – its fiat currency. That too is not going to change, they say.
America’s printing press nevertheless would cease its benign functioning if, for example, the Dollar were to be seriously threatened as the world’s reserve currency or its money-printing were to create excessive inflation. Because today’s economic, social and geopolitical circumstances have made this era different from others, past money-printing experiences are not an accurate guide (discussed in “This Time is Different“).
Insofar as the Dollar’s reserve currency status is concerned, although China is not quite yet in a position to challenge for currency supremacy, it has been taking steps to do precisely that. One step is its plan to replace US sovereign debt as the world’s safest and most stable asset. US Treasuries currently yield less than 1% while comparable Chinese sovereign debt yields 3.25% … and has the backing of a country with a high-growth history, an increasing GDP, and a government intent on presenting itself – and its currency – as fiscally responsible. The Chinese Yuan, after all, has been strengthening while the Dollar has been weakening. The Fed is continuing to reduce interest rates and purchase Treasuries and mortgage-backed and other securities, driving yields ever lower. China also has positioned its equity markets as viable alternatives to American ones (per Ray Dalio: “China already has the world’s second largest capital markets…. Throughout history, the largest trading countries evolved into having the global financial center and the global reserve currency”). As discussed in “The Hegemon’s Handbook,” even though the threat to the Dollar’s dominance isn’t imminent, China’s planning for global dominance, and its execution to-date, make it impossible to ignore the ticking sound.
With respect to inflation, one circumstance that stands out is that the printing presses of the world’s leading countries have been running at comparable speeds since 2009 …, meaning that the purchasing power of any one currency has not significantly deviated from that of other principal currencies …, precisely the definition of “non-inflation.” The US Dollar, the Euro, the Chinese Yuan, the British Pound, the Swiss Franc, the Yen, the South Korean Won, the Australian Dollar, the Canadian Dollar, etc., all have experienced the same economic shocks and responded in substantially the same ways by over-spending, printing their currencies, subsidizing their industries and citizenry, and adopting near-zero interest rate policies … thereby similarly debasing their currencies. China’s economy, however, separated itself from the rest of the world in 2020. China successfully managed its internal Covid-19 crisis, controlled its money-printing, upgraded its economic performance, and finessed America’s tariff and trade barriers. The Yuan and China’s GDP accordingly have strengthened …, while the Dollar and America’s GDP have weakened. China therefore has become the world’s economic outlier, to its
long-term benefit. Meanwhile, the U.S. continues to print increasing quantities of Dollars and is experiencing what is likely to be a double-dip recession. In addition to the $2.2 trillion injected into the U.S. economy by the CARES Act and an additional $900 billion of stimulus in December, the incoming Biden Administration is likely to add a further $400 billion by increasing the recent $600/person stimulus to $2,000/person and by adding a further ~$750 billion support bill to address the March expiration of unemployment insurance and to subsidize State governments. China and Japan were once the largest buyers of US Treasuries. No more. America’s Federal Reserve now has the mantle as foreigners look elsewhere for yield … and safety. In 2020, the Fed monetized virtually all of America’s $3+ trillion budget deficit and the likelihood is that the Fed will have to take the same action again in 2021. Democrats and Republicans as well as the Fed’s governors all have bought into MMT, betting that money-printing is risk-free and debt and deficits don’t matter. They most certainly do matter to the US Dollar.
The US Dollar Index, a measure of the Dollar against a basket of six major currency rivals, fell 6.7% in 2020. That fall stands to continue with America’s easy money policies likely to increase under the Biden Administration. In China, both producer and consumer prices are falling, which means that global products and services will continue to fuel deflationary pressures as supply continues to exceed demand, contributing to slow (and possibly negative) job growth … and to further social and economic unrest in the West. America’s huge trade and current account deficits did not reverse under the Trump Administration’s tariffs on imports from China and Europe. They will persist. An observer reasonably can question how long America’s perpetual motion machine can operate before it overheats, seizes up, and ceases to function.
Those Americans who believe in “Divided We Stand, United we Fall,” should reconsider. The economic and social costs of disunion are becoming more and more apparent in today’s highly competitive international environment.
Finally (from a good friend)
When one door closes and another door opens, you are probably in prison.
To me, “drink responsibly” means don’t spill it.
It’s the start of a brand new day, and I’m off like a herd of turtles.
When I say, “The other day,” I could be referring to any time between yesterday and 15 years ago.
I had my patience tested. I’m negative.
Remember, if you lose a sock in the dryer, it comes back as a Tupperware lid that doesn’t fit any of your containers.
When you ask me what I am doing today, and I say “nothing,” it does not mean I am free. It means I am doing nothing.
I finally got eight hours of sleep. It took me three days, but whatever.
I run like the winded.
I hate when a couple argues in public and I missed the beginning and don’t know whose side I’m on.
When someone asks what I did over the weekend, I squint and ask, “Why, what did you hear?”
When you do squats, are your knees supposed to sound like a goat chewing on an aluminum can stuffed with celery?
I don’t mean to interrupt people. I just randomly remember things and get really excited.
When I ask for directions, please don’t use words like “east.”
Don’t bother walking a mile in my shoes. That would be boring. Spend 30 seconds in my head. That’ll freak you right out.
Sometimes, someone unexpected comes into your life out of nowhere, makes your heart race, and changes you forever. We call those people cops.
My luck is like a bald guy who just won a comb.