In addition to his years as a strategist with leading investment firms, Dr. Yardeni was previously an economist with the Federal Reserve Bank of New York and also held positions at the Federal Reserve Board of Governors and the US Treasury Department.
Following the Covid outbreak and crash, Dr. Yardeni warns that we have now entered a new era of Fed and government intervention with a wide embrace of Modern Monetary Theory (MMT), which will have important implications for markets and investors going forward.
Here's what he had to say when we spoke with him on FS Insider (see Ed Yardeni: US Govt Using Modern Monetary Theory on Steroids for audio).
US Under Heavy Drug Use
The response to the Great Financial Crisis (GFC) of 2008-2009 was thought to be both unconventional and extraordinary given the large amount of stimulus, plunge in interest rates, and trillions in money printing conducted at the time. Many thought that we might never escape an addiction to such policies once implemented.
Now, in the wake of the Great Virus Crisis (GVC) of 2020, we’ve seen an extraordinarily greater amount of intervention into the markets and the economy, far outstripping anything we've seen in history. Also, there is very little discussion of an exit strategy at this point thus reinforcing the addiction to cheap and easy credit, Yardeni noted.
“In many ways, the Great Virus Crisis has been a world war against this virus... The unconventional has become conventional. (The Fed) now describes quantitative easing, zero interest rates and ultra-easy forward guidance, as they call it, as part of their toolkit. That's where we are on the monetary side. On the fiscal side, there's never been anything like this. We’ve had one stimulus program after another, adding up to several trillion dollars, and that's where we are now. Perhaps one way to describe this is Modern Monetary Theory on steroids and speed.”
What Kind of Inflation Will We See?
The main controversy that has resulted from the embrace of Modern Monetary Theory by the Fed and by the Treasury is whether their policy actions will bring inflation back. These policies have clearly brought back asset inflation, Yardeni noted. The stock market continues to move to record highs, and home prices are still exploding.
We need to look no further than action in Bitcoin and Gamestop to see this play out. Much of this behavior appears to be irrational exuberance. What’s more, the Treasury and the Fed now appear to be working hand-in-hand to provide an enormous amount of stimulus, essentially in policy lock-step.
We’re seeing implementation of what has been called, 'Helicopter Money,' as official fiscal policy. With massive stimulus spending, the question becomes, how will this liquidity affect inflation?
“In some ways, the phrase, ‘Helicopter Money,’ has become so yesterday... It's really more like B-52 money. They've been loading up the B52s with massive amounts of cash to drop on the economy and consumers. … I've tried to stay away from being a preacher, in terms of declaring what they're doing is good or bad. As an investment strategist, my day job is to focus on whether it is bullish or bearish. Clearly, whatever the amount of money it adds up to be, it's a huge amount. I like to focus on M2, the monetary aggregate, which includes most of the liquid assets that are available in our economy. It's up a staggering $4.2 trillion over the past 12 months through February. That's never happened before. That's liquidity that hasn't really been spent. … It certainly has the potential to continue to stimulate not only economic growth, but also inflation, both in asset prices and possibly even in consumer prices.”
Where Do We Go from Here?
In some ways, it appears the Fed and the Treasury are playing a game of whack-a-mole, Yardeni noted. Every response to each emerging crisis may be creating the conditions for the next crisis, he stated.
Now, however, we’re seeing policy take on proportions not imagined even at the worst of the Great Financial Crisis.
For example, the Fed has effectively backstopped the corporate bond market, and this action appears to have been effective. The stock market already appears to be in a melt-up phase, Yardeni noted.
We may be on our way to another financial crisis, he noted, but this begs the question: what happens when the next crisis hits?
“In terms of the next crisis, my guess is we will see more of the same,” Yardeni said. “It's hard to imagine that there are too many new tools, other than the ones that both the Fed and the Treasury have been using. They’re basically throwing money out the window at passersby, and hoping they pick it up and end the crisis. But, of course, another related issue is, does all this money actually set the stage to create the next crisis? … We seem to go from crisis to crisis. … There’s $4 trillion more in M2 than there was a year ago. We're floating in liquidity, but the risk is, we drown in it.”
This was just a small portion of our full 45-minute interview with Dr. Yardeni on the US government using MMT on steroids. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer