Connect with us

Modern Monetary Theory After The Crisis (Part II)

Modern Monetary Theory After The Crisis (Part II)

Published

4 years ago

on

The uncertainty about the medical containment of the pandemic remains high, and forecasting at this point is largely an exercise in wild guesses. However, it seems likely that we will be in a environment of high unemployment even after a vaccine tames the virus. Modern Monetary Theory (MMT) will be highly relevant in that environment.

Current Situation: Not Many Options


The main policy decisions we currently face are largely medical: how hard does economic activity have to be locked down? Where to deploy medical resources? What activities will be safe to resume? How long do these policies need to be put into place?

The economic policies that are pursued are reactions to those medical decisions. Take the situation of the household sector as a key example. Many developed countries were unprepared for this pandemic, and so a lockdown was pursued. This entailed keeping households at home. Meanwhile, very few households had large financial buffers, and so a mass default event would be inevitable if no economic actions were taken. There were only three broad options:
  1. Do nothing, and liquidate households en masse. 
  2. Somehow put in place a standstill on fixed obligations.
  3. Hand out bridging cash flows.
Policy makers felt the first two options were not acceptable or workable, so the third (cash transfers) was the only option. Different countries followed different methods, reflecting differing institutional frameworks.

When we turn to the business sector, we faced the similar prospect of liquidation or suspended animation. 

The key point is that these economic decisions were forced by the facts on the ground, and economic theory had little to offer. Even if one could demonstrate that an alternative intervention was optimal, there is no hope of implementing it amidst the chaotic nature of the lockdown.

Once Activity Normalises, Policy Space is Wider

Once the medical interventions needed to control the virus are better understood. policy options will open up. It is safe to say that the positions of different countries will vary widely, but at the same time, widespread unemployment is extremely likely. The reasoning is straightforward: in addition to failed domestic businesses, global trade and activities like tourism will be crippled. This will create a demand-deficient environment that will in turn force retrenchment in things like the energy industry.

The implication is that we will be in an environment that has broad similarities to the post-2008 world.

Many people are calling for and/or expect deep structural changes to the capitalist system. This seems possible, particularly with respect to how the American health care system operates. However, I do not see any potential changes as being inevitable, so I will put them aside.

My argument is that Modern Monetary Theory will be in a good position to analyse the main economic issues of the post-Crisis environment. (I discussed some of the reforms associated with pandemic handling in a previous article. Those reforms are largely theory-agnostic.) 

Government Debt

Governments are being forced to throw around large amounts of cash in order to avoid a liquidation event, while at the same time, tax revenue is falling. Although the usual suspects are wailing about imminent hyper-inflation, no credible economists are worried about government debt levels now.

Based on past experience, this will not last. Once the stock market has resumed a bull market, fiscal conservatives will come out of the woodwork, worrying about the risks of a financial crisis created by bond vigilantes. (The solution will be to cut welfare state spending, and not to raise tax rates.)

My gut reaction is that these debates will be largely contained to the media and online. Hard money proponents will be emboldened by the validation of their prediction that the fiat currency system is susceptible to crises, and will push currency collapse stories. These partisans are mainly found in finance and online, and so there will be a flood of articles about upcoming government debt market collapses. Of course, this narrative will be opposed by MMT proponents, like myself.

Neoclassical economists in academia and central banks will largely be tut-tutting from the sidelines. Very few of them will want to align themselves with hard money investors who have been wrong about sovereign debt crises for decades. At the same time, they will want to avoid saying that MMT proponents were correct. So they will write hand-wringing articles about debt sustainability -- why it matters, but why not now.

Euro Area

Once again, the survival of the euro area is up in the air. The conclusion from Modern Monetary Theory (and was noted early on by others, such as Wynne Godley) is that the euro is a construct doomed to fail, as it lacks a central fiscal agency.

This pessimism is perhaps unwarranted; although the European project is supposed to be rule-based, the rules tend to only apply to small countries. The question is what legal dodges can be used to keep the common currency functioning. This is a topic that will be of intense interest to Europeans, but bewildering to outsiders like myself. Details of institutional structure will matter more than theory.

Job Guarantee vs. UBI vs. Helicopter Money

We have discovered the hard way that society needs a way to keep a minimal income flowing to households. I see three broad strategies. The existing strategy -- reliance on unemployment insurance -- broke down in this crisis.
  1. A Job Guarantee (the MMT preference).
  2. Emergency direct cash handouts on a time-limited basis. This was the strategy chosen. The policy is to put in place a permanent infrastructure to allow ready use. I call this strategy "helicopter money."
  3. A permanent Universal Basic Income.
There is very little doubt that emergency cash handouts ("helicopter money") was the correct policy in this crisis -- there was no time to build anything else. However, I would argue that a Job Guarantee would have accomplished the same thing: workers would have been told to "work from home" if there was nothing safe for them to do. Policymakers would just need to make the programme flexible to allow it to deal with similar emergencies in the future.

