Get the printing press ready! Australia to lead the West!

Get the printing press ready! Australia to lead the West! By Percy Allen, a public policy, management and finance adviser and a former secretary of the NSW Treasury and chairman of the NSW Treasury Corp. (I changed the title, as will become obvious.)

Both the IMF and the OECD say monetary policy is largely exhausted: fiscal policy must now be used to ramp- up economic growth that has been held back by the triple Ds of high debt, ageing demographics and disruptive digitisation, which includes robotics. The Reserve Bank of Australia has come to the same conclusion. …

In Australia this issue has now come to a head. The governor of the Reserve Bank, Philip Lowe, has urged the government to start pump-priming the economy by sponsoring a massive capital works program. That would lift aggregate demand given that over-indebted households are underspending. Lowe is right.

By contrast, Treasurer Josh Frydenberg has vowed to maintain a fiscal surplus – covering operating and capital accounts – since this is Australia’s best safeguard against another global financial meltdown. In such a crisis, economies such as Australia with a Triple-A credit rating stay buoyant: why squander that advantage? Frydenberg is also right. …

Let’s paraphrase: Government can’t afford any more debt. But governments need more money, if only because they think they need it to simulate the stagnating economy. The best (the only remaining?) place to get it is out of nowhere, so let’s do it in the most equitable way we know.

Governments today could issue equity – for example share certificates – against public works and request their central banks to buy them. This would sidestep debt limits. That’s not presently permissible for the US Federal Reserve, though former governor Janet Yellen ventured the Fed should be given authority to buy stocks in a recession.

Government shares, unlike bonds, would not pay interest nor add to public debt which is important because sovereign debt across the OECD area has jumped from US$25 trillion in 2008 to US$45 trillion in 2018. …

My suggestion is QI – quantitative investing – whereby central banks print money for the public good rather than private gain.

Does this proposal sound crazy? Sure does, but so did quantitative easing (QE) when it started because it was tantamount to central banks printing money to buy government bonds and other securities mainly from banks. The banks in turn used the proceeds to lend largely for asset speculation and corporate share buy-backs because most businesses refused to borrow for new plant and equipment.

QE saw bond, property and share prices soar, but there was little expansion of productive capacity and earnings. Financial centres flourished while economic hinterlands struggled. The asset-rich enjoyed rising share and property prices. Ordinary people whose wages stagnated, then revolted by electing Donald Trump, supporting Brexit and flocking to populist parties across Europe.

That’s why the burning question for the developed world, including Australia, is what should replace QE given that we have reached a monetary and fiscal impasse?

My suggestion is QI – quantitative investing – whereby central banks print money for the public good rather than private gain. Any return to QE which increased economic and social inequality could further strain class, regional and inter-generational tensions. That could imperil liberal democracy. …

We have being saying for two decades now that when the crunch arrives, the political class will choose inflation to debt repayment. They will choose an inflationary mess rather than risk repeating the Great Depression. This is inevitable, and was always foreseeable.

Normally a national Ponzi scheme such as this would be inflationary, but if the developed world is in a liquidity trap exacerbated by high debt, an ageing population, a shrinking workforce and low productivity gains, then weak aggregate demand would be bolstered by a large infrastructure program funded by government share certificates bought by the central bank. It would be preferable to governments loading themselves up with more debt given already excessive levels.

Author: It’s inflationary, but we have to do it. We have no choice. Besides, the new money will be spent by us, big government! Which will be lots of fun for us and our friends, and the people in receipt of government spending.

Money is implicitly a promise, that you will be able to exchange it sometime in the future for roughly what it’s worth now, in terms of goods and services. Issue too many promises, and they cannot all be kept. Inflation follows, whereby each unit of currency buys much less in the future.

Gold, anyone?