The Bear’s Lair: The Wokenomics approach to monetary policy

In a thousand years’ time, when the economic history of our era is examined by forensic historians, Senator Lamar Alexander (R.-TN) will receive special notice as the tiny catalyst for economic collapse. His rejection of Judy Shelton for the Fed Board of Governors, on the grounds that she is too close to an administration that is presumably leaving office in 37 days, will ensure that there is no voice of sanity in U.S. monetary policy – and that the final implosion of the U.S. economy is thereby rendered unavoidable. For the Fed’s current management, as for Antifa, even small voices of dissent must be silenced.

Shelton is an intellectually active economist, who has in the past expressed admiration for the Gold Standard. During the Trump years, however, she appeared to fall in with that real-estate-baron President’s view that ever-lower interest rates were what was needed. One can accuse her of putting ambition ahead of principle, but at least she appears to have some principles, and ideas that can be modified to reflect the changes in monetary circumstances. As such she would fill a very useful role on the Fed’s Board of Governors, where the current occupants are drone Keynesians, ever following the grail of monetary “stimulus” regardless of how much damage it does in the real economy.

Make no mistake about it, Shelton’s capability for original thought will come in useful next year. M2 money supply increased by 25.7% in the year to November 23, 2020, and almost all that increase has come since February. Put another way, the Fed’s balance sheet has expanded in the last year from $4.0 trillion to $7.2 trillion, an expansion of 80%, or $3.2 trillion, about 16% of U.S. GDP in the balance sheet of one institution.

We are now getting vaccinated, or at least the British are. That means that over the next six months or so, the current “lockdown” restrictions on the U.S. economy will be lifted, doubtless with Governor Gretchen Whitmer of Michigan dragging her feet to the last. Thereafter, all that excess money will feed through into prices and inflation will take off like a rocket.

Look at it the other way round. The U.S. Federal budget deficit for the year to September 30, 2020 totaled $3.1 trillion and another $284 billion was added in October. There is a strange coincidence there – the Fed is financing almost 100% of the U.S. budget deficit, which is one reason interest rates are so low – there is no stress at all on the financial system. In the next fiscal year, when the U.S. is expected to run a deficit of another $1.8 trillion – a figure that is certainly too optimistic, as it does not include any of the magic “stimulus” which Congress is currently debating, which must add at least another $1 trillion to the deficit figure.

Presumably, the Fed will finance this as well, making a total of $6 trillion increase in its balance sheet in two years. The whole position is under conventional economics untenable. Third World countries in the 1990s were sternly advised by U.S. Treasury and IMF staff that any significant financing of governments through the central bank would inevitably lead to inflation , collapse and despair. That now seems to have gone out of the window; we are in a new era of wokenomics, in which Zimbabwe and Venezuela are the models to follow.

The underlying idea that the government should force down interest rates artificially to stimulate growth is not new; it was originally propounded by Sir Josiah Child (1630-99) in his 1668 book “Brief Observations concerning Trade and the Interest of Money.” Child became the Governor of the East India Company in the 1680s and was responsible for an attempt to overcome the might of Aurangzeb’s Mughal Empire with a force of 600 men sent out from England – Aurangzeb’s standing army totaled 100,000 or so. I have always been a supporter of the belief that one gallant British soldier is worth half-a-dozen wimpy foreigners (see: Crecy, Agincourt, Plassey, Crysler’s Farm), but an adverse ratio of 150 to one is excessive. It had always been thought that Child’s economic and military over-optimism were matched, but apparently we should now re-evaluate both!

Under wokenomics, government spending is held to have zero cost. The central bank can always finance it by buying government bonds, and issue short-term paper to commercial banks to finance itself. Because major Western currencies are exchangeable against each other, this can be done for arbitrarily large amounts of money. Consequently, all social “needs” can be provided by the government, college can be financed through government loans that are then forgiven, and subsidies can be given as necessary to finance whatever environmental boondoggles are fashionable that year. Since government spending has no cost, this has only a stimulative effect on the economy, providing more jobs for the unemployed.

The main fallacy of wokenomics is not that all that funny money leads to inflation. Such an outcome is likely, but as we have learned since 2008, by no means inevitable, for some reason that is yet lost in the mists of uncertainty. Wokenomics’ principal problem is that the overall output possible from the economy is finite; if that economy is close to full employment, every dollar of labor and capital absorbed by the government is a dollar not available to the productive private sector. The government absorbs an ever-larger share of output, even though taxation can remain relatively low.

In such an environment, the private sector must inevitably atrophy; it is not a question of lack of demand, but of lack of supply. The effect we have seen this year on restaurants, hairdressers and small businesses generally, whereby it becomes impossible to supply their service and so they go bankrupt, is spread throughout the economy. There is still a demand for restaurants and hairdressers — people are aching for a nice meal out or a cool haircut – but Covid-19 means that the demand is suppressed, and so the supply disappears. With infinite production of government services, there will no longer be so much ability to supply private ones, and so productive businesses will go bankrupt just as restaurants and hairdressers have been doing this year.

Wokenomics may continue to include a small, battered private sector, but with its love of regulation and planning and ever-expanding state sector it will be essentially a Soviet society, with declining living standards to match. You cannot install the exact opposite of the economic policies that brought the Industrial Revolution and expect the living-standards gains of the Industrial Revolution to remain intact. If James II had remained in power, with Josiah Child as his economic advisor (in real life Child, like James II, was removed from office by the Revolution of 1688), Britain would have been partially re-converted to Catholicism, and economically, it would have moved closer to the state-directed economic policies being pursued at that time by Jean-Baptiste Colbert for Louis XIV. In such an environment, an Industrial Revolution would have been pretty unlikely. Corporate growth would have been directed by the state (thereby cutting out the small-scale private sector) and the clever working-class tinkerers who produced most of the innovation would have been repressed.

There are no such things as the Laws of Economics – this is not physics. But there is such a thing as the Laws of Economics that Works. Allowing leftist professors to corrupt the tried and true rules of capitalism with ever more dozy theories that combine socialism, environmentalism and free-money wishful thinking is no way to run an economy. Wokenomics must go!

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)