The Capital Note

Has Wall Street Veered Left?

A Wall Street sign outside the New York Stock Exchange in New York City (Carlo Allegri/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: a paradigm shift on Wall Street, Airbnb’s IPO, China’s private-sector crackdown, and the Lindy Effect.

Has Wall Street Veered Left?

From the start of the COVID-19 pandemic, Wall Street has been exhorting Washington to spend more money. The CARES Act, which added $2 trillion to the debt, was greeted with enthusiasm by investors. During the current round of stimulus negotiations, markets have moved in lockstep with Washington.

It’s a far cry from the 1990s, when “bond vigilantes” sold of Treasuries and thwarted Bill Clinton’s stimulus programs. Back then, traders punished government profligacy; now, they embrace it.

Some industry veterans take this shift to mean Wall Street is veering left. In a recent Business Insider piece, Paul McCulley — former managing director at PIMCO and longtime proponent of Modern Monetary Theory (MMT) — is quoted as saying that Wall Street’s fiscal dovishness is “about as wholesale a paradigm shift as you can imagine. I can see a comfortable relationship between Wall Street and a more progressive Democratic agenda going forward.”

There’s some evidence to support that theory. To take one example, a Goldman Sachs research note issued before the election argued that a “blue wave” in which Democrats won the White House, the Senate, and the House would bolster economic growth because of “substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook.”

But while investors may be less concerned about the federal debt than they were in the past, there’s little evidence that their economic models are fundamentally changing.

Put simply, the main disagreement between neoclassical and left-wing economists centers on employment. The latter group — post-Keynesians, neo-Marxists, MMT adherents, etc. — sees chronic underemployment as a fundamental feature of market economies. On that view, as an economy grows, capital owners accumulate wealth and invest it, putting upward pressure on the prices of assets and downward pressure on consumption. As consumption decreases, economic growth slows, and inflated asset prices leave the financial system sensitive to frequent turmoil.

The role of fiscal policy, then, is to drive consumption by redistributing income to workers through tax cuts, transfers, and public-works programs. In order to avoid economic fluctuations, fiscal authorities need to intervene consistently, not only during recessions. That’s why John Maynard Keynes argued that the “somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.”

The stimulus measures Wall Street is cheering on now are more like traditional countercyclical policy on steroids than post-Keynesian policy.

Keynes might have argued for massive infrastructure investment, a Green New Deal, and a host of other public works that would boost employment. In contrast, most of the “fiscal” stimulus passed this year is aimed at stabilizing the money supply. Close to $1 trillion of the $2 trillion CARES Act went to small-business loans and Fed lending facilities, and a sizeable chunk of unemployment insurance and stimulus checks went to fixed costs such as housing — the kinds of expenses that would previously have been alleviated by interest-rate cuts.

Hyman Minsky, a leading post-Keynesian, explained in 1975:

The economy is now a controlled rather than a laissez-faire economy; however, the thrust of the controls is not in the direction envisaged by Keynes. Investment has not been socialized. Instead, measures designed to induce private investment, quite independently of the social utility of investment, have permeated the tax and subsidy system. The strategy has not been to operate on the distribution of income so as to raise the consumption-income ratio; rather, the strategy has been to increase corporate untaxed income, which tends to lower the consumption-income ratio.

Around the Web

Airbnb shares double on IPO, bringing the startup’s market cap to $86 billion.

Foreign investors have spent years waiting with bated breath for China’s private sector to be unleashed. Xi Jinping has other ideas:

China’s most powerful leader in a generation wants even greater state control in the world’s second-largest economy, with private firms of all sizes expected to fall in line. The government is installing more Communist Party officials inside private firms, starving some of credit and demanding executives tailor their businesses to achieve state goals . . . In some cases, it is taking charge entirely of companies it regards as undisciplined, absorbing them into state-owned enterprises.

Tyler Cowen has a (partial) change of heart on Brexit:

Projected EU budget deficits could run as high as 9% of GDP, due largely to the pandemic. These deficits are largely unavoidable, and the U.K. is doing the same. Still, patching together the euro zone with budget deficits of that size is going to absorb a great deal of the EU’s energies in the coming years. What if it is necessary to forgive a lot of Italy’s debt to hold the euro zone together? Can you imagine a messier and more contentious debate?

Random Walk

In the Financial Times yesterday, a Morgan Stanley strategist argued that Bitcoin could end the dollar’s reserve-currency status.

I was struck by this paragraph:

Before the US, only five powers had enjoyed the coveted “reserve currency” status, going back to the mid-1400s: Portugal, then Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average. At the start of 2020, the dollar’s run had endured 100 years. That would have been reason to question how much longer it could continue, but for one caveat: the lack of a successor.

That’s the wrong way to think about it.

In Antifragile, Nassim Taleb explains:

If a book has been in print for forty years, I can expect it to be in print for another forty years. But, and that is the main difference, if it survives another decade, then it will be expected to be in print another fifty years. This, simply, as a rule, tells you why things that have been around for a long time are not “aging” like persons, but “aging” in reverse. Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness. The robustness of an item is proportional to its life!

If we buy the Lindy Effect, the dollar’s hundred-year reign as the global reserve currency should not be interpreted as a sign that it has outlived its usefulness, but that its life expectancy is longer than those of other currencies.

— D.T.

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