Exclusive Gerard Minack: MMT the new normal. Get over it

Special report from Gerard Minack:

Monetising deficits has started.  Expect it to stay.

The helicopters have arrived.  Central banks are printing money to fund expanding government deficits.  I expect them to stay: fiscal will remain the lead instrument for cycle management through the coming expansion, and it will be backstopped by central banks.  Deployed with sufficient vigour – which will be a matter of political will, not ability – this will end the era of secular stagnation.

The Fed is now fully monetising the expansion of the US Federal budget deficit.  The Fed isn’t directly crediting money to the Government – the Treasury bonds are being laundered by a fleeting period of private sector ownership – but this is in every way that matters pure monetisation.

Exhibit 1 shows the 12 month change in the budget deficit – the deficit over the year to June was $2.1tr larger than the deficit over the year to June 2019 – and the 12 month change in the Fed’s Treasury holdings.  At the end of June the Fed owned $2.2tr more Treasuries than it did in June 2019.  Bingo.

Exhibit 1 also shows how this cycle differs from the prior cycle.  Budget deficits widened amidst the GFC, but there was no synchronisation with Fed balance sheet changes.  More to the point, the waves of quantitative easing through the subsequent expansion (the periodic increases in the red line in Exhibit 1) coincided with fiscal contraction.  QE proved to be an ineffectual macro stimulant, while fiscal tightening was a significant headwind for growth. Policy will be much more effective boosting growth now than it was in the prior cycle because it is being led by fiscal.

A few follow-on points:

First, the Federal Reserve continues to have a ‘small’ central bank balance sheet, at least when balance sheets are measured relative to the size of the economy (Exhibit 2).  (Note that Exhibit 2 shows the size of the overall balance sheet, while Exhibit 1 showed the change only in the Fed’s outright holdings of Treasuries, not all Fed assets.)

Second, de facto monetisation is occurring throughout the developed economies.  The IMF estimates that the fiscal measures in response to the Covid-19 crisis now amount to just under 10% of GDP in the developed economies.  The aggregate balance sheet of the major economy central banks has already increased by 15% of GDP (Exhibit 3).

Third, as with the US, there are already signs outside the US that policy will be different in the post-Covid-19 expansion compared to the post-GFC expansion.  Fiscal policy was tightened throughout the developed economies in the aftermath of the GFC (Exhibit 4, which includes clearly overtaken-by-events OECD forecasts for fiscal policy this year and next).  Fiscal tightening led to secondary recessions in Japan, UK and Europe.  The idea of ‘expansionary austerity’ proved to be as daft as it sounded.  It is clear that there will be no repeat of post-crisis fiscal tightening in this cycle.  It also seems clear that central banks outside the US will stand ready to backstop ongoing fiscal expansion.

Fourth, the fact that central banks are backstopping the expansion in public sector debt loads reduces a major risk for private banks.  The deleveraging of government balance sheets in the aftermath of World War 2 was facilitated by a rigged financial system.  Effectively governments forced the private sector to hold government bonds, artificially supressing yields.  The banks were the biggest loser: Treasuries were a major component of bank balance sheets (Exhibit 5).  This sort of financial oppression is much less likely if central banks become the largest buyer of government debt.

Secular stagnation is first and foremost a problem of excess saving: the private sector’s planned saving exceeds planned investment.  The public sector running sufficiently large deficits can be an effective antidote to secular stagnation.  It seems likely that the Covid-19 crisis will make acceptable the use of sustained, aggressive fiscal stimulus backstopped by central bank balance sheet expansion.  The test of whether this change has occurred is not what is happening now amidst the crisis.  The real test will be whether policy makers continue to use fiscal stimulus through the recovery phase.  I think they will.  And if that’s the case then it will reverse many of the investment trends of the past 30 years.

And that’s how far behind the times that the RBA and Scummo are.

David Llewellyn-Smith
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  1. Know IdeaMEMBER

    It seems that is the way we are headed. In addressing the short-term problem it seems there is a longer-term one being glossed over. When do you stop heading down this path? Can you stop once the genie is out of the bottle?

