What would Milton do?

In yesterday’s post, I pointed out that the fear that many Americans – and in particular some GOP Senators – have about the effects of passing a huge new coronavirus relief bill aren’t justified simply by examining the facts. There’s no reason to fear that we’ll just be giving more control of our debt to the Chinese, since it’s likely that the great majority of the debt created will be held by the Federal Reserve – we’ll literally owe the debt to ourselves. There’s also no reason to fear that the huge bill will cause either interest rates or inflation to jump, since the markets clearly don’t fear either eventuality, and there’s no inherent economic reason why either interest rates or inflation should go up because of the bill.

However, I realize that it still doesn’t seem right. After all, if I decided to shore up my family’s finances by taking on a huge debt with no realistic likelihood of paying it back anytime in the foreseeable future, I’d be justly condemned – and of course I wouldn’t be extended the funds I wanted anyway. Yet it seems we’re asking for a free lunch. How can that work?

Perhaps the person most associated with the words “There is no such thing as a free lunch” is Milton Friedman, who wrote a book titled exactly that (the phrase originated long before him, though). Yet, having studied with Friedman at the University of Chicago a long time ago, I can assure you that he wouldn’t use that to argue against another big relief bill at this time – or the three other huge bills that have already been passed.

This is because you have to look at what Friedman believed was the ultimate driver of economic fluctuations: variations in the money supply. He tried to demonstrate this in his huge study (with Anna Schwartz) of the US economy since the Revolutionary War: “A Monetary History of the United States”. In that, he tried to show (and basically succeeded, IMHO) that the biggest downturns in the US economy had been driven by big drops in the money supply, or even just a slowing of the constant rate of growth that he advocated for good times and bad – around 2% a year.

When I took courses with him, he had become well known for attacking the Federal Reserve for allowing the money supply to expand too rapidly in the late 1960’s and early 1970’s. This led to a huge bout of inflation in the 1970’s, culminating in a 12.4% rate of growth in the Consumer Price Index in 1980 (which of course made Jimmy Carter a one-term president).

However, in the two courses I took with him, he regularly went off topic – the subject was microeconomics – and pointed out why the Great Depression had been so bad: The US money supply had fallen by about one third during 1931 and 1932, the last two years of the Hoover administration, by far the largest drop in history. People didn’t trust the banks and pulled their money out, making many of them insolvent. When the banks failed, the businesses that depended for them on credit failed. And the resulting unemployment simply snowballed because unemployed people don’t have money to spend.

What could Hoover have done to keep this fall from happening? For one thing, he could have just told the Federal Reserve to print lots of money and made the banks whole (even though some of them had failed because of the effects of fraudulent activity they’d engaged in, that led to the stock market crash in 1929). He could have mailed checks to everybody who was unemployed – of course, there was no unemployment insurance at the time. Even better, he could have started large-scale public works projects like those that Franklin Roosevelt launched a few years later, which put millions of people back to work.

But of course, Hoover did none of these things, because he couldn’t see beyond the prevailing ideology – and certainly the consensus of economists at the time – that, when a country starts to see tough times, it needs to do just what a family would do: cut back its spending. Unfortunately, that’s literally the opposite of what needs to be done. A dollar I send at the store is a dollar that others receive as income. If consumers are all retrenching, it’s up to government to step in and fill the gap with spending of their own. And the deeper the downturn, the greater the amount of spending that’s needed.

Of course, we learned this week that US GDP fell in the second quarter by 9.5%, or about 34% at an annual rate. This is the biggest fall since at least the demobilization after World War II, and perhaps since the Great Depression itself (modern economic statistics weren’t compiled until the postwar period). Sure, we’ve spent something like $5 trillion already. But this obviously isn’t enough, especially since employment is falling steeply again, after rebounding some in May and June. We need to spend a lot more. And Friedman would agree with this.

So is there really a free lunch to be had in this case? No. However, you could call this a lunch we’ve paid for in advance. The huge GDP drop last quarter greatly reduced overall demand. We’re just stepping up and restoring some of the demand that was lost then. The point is to do what we can to keep these from becoming permanent losses, meaning our economy and our country would be permanently shrunken, for no reason other than that we were worried about having a free lunch.

