Test Driving Universal Basic Income
Government intervention always creates more problems than solutions
In March of 2020 U.S. markets saw one of their steepest declines on record. Over the span of a month the Dow fell 38%, S&P 35%, Nasdaq 32% and the Russel 2000 by 43%. Marking one of the fastest drops in equites on record. This rapid rush out of financial markets sparred monetary and fiscal policy changes whos effects are still being felt today. Arguably it is anyone's guess how long these policy shifts will take to completely unwind throughout the global economy.
We all want to believe this near 40% drop was due to grave concerns over the COVID-19 virus. Granted some losses could be attributed to this. However it is clear that the financial system had been screaming for help since September of 2019 when the reverse repo rate shot up to around 7%. With QT continuing and the Fed attempting to raise interest rates there was an overnight scramble for liquidity. QT was stopped cold and QE was turned back on at $20 billion a month and $60 billion in reverse repo. Interest rates were slashed by .5% then .25% the following month. Financial stability was clearly an issue with these measures serving as a temporary band aid.
Enter March 2020 when the first "official" talks came to the U.S. regarding Covid. Market sell offs accelerated causing the Fed to slash interest rates in the beginning of the month from 1.6% to 1.1%. QE went up to $40 billion with $75 billion in purchases by March 23rd. Mortgage Back Securities (MBS) were also being bought simultaneously by the Fed. All these measures were not enough as markets continued to tank. $300 billion was committed to on March 24th and another $150 billion on March 30th, a $75 billion per day QE arrangement. Starting now and lasting till November of 2021 the Fed’s balance sheet grew by about $120 billion a month. With purchases between U.S. Treasuries and MBSs. Interest rates were also dropped to ZERO.
Combining this with the March 23rd CARES Act begun an epic reversal in markets. Such enormous fiscal and monetary support provided guaranteed liquidity for the markets. In prior iterations of QE only monetary support was need to reverse markets to the upside. You can see in the below graph the combined effects dual policy has.
Monetary and fiscal support of this magnitude effectively equal the definitions of UBI (Universal Basic Income) and MMT (Modern Monetary Theory). Government transfer payments and expanded unemployment benefits mean huge amounts of currency going directly to consumers. Consumers who in most cases were not working at the time of receiving these benefits, UBI in a nutshell. Government intervention during the pandemic created an environment similar to what UBI would be. Telling people not to work promotes an environment where far less goods and services are created. While the demand for those same things increase due to the increased amount of currency people have access to.
People will argue the fear of Covid added a layer that made some scared to go to work. How many people know someone who kept on the unemployment gravy train after we found out Covid wasn't all to scary or were forced to stay home because businesses were closed/not hiring? Still millions of middle income people received stimulus checks anyway, whether working or not.
This period of extremely easy monetary/fiscal policy led to a 40% increase in the number of dollars in circulation. Where did all those dollars go?
Directly into the financial markets. Whether it be corporate share buybacks, young gamblers in the Robinhood casino or people getting in on the crypto craze.
Suddenly cities became less attractive places to live. Big companies here were able to move large portions of their businesses online removing the need for office space. Crime rates began to rise in conjunction with bigger cities Covid policies making them less attractive for everyday leisure and entertainment. As a result housing prices rose in suburb and rural areas. This gave sellers a huge advantage when it came to equity in their homes. Equity which was either recycled into home improvements or financial markets.
This chart is a prime indicator of where the majority of currency flowed in the past two years. Over ONE TRILLION DOLLARS was thrown into global markets. With millions of younger workers making a killing in financial markets there is little need for them to seek out employment. People who are close to retirement see huge gains in their retirement accounts. They may not want to deal with Covid restrictions at work so they decide to retire early. These two groups exiting the workforce creates a gap in lower paying jobs that function as starting out points for workers. Also losses in skilled employees that are harder to replace.
Created is an environment with an abundant supply of cash but less access to goods and services. CPI inflation is the result, more currency but less stuff. At the same time because of zero percent interest rates and continued QE real wages are unable to rise. Though nominal wages have been driven up in an effort to get people back to work. The nominal gains only help add to the gains in financial markets as those higher wages are recycled into 401ks.
Here in lies the dilemma the Fed and government face. The two years of easy "money" policy has created an environment in which a lot of people are dependent on asset prices to sustain their standard of living. If asset values begin to decline the influx of workers forced back into the labor market will cause unemployment to rise. Current unemployment is down because so many people aren't even looking for work. With assets appreciating so much in value they only need tap into that equity.
Overall household wealth grew by $35 trillion since the pandemic. A drop by 20% to 30% would feel more like a 60% to 70% drop for those tapping into this equity!
Government transfer payments create an environment of immense moral hazard. Someone has to produce the goods and services that people are consuming with that currency that is printed. Governments can print currency but they cannot print stuff. People still have not realized wealth is not measured by the amount of currency units you have but by the goods and services you have access to. Without an incentive structure to go out into the market and produce high quality goods and services, in exchange for currency or other things people simply do not contribute enough.
Distortions throughout our economy over the past two years point this out directly. Whether it be supply chain issues or the decrease in quality experienced when dining out. Without incentive people are not willing put in all they can, we simply skate by. All this free currency ("money") proves that UBI is not sustainable in a country like ours. The only way to limit the amount of currency circulating would be by raising taxes. Everyone knows that is not politically viable. No one wants to pay more in taxes just like people realizing more government is only more expensive.
CPI inflation has been teaching average people that nothing is free. Running up deficits for twenty years has a price that must be paid. Whether by cutting spending, raising taxes or inflation. The ladder seems to be the government’s current model.
Inflation makes it harder to obtain solid returns on "safe" investments. Saving your money in the bank when inflation is at 7% and the rate of interest is at ZERO PERCENT leaves you with a -7% yield/return. Meaning your currency that you’re saving is losing 7% of its value or purchasing power each year. This same logic applies to owning government bonds in the form of treasury securities. Yields are at all time lows and inflation is at all time highs. Therefore traditional safe haven investments like treasuries, bonds or cash aren't so safe anymore.
This chart represents the inflation adjusted yield on treasuries going back 15ish years. As you can see yields or returns have been negative since 2020. So if you were holding any of these assets you were losing purchasing power. This negative yield has created an environment that pushes people further out on the "risk curve" to earn returns. Tech stocks and crypto are perfect examples of this. These stocks are trading at insane valuations with elevated P/E ratios (price to earnings). Some of them aren't even making any money or don’t even sell anything! With future inflation everyone is trying to own things that can keep up regardless of fundamentals. Leading to even more of an increase in asset prices.
I do believe we are at the beginning stages of seeing a return to American Manufacturing. Bringing jobs back to America is a viable way to force real wages to grow. Free money will become less free as the debt burden becomes unsustainable with rates rising.
It is time to get out of the speculation mindset and focus on wealth preservation. All the equity gained since the creation of QE in 2008 will be tested. Tons of it being erased from existence as defaults become a reality. Drugs are addictive and QE is a drug, eventually the overdose happens. We are closing in on that fatal overdose, as the currency continues to lose its purchasing power eventually going to zero. Financialization of an economy can only last so long. We are at the end of this road and feeling the brunt of its reality.