    Also, the article notes that “Secular stagnation is first and foremost a problem of excess saving …”

    But is not excess saving the flip side of excess debt? The money created from bank borrowings has to go somewhere.

    • Bingo!
      And where does all this MMT stuff end up? Not where it’s needed, that’s for sure! Funnily enough, it floats to The Top, and those who created even more debt, us, just end up funding the ‘savings’ accounts of those who really have enough already.
      The answer to what ails us at the moment may be more Public debt, but it’s not the long term solution. In fact, unless Private Debt falls they are both the long term trap.

      • pfh007.comMEMBER

        MMT is fast becoming whatever anyone wants it to be.

        If it is merely an operational description than it CANNOT be a description of a central bank directly monetising a fiscal deficit because that is fundamentally not part of our current system of privatised public money where the government funds deficits by selling bonds to the private sector.

        Direct monetisation is not just a option, it is a fundamentally different option that is highly political.

        The politics were bubbling right below the surface of Governor Lowe’s recent speech.


        One problem with MMT is that It is talking about stuff that is highly political but pretending that it is just technical and a matter of choosing better policy options.

        Perhaps that is just a political tactic but it is creating enormous confusion.

          • pfh007.comMEMBER

            It hasn’t changed at all.

            Central banks buying bonds from rich people is same old same old.

        • I AM outraged. It is easy to see that the Covid virus is the best thing that has happened to the 1%. It bails out the bad loans held and gives the banks and thir benefiaries the power to purchase what’s left. The more money the government borrows, the better it is. The question is which is stronger the deflationary forces of the grinding poverty of the populace or the inflationary forces of free money for the1%?

        • ErmingtonPlumbingMEMBER

          Maybe your going to get the system you want 007 without anyone admitting it!

      • MMT deleverages. Indeed it does – but who pays?
        Normally the debtor is responsible for repaying their debts
        But in this instance every citizen gets to pay a part of the bill – including savers and those who don’t have debts.
        Once again the costs are socialized – but in this instance the proles are kept in the dark.

    • 1. I didn’t see this coming
      2. Secular stagnation has nothing to do with excess saving
      3. Once the genie is out of the bottle, that’s it. Quacks like Stephanie Kelton insist otherwise but she and others will he proven wrong. That said, MMT is a natural consequence of the end of a debt based money system – and here it is. Finally.

      • Weimar Republic Dominic
        This will really take gold to no offer.
        Who would sell their gold during hyperinflation…. you just don’t know when the fiat will stop climbing.

        Experience runs an expensive school but fools will learn in no other.

        • Sorry, by “no offer” you mean really, really high? Or to zero.

          As for your last line, that is some cracking wisdom.

          • During the Weimar Republic Hyperinflation 1921 to 1923, some astute people decided to sell their gold when it hit 1,000,000,000 marks, thinking that it could not possibly go higher.
            Unfortunately even that amount of money quickly lost its purchasing power.
            Better to patiently wait before selling all your gold.

          • Not if it’s vaulted abroad it won’t.

            Easy to do and really not that expensive either.

          • Gold was confiscated in 1933 because most people had gold coins in their purse and their pocket.
            Today, hardly anyone owns gold, so there is no need to confiscate.

            Furthermore, in 1980 the US did not confiscate gold.
            Instead, the governor of the Federal Reserve increased interest rates(short-term rates to 19%) to 14% for the 10-year Bond.
            Holders of gold swapped the yellow metal for the Bond.

        • Weimar Republic lol. Although I do see parallels for Australia with massive RE debt financed by supposedly currency-hedged big 4 bond issuance. Part of me thinks the recent Ausgov rejection of China is a pre-condition to having this debt forgiven by the seppos.

          As for hyperinflation, that means the public rejecting its own currency. What is going to step in? Gold? Bitcoin? XE Fords? Sure there will be pain, but I get the feeling that the “strength” will suffer more than the average punter, which is why they are fighting tooth-and-nail against it.