Since the Job Guarantee is a core part of MMT research, it will be of use in upcoming debates.

De-Globalisation

One popular way of phrasing MMT's view of fiscal policy runs something like this:
The central government can always pay for any goods or services offered for sale in the domestic currency.
When we look at the current situation, we see the obvious problem faced by policymakers: they face a shortage of critical protective equipment available for sale in the domestic currency.

Many post-Keynesians are obsessed about external financial constraints. However, if your trading "partner" commandeers equipment you are trying to purchase, we see that financial resources are not really the issue.

Countries need to concern themselves with securing supply chains of critical resources and materials. This does not mean that globalisation is necessarily dead; there are only few risks if you are dependent upon foreign countries for cheap plastic toys. Instead, countries need to focus on real resources, and think hard about where their real vulnerabilities are.

Inflation

Inflation is going to be a major theoretical obsession over the coming years. In the short term, there will be massive divergences in different components of the CPI. The highly vocal hard money partisans will highlight the prices that are rising (which will be highly visible), and argue that inflation data are being doctored by government bureaucrats. Given the bureaucratic failures (and outright lying) in the management of the coronavirus, these complaints will be landing in a fertile field.

Longer-term, it seems extremely likely that conventional models will suggest that NAIRU is over 10%. The only way to stop this will be bald-faced fudging with the models in order to get a plausible number. This environment will create demand for alternative theories of inflation, such as the one provided by MMT/post-Keynesian thought.

Interest Rate Policy

There will be a massive flood of papers that will attempt to find a mechanism by which to make interest rate policy relevant again. On the other hand, MMT proponents will stick to their stance that interest rate policy offers almost no way to stimulate the economy under current conditions.

Micro/Legal

I mainly look at top-down macro, but MMT is multi-disciplinary, including legal analysis. There should be an examination of the legal structures within our societies. The key area I see are around the environment for large corporations, as they have benefited at the expense of small firms during the crisis. 

Green New Deal

Most Western countries ignored the warnings of scientists for decades regarding pandemic risks. (Asian countries took the warnings more seriously, and performed better as a result.) There is a slight chance that the population might take other scientists' warnings more seriously, and Green New Deal policies will be of greater interest. Given the disarray of current economic arrangements, it is much harder to argue that these plans are disruptive -- there is a lot less activity to disrupt.

Although one can favour a "Green New Deal" without agreeing with MMT, many of the proposals have come from MMT proponents.

Concluding Remarks

In popular discourse, the same arguments we had the last decade are likely to repeat. The same ideological divide exists, and the underlying problem of deficient demand is the same. Modern Monetary Theory is likely to come up in those debates, since the core of the theory addresses the underlying issues.

As for academic economic theory, it is less clear what will happen. Adding epicycles to highly aggregated models is the path of least resistance, but of little relevance to questions around the deployment of particular real resources.


(c) Brian Romanchuk 2020

Read More

Related Topics:
Continue Reading

Uncategorized

Key shipping company files for Chapter 11 bankruptcy

The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.

Published

1 hour ago

on

March 14, 2024

By

The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.

The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.

Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible

Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.

The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.

Lawsuits force companies to liquidate in bankruptcy

Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.

California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.

The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.

The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.

In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.

Truck shipping products.

Shutterstock

Nationwide Cargo seeks to reorganize its business

Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.

The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.

Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)

The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023.  From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.

Related: Veteran fund manager picks favorite stocks for 2024

Read More

Continue Reading

Uncategorized

Key shipping company files Chapter 11 bankruptcy

The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.

Published

2 hours ago

on

March 14, 2024

By

The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.

The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.

Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible

Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.

The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.

Lawsuits force companies to liquidate in bankruptcy

Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.

California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.

The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.

The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.

In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.

Truck shipping products.

Shutterstock

Nationwide Cargo seeks to reorganize its business

Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.

The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.

Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)

The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023.  From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.

Related: Veteran fund manager picks favorite stocks for 2024

Read More

Continue Reading

Uncategorized

Tight inventory and frustrated buyers challenge agents in Virginia

With inventory a little more than half of what it was pre-pandemic, agents are struggling to find homes for clients in Virginia.

Published

4 hours ago

on

March 14, 2024

By

No matter where you are in the state, real estate agents in Virginia are facing low inventory conditions that are creating frustrating scenarios for their buyers.

“I think people are getting used to the interest rates where they are now, but there is just a huge lack of inventory,” said Chelsea Newcomb, a RE/MAX Realty Specialists agent based in Charlottesville. “I have buyers that are looking, but to find a house that you love enough to pay a high price for — and to be at over a 6.5% interest rate — it’s just a little bit harder to find something.”

Newcomb said that interest rates and higher prices, which have risen by more than $100,000 since March 2020, according to data from Altos Research, have caused her clients to be pickier when selecting a home.

“When rates and prices were lower, people were more willing to compromise,” Newcomb said.

