Garrett Fisher
March 15, 2020
Almost 7 years ago, I sat beside a snowmelt-fed alpine stream high in the Colorado Rockies and wrote “Anatomy of a Meltdown – Articulating the Fear of a Developed World Currency Collapse.” It was an article inspired of lingering wounds from the Great Recession of 2008, with still sizable annual US government deficits, near zero interest rates, and a healthy dose of pondering how the hell we’d get out of the situation down the road without a disaster. Now, seven years later, I sit next to a snowmelt-fed alpine stream in the Alps, contemplating how the spread of a single-celled organism might be the mechanism which delivers the fears I wrote about.
The subject of the article in 2013 was an intuitive fear that the developed world was effectively mortgaging its systemic economic issues, as expressed through continuously climbing debt-to-GDP ratios, declining interest rates, ongoing deficits, and inadequate economic growth despite the deployment of many monetary stimulus tools. The premise of any tinkering with monetary stimulus is to prevent a much worse situation (an economic depression) by taking out a national mortgage, pouring money on the problem, and with the resulting economic growth, slowly pay off that mortgage.
The problem I felt then, and continue to ponder now, is the fact that the return on these stimulus measures seems inadequate to make the figurative mortgage payments. In other words, the economy grows as a result of tax cuts, low interest rates, stimulus, and deficits, yet it doesn’t grow enough to repay the cost of stimulus, leaving a debt hangover.
Debt does not have an immediate externally-enforced consequence if the payment can be made and the obligation serviced. Much like an individual with increasing debt, a problem can metastasize while successfully making debt payments. This would take the form of ongoing personal deficits, where ever-growing debt is used to fund an excessive personal lifestyle. It is conceivable to be able to make the payments for years in a scenario like this, growing the balance to painful levels, until one of two things happens: payments can’t be made, or lenders refuse to lend. The triggering event brings about what is, in one fashion or another, a personal bankruptcy with all of the pain that entails.
On a national level, I posit the same problem. If deficit-inducing stimulus measures are similar to our debt-intoxicated individual, then the fiscal house is not in order. A present problem is continuing to get worse; however, it lacks an external mechanism that has enforced solving the problem. As long as lenders lend and interest payments can be made, the problem can continue to grow until one of those two things occurs. When it does happen, we can surmise that the consequences are severe, much like a bankruptcy. This theory, if correct, would imply that we “didn’t take our fiscal medicine” when the first contraction occurred, and much like an irresponsible debtor, we would have made the problem larger by deferring it, which perversely disincentivizes dealing with it. In such a situation, it is usually the external enforcement mechanism that eventually forces the problem to be dealt with.
When I wrote the last article, my fear was that we would not have enough time before the next recession to get deficits in order and that we’d need another massive round of stimulus measures. If trillions couldn’t fix a problem in the first place, who would invest in US Treasuries to finance the next round, so soon after we flirted with disaster? Thus, my fear was the prospect of a situation akin to a national bankruptcy, triggered by the next recession.
What I did not expect was that the world would head into completely uncharted territory. The massive 2017 tax cut, which accelerated annual deficits to levels touched only during the worst fiscal year of the Great Recession, became the norm, during an expansion. The Dow rocketed to levels more than double its 2007 high. The European Central Bank employed ongoing QE measures, and negative interest rates, a concept heretofore nonexistent, became a thing in many countries. European countries also run in ongoing deficits alongside America. Amidst all of this rapid economic and social change, where we experiment with tools and methods not before used, a bat spread a single-celled organism to some poor schmuck in Wuhan in 2019, and we are staring at the entire developed world in quarantine and lockdown measures akin only to a war. At the time of this writing, a one trillion-dollar stimulus plan is being posited, which would result in a $2T deficit in America in 2020. Edit: $2T was passed. Shrug. Make that a $3T deficit.
If I was wondering in 2013 how we’d get out of the next mess, then the question has magnified in its import in ways I could not have imagined. While I am not certain that we will face the “national bankruptcy” in the near term from this virus, I do contend that the risk and problem has grown, and the philosophy of its outworking is even more curious. At the same token, a worthwhile analysis is owed as to why some poor financial instrumentation led to the near collapse of the entire financial system in 2008, whereas we can toy with trillions of dollars in new ideas now without the same occurring now. And then, as a finale, I will propose one version of how the shit could hit the fan.