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The Three Trillion Dollar Response!
The U.S. Response to COVID-19 & Modern Monetary Theory in Action
By: Ryan Tracy, CFP®, Senior Consultant, The Wealth Office™
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Unprecedented times often call for unprecedented measures. None more representative of this is the response by the United States (and the world) to the COVID-19 pandemic, which resulted in trillion-dollar policymaking and rapid-response monetary action taken by global central bankers. In this article, we evaluate the actions taken by the United States government compared to historical responses. We also analyze a relatively new approach toward funding these types of measures.
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The Center for Strategic & International Studies (CISI) estimates that as of April 29, 2020, the G20 countries’ fiscal policy response to the COVID-19 pandemic was roughly $6.3 trillion dollars. This equates to 9.3 percent of the 2019 Gross Domestic Product (GDP) of the G20. Recall, GDP is the total value of all goods produced and services provided within a country’s boarders during one year. The heat map below helps demonstrate countries with the largest fiscal policy responses in total dollar terms, with the darkest shades representing the largest responses as a percentage of that country’s 2019 GDP1.
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In the United States, the fiscal policy response (actions taken by Congress) has reached nearly $3 trillion dollars or roughly 13.6 percent of 2019 GDP.
The question then is: How large is a three trillion dollar response? To put it into perspective, only five countries in the world have larger annual GDP figures for 20192. They are:
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1. United States – $21 trillion
2. China – $9.2 trillion
3. Japan – $5.2 trillion
4. Germany – $4.2 trillion
5. United Kingdom – $3.2 trillion
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In another equally impressive illustration of this financial magnitude, the COVID-19 response by the United States thus far in 2020 is larger than the following annual 2019 economies of:
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1. India – $2.9 trillion
2. France – $2.9 trillion
3. Brazil – $2.0 trillion
4. Canada – $1.8 trillion
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Not only has the United States’ response to the COVID-19 pandemic been unprecedented in terms of the sizeable pure dollar amount spent but also in terms of the exponentially faster speed at which the policy was enacted. Relative to other major legislative actions taken during similar crises, this one shatters the norms. During the Great Financial Crisis (GFC) of 2008-2009, for example, the government did not fully dispense of the full $1.47 trillion in aid and stimulus allocated until almost an entire year had passed:
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Comparing the actions taken during the GFC to the U.S. COVID-19 response, the aid package is more than double the size at $2.98 trillion thus far and was enacted in a fraction of the time at 49 days.
In prior years, the central question at this point would have been, “How does this all get paid for?” These days, though, a better question might be: “Do these funds ever need to be paid back?”
According to Stephanie Kelton, a leading expert on Modern Monetary Theory and a former Chief Economist on the U.S. Senate Budget Committee (Democratic Staff) and key advisor to Bernie Sanders’ 2016 and 2020 presidential campaigns, the potential answer to that question is, no.
The basic idea behind Modern Monetary Theory (MMT) is that the U.S. government has a monopoly on the U.S. dollar and as a result can create unlimited amounts of new dollars (via fiscal policy) as long as it doesn’t create runaway-inflation. Advocates of Modern Monetary Theory suggest that high levels of unemployment are indicative of economies that are operating at sub-optimal levels. Often, one of the textbook solutions is to increase deficit spending to boost the efficiency of resource deployment.
A tangible example of this is when the government spends $100 on a fiscal policy program and at a later date takes $90 from the economy in taxes. The residual $10 that wasn’t “taxed” back out of the economy (to ideally pay off the deficit spending) remains in the economy as a capital transfer. Essentially, the $10 is in someone’s pocket/bank account/investment portfolio rather than being returned to the government to reduce the deficit. Again, this is an effective and successful policy provided inflation does not persist in the economy. Therefore, governments like the U.S. that maintain this monopoly on their currency are able to carry permanent balance sheet deficits.
When a number like “a trillion dollars” propagates with such ease, it can be hard to conceptualize the relative size and scope of something that large. Our goal in those cases is the same as the objective of the work we always do for our clients: Help simplify these topics, shedding layers of complexity, carefully clarifying each point so you become better informed and make the most advantageous decisions possible for the financial future of you and your organization.
Should you have any questions about your personal portfolio or that of your organization, please reach out to any of the professionals at DiMeo Schneider & Associates, L.L.C.
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This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance and there is a possibility of a loss. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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