Who will pay for this Covid catastrophe? By Peter Franklin.
The radical Left — excluded from power across the West — sees an opportunity here. In fact, it believes that it is on the brink of a historic breakthrough. We were told that there is no “magic money tree” to pay for the lavish spending plans of politicians like Jeremy Corbyn and Bernie Sanders. So how will voters react when neoliberal governments admit that these arborial wonders do exist after all?
If the limits on what a government can borrow are much looser than what we’ve been previously led to believe then the political implications are profound.
This is how Thomas Fazi puts it in his recent article for UnHerd:
“All the pain, suffering and misery imposed on millions of people as a result of austerity was entirely a political choice. All the cries of “How are you going to pay for that?” were simply a way to maintain the deeply unequal relations of power in our societies. To dramatically restrict our ability to imagine economic and political alternatives. But “all of these excuses that we have been given as to why we cannot treat people humanely have suddenly gone up in smoke”, as Alexandria Ocasio-Cortez said. If money can be created out of thin air to fight a ‘ war’ against a deadly virus, doesn’t it follow that the same can be done to ‘ wage war’ on poverty, unemployment, inequality, ecological collapse – all of which are much deadlier evils than Covid-19.”
It’s a powerful argument. …
What stopped governments for the past few decades from just printing new money? The fear of inflation driving down the value of its currency.
But, what if all the countries of the world printed simultaneously — like now? Then all the currencies would stay together, and no currency would plunge with respect to the others! Sounds awesome, but… they would plunge with respect to real stuff — and the old currency, gold. There’s no free lunch after all.
The advocates of Modern Monetary Theory (MMT) have an answer to that. This new school of economic thought argues that central banks should create all the money that governments need to spend, and that the tax system should be used to remove enough money from circulation to keep prices stable. …
If the coronavirus does force us through the MMT looking glass — and if it doesn’t blow up the economy (two very big ifs) — is there any objection to Thomas Fazi’s argument?
Yes — and it’s precisely the thing that the radical Left most likes about this brave new world: it would give government unprecedented power.
The modern state already has a monopoly on the use of violence. By and large that’s a good thing , ensuring law and order. Yet tyrants throughout history have turned it against the people. The ability of free societies to constrain that power has been hard fought.
Indeed, it’s striking that where governments don’t rely on their people for revenue — perhaps because the economy isn’t developed enough for a modern tax system or there’s a state monopoly on the exploitation of valuable natural resources — there’s little or no democracy. Think Russia or the Middle East or much of Africa.
This is what worries me most about a state that gets its money from the central bank, not the general population. It’s what especially worries me about the idea of the state providing people with universal basic income or some equivalent system. As soon as we depend on them, the power relationship is reversed.
Democracy is what happens when the people pay the government, not the other way round.
A similar monetary event happened in WWI. In the early days in 1914, all the participants thought the war would be over by Christmas.
(My grandfather enlisted as number 34 in the Australian Expeditionary Force, eager to join and get a free trip to Europe, figuring the fighting would be over by the time he got there. He returned in 1919, having been wounded twice.)
All the warring countries borrowed like crazy, issuing mountains of war bonds — promises to repay in national currency after a certain date, which included a good interest rate. But the war dragged on for 20 times as long as they expected. They issued far too many bonds to finance their competing war efforts.
Going into WWI, the currencies were based on gold. A pound or a mark meant a certain amount of gold or silver — anyone could present their currency notes at a bank and walk out with the metal. Gold and silver on demand.
The war bonds destroyed that — the governments didn’t have enough precious metal to cover their war debts. After WWI, none of the combatant countries managed to get back onto their various gold standards. Some tried for 12 years. Then the great depression came along and everyone gave up.
From then on, currency has been printed. Because governments blew the limit with their war bonds in WWI.
Maybe the COVID response will be similar, ushering in MMT and an epidemic of government printing. Just like WW1 forced the abandonment of basing currencies on a constrained quantity like precious metals, perhaps COVID will force the abandonment of cautious issuance of new currency.
If you allow anyone to create money from nothing, some emergency will always come along that causes them to create lots of money from nothing. At some point, their solemn promises not to abuse their powers will count for nothing. Sooner or later. History is very clear on that point.
Inflation, here we come!
UPDATE: The Donald Trump, in 2015, said in an interview:
“We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because “we don’t have the gold. Other places have the gold.”
UPDATE: While the right is fighting over the empirical data on COVID, economy versus health trade offs, and the best response to a nasty but not severe pandemic, the left is unified and on the verge of its nirvana.
MMT will mean that every leftist dream will be affordable. The bankers will rather like MMT too — for now — because it allows them to inflate away the debt bubble and start over.
So it’s not unlikely the world will enter a new era of control-P (command-P for Macs, try it on your keyboard).
It will take about 10 years to destroy the world as we know it, but it is very hard to get off that path once we are on it.
The people have just discovered that they can vote themselves the contents of the treasury, AND the treasury has a printing machine. Ctrl-P to oblivion! Yippeeee!
via Tip of the Spear