Dr Doom hoses MMT

Via Nouriel Roubini:

With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. When that happens, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it.

A cloud of gloom hovered over the International Monetary Fund’s annual meeting this month. With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. Among other things, investors and economic policymakers must worry about a renewed escalation in the Sino-American trade and technology war. A military conflict between the United States and Iran would be felt globally. The same could be true of “hard” Brexit by the United Kingdom or a collision between the IMF and Argentina’s incoming Peronist government.

Still, some of these risks could become less likely over time. The US and China have reached a tentative agreement on a “phase one” partial trade deal, and the US has suspended tariffs that were due to come into effect on October 15. If the negotiations continue, damaging tariffs on Chinese consumer goods scheduled for December 15 could also be postponed or suspended. The US has also so far refrained from responding directly to Iran’s alleged downing of a US drone and attack on Saudi oil facilities in recent months. US President Donald Trump doubtless is aware that a spike in oil prices stemming from a military conflict would seriously damage his re-election prospects next November.

The United Kingdom and the European Union have reached a tentative agreement for a “soft” Brexit, and the UK Parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point. Finally, in Argentina, assuming that the new government and the IMF already recognize that they need each other, the threat of mutual assured destruction could lead to a compromise.

Meanwhile, financial markets have been reacting positively to the reduction of global tail risks and a further easing of monetary policy by major central banks, including the US Federal Reserve, the European Central Bank, and the People’s Bank of China. Yet it is still only a matter of time before some shock triggers a new recession, possibly followed by a financial crisis, owing to the large build-up of public and private debt globally.

What will policymakers do when that happens?

One increasingly popular view is that they will find themselves low on ammunition. Budget deficits and public debts are already high around the world, and monetary policy is reaching its limits. Japan, the eurozone, and a few other smaller advanced economies already have negative policy rates, and are still conducting quantitative and credit easing. Even the Fed is cutting rates and implementing a backdoor QE program, through its backstopping of repo (short-term borrowing) markets.

But it is naive to think that policymakers would simply allow a wave of “creative destruction” that liquidates every zombie firm, bank, and sovereign entity. They will be under intense political pressure to prevent a full-scale depression and the onset of deflation. If anything, then, another downturn will invite even more “crazy” and unconventional policies than what we’ve seen thus far.

In fact, views from across the ideological spectrum are converging on the notion that a semi-permanent monetization of larger fiscal deficits will be unavoidable – and even desirable – in the next downturn. Left-wing proponents of so-called Modern Monetary Theory argue that larger permanent fiscal deficits are sustainable when monetized during periods of economic slack, because there is no risk of runaway inflation.

Following this logic, in the UK, the Labour Party has proposed a “People’s QE,” whereby the central bank would print money to finance direct fiscal transfers to households – rather than to bankers and investors. Others, including mainstream economists such as Adair Turner, the former chairman of the UK Financial Services Authority, have called for “helicopter drops”: direct cash transfers to consumers through central-bank-financed fiscal deficits. Still others, such as former Fed Vice Chair Stanley Fischer and his colleagues at BlackRock, have proposed a “standing emergency fiscal facility,” which would allow the central bank to finance large fiscal deficits in the event of a deep recession.

Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetized by central banks should be used to stimulate aggregate demand in the event of the next slump. To understand what this future might look like, we need only look to Japan, where the central bank is effectively financing the country’s large fiscal deficits and monetizing its high debt-to-GDP ratio by maintaining a negative policy rate, conducing large-scale QE, and pursuing a ten-year government bond yield target of 0%.

Will such policies actually be effective in stopping and reversing the next slump? In the case of the 2008 financial crisis, which was triggered by a negative aggregate demand shock and a credit crunch on illiquid but solvent agents, massive monetary and fiscal stimulus and private-sector bailouts made sense. But what if the next recession is triggered by a permanent negative supply shock that produces stagflation (slower growth and rising inflation)? That, after all, is the risk posed by a decoupling of US-China trade, Brexit, or persistent upward pressure on oil prices.

Fiscal and monetary loosening is not an appropriate response to a permanent supply shock. Policy easing in response to the oil shocks of the 1970s resulted in double-digit inflation and a sharp, risky increase in public debt. Moreover, if a downturn renders some corporations, banks, or sovereign entities insolvent – not just illiquid – it makes no sense to keep them alive. In these cases, a bail-in of creditors (debt restructuring and write-offs) is more appropriate than a “zombifying” bailout.

In short, a semi-permanent monetization of fiscal deficits in the event of another downturn may or may not be the appropriate policy response. It all depends on the nature of the shock. But, because policymakers will be pressured to do something, “crazy” policy responses will become a foregone conclusion. The question is whether they will do more harm than good over the long term.

Actually, MMT and inflation would still be the appropriate response to a supply shock. We need inflation to monetise private debts and lift interest rates to give capitalism back a pricing mechanism. Any wage push inflation resulting from deglobalisation would thus be quite welcome.

