The Garden of Earthly delights is a very famous painting by Hieronymus Bosch that hangs on the walls of the Prado museum in Madrid, Spain. It is a tryptic painting, composed of three sections: heaven, the earth and hell. Could they represent our current options for the post COVID-19 world?
I would have loved to name this post as Brave New World, but it seemed kind of kitsch and worn out, as I have no crystal ball to see the future, but there is something in Huxley’s 1932 book that might hint to a what we may see in the post COVID-19 world.
I read the novel in high school and it takes place in a dystopian society that creates artificial humans, manages emotions with a drug called SOMA and with an unrecognizable society that has recognized casts that everyone respects. War and poverty have been eliminated and everyone is permanently happy, but at the high cost of eliminating the concept of family, cultural diversity, arts and sciences, literature, philosophy and love.
Our current predicament.
We are now amid a global economic crisis and that can be read about in any regular news outlet. The problem that is exploding in all politicians’ hands worldwide is what I will try to humbly explain.
The value of money, is a concept that has been questioned and which I have written previously. As many surely know, link between gold and currency was severed by Nixon in 1971. At that moment a severe depreciation of the US dollar began. The purchasing parity of wages in the USA is today below what it was in 1973. To make the concept easy to understand, the example is that buying a house in the 50s and 60s took fewer years of wages than after the 1970s.
With the rise of financial derivatives in the early 70s and their explosion in the 90s-2000s, a massive amount of “fake money” was created. Combined with the fact that the USA became the vacuum cleaner that sucked the whole worlds money to finance its consumption, a flow of capital was inverted. Traditionally, developed economies invested and sent their capital to the developing nations. With the massive commercial surpluses of Asian countries starting in the early 90s, everything changed. Now developing countries started sending their surpluses to developed economies. A massive amount of money was now available, and this led to the cost of money (interest rates) collapsing. Europe reached negative interest rates in 2019 and the USA is arriving there in 2020.
Since there is no traditional product to save money that pays something worthwhile such as bank accounts, CD’s and many bonds, other asset classes start taking the lead as wealth shelters. Many don’t provide cash flow; the bet is having an asset that will hold on to value on the long term. Some are:
- Precious metals
- Sovereign debt of developed countries
- High grade corporate bonds
- Equities (stocks) : Central Bank of Switzerland and Japan, are massive equity investors.
- Real estate
- Cryptocurrencies: a bet on it being a new gold standard
As I learned operating markets, fundamental and technical analysis are pretty much of no use in the era of central bank intervention. All asset values have fallen and negative yields are now a truth.
We are living real-time macroeconomics, there are no longer any textbooks and theories. Neither Keynes nor Hayek lived through a pandemic combined with commodity deflation in an over indebted society that is managed by central banks that print money as if they were alchemists. Fortunately, I am not an economist by profession, as everything I would have learned might have become obsolete the past two weeks. As all my regular marketing skills were made obsolete by digital marketing, so have my macroeconomic skills. Now everyone is a theorist, me included.
The first time I actually grasped what was going on was in 2018 when I was reading Spanish economist Daniel Lacalle’s book, The Central Bank Trap.
Despite a war on trade between the US government and China, P/E ratios where the highest in history, and the fact that the FED lost its battle to wind down its balance sheet because of government pressure to keep the stock market running at full speed did not send the correct signal.
Modern Monetary Theory makes a landing.
MMT as it is known, can be studied on Wikipedia, and basically says that a nation can produce the money it requires for whatever purpose it deems necessary. In other words, print whatever money it requires to keep people happy, even if that means sending them a check. This is what is called the Universal Basic Income theory. In 2017, Finland tested it out and backed away after a couple of months. In 2016, Switzerland voted No on a referendum on handing out a Universal Basic Income.
Until early March, only democratic primary candidate Andrew Yang, spoke about Universal Basic Income and proposed sending out everyone a 1,000-dollar check. On March 17th, treasury secretary Mnuchin and president Trump went on a press conference that basically let everyone know that MMT was landing and that they would print whatever it took as necessary to keep cash flowing. Basically, Trump ended executing Andrew Yang’s platform to find a way to avoid economic collapse.
Chancellor Merkel from Germany and President Macron from France said basically the same thing.
With the sudden loss of demand, deflation will surely occur, if people are not driving and consuming, gas prices will be rock bottom. Now it is everyone’s guess what will happen, this is unknown territory.
And this brings the big issue for individual investors:
What is going to be the future value of asset classes?
(Precious metals, equities, oil, bonds, real estate, crypto, currencies such as dollar, euro, yen, yuan)
I do not have an answer to that question. Until today, the dollar has been a value shelter with most currencies losing value to it. It is also a sign that the world is short on dollars.
Buying dollars and keeping them in a bank account has been the best trade so far, knowing that all my other assets are changing value in a way that is unknown to me at the moment.
I am sure that humanity will overcome the pandemic, and if government and banks work together as they should, they should finance business and person for a while, and then give them a long-term payback schedule.
I am also sure that society will not tolerate a repetition of 2008 where banks were saved at a huge fiscal cost, but the executives in charge of the banks ended all being free millionaires even though they traded in products their brains could not possibly understand, with massive risks and massive ambition. Lots of fiscal printing was done to keep the financial system flowing. This time the printing will have to focus on main street and back street. Unless everyone gets their fair share of help, scenes like the yellow jackets in France and the disturbances that destroyed the metro system of Santiago de Chile in one day, could become quite widespread and common.
The era of big government is here.
Fiscal stimulus will bump government debt way beyond what was considered reasonable. National debt bellow 100% will seem a thing of past naive days. Maybe the new standard will become something between 100 and 1000% debt to GDP. Deficit control, maximum debt ceilings will all become issues of the past.
How does an economy work with these new rules? No one yet knows. Everyone is still creating theories or trying to find one that fits from a book made in the 1930s.
How will this as a society change us? Can democracy still exist in the era of big government?
Are we heading to a dystopia as Huxley’s Brave New World, or Ayn Rand’s, Atlas shrugged?
What will happen?
This is a question nobody really knows, specially politicians and economists. I hope for the best and hope that we do not live Bosch’s version of hell. I doubt that MMT will take us to live in Bosch’s version of heaven either as many politicians have promised. I just hope that the vision of earth in the center of the painting continues with improvements regarding our behavior towards others, our nature and specially ourselves.
Originally published in Spanish in March 20th of 2020.