The numbers

These numbers are updated every day, based on reported US Covid-19 deaths the day before (taken from the Worldometers.info site, where I’ve been getting my numbers all along). No other variables go into the projected numbers – they are all projections based on yesterday’s 7-day rate of increase in total Covid-19 deaths, which was 5%.

Note that the “accuracy” of the projected numbers diminishes greatly after 3-4 weeks. This is because, up until 3-4 weeks, deaths could in theory be predicted very accurately, if one knew the real number of cases. In other words, the people who are going to die in the next 3-4 weeks of Covid-19 are already sick with the disease, even though they may not know it yet. But this means that the trend in deaths should be some indicator of the level of infection 3-4 weeks previous.

However, once we get beyond 3-4 weeks, deaths become more and more dependent on policies and practices that are put in place – or removed, as is more the case nowadays - after today (as well as other factors like the widespread availability of an effective treatment, if not a real “cure”). Yet I still think there’s value in just trending out the current rate of increase in deaths, since it gives some indication of what will happen in the near term if there are no significant intervening changes.

Week ending	Deaths reported during week/month	Avg. deaths per day during week/month	Deaths as percentage of previous month’s
March 7	18	3
March 14	38	5
March 21	244	35
March 28	1,928	275
Month of March	4,058	131
April 4	6,225	889
April 11	12,126	1,732
April 18	18,434	2,633
April 25	15,251	2,179
Month of April	59,812	1,994	1,474%
May 2	13,183	1,883
May 9	12,592	1,799
May 16	10,073	1,439
May 23	8,570	1,224
May 30	6,874	982
Month of May	42,327	1,365	71%
June 6	6,544	935
June 13	5,427	775
June 20	4,457	637
June 27	6,167	881
Month of June	23,925	798	57%
July 4	4,166	595
July 11	5,087	727
July 18	5,476	782
July 25	6,971	996
Month of July	26,102	842	109%
August 1	6,846	978
August 8	7,269	1,023
August 15	7,486	1,069
August 22	7,828	1,118
August 29	8,185	1,169
Month of August	32,596	1,051	125%
Total March – August	188,820

I. Total deaths

Total US deaths as of yesterday: 155,306

Deaths reported yesterday: 1,466

Yesterday’s 7-day rate of increase in total deaths: 5% (This number is used to project deaths in the table above; it was 5% two days ago. There is a 7-day cycle in the reported deaths numbers, caused by lack of reporting over the weekends from closed state offices. So this is the only reliable indicator of a trend in deaths, not the three-day percent increase I used to focus on, and certainly not the one-day percent increase, which mainly reflects where we are in the 7-day cycle).

II. Total reported cases

Total US reported cases: 4,635,226

Increase in reported cases since previous day: 67,189

Percent increase in reported cases since 7 days previous: 9%  

III. Deaths as a percentage of closed cases so far in the US:

Total Recoveries in US as of yesterday: 2,285,613

Total Deaths as of yesterday: 155,306

Deaths so far as percentage of closed cases (=deaths + recoveries): 6%

For a discussion of what this number means – and why it’s so important – see this post. Short answer: If this percentage declines, that’s good. It’s been steadily declining since a high of 41% at the end of March. But a good number would be 2%, like South Korea’s. An OK number would be 4%, like China’s.

I would love to hear any comments or questions you have on this post. Drop me an email at tom@tomalrich.com

We shouldn’t be worrying about the deficit now

Note: I wrote this for my Pandemic Blog, but I think the topic is important enough to include it in this blog as well.

The US economy clearly needs a lot of help – as today’s second quarter GDP number will undoubtedly show. A new aid package will be approved soon, but it seems a number of GOP Senators are digging in their heels because of a renewed concern about the deficit. While I realize there are political reasons for their saying this, I think it’s important to address their argument on its merits, because a lot of people will think it actually makes sense.

Of course, if we’re going to hand out $1-3 trillion dollars in new aid (on top of what’s already been approved), we’re not going to increase taxes to pay for it; it will result in an increased deficit. This means we’ll have to borrow the money for this new package. So our national debt will increase by that amount.

OK, our debt increases. What’s the problem with that? The interest rate we’ll pay will be very close to zero, so that’s not an issue. Of course, the problem is we’ll have to pay the money back when it’s due (say 10-30 years from now). Yet we don’t even have to pay it back then; we can always extend it, especially if the interest rate stays close to zero (and current interest rate futures markets don’t show any big jump coming anytime in the future. This doesn’t mean that a big jump couldn’t happen – just that it’s certainly not inevitable).

