Pro Perspectives 1/15/21


January 15, 2021

Biden talked about his “American Rescue Plan” last night.  This is a proposed $1.9 trillion, in addition to the $900 billion that has yet to be spent from the late December aid package. 

And that does not include money for what he’s calling his “Build Back Better” recovery plan.  That’s the climate action economic transformation plan.  That will be another $1 trillion plus, probably $2 trillion.

Understand, this climate action plan is not a Biden aspiration, necessarily.  This is a global plan.  The U.S. is just now on board with it, with a new President.

In fact, a policy group in Canada wrote a paper back in June on a green energy economic plan for the Canadian government.  Guess what it was titled?  Building Back Better.

So, we have to wonder, what the consequences will be for the world that deficit spends its way to economic transformation, funded by central banks buying their own debt.  We know the early investors in the climate action initiative will get rich (the same ones that conceived, promoted and influenced the execution of these plans), but what will happen to the countries executing these plans?

This is the current picture of the U.S. Federal debt…

We should expect several trillion to be added to this $27 trillion. That’s against a $20 trillion economy.  But this plan, also in line with the initial covid policy response, is all about increasing the nominal value of the economy (inflating GDP through higher asset prices) and devaluing the debt (paying it back with less valuable dollars).  

With this fiscal and monetary strategy, the first assumption is that the currency gets punished.  But currencies are valued relative to other currencies.  With that, if everyone is doing it, the currencies look unscathed.

We can see that in the dollar.  It’s in a typical long-term bear cycle, but no extraordinary decline or volatility.

But as we know, the dollar has been punished relative to asset prices. The price of practically everything is going up, and will continue to.  And at some point, likely soon, we will begin seeing it in the Fed’s favored inflation measures.  Then the true test will come:  Will the massive investment in growth (and recovery), produce hot enough real growth (after adjusting for inflation).