I’ve just read and watched the unprecedented statement from the British Chancellor of the Exchequer. Shortly after him, within a matter of hours or days the US Congress will come to a similar place – with their own twist on it of course.
Someone asked me just what this money is. Where does it come from and what is it really – a loan, a repo or something else, maybe money printing.
The answer is, qualitatively the same for all people putting in place fiscal stimulus right now.
It’s based on several things but probably the best analogue are the warbonds which had no maturity but would be called at the appropriate time (the last of which weren’t called until last decade). It is unprecedented. It’s also impossible to foresee the long term consequences of this. I’m sure people are thinking about them. Ironically perhaps – this is how you get inflation because supply side is going to become more and more strained the longer borders are closed and people can’t work. Prices can and will go up because of that – not because we’ve got more money. However, this will clearly be offset by people not actually having money. It’s a hugely risky strategy – but clearly the risks of doing nothing will be worse. Rishi Sunak has just promised to cover 80% of salary up to 2500 per month indefinitely. This is astonishing and tremendously welcome but tells you just how scared everyone is by the economic impact of this. If you’re not taking this seriously right now then you are, simply, a fool. A government composed of right wing nationalists and fiscal conservatives for whom Hayek and the Chicago school remain idols have just announced Universal Basic Income and an effective socialisation of salary and all of society’s risks. This is the tiger making dinner for the rabbit, it’s the coyote apologising to Roadrunner. (and for those in the know…don’t be Peck.) The term unprecedented here is both correct and far too small to underscore what’s going on.
Back to the question of ‘how do we pay for this?’
Well I mentioned warbonds earlier. Specifically those from WWI and II. They didn’t think about how they would repay – the nation was supposed to be facing an existential crisis. So they borrowed from a future they hoped was there to be borrowed from. The sense of desperation here is the same. We fail and it’s a generational depression to make the financial crisis look like losing your lunch money vs. losing your house and being forced to live on the street.
If we successfully meet this challenge? Well then we’ll worry about the implications then. What’s clear is no western country, especially the UK, will be the same after this. The US still has a journey to go on but they too will be no less different after this is over and, perhaps a silver lining, but this will be a real insulation against partisan politics and especially popularists because the virus respects nobody. It’s not an innoculation but like a large volcanic eruption can stall climate change, this can stall the growth of populism if only for a time.
I’m not sure there’s anything further to say – beyond this point everything is speculation. There are precious few voices I’m interested in listening to on this right now – I’m kind of absorbing lots and filtering 95% of it as the noise people make when they’re scared – it’s all shouting and fear and fastening onto any details which people see that appear new.
Yet the above is relevant. The government is doing something beyond the wildest fantasies of any serious economist I know – including me. You may criticise them all you like but I’ll have less respect for you if you do (see my reference to Peck). I guarantee you, you don’t know better and you wouldn’t do better. The choices made today by Sunak and by other European countries ahead of him this week and by the US over the weekend are literally undreamt of – not simply because the world economy was never structured to allow it (and there’ll be a lot of previously important influencers in the system who will now either fall into line or disappear into irrelevance) but because fundamentally literally no one could imagine this situation and moreover, no one can foresee the consequences of this in a month, a year or a decade.