An unusually obtuse effort by Dr Doom.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. This is LOL stuff. He did so well through the GFC, only to now face diminished relevance by resorting to mis-characterisations. What he’s described is the Krugman view. Oh well, back to the hot tub, doctor …

  2. Any increase in interest rates will without a shred of doubt collapse the US economy entirely beholden to its LVO’s – there is 100% no question on this issue.

    MMT directly into households – any MMT at all – will unleash inflation and there is just no question on that matter as it would be an alternative to wage increases.

    Consider official interest rates in Australia at 5% – it would crash our economy over night – I think there would very few people who would argue the point with any seriousness. Let alone 8%.

    That said – bring it on. Would love to see it happen. No place on earth deserves an absolute shellacking more than this festy cesspit.

    ..

    • Genghis
      It may not create inflation. It may create a greater Current Account Deficit. This is where we have been for the last 30 years – more imported cheap goods means low inflation numbers but an exploding CAD.
      Certainly we will get one or the other! It’s a brilliant economic strategy!!!

  3. C.M.BurnsMEMBER

    What is the transmission mechanism for high asset and consumer goods inflation to transfer into high wage inflation ?

    The mechanisms that were in place during the 70s and 80s, which enabled the ‘inflate our debt away’ response to those crisis, have been systemically broken down to the point of irrelevance. You here at MB write about it all the time (mass immigration and the slave economy).

    You can’t, IMO, propose that we will be able to inflate away private debts without also proposing a clear way that the transmission mechanism(s) will be re-established

  4. ” We need inflation to monetise private debts and lift interest rates to give capitalism back a pricing mechanism. Any wage push inflation resulting from deglobalisation would thus be quite welcome.”
    I can’t believe I’m reading that on here as a solution to what ails us!
    Any increase in wages will go into exactly the same box as all the others over the last several decades – leverage to take on more household debt, to ‘invest’ in speculation.
    It doesn’t matter where the fuel comes from ( call it MMT if you will) but without a change in community mindset, increased wages are going to make things worse!

    • MMT = Fair debt jubilee = the Weimar solution

      It is looking inevitable by the day.

      The next episode: “Return of the Barter” Coming soon to the city near you.

      • In an informal way, I’m seeing a bit more bartering.
        The potential has always been there( I’ll swap some of my fruit for your vegetables, I’ll do a dinner for you in return for this done), but all of a sudden, I’m seeing lots of it where I didn’t previously.
        And, also, people want to come and look at my veggie garden, chooks, fruit trees etc. it’s always been regarded as my little eccentricity, but now others want to follow.
        I sense a few people are more nervous than they were. Not all- some of my closest, most conservative friends have got into multiple interest only properties- so plenty of that still around. Can’t believe it watching them.
        But I’m sensing a slight change in the wind.

  5. “…Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetized by central banks should be used to stimulate aggregate demand in the event of the next slump…”

    That is a pretty accurate description of what is being proposed and there are plenty of reasons to question the wisdom of those approaches…not that the article discusses them. The main problem is that NONE of those approaches attempts to deal with the fundamentally broken model that has produced the current mess.

    It would be nice if we had some discussion of that broken model.

    Why on earth should the general public be limited to only using liabilities of the Central Bank in the form of notes and coins.

    If they are permitted to deal with notes and coins why not let them operate accounts at the Central Bank as well.

    Why not allow them to save money in an account at the Central Bank.

    If people wish to have a punt by investing some of their money good luck but it is outrageous that they are forced to use private bank accounts to “save” as the only alternative to cash in the freezer..

    Once the general public has access to Central Bank accounts for a 100% safe method of saving we can unwind the dysfunctional and corrupt public/private cartel whereby private banks are given a monopoly on the ability to offer ‘deposit’ accounts to the general public.

    In future banks will be limited to offering unsecured investment accounts – which is what technically their ‘deposit’ accounts currently are.

    If banks wish to attract funds and try to blow asset price bubbles with those ‘investment’ funds they will be free to try but they will be unable to hold the public monetary system hostage as most of the population will have their ‘core’ savings perfectly safe in the central bank (or in the freezer).

    The only people at risk from a bank making reckless loans will be their investors and that risk is why they are earning a return on their investment.

    Until we start talking about this fundamental problem and instead continue to kid ourselves that our broken private bank monetary model can be “fixed” we are going nowhere fast.

  6. “We need inflation to monetise private debts and lift interest rates to give capitalism back a pricing mechanism.”

    We don’t need that at all. We have a pricing mechanism in effect, it’s called foregone (future) consumption, which is what debt is by definition. I’ll tell you what we need.

    “Any wage push inflation resulting from deglobalisation would thus be quite welcome.”

    We don’t so much need debt inflation, and its particularly obscene to have inflation amortise debt levels away. What we need is increased wage share. All monetary driven inflation will do is recalibrate prices, not make workers better (other than paying less for debt, which means someone else is paying for it).

    A petty robber baron thinks he is clever paying workers less, for the same output, in other words getting something for nothing.

    However, when everyone does it, then who do you expect your customers to be?

