The outlines of a post-pandemic world are just starting to take shape. Winners are likely to emerge in the industries one might expect—highly skilled and educated professionals in technology and health care.

At least for now, though, the world looks harsh for less fortunate people. About 40% of all American households making $40,000 or less lost a job in March, Federal Reserve Board chairman Jay Powell said in a May 13 webcast. Another 20 million jobs were lost in April, so one can only assume millions in the bottom income tiers were among them.

The current public health crisis differs from anything Americans have seen in their lifetimes. During the financial crisis, it was easy to blame irresponsible lenders, borrowers and regulators. After the tech bubble crashed, delusional investors made a convenient target while the unemployment rate grew from 4% to only 6%.

This time around, the pain is much deeper and wider. There is really no one to blame—certainly none of the 36 million and counting individuals who have lost their jobs.

The first several rounds of stimulus were widely accepted, but that could be about to change when the bills keep piling up. With the $3 trillion in new federal debt being just table stakes and global central banks opening up the spigots like never before, the world is witnessing a full-blown experiment in Modern Monetary Theory (MMT).

It’s worth examining how some believe MMT, which holds that government can freely use money supply expansion to finance employment-driven fiscal policy, encourages reckless spending and poor capital allocation that ultimately leads to moral hazard. It’s doubtful Jay Powell ever thought five months ago he would be leading the laboratory test for MMT. Now he has no other choice.

How will it play out over the next decade? That was the subject of a presentation by Lacy Hunt, executive vice president of Hoisington Investment Management, at John Mauldin’s Strategic Investment Conference in May. Even before the longest economic expansion in history ended abruptly in March, the economy was already vulnerable. Much of the global economy was in worse shape.

Hunt noted that inflation never reached 2% for any sustained period, and interest rates were near historic lows. “We’ll be moving to a deflation rate of [a] couple of hundred basis points,” he predicted.

When the economy starts to recover, the initial numbers may look impressive because they are coming off a period when entire industries were shut down. But the total U.S. debt-to-GDP ratio should exceed 400% in 2020, eclipsing its level after the Great Recession, and that’s a problem, according to Hunt.

“When debt to GDP rises above 250% to 275%, it slows GDP,” he observed. Anyone who doubts that might want to examine the Japanese experience over the last three decades.

Savings Rate Headed Higher
The good news for financial advisors is that the personal savings rate of about 8% is fairly healthy. Past experience reveals that it tends to rise after events like World War II or the financial crisis, at least among people who remain employed. Even if restaurants, bars, movie theaters and other entertainment outlets reopen over the next few months, consumer spending is likely to remain subdued for several years.

Take private savings out of the equation, however, and the story line shifts. The federal budget deficit was running at 6%, and Hunt expects it to go to the 14% area this year. Throw in corporations, many of which have been dissaving by borrowing to buy back their stocks, and one gets a negative national savings rate.

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