Explaining what is wrong with Magic Money Theory [MMT]

This was from Beachcomber in the comments:

Hi Steve, I just read a fascinating essay by Peter Smith at Quadrant: Money printing in the age of Covid

In the essay it states:

In the age of COVID-19, bonds sold to finance deficit spending are being largely or wholly bought up by respective central banks. This is manifest in banks’ holdings of deposits with their central bank and of treasury notes or bills.

In comments the question is asked as to from where the “central bank” garners the money to buy the bonds.

To which Peter Smith answers:

It creates it out of thin air cos it can.

The central bank simply issues a cheque or like instrument, drawn on the central bank, which allows the holder of the bond (assume it is a non-bank – the process is short-circuited if the holder is a bank) to lodge the cheque in its bank account. The bank correspondingly lodges the cheque with the central bank and sees its deposts with the central bank increase accordingly. The central bank now has an asset – the bond – and a corresponding liability – the bank’s deposit. It can go on doing this till the cows come home. Or, practically speaking, until inflation rears its ugly head.

Is this true? Can this continue forever? With shrinking incomes and the associated shortage of money supply, inflation seems unlikely. Peter Smith makes a distinction from Modern Monetary Theory without explaining how it is different. Can the creation of money from nothing by the Government continue forever? If so, then Andrews can reign forever!

First, if there is an authority on the banking system in Australia outside and beyond the reach of government, it is Peter Smith. He was, when I first met him, the economist for the Australian Bankers’ Association, then became the Chief Economist for the State Bank of Victoria and finally was the first Chief Executive for the Australian Payments Clearance Association. No one gets this stuff better than he does.

But let me buy into this because this is part of my expertise as well. And to follow this with any understanding you have to divide the economy into two halves. On one side is production, the actual goods and services produced, which also includes the production of inputs into the production process, such as iron ore and natural gas.

And on the other side there is the monetary side of the economy which is completely distinct. This comprises:

  • money as a medium of exchange, say a $100 note, but represents the value of goods and services so that we can sell what we produce to buy what others produce
  • money which we set aside as a store of value, such as bank accounts or superannuation savings, and
  • money which we use as a unit of account so that businesses can calculate how much things cost to produce so that they can determine what to charge so that they can calculate whether they are making a profit.

And it should be emphasised that only profit-making businesses create more value than they use up in production. Loss-making enterprises – which include virtually every activity run by governments – slow the economy, using up more value than they create. Loss-making enterprises cause the economy to contract. Only if there are other enterprises making profits – almost always private sector enterprises – can the economy expand. Without understanding that, you cannot understand the first thing about how an economy works.

Creating more money does NOT create productive resources. Giving more money to governments, or allowing them to print more money out of thin air, lets governments spend on non-productive activities which they inevitably do. Spending more on non-productive activities means less is spent on productive activities.

And adding to the problems, when the government expands the volume of money by just printing the stuff up, they undermine each of the uses money has: as a medium of exchange, as a store of value and as a unit of account. The economy can no longer be run as productively as it might have been and often even leads to a fall in real income across the entire community.

Virtually no politician I have ever met has understood this. Virtually no political leader I see in the news today understands this. All of the others are Keynesians now, who believe the mere spending of money creates jobs, growth and higher real earnings. On this they could not be more wrong.

We will be paying for this ignorance for a very long time to come.

Every government’s greatest wish: to spend like a drunken sailor

Next to my own article at Quadrant Online is a new one by Peter Smith, one of the few economists I think of as worth the time to read: This Can’t Go On Much Longer. His point is that you can print money from now until forever, but eventually you will cause enormous damage which will remain unrecognised until the after the deluge has struck.

I will go to economics and ask where is the money coming from and what are the implications of governments spending so much of it. I note that some commentators have referred to Modern Monetary Theory for guidance (watch for lefties coming out of the woodwork to promote it). Consult my article in the last July/August issue of Quadrant if you want to know about this theory; but, sufficient to say, it sheds more obscuration than it does light.

Governments are giving vast amounts of money to businesses and individuals to try and make up for their loss of revenue and income. Is it a good policy? Yes, it is. Governments have shut economies down and, thus, there is no option. Otherwise, people would starve and businesses across the board would collapse. At the same time, the character of giving matters. Some is sensible; some wasteful.

A formula being used in the US, and maybe elsewhere, seems by far the most sensible. Small and medium sized businesses are being given loans to cover their costs, including their wage costs, which will be forgiven if they keep all their employees on. Support to large businesses is also vital to ensure they do not collapse; and support to individuals thrown out of work.