          • Hi Boofhead
            You probably haven’t heard of Gerard Minack before.
            Here is a really good interview of Minack with Raul Pal from Real Vision on June 8th 2020:


            In the last 10 minutes of the interview Minack admits he holds gold and gold shares because of the eventual result of Modern Monetary Theory.
            Raul Pal then completely agrees with him.
            Boof, if you put in a bit of homework on the importance of gold you may be able save yourself and your family in the coming difficult times.

          • I’ll just do my homework on who looks like a gold hoarder and pay them a visit with my starving MMT mates. But by then the cops will most likely have your gold anyway. Here’s to a beautiful deleveraging lol.

  2. Aussies Can't Socially Distance

    What’s the plan in 5 years time when we’ve had our little MMT induced boom and back to anaemic growth, poor productivity, still the most indebted households in the world?

    • That’s easy.
      After MMT comes NNT, followed by OOPS.

      All I’m hearing is my own cynical negativity. Show me how this won’t just be used to kick the can! You can’t! Now is the time for reform and courage, not more is the same shyte!

      • This current government is short on brain power but long on ambition and vitriol

        They will cock it up. There is no doubt in my mind about this.

        • Let’s firstly change the economic measures we focus on. Out with GDP and in with something socially focused. Let’s get that part right first! Otherwise we’ll be plotting a course for the same outcome, as above, just deeper into the abyss.

  3. pfh007.comMEMBER

    “.. The Fed isn’t directly crediting money to the Government – the Treasury bonds are being laundered by a fleeting period of private sector ownership – but this is in every way that matters pure monetisation…

    Gerard is confused.

    There is an ENORMOUS difference between funding a deficit by selling bonds to the wealthy and selling zero interest bonds to the RBA at full face value.

    Selling bonds to the banks is nothing more than creating assets for the rich that extract public wealth.

    Examine the accounting entries if you wish to understand the difference and why Governor Lowe loves the model where the rich get to buy interest bearing government bonds.


    • First rate 007. Thanks for the explanation. In the current climate does this exercise prevent the banks from going under on their RE loans?

      • pfh007.comMEMBER


        The banks have been packaging up their real estate loan books and getting them ready to sell to Uncle Phil.

  4. MMT will prop up asset prices and devalue the dollar in everyone’s pocket. Quick – go buy a house.

    • That is correct but partial. It will also inflate prices and deflate debt. It will also raise demand. It genuinely raises all boats.

  5. BobTurkeyMEMBER

    So if the magic trick of fiat currency gets revealed, what next? Hyper inflation? Use of alternative, more stable currencies?

    Government says spend now, ’cause my money isn’t going to buy as much later…

    • The question is -on what? RE in the current climate? Shares at current prices? Gold at record prices? Bonds at minimal yields?

      • Spot on.
        Why can’t it be something like, I dunno… Decentralisation? Something for the future? Large infrastructure projects making living outside of the clusterfk capitals feasible, thereby spreading economic growth more fairly? The growth of satellites itself should create domestic demand more progressively than these sugar hits from OS.

    • Nick1970MEMBER

      How do you get hyperinflation when there is much slack / productive capacity still in the economy?

      • You get hyperinflation by greatly diluting the currency.
        Eventually even the dullest person realises their purchasing power is quickly vanishing.
        They then swap all their fiat for any tangible asset they can to get rid of the stuff.

        • If you believe gold is the solution, then you should also be buying guns, farmland and seeds. How much of western economies are bullshit jobs? 80%? 90%? Gold is somehow going to keep all those people fed and happy?

          MMT is the least worst option for the majority of people. The problem is the 1% types no longer have the 99% trapped by debt and self-sabotage.

          • Jumping jack flash

            “The problem is the 1% types no longer have the 99% trapped by debt and self-sabotage”

            lol.. they are certainly trapped by debt. Trapped under piles of debt so big that nobody should have ever needed to take them on.

            The irrational exuberance was irrational and exuberant. Nobody came up for air. Nobody took a step back and looked at the pile of debt they were taking on and said “no way, that’s just too much”. Taking on that much debt was just something that was required to be done.

  6. I would like to hear a podcast from MB about MMT, after the participants have listened to Kelton and others discuss it. Kelton’s podcasts are available on the net here:

    MMT is clearly the last stage on the road to perdition, but I suspect the process could be glacial (decades).

