Money for Nothing is Money Worth Nothing

Almost two years ago I wrote a post on Linkedin and Facebook that got quite a bit of response. With historically low labor force participation, the post questioned the wisdom of additional stimulus and Modern Monetary Theory.? I proposed that pumping trillions of dollars into the economy, bereft of any sort of value-creation, would cause the value of the dollar to decline - inflation.??

The central idea of modern monetary theory is that governments with a fiat currency system under their control can and should print as much money as they need to spend because they cannot go broke or be insolvent.? Modern monetary theorists know they could never tax enough to pay off the debt, rather they believe taxation is a tool used to cool off the economy.?

Most of the responses to my post were affirmative, but I got enough push back that I began to examine my position.? My mental model was to apply the same logic one would apply to a household budget or the finances of a business when thinking about sovereign debt.? But should the same budgetary rules apply to the entity that actually prints the money?? If you have a bunch of debt, and you can print money in your basement, then that debt is no big deal right?? I was actually coming around to the idea of Modern Monetary theory around the end of 2021.? After all, it seems like we got away with quantitative easing in 2009.? I have heard guys I respect like Seth Goden talk about the merits of Modern Monetary Policy. Perhaps my thinking was flawed?

I read Ray Dalio’s book Principles for Navigating the Changing World Order late last year and it turns out that modern monetary policy is not modern at all.? In fact, we have seen so-called modern monetary policy used by the English and Dutch as their empires declined as well as a half dozen dynasties of China in the twilight of their primacy.? Looking back over the last 2000 years you see the same pattern of dominant empires in decline getting over-extended financially, as the fundamentals of education, innovation, productivity and social cohesion decline.??

In the case of the Dutch and English empires, their currency was the exchange currency for the world, like it is for the US dollar today.? As that dominant empire declines, because they control the world's exchange currency, the ailing world power is able to borrow and print money to prop up its economy.? This option is almost always taken because this is easier than austerity measures or raising taxes.? For the English, Dutch and a half dozen Chinese dynasties before them, the chickens eventually came home to roost, those economies collapsed, the empires fell and a new world order emerged.??

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury.” - Alexander Frasier Tytler

It is tempting to see history as linear but if you look back further than about 100 years, one realizes it is actually cyclical, marked by big 85 to 120 year cycles.? As Mark Twain said “History never repeats itself but it does often rhyme.”? When one looks at the rise and fall of great empires the similarities are striking.??

Republican and democratic leaders alike have been steadily building our national debt over the last 40 years.? Unfortunately we have leapt forward over the last 3 years adding over $8 Trillion in debt, bringing our total to $30.8 Trillion.? For perspective, our total debt in 2005 was less than $8 Trillion.? We have NEVER seen debt grow at anywhere near the pace we are currently growing.? At the time of this writing, the US debt is 130% of our gross domestic product. Think about it, the US debt is one and a third times bigger than its total economic output for a entire year!? There is no magical ratio where everything blows up but the previous peak in the US was during WW2 when we topped out at 112%.? Clearly the US balance sheet is in bad shape.

Relatively moderate amounts of stimulus spending on education and true infrastructure is a sound investment for us to make in our future and can help an economy get back on track.? What we did when we shelled out $3 to $5 Trillion to pay people to be unproductive was the economic equivalent of a crack cocaine binge.? We gave people a bunch of money untethered to any value creation.? People had cash, so naturally they wanted to spend it, but with a huge swath of our workforce paid to be on the sidelines, goods and services were scarce.? The combination of lots of cash and low supply sent inflation up like a rocket.??

Money for nothing is money worth nothing.

There is nothing more satisfying to me as a business leader to see people in our organization thrive in their careers.? We pride ourselves in providing the most usable and affordable benefits in the staffing industry and have partnered with our clients for years to make sure we are offering a competitive opportunity to the workforce.? I also believe that a wealthy society like ours should provide a safety net for our most vulnerable.? However, our currency needs to be attached to value for it to work.? Simply printing money and handing it out devalues our currency.? If we say $50 an hour is the new minimum wage, then $50 an hour becomes the new level of scarcity and we usher in the age of the $50 cheeseburger.? This is not an opinion, it is economic law and it is as sure as gravity.?

