Back in 2017, I travelled to Baltimore for a three-day meeting.
It was my first time visiting the small city full of rich architecture. The day before the meeting, the hosts had organised a tour around the city for us, so I went along to it.
We passed by the Washington Monument, the first monument in the US dedicated to President George Washington, and the Baltimore Basilica, which prides itself on being ‘America’s First Cathedral’…or so I had read on a pamphlet the hotel had left in my room.
As I found out during the tour, that wasn’t exactly right.
The first Washington Monument is really in a little town called Boonsboro, in Maryland. As the guide told us, when Boonsboro heard Baltimore was building the monument, they rushed to build their own to beat them to the punch.
And the Baltimore Basilica isn’t actually America’s first cathedral. The oldest, and in consequence, first cathedral in the US is in New Orleans, which was under French rule at the time the cathedral was built.
While we toured several historic buildings around Mount Vernon, I had a great chat with the man sitting next to me on the bus. His name was Richard Duncan, author of The Dollar Crisis: Causes, Consequences, Cures.
Richard had an interesting take on central bank policies.
His view was that in the next crisis, the US government should borrow and spend to support the economy to keep it from falling into a depression, even if this spending inflates asset prices because if they didn’t, the economy could collapse.
That is, it’s better to increase asset prices with their policies than to have the economy crash. His view was that this was the best of two bad options, a between-a-rock-and-a-hard-place scenario.
We could take decades to recover from a complete collapse of the system.
The idea is that if governments keep spending, by the time the crisis is over, the economy will look much similar to what it did before the crisis.
It’s something we kind of trialled and tested during the 2008 crisis. Low interest rates and easy credit pumped the property bubble. When the bubble popped, central banks pumped money into the system to keep things from collapsing.
The take-home lesson has been that central banks can create money and governments can borrow it without driving interest rates higher.
Since then, we’ve had higher stock and properties prices.
Richard argued central banks should continue to print money and allow the government to run budget deficits without worrying about interest rates.
And if governments can continue to take on debt without increasing interest rates, what should they do with all that extra money?
Richard argues they shouldn’t waste it, but invest it. Invest it in technologies and future industries.
Things like AI, biotechnology and…ahem…greener energy.
This would incite a technology revolution that would improve people’s lives, boost economic growth, and increase productivity.
I must admit, I was a bit sceptical. I wasn’t convinced you could control the economy in such a way and that these policies would have huge consequences. I’m still not.
But remember, this was 2017.
When the next crisis hit (the pandemic), this is exactly what happened.
Differently from 2008 though, they didn’t wait for things to slow down. Central banks flooded the system with stimulus to pre-empt a crisis. They sent money to locked-up consumers and businesses, and money kept ticking through the economy.
It’s kept unemployment numbers down, while fuelling a rally in the stock market and properties.
The US Fed balance sheet has now gone from about US$800 billion before the 2008 crisis to US$4.5 trillion in 2015, and then up close to US$8 trillion today.
We have no idea how this experiment will turn out.
The problem is that this pandemic is a whole different beast from all the previous crises.
I mean, in 2000 and 2007 asset bubbles popped…liquidity drained from the system. Central banks then pumped stimulus.
This time everything is even more out of whack, and we have no idea what the economy really looks like with consumers stuck at home.
We don’t really know once lockdowns end if we will see higher spending and demand, and an inflation uptick…or if unemployment will go higher and people will stop spending.
We don’t know how we will emerge out of this one.
But in the last few years, we’ve also gotten several glimpses of what could happen if central banks stop stimulus. The latest being this week, when the Fed shifted slightly on interest rates and markets dropped.
The US Fed has been saying they’re in no rush to raise rates, and that the inflation we’re seeing is transitory. We’ve seen inflation show up in commodities and in cars. Much of it seems to be coming from supply disruptions.
But as I wrote last week, the tone was already changing prior to this.
While last year the expectation was that the Fed was looking at raising interest rates no earlier than 2024, during this week’s meeting we found out that some members are expecting this could happen earlier, with two rate increases in 2023.
But what is certain in my mind is that central banks won’t stop stimulus unless their hand is forced.
We could see plenty of money flowing into advancing new technologies, and in particular, things like the energy transition.
Central banks have already been showing plenty of interest in it.
In April this year, for example, the G20 finance ministers and central bank governors met and agreed that addressing climate change and promoting environmental protection was an increasingly urgent matter.
It could be the growth story for decades to come.
For The Rum Rebellion
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.