In his address to the American people earlier this week, President Joe Biden added to his spending proposals. He wants the U.S. government to spend some $6 trillion it doesn’t have to take better care of us folks.
Under modern monetary theory, not having ready money in hand to spend on us is not a problem for President Biden. He can just order it up from the Treasury and the Federal Reserve System and dump the money into the economy, seemingly free of charge.
Some call this “helicopter money,” just dumped down on the washed and unwashed alike.
Biden and the modern monetary theorists are not alone in promoting such public largess. Liquidity transfusions into real economies is the template for a new system of nationalized capitalism. It’s all the rage in Europe, Japan and China, to name just a few open-pocket governments.
Perhaps we should ask that ancient practical question: Cui bono? – “Who benefits?”
Now, I want to go beneath the surface in thinking about this question. Of course, those who get the cash benefit – renters, those needing health care, students, others with subsidized living expenses, workers on infrastructure projects, federal, state and local bureaucrats and in some intangible way, society – will benefit from increased public goods flowing from provision of such private goods. We have no way of measuring, as an offset, any public “bads” that might also come with these gifts of money.
But once the money is spent by its recipients, where does it go? Mostly, it seems to flow ultimately into financial markets. Middle and lower income people will spend it on consumption. That will send money to those they buy from. Ultimately, the money floats up to the wealthy. They don’t consume so much, so they put their money in assets, mostly financial assets.
The flow of liquidity into financial assets raises asset prices, day in and day out. Cui bono? Obviously, the owners of financial assets. These are mostly the top 1% and 10% of society.
So, the result of helicopter money is to make the rich richer in the short and long runs and the not-so-rich a little better off in the short-run.
Consider the growth in global liquidity:
Consider the result of liquidity creation on the purchasing power of the U.S. dollar:
Consider the stasis of average American incomes for the last 50 years:
Consider the shift in income towards the wealthy:
Consider the growth in the Dow Jones and the S&P 500:
Now, here are some news stories on what happens when financial assets appreciate:
Venture funds bask in blockbuster profits. Sutter Hill made a $190 million investment in Snowflake Inc. Last month, it distributed $12 billion in profit from that investment. Sequoia Capital invested $235 million in Airbnb, which is now worth $14 billion.
With companies using SPACs or special purpose acquisition companies to issue stock to the public, The Economist reported that about half of recent SPACS are losing money. Nevertheless, the 50 firms studied collectively report some $1 billion of gross operating profits. They forecast their profits to rise to $15 billion by 2023. Five new electric vehicle companies, which were ushered into public markets in 2020, expect to go from no revenue to $10 billion in revenue in five years. And people invest in these projections. The cost of money is so low, why not, especially if you are a billionaire? What else are you going to do with it, buy another mansion?
Four executives who ran GameStop in the most recent stock market bubble are leaving the company with stock worth $290 million at market price.
Market prices for all assets are on a tear-up! And who buys assets to push prices up even more? Those who already own assets.
On April 27th, Microsoft won from buyers of its shares a market capitalization of $1.97 trillion. Good for those who owned those shares, but what about you and me?
As I asked above: Cui bono?