The elderly who are living off of investment income or off of fixed income are the most negatively affected by our crack-pipe monetary policy.? Think about the middle class couple who lived below their means, saved and invested so they could enjoy retirement in Arizona.? Not only has the value of their portfolio dropped by 30% over the last year, the buying power of what is left has been cut by another 8 to 15%. We are stealing their harvest from a lifetime of stewardship and disincentivizing the very behavior that fuels real economic growth.? Beyond their earning years, they play a game of beat the clock, hoping they have enough to live out the rest of their days in dignity.

The other group disproportionately hurt by our monetary policy is the low wage worker.? The middle and upper class do not like the increased cost of goods and services but can for the most part absorb the blow by reducing what they spend on non-essentials.? Because such a large percentage of the low-wage workers' pay is spent on essentials, inflation of staple items hits them much harder.? Although wages have increased over the last couple years, because of inflation the US worker saw a 3% decrease in their real average weekly earnings between 2021 and 2022. The very people our stimulus spending intended to help are now getting whipsawed into a worse financial position than they were in before the administration fired up the pipe.? Wage inflation and low workforce participation is driving automation and off-shoring, both a long-term threat to the American worker.?

This is not to say that stimulus spending was (or is) the sole driver of today’s problematic inflation– the economy is a complex system with many factors at play: trade relations, supply chain ecosystems, the state of the labor market, international conflicts and so much more. That said, according to a September 2022 report from the Brookings Institute, the 6.5% inflation rate as of July 2022 would have been just 3.7% without the impact of the second round of stimulus money. And that impact and the monetary policy that enabled it continues to have a ripple effect.

Do we have the fortitude as a society to beat this addiction?? The English and Dutch held a similar position of preeminence in the world and they both fell when in their waning years they got short-sighted and devalued their currency by printing money to keep the party going just a little longer.? Will we wake up to the folly of our ways or will we cede our position to a new rising power?? Let's be real, we have grown soft, hyper-sensitive and entitled.? A renewed sense of neo-American exceptionalism is the only way forward.??

What are we going to hand to our kids and grandkids?? Eventually every empire falls but it does not need to be on our watch.? The silver lining is that the US financial position relative to the rest of the world is strong, even China has racked up significant debt over the last few years.? We are taking for granted the strategic advantage of the dollar being the world exchange currency.? Holding the exchange currency has historically been the last foothold of the dominant world empire.? Like in a corporation, a country needs a strong balance sheet to compete.? We need to make our stand here, strengthen the position of the dollar and build back our national balance sheet while we still can.?????

The Strong Center

The far right and far left have dominated sound-byte politics of the last few years.? Nuance and compromise have been political poison when filtered through the partisan main-stream news media.? Clicking from Fox News to MSNBC is to bounce between alternate curated realities built to trigger alternating bursts of dopamine and cortisol to keep the viewer locked into the 24 hour fake news cycle.? Tribalism and political polarization leads to stupidity, plain and simple.? I have got to believe that most Americans are willing to listen to great ideas regardless of who has them and are fair minded and willing to compromise.? The lunatic, click-bait fringe has been running the show for too long now and it is time for the center majority to take back the wheel.???

Taking the long-view, we seem to be in the winter season of a societal saeculum - a 85 to 100 year big-cycle which started at the end of WWII.? Our decisions today will have a big impact on how we come through the winter and how we will emerge in the next saeculum.? I am encouraged by smart influencers like Ray Dalio and All-In podcast “besties” Chamanth, Calacanis, Sacks and Friedberg talking about the urgency of getting our financial house in order.??

This is not a partisan issue, it is an existential threat.? If we want to break out of the grips of the news cycle we need to get off the chop of the top water and go a little deeper to understand what is really going on and how we can move forward.? I said neo-American exceptionalism earlier because there are a lot of things we need to fix in the coming years. We must secure the foundational elements of human hierarchy of needs like safety, shelter, food before we can tackle the societal and environmental challenges up Maslow’s pyramid.? Simply put, America needs to make some tough choices and work to produce more than it consumes once again. A collapsing currency, increasing debt and rampant inflation will strike at the very foundation of our society.? There is nothing new under the sun, the patterns are there to learn from.? History is calling America’s strong center to rise up and lead the way forward.????????