    And (bad news for MBers), I would not be surprised if it underpins bloated house prices for a very long time.

    • And this is why I bought a house.. the madness will be bailed out in some way. I suspect prices paid during the boom years may appear a pittance in hindsight. Nathan Birch to become Strayas richest man!

      • I did the same. I wonder how the 1% will weaponize home ownership against people. Ultimately they control a frightening system for violence and population control – taxes, asset seizure, courts, sheriffs, police, and so on.

  7. MMT is fundamentally an admission that the two millstones around the necks of Western civilization – baby boomer retirees and low-productivity ethnic groups – can no longer be financed using traditional measures, that the burden has become too great.

    What we should be doing is introducing sumptuary taxes so that this MMT at least stays in the country it was printed. eg. no overseas trips for retirees or welfare recipients, no access to consumer products of X brand, and that inheritances either go to an Australian citizen/s or to the government.

    And secondly regulating the commissions of digital marketplaces to a maximum of 15% so that all of the profit doesn’t flow to Apple, Sony, Tencent, Microsoft, Google, Valve, Nintendo.

    • Maybe those “low-productivity ethnic groups” just look that way because they are extremely good at not paying taxes and looking poor. If we ditch the regressive taxes and go full LVT this solves the problem and gets rid of all the tax accountants.
      Here’s another millstone…having a Democratic, rules-based Western Civilisation when compared to the CCP’s ability to manipulate and dominate the narrative.

    • Oy, Oswald Mosley, grab a cork. I’m a boomer retiree and I don’t cost the state much at all. I’m still paying taxes. And I find your statements about “ethnic groups” being at the heart of our problems offensive and stupidly wrong anyway.

      • If ethnic groups are so productive, why are their countries of origin so destitute that they pick up and leave?

        • You should ask the same about the Aussie diaspora. Aussies have left in their hundreds of thousands, perhaps millions, to work overseas. I include my son in that.

    • Arthur Mosley. You are definitely thinking outside the square. I encourage that type of thinking.
      Yes we do have a problem with digital monopolies.
      Yes, some forms of local “merit token” would be an improvement on these global fiat currencies.

      • I like the idea of merit tokens as well. Money should be earned via productive labor, not money games. Instead everything is oriented the other way.

        • Jumping jack flash


          Debt is not inherently bad though. If debt is used to extend productive activities to the point where the increase in production is more than the interest obligation then that debt is good.

          That’s the only reason why debt should be created and used.

          The problem is houses and other trinkets don’t do anything productive so the debt used to obtain them becomes a net drain on the economy. This debt is inherently deflationary when its interest is considered, and that’s why this kind of debt must constantly grow and when it stops growing or even when it doesn’t grow fast enough it turns into a massive problem – a problem just like what we have now.

  8. MMT is a currency devaluation play. Nothing has changed. It’s a race to the bottom.

    • They’re essentially identical. Add more money to the system.

      QE pretends it’s going to pay it back. MMT doesn’t pretend.

      • Jumping jack flash


        At the heart of all of this mumbo jumbo is one or two fundamental truths.

        One is that at the very least interest must be paid to the banks through whatever means necessary.
        Another is that nonproductive debt – the basis of the New Economy – must grow infinitely and exponentially or the whole place violently implodes because of the interest that must be paid.

        There are probably a few more, mainly around the rules for debt eligibility and LVR – the only measure of risk that is considered, but not all that many. Its fundamentally very simple so they like to obfuscate it so plebs don’t catch on and start poking holes in it.

        The solution is to simply stop paying the interest and let the overleveraged banks die, but since the world is run by banks now that’s not an option.

        • I like the Steve Keen proposal of a pseudo jubilee, whereby these bank debts and interest repaid with printed money, just like the fake and unscrupulous credit they minted by hijacking the money supply. But the average punter is too brainwashed into supporting the status quo.

    • drsmithyMEMBER

      I find the concepts of MMT […]

      The limits of the economy are raw resources and the people to make use of them, not money, and it is a waste of the former pretending the limit is the latter.

      The rest is implementation details.