    In every economic battle for the last 2 generations…
    Labour vs capital
    Environment vs business
    Productive vs oligarchs/monopolies/rent seekers

    Business has been the beneficiary every single time for 35 years. How much more favouritism do they need before it becomes ‘better’?

    A market is the alignment of business and its customers. Pro-market is not necessarily pro-business, more so when you’re neglecting one side of the equation. One way customers are looked after is how do they bring about their claim to the economy?

    The fantasy element of trickle down economics is if more share is given to capital (taken away from wage share) then they’ll invest more.

    It’s bullshit, they will not invest in any more production if their customers can’t afford to buy the product.

    Keynes proved this.

    • The proof of that pudding is in the numbers, particularly in the US, at the moment. Little investment in research and production. Plenty in share buy-backs to raise the share price to get the big bonuses.

    • bolstroodMEMBER

      You said it better ,I quite agree,

      https://www.macrobusiness.com.au/2019/10/employers-industrial-relations-demands-would-smash-wages/
      my comment from this post;
      Comments

      bolstroodMEMBER
      October 29, 2019 at 5:44 pm
      This is a fools errand that busines and the LNP goverment are on. This is a favourite idea of the Moron class LNP.
      The results will be less money in the economy, therefore less activity, higher unemploymentand less profit for business, a revival in union involvement, and quite likely a rise in forceful worker countermeasures. (I can only hope.)

      REPLY

  7. The object of trying to create inflation is to make RAT interest rates even more negative. Yep !! That’s a great policy. It has ALWAYS worked so well so far!! How the hell does anyone think we got to this current debt mess?
    Lower (more negative) interest rates equals more debt!

    • As the entire planet is being cornered, the Weimar solution (or Zimbabwe / Venezuela / Argentina solution) looks inevitable by the day.

  8. the only way to create good inflation (one driven by average income growth) is: debt jubilee
    when population is so much in debt even handing cash around doesn’t help create inflation

    once RBA buys most of our junk RMBSs it’s going to be easy to implement debt jubilee. But it has to come with some way of addressing moral hazard.
    One way would be to implement some kind of soft bankruptcy, which will prevent all people whose debt is being erased from getting a credit for a while (5-10 years). Also, people with savings would need to be compensated somehow, one way would be via backdated interest on their savings. Also, people without savings or debt would need to be compensated, maybe via interest free credits.
    I know these ideas sound crazy to you but that’s the only way out.

    • And what will happen to the creditors and the bond holders in a debt jubilee?

      If everyone is compensated in full, that would be nothing other than the Weimar solution.

  9. I could not find the MMT in what Roubini was banging on about, seems he confuses neo – new Keynesian with Post Keynesian administration and then calls it left wing. Absolutely no one in the MMT – PK group is suggesting QE for the people for the same reasons its anti UBI – it goes straight to Capital.

    Seems Roubini is fronting for bond holders ….

    • It doesn’t really matter the label or form it takes.
      His point is that MMTs prescription for high unemployment is fiscal policy financed by money – whatever form that might take.
      But that only works in one narrow circumstance. ie. where growth is constrained on the demand side and interest rates are zero so qty money demanded explodes as it become a perfect substitute for bonds.
      It doesn’t work where high unemployment is caused by a supply shock it would just add fuel to the fire. You can argue whether it would do much damage – personally I don’t think it would as the cost of inflation is. generally overstated imo.

  10. He is completely correct.
    Take a future supply shock. Let’s call it say… Brexit.
    This would drastically reduce global demand for UK assets and goods and lower real GDP. Because it’s a supply shock employment would be less effected. Real wages would fall.
    MMTs prescription, finance the deficit with money to even further tank the pound and unmoor inflation.
    Classic example of why MMTers can’t see that their policy only makes sense when aggregate demand is depressed and money qty demanded is infinite (eg interest rates are stuck at zero).

    • Because MMT is not looking at global demand for stuff, it washes it self via FX or open markets. MMT is more concerned about the fundamentals of the sovereign state and it citizens in the long run. Roubini is making a neoclassical argument about MMT in the dominate economic purview. His peal clutching about Argentina says it all – what will the IMG say – ZOMG – bond holders … cough Singer sorts … barf~~~~~

      This is the same dreck pushed [oblivious too] pre GFC and sprinkled with all the heads on fire post GFC, with the IMF pushing austerity from the U.K., E.U., South America et al, and even the U.S. and now everyone is going more right wing, with a few attempting to return to some semblance of a center that is now considered leftist. Then some about bang on about globalization … which is it …

      • ok so this is a good chance for MMT to put their cards on the table.
        A not impossible scenario; there’s a hard brexit (supply shock per Roubini) bottlenecks at customs etc. real GDP falls significantly, unemployment goes up but not to the same degree.
        What does MMT advise the UK – currently running a CAD 5.5% of GDP – to do? Money financed deficit to maintain full employment or not?

        • Might help if rubini did not confuse yang sorts with MMT or use it to concot strawmen. MMT is not using neoclassical econometrics, it seeks to change that to set a foor and use taxes reflecting that wrt inflationistas.