In the aftermath of the coronavirus, we face the strong possibility of a deflationary depression. We cannot allow that to happen.
This is going to mean significant amounts of government debt, and much of it will have to be monetized by the Federal Reserve. I fully get that means risking an inflationary episode as a result.
In order to get inflation, there has to be a big rise in demand along with a jump in the money supply.
We are going to see the money supply climb higher, yes. But we cannot be sure that we’ll see a concurrent spurt in demand growth that tops pre-virus crisis levels.
This crisis could emotionally scar a generation just as much as the Great Depression affected our grandparents and great-grandparents.
We were still recovering from the Great Recession just 10 years ago, and that makes us especially vulnerable.
Look at what happened in Japan after its economic bubble burst and recession hit in 1990. The country responded with massive monetary stimulus similar to what the U.S. is considering now. Even that did not result in inflation in Japan.
The Japanese became savers. It literally changed their habits.
Other habits are serving them well during this pandemic. Bowing is more customary than handshaking. Many wear masks during travel. And, for better or worse, their increasingly elderly population experiences isolation.
Japan’s 38 million people are doing their part to slow the coronavirus’ spread, perhaps without even trying. We could learn something from them.
There are ways to control an inflationary episode. There is damn little you can do with a deflationary depression. It will bring some changes.
First, our response to the virus crisis will change the way we structurally organize our business lives. Companies are learning that they can do more remote work. Employees will enjoy that. We may not need as much office space.
We are also going to realize that we might need less of certain things. Which means a lot of jobs that existed pre-crisis are simply not going to come back in any viable form, post-crisis.
The government cannot keep a small business going beyond a certain point. Pick a number. Three months? Six months? Many business owners and employees will be forced to figure out a Plan B and find something else to do.
Second, the U.S. ramped up for World War II. Then when the war was over, the soldiers came home and resumed their civilian lives. America cannot stay on a wartime footing for more than a few months after the crisis ends. No permanent government programs. Period. This is important.
Third, let’s assume we keep everybody afloat for six months, although I sincerely hope it is not that long. An extreme lockdown could mean a few months, not six months. What do we do after the virus is contained and we have vaccines?
If we are going to blow out the budget anyway, let’s sell a few trillion dollars of 100-year, 1% bonds and use all the proceeds on infrastructure projects over the next four years.
No techno wizardry like high-speed trains. Stick to the foundationals, like replacing our roads, bridges, water systems, and upgrading our electricity grid.
This may seem radical, but the world can absorb those bonds along with the other bonds we will need to sell.
The process will get a bit prickly, but we’ll figure it out. And we don’t have to issue the entire amount on day one. Rather, just as the money is needed, which reduces inflationary risk.
That will put people back to work—in particular, those people whose jobs are no longer viable. And we actually get something for all that money—revitalized infrastructure that will last for generations. Gods know we need to spend money on infrastructure. It is crumbling.
Fourth, I hate to say this. I truly do. But we may be in a period like at the end of WWII where the Fed controlled the entirety of the yield curve. Maybe this is the Great Reset 1.0, or a good practice round. Let’s do what we can and learn from it.
None of us wanted this crisis and it’s certainly not good. But we can take this lemon and make lemonade. Or at least we have the opportunity.
The Great Reset: The Collapse of the Biggest Bubble in History
New York Times best seller and renowned financial expert John Mauldin predicts an unprecedented financial crisis that could be triggered in the next five years. Most investors seem completely unaware of the relentless pressure that’s building right now. Learn more here.