The big issue is that at some time in the future, the people who hold this debt may lose patience or trust in the US and they’ll demand – through the markets – that we either pay it back or extend it at a much higher interest rate. However, this ignores an important fact: It’s certain that these lenders we’re so worried about will be – either entirely or in the greater part – ourselves. This is because the Federal Reserve will buy all the debt that can’t be adequately financed at a very low rate. Chairman Powell has been urging Congress to spend big to prevent an outright Depression, which shows the Fed will do everything it can to allow this to happen.

This brings the question down to: Where will the Fed get the money to pay for all of this debt they’re going to buy? Do they have some sort of reserve – like the gold supply at Fort Knox – that they can tap into? No, any reserves the US has are owned by the Treasury. The Fed will create money to pay for this debt (which of course can be done simply by a credit to the Treasury’s account at the Fed. Wouldn’t it be nice to open your bank statement and see there’s an extra $3 trillion that wasn’t there yesterday? I’d be willing to settle for much less than that!).

So the real objection to further increasing the deficit at this point comes down to the question: What’s the downside of the money supply suddenly increasing by $3 trillion? Is it a totally “free lunch”? There are only two possible negative consequences: Interest rates will jump sharply, or inflation will jump sharply.

What do markets expect will happen? As far as interest rates go, long-term rates aren’t much higher than short-term rates; in fact, there was in recent months an “inverted yield curve”, meaning long-term rates were lower than short term. This is an implicit forecast for rates to go lower, not higher. And since the Democratic relief package was passed in May and had a $3 billion price tag, this has certainly already been included in the market’s expectations.

So how about inflation? Will the Fed’s actions to increase the money supply result in a big run-up in inflation down the road? Again, the markets don’t think so. The interest rate on inflation-adjusted bonds, which serves as the market’s “forecast” of inflation, is very close to the rate on “regular” bonds, meaning the market doesn’t believe inflation will increase significantly in the next ten years. Again, this forecast is based on the knowledge that a big relief package will be passed soon (which it will, although it doesn’t look likely this week).

Of course, the GOP Senators all know this. Yet they still believe that further running up the deficit will spell disaster for the US. I have an idea: They need to hear some words of comfort from someone that they all look up to: Milton Friedman. He’s no longer with us, but tomorrow I’ll share a point that he made over and over again during the two courses that I took with him at the University of Chicago in…hmm, I can’t seem to remember the year. In any case, it was a little while ago. But the words are as true today as they were then.

The numbers

Worldometers.info just restated their numbers for deaths and cases for recent days, and it seems things might not be as bad as I thought yesterday – i.e. the death projections may not be as grim as I thought. However, I want to wait at least a day before I do another projection, since they might restate their numbers again.

So I’ve simply filled in the actual numbers from yesterday. These show some marked improvements – with the 7-day rate of increase in total cases down to 10% from 12%, and the 7-day rate of increase in total deaths down to 4% from 5% (restated from the 6% based on yesterday’s numbers). I hope these are real!

I. Total deaths

Total US deaths as of yesterday: 153,840

Deaths reported yesterday: 1,485

Yesterday’s 7-day rate of increase in total deaths: 4% (This number is used to project deaths in the table above; it was 5% two days ago. There is a 7-day cycle in the reported deaths numbers, caused by lack of reporting over the weekends from closed state offices. So this is the only reliable indicator of a trend in deaths, not the three-day percent increase I used to focus on, and certainly not the one-day percent increase, which mainly reflects where we are in the 7-day cycle).

II. Total reported cases

Total US reported cases: 4,568,037

Increase in reported cases since previous day: 66,921

Percent increase in reported cases since 7 days previous: 10%  

III. Deaths as a percentage of closed cases so far in the US:

Total Recoveries in US as of yesterday: 2,189,592

Total Deaths as of yesterday: 152,358

Deaths so far as percentage of closed cases (=deaths + recoveries): 7%

For a discussion of what this number means – and why it’s so important – see this post. Short answer: If this percentage declines, that’s good. It’s been steadily declining since a high of 41% at the end of March. But a good number would be 2%, like South Korea’s. An OK number would be 4%, like China’s.

I would love to hear any comments or questions you have on this post. Drop me an email at tom@tomalrich.com