By Peter Lundgreen,
Positive effects from even the worst crisis are the changes that subsequently happen and help societies and economies to move on, but not all ideas and initiatives are for the better.
Newly appointed US Treasury Secretary Janet Yellen had a long and very respectable career at the US Federal Reserve Bank (Fed). She even reached the very top and sat at the end of the table as chairman of the world’s most powerful central bank. Yet, Janet Yellen, with her new position as Treasury Secretary, has “jumped over the fence”, namely to the political side. The first thing she has taught us is that one must “act big”, not only think big, and really put action into the thoughts. It’s basically a good idea, but in this particular situation, it can be rewritten to a firm belief that the US can easily let the government debt explode further, which can make investors nervous or hit the US economy-quite interesting.
Janet Yellen unveiled her thoughts during the hearing in the Congress on 21st January, which was held in connection with her inauguration as Treasury Secretary. The statements are based on ideas that some economists have discussed during the recent years and are referred to as “Modern Monetary Theory”.
The modernity in the argumentation is that one should not focus on the government debt’s share of GDP, but instead, the interest expenditure’s share of GDP. As interest rates have been falling for almost 30 years, the result is that the US government’s annual interest payments have fallen to the lowest level ever, in percentage of GDP.
Therefore, one must think big, and use the low interest payment as a yardstick, which is the argument why a government should borrow much more than economists have historically been comfortable with.
One of the most fascinating things about the financial markets is that overall, they are never completely identical to any previous time in history. Therefore, one must be forward-looking and not look too far back at historical developments when the future movements are predicted.
Conversely, economic history is fascinating because one can really learn from prior developments. As it is said about history, it repeats itself if one doesn’t learn from it, and the same goes for economic history- it is worrying that a rising number of politicians around in the world have clearly never spent much time on economic history and could be misled by a personality like Janet Yellen.
One could argue that since the global financial crisis, the American economy has shown better growth than other Western countries, despite an increasing government debt-to-GDP ratio. Although, the US economy has also moved closer to the failing point, with an alarming speed.
The “Modern Monetary Theory” fails at the same point as it has during the past several hundred years of economic history. In my view, this underlines that the “Modern Monetary Theory” is not modern at all, but simply an excuse for not reforming the economy and keeping it fit.
The point of failure is when queens, kings, political leaders, governments, etc. trust that they can continue to grow the economy by controlling all parts of a country’s economy including the domestic financial market. The best way I can illustrate how I experience the political action is that politicians can also decide to suspend the Law of Gravity, which is possible, though it doesn’t eliminate gravity– it’s the same with how real economics work.
A good example from the past years is Turkey, where over the decade, the government has increased its control, including over the central bank. This sparked foreign investors to withdraw investments, which generated a freefall for the country’s currency and naturally resulted in high domestic inflation- even during the Covid-19 crisis, Turkey’s inflation is at 12 to 14 pct.
The American economy is the largest in the world and enjoys the advantage of having the only true reserve currency in the world. Still, even USA is slowly moving towards the same direction, which will concern some investors. The first signs of nervousness will be an increasing discussion about how to park money safely. I expect that a growing number of investors will choose to buy shares in global companies. It’s not to profit from rising stock prices, but simply because global companies will increasingly be seen as safer than governments when it comes to preserving savings.
Peter Lundgreen is the Founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment & finance. Peter is an international columnist and speaker on topics about the global financial markets.