It’s Modern Monetary Theory time as the state steps in

It’s Modern Monetary Theory time as the state steps in, by Alan Kohler.

The economy is likely to be entirely shut down within a few days apart from essential services, in which case government support for businesses and jobs will have to be unlimited, as it is in other ­countries. …

An economic depression seems guaranteed no matter what monetary or fiscal stimulus is applied, and governments everywhere will be forced to supply unlimited cash to stop people from dying of starvation or a lack of their usual medicines and therapies.

Capitalist, small-government economies like Australia’s will be replaced for a while by a socialist one, in which the state owns the means of production … of money, that is. …

So unless there is a wave of debt defaults — sovereign, corporate and personal — either during or after the crisis, to wipe the slate clean again, the lasting legacy of the coronavirus is likely to be much more global debt than we’ve already got, which is saying something (it’s currently more than $US250 trillion, or 320 per cent of world GDP). …

It seems inevitable to this armchair epidemiologist that the RBA will have to end up buying the government’s debt as well: no one else will buy it at a yield of 1.1 per cent yield …

Now think about the elements of the Australian rescue packages announced over the past week. … All of it will be new debt … except for the source of the RBA’s QE, and presumably the $90bn facility.

That money will be newly manufactured on the RBA’s computers before being dispatched to banks at the click of a mouse, to be dispatched by the bank at the click of another mouse — for a small margin of course. …

This has a name: Modern Monetary Theory, in which deficits don’t matter because they can be funded with money manufactured out of thin air by central banks.

So far that magic has been confined to supporting share prices through central banks buying bonds from banks to “provide liquidity to the financial system”. More than $US20 trillion has been thus created and now sits as (mostly) government bonds on the balance sheets of four central banks — the US, China, Japan and ­Europe. This has led to a historic boom in the US sharemarket, since money tends to flow to the asset with the greatest return, and in the past decade that has been American technology firms, thanks, ironically, to globalisation. …

Up to now MMT has been mainly pushed by the lefties in US congress, led by Alexandria Ocasio-Cortez (Democrat, New York), and opposed by the Right, and all right-thinking economists, as the thin end of the socialist wedge. …

But all bets are off now — something new has come along. Capitalism has to close for a while and the state has to step up.

A parliamentary portrait of Pauline Hanson early in her political career

Pauline Hanson proposed MMT in about 2000, and got laughed off the stage by the commentariat. (She didn’t invent it, but it was One Nation policy.) Doesn’t everyone know that printing causes inflation, they rightly said? Now they are doing it themselves, bigtime. Yep, all it takes is 20 years, but Pauline is ahead of the Canberra pack.

So the state will be just giving itself the power to help itself to vast amounts of real resources. By creating money out of thin air, it acquires goods and services for nothing. This necessarily devalues the money held by the rest of us. Naturally, this damages the real economy and makes society poorer in the long run. Some individuals, however, do well out of the new arrangements, either economically or politically.

(And governments simultaneously push down the price of old money in that farcical paper market that sets the price of gold in New York. Good one, very Orwellian. The counter-reaction when that game wears out will be something to behold, if capitalism survives the crisis.)