History doesn’t exactly repeat itself. But it does rhyme. The year was 1775. The government in the British colony in North America was out of money to pay its soldiers. The American Revolution was well underway and they needed cash to to help fund the Revolutionary War. Continentals quickly lost value, partly because they were not backed by a physical asset like gold or silver, but also due to the fact that too many bills were printed.
Here we are in 2020. Ignorance of history and economic ignorance is spreading through the country faster than the Covid-19 virus. So much of what you’re hearing in the mainstream media is just plain wrong. The problem is that much of the economic ignorance sits in our houses of Parliament, and in our legislative bodies.
We have Senator Mike Gianaris, deputy leader of the Senate in NY State, advocating a 90 day suspension of residential and commercial rent for tenants and small businesses impacted by the coronavirus pandemic. How will the building owners survive for 90 days? How will this modern day Robin Hood shower cash upon the tenants, and ultimately protect the banking system from collapsing? Not to worry, the Evictions in the state have been frozen by a moratorium issued by the Unified Court System and Governor Cuomo has already ordered a 90-day mortgage moratorium. But wait a minute. Rents pay for much more than just the mortgage on a property. Where will the money to pay the property managers come from? Where will the funds for maintenance of the properties come from? I guess the Federal Government will helicopter more money into those businesses.
Tuesday the Dow went up nearly 11% in the largest single day gain since 1933. What was the driver for that? The news that the Federal Reserve would buy an unlimited number of US Treasuries. That’s right, there is no limit. Republicans and Democrats reached a deal on a 2 trillion dollar funding package. This fiscal stimulus will be used to help businesses and individuals affected by the outbreak. The mechanism for getting money into people’s hands is not clear yet. What will constitute a loan? What will be an outright grant?
It’s tempting to blame the bursting of a balloon on the pin. But if the balloon wasn’t over-inflated, the pin would have no effect. Now we’re trying to pump more air into the balloon after the balloon has burst. The last time the balloon burst was in 2008. But the Fed doubled down on printing money.
The pin in this case is Covid-19.
The worst thing that can happen to someone’s money isn’t the loss of a bit on their investments. The worst thing is hyper-inflation. We’ve seen it through-out history. One of the founding principles of the United States of America, enshrined in the constitution was the notion of
We saw it in the Weimar Republic in Germany from 1919 until 1933. Germany was licking its wounds after the defeat in the first world war. The country was focused on reconstruction and it lacked the resources to fund the reconstruction.
When the printing of money happens with complete abandon, the problems multiply. It caused the collapse of the Roman Empire.
The problem with printing money is that it is inflationary. The deficits are rationalized as temporary. They will be made up during the boom times. Little by little the government becomes addicted to the temptation to perform a politically expedient move and kick the can down the road. Each hit of cash feels great. It’s like a hit of cocaine to the cocaine addict.
The effect of inflation is to wipe out purchasing power for those on fixed income. It has the effect of wiping our savings, and it has the effect of wiping out debt. It’s a wholesale devaluation of the currency.
While it’s happening, the short term impact is positive. Asset prices increase. Remember, the best performing stock market in the past decade was Venezuela, that is, up until their economy collapsed.