Out in Wise, Virginia, near the westernmost tip of the state, RE/MAX Cavaliers agent Brett Tiller and his clients are also struggling to find suitable properties.

“The thing that really stands out, especially compared to two years ago, is the lack of quality listings,” Tiller said. “The slightly more upscale single-family listings for move-up buyers with children looking for their forever home just aren’t coming on the market right now, and demand is still very high.”

Statewide, Virginia had a 90-day average of 8,068 active single-family listings as of March 8, 2024, down from 14,471 single-family listings in early March 2020 at the onset of the COVID-19 pandemic, according to Altos Research. That represents a decrease of 44%.

Virginia-Inventory-Line-Chart-Virginia-90-day-Single-Family

In Newcomb’s base metro area of Charlottesville, there were an average of only 277 active single-family listings during the same recent 90-day period, compared to 892 at the onset of the pandemic. In Wise County, there were only 56 listings.

Due to the demand from move-up buyers in Tiller’s area, the average days on market for homes with a median price of roughly $190,000 was just 17 days as of early March 2024.

“For the right home, which is rare to find right now, we are still seeing multiple offers,” Tiller said. “The demand is the same right now as it was during the heart of the pandemic.”

According to Tiller, the tight inventory has caused homebuyers to spend up to six months searching for their new property, roughly double the time it took prior to the pandemic.

For Matt Salway in the Virginia Beach metro area, the tight inventory conditions are creating a rather hot market.

“Depending on where you are in the area, your listing could have 15 offers in two days,” the agent for Iron Valley Real Estate Hampton Roads | Virginia Beach said. “It has been crazy competition for most of Virginia Beach, and Norfolk is pretty hot too, especially for anything under $400,000.”

According to Altos Research, the Virginia Beach-Norfolk-Newport News housing market had a seven-day average Market Action Index score of 52.44 as of March 14, making it the seventh hottest housing market in the country. Altos considers any Market Action Index score above 30 to be indicative of a seller’s market.

Virginia-Beach-Metro-Area-Market-Action-Index-Line-Chart-Virginia-Beach-Norfolk-Newport-News-VA-NC-90-day-Single-Family

Further up the coastline on the vacation destination of Chincoteague Island, Long & Foster agent Meghan O. Clarkson is also seeing a decent amount of competition despite higher prices and interest rates.

“People are taking their time to actually come see things now instead of buying site unseen, and occasionally we see some seller concessions, but the traffic and the demand is still there; you might just work a little longer with people because we don’t have anything for sale,” Clarkson said.

“I’m busy and constantly have appointments, but the underlying frenzy from the height of the pandemic has gone away, but I think it is because we have just gotten used to it.”

While much of the demand that Clarkson’s market faces is for vacation homes and from retirees looking for a scenic spot to retire, a large portion of the demand in Salway’s market comes from military personnel and civilians working under government contracts.

“We have over a dozen military bases here, plus a bunch of shipyards, so the closer you get to all of those bases, the easier it is to sell a home and the faster the sale happens,” Salway said.

Due to this, Salway said that existing-home inventory typically does not come on the market unless an employment contract ends or the owner is reassigned to a different base, which is currently contributing to the tight inventory situation in his market.

Things are a bit different for Tiller and Newcomb, who are seeing a decent number of buyers from other, more expensive parts of the state.

“One of the crazy things about Louisa and Goochland, which are kind of like suburbs on the western side of Richmond, is that they are growing like crazy,” Newcomb said. “A lot of people are coming in from Northern Virginia because they can work remotely now.”

With a Market Action Index score of 50, it is easy to see why people are leaving the Washington-Arlington-Alexandria market for the Charlottesville market, which has an index score of 41.

In addition, the 90-day average median list price in Charlottesville is $585,000 compared to $729,900 in the D.C. area, which Newcomb said is also luring many Virginia homebuyers to move further south.

Median-Price-D.C.-vs.-Charlottesville-Line-Chart-90-day-Single-Family

“They are very accustomed to higher prices, so they are super impressed with the prices we offer here in the central Virginia area,” Newcomb said.

For local buyers, Newcomb said this means they are frequently being outbid or outpriced.

“A couple who is local to the area and has been here their whole life, they are just now starting to get their mind wrapped around the fact that you can’t get a house for $200,000 anymore,” Newcomb said.

As the year heads closer to spring, triggering the start of the prime homebuying season, agents in Virginia feel optimistic about the market.

“We are seeing seasonal trends like we did up through 2019,” Clarkson said. “The market kind of soft launched around President’s Day and it is still building, but I expect it to pick right back up and be in full swing by Easter like it always used to.”

But while they are confident in demand, questions still remain about whether there will be enough inventory to support even more homebuyers entering the market.

“I have a lot of buyers starting to come off the sidelines, but in my office, I also have a lot of people who are going to list their house in the next two to three weeks now that the weather is starting to break,” Newcomb said. “I think we are going to have a good spring and summer.”

Read More

Continue Reading

Trending