Yellen's pitch, Trump's last day, and another busy day for earnings.
Former Fed Chair Janet Yellen puts on her new fiscal cap for the first time today as she faces the Senate Finance Committee for her confirmation hearing as Treasury Secretary. While Yellen is probably a "known quantity" to many senators, her role today will be to help sell President-elect Joe Biden's $1.9 trillion stimulus plan. While many of the measures it contains can squeak through with the slimmest-possible majority in the Senate, Biden's preferred route is to get enough bipartisan support for the package to achieve the 60-vote supermajority needed for quick passage.
President Donald Trump will depart Washington tomorrow morning before the inauguration of Joe Biden to begin his life as an ex-president at his Mar-a-Lago resort in Florida. While much will be written about his legacy as a leader of the U.S., the thing that matters for markets will be how many of his policies survive the opening weeks of the new administration. Already Biden has promised to rejoin the Paris Agreement on global warming, kill the Keystone XL pipeline, and push for greater adoption of green technology. Spending on the border wall will stop, taxes will increase on higher earners and corporations, and it looks like Wall Street regulation will get tougher.
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Speaking of Wall Street, earnings season for the big banks continues today with Bank of America Corp. and Goldman Sachs Group Inc. reporting before the open. Last week's results from JPMorgan Chase & Co. went some way toward tempering investor optimism about the sector, with the likelihood of increased scrutiny under the Biden administration possibly also set to weigh on any earnings surprises today. State Street Corp. and Charles Schwab Corp. also report today.
U.S. investors missed little during yesterday's holiday, as news of strong economic data from China was met with a mixed reaction amid reports of further American measures against Chinese tech companies. Overnight, the MSCI Asia Pacific Index added 1.2% while Japan's Topix index closed 0.6% higher. In Europe, the Stoxx 600 Index had gained 0.1% by 5:50 a.m. Eastern Time ahead of a crucial vote in Italy's parliament that will decide the fate of Prime Minister Giuseppe Conte's government. S&P 500 futures pointed to plenty of green at the open, the 10-year Treasury yield was at 1.118%, oil held above $52 a barrel and gold gained.
Janet Yellen's testimony in the Senate begins at 10:00 a.m. U.S. TIC flow data for November is published at 4:00 p.m. For oil investors, who already have this morning's IEA demand warning ringing in their ears, the Atlantic Council Global Energy Forum begins. While Wall Street earnings will dominate the early running, after the close Netflix Inc. will report. Investors will be looking for how the company, which has long dominated online video streaming, is performing against a slew of new competitors.
What we've been reading
This is what's caught our eye over the weekend.
And finally, here’s what Joe's interested in this morning
Treasury Secretary nominee Janet Yellen will face a Senate hearing today where she'll argue, among other things, that now is the time to spend nearly $2 trillion on more Covid relief. In light of all this spending, and the Fed buying billions of dollars worth of bonds, commentators are all talking about how we're "going full MMT" or "trying some crazy MMT experiment" or something like that. So once again it's time to clear up some misconceptions about what MMT is and isn't.
- Aggressive deficit spending isn't MMT. It's just fiscal stimulus, the likes of which the U.S. has done many times before. The government might be spending on a historically large scale these days, but still, that just means it's a large fiscal stimulus.
- QE isn't MMT. The Federal Reserve buying bonds represents a swap of long-term government liabilities (Treasuries) for short-term government liabilities (reserves held at the Fed). It's a tool that central banks employ, in part, to signal their desire to keep rates low. It's not that new or special. It's not even clear if it does very much.
- Low rates aren't MMT. Low rates are just low rates.
- Low rates + QE + fiscal stimulus all at the same time isn't MMT. It's just monetary policy and fiscal policy both pushing toward expansion at the same time.
OK, so then what's MMT? Well, here's a beginner's guide. But for our purposes, below are a few things to keep in mind:
- The MMT view is that government spending is always based on monetary financing. This is key. It doesn't matter whether deficits are high or low. It doesn't matter whether rates are 0% or 5%. It doesn't matter whether the Fed is buying bonds or shrinking the balance sheet. The MMT view is that a country like the U.S., which issues and spends its own currency, always finances spending the same way: by creating money. This is as true now as it was during the Clinton surplus years.
- As such, conventional notions of spending sustainability (like the size of the deficit or debt-to-GDP) are useless. Instead, the main constraints on spending are political (will politicians allocate the money?) and real (are there enough real resources in the economy to absorb the spending?). If there is a shortage of real resources, we would expect to see inflation. Inflation is the indicator that spending is unsustainable, not some arbitrary ratio.
- Therefore, the goal of budgeting shouldn't be to set government outlays and tax revenues equal to each other, but to achieve full employment. Furthermore, fiscal policy (not interest rate policy) is seen as the primary tool for achieving full employment and macro stability.
Now it is true that attitudes around the deficit and spending are changing. Deficit-phobia is on the way out. Appreciation that fiscal policy is a powerful tool is in. The idea that full employment is a good thing is also in. So it's true that many premises advanced by MMTers are making headway in the broader debate. But in terms of policies that we're doing or seeing right now, it's all conventional stuff on a large scale to address a very large crisis.
Joe Weisenthal is an editor at Bloomberg.
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