From the good professor today at the AFR:
Proponents of an old idea in new clothes – modern monetary theory (MMT) – argue that central banks can solve all these problems by simply buying the large amounts of government debt and increasing the money supply…This can only be described as a classic free lunch.
…The basic problem with MMT is it has been tested by countries and the result has always been hyperinflation, massive social and economic destruction and a crisis followed by more conventional economic policies being imposed. All existing experience – Venezuela today, Zimbabwe in 2008; Yugoslavia in 1994; Hungary in 1946; Greece in 1944; Wiemar Germany in 1923 – demonstrate the large costs.
…Most taxes are transparent such as income or profit taxes but the usual tax that eventually finances large and persistent fiscal deficits and exploding government debt is the inflation tax.
Well, yeh. Except when it doesn’t. Like now, when we face a full court press of lowflation in wealth imbalances, fading demographics and a slowing China. Nor is the MMT proposal just about financing excessive public debt, it’s about deleveraging excessive private debt by boosting non-debt driven demand. The only other ways to achieve that are very difficult productivity reforms that pollies never do, cramming down creditors which pollies never do, or various kinds of trade and shooting wars.
MMT can always be turned off when inflation is generated. And so long as the central bank is still independent it will cut it off automatically with higher interest rates when crowding out drives inflation higher. That’ll finally give capitalism its most fundamental price back.
But don’t just believe me, ask…Professor McKibbin from last year:
“If we ever got to a situation that Europe or Japan is in, I’d move straight to helicopter money,” Professor McKibbin told The Australian Financial Review.
Rather than using quantitative easing – which he says aims to lower long-term interest rates but can often hurt savers, particularly older people living off fixed incomes – he says it makes more sense to have the central bank print money for the government to spend.
“You bring down the barriers between the fiscal accounts and the monetary accounts. Therefore the government spends and puts money in the hands of people.
“It’s really a last resort measure and you need a way to rein in the inflationary pressures once they emerge.”
Quite right, old boy.