Even on my own high street, there are all kinds of businesses in great difficulty, some even shutting down, never to return again, in many instances because landlords are not reducing their rents. Others will return, but many others won’t. Back luck to them, but also bad luck to you since your personal wealth is being depleted by these typical actions of governments, actions costless to them but not to us. This is how Peter ends:

So, what am I saying? I am saying that the normal implications of government overspending do not apply. This situation is unique. Think of it as an enforced sojourn, albeit on hard rations in solitary confinement. Most everything shuts, we sit on our hands, and the government gives those made destitute free money to pay bills and buy food and medicines. When the sojourn is over, we will have suffered a sharp loss of production but can make up for that over a period of time.

The trick is to ensure that business collapses are kept to a minimum; that most are in shape to start up again, and that individuals are kept whole. Every day will make it harder for some businesses and people to bounce back. This means the sojourn can’t go on much longer; only a few more weeks at most. Trump knows this, and could provide a lead for other countries, including Australia; if the hate-filled American media don’t deter him from acting as speedily as we need. And need it we do. Morrison, in the announcement I referred to, mentioned restrictions being in place for six months.

It’s every government’s greatest wish to throw around money at everyone and everything. Just think of Kevin Rudd and Barack Obama in the wake of the GFC. It then took near on a decade to return to where things had been in the US, and that only because of Donald Trump. Here we never got back to where we were in 2009. If you think this will be different, well good luck to you. We are being systematically robbed, and it will continue right up until the day the community at large finally says they have had enough.

EN PASSANT: From the comments thread at QoL:

Peter,

This is the economic destruction of the West (and Australia) that the globalists, climate Cultists, Fabians, Totalitarians (of every ilk) and Socialists have dreamed about since forever. Greta can now go back to skool as the capitalist world has deliberately suicided at the behest of our politicians.

It appears to be relatively easy to prophesise our future, so here are some of mine in this Orwellian Brave New World:
a. The Chinese are already buying stocks in key American (and Australian) companies.
b. They are offering big loans and support to those supporting their Belt & road initiative – like Victoria. All you have to do is bow and kneel. How easy is it to just bow and scrape in order to be saved?
c. The ‘Oz stimulus package’ will turn out to be a massive ‘hot shot’ heroin overdose that will economically ruin Oz.
d. The Oz $$ will become valueless
e. The Chinese will call in their markers and will take key assets as payment (Ports, Communications, Infrastructure, and whatever else they want that destroys our sovereignty). The Greens, the Left and the ABC will cheer this on as a ‘good thing’.
f. Emergency ‘Social Control’ measures will become more draconian and possibly permanent
g. Pollie pensions and benefits will NOT be cut …

Welcome to the future …

As usual, my solution requires ‘risk-taking’, which my children condemn as cavalier. When their arguments have no effect on me, they then (justifiably) ask, ‘But what about Mum?”
Anyway, I think that applying a harsh Triage approach has statistical merit and would contribute to achieving the prime practical objective of decreasing the ‘Rate of Increase in Infection’ through the period of Peak Hospitalisation Demand. This would maximise the number remaining at work and minimise the permanent damage to business and industry.

However, as we import so much from China our industries will probably collapse anyway as materials are already in short supply. The owner-builder next door has stopped as he cannot get – wait for it – roofing screws.We have destroyed the Australia I knew because 1,800 people are known to be infected and 16 have died.

The look of self-satisfaction on ScoMo’s face at the destruction he and Parliament have wrought on Oz beggars belief. Why not add a super-tax to our last productive industry and finish the job? Kill off mining and we will have destroyed Oz to save the planet.

Globalisation is well on the way to bringing us to ruin

This is an exceptionally good article by Peter Smith at Quadrant Online whose title provides little insight into what is to come: In Determined Pursuit of Unhappiness. It’s about the way in which our political class is attempting to demonstrate a virtue signalling globalist agenda by selling out the people who put them into office. This is near the start but is only a prelude, but an important prelude to what comes after.

There is a fetish with free trade among globalists. Only heretics object. The General Agreement on Tariffs and Trade took effect from the beginning of 1948. It was succeeded by the World Trade Organization from the beginning of 1995. From around 10 per cent of world GDP in 1948, international trade has since burgeoned to be now around 25 per cent. The free trade agenda has been driven primarily by the libertarian-cum-classical-liberal side of the political divide. Let me be heretical. There is no well-based rationale for free trade. Unless, that is, you think that maximising the availability of cheap stuff outweighs all other considerations.

Free trade brings significantly reduced industrial diversity within nations. It brings a loss of skills. It brings entrenched regional unemployment and despair. It brings long and vulnerable supply lines which threaten national security. International trade is like cabbage, broccoli and other leafy greens. Some is an essential ingredient of a balanced diet; yet more is very good for you. But they don’t make for a complete eating regime. Let me be clear, the issue is not one of trade versus protection. It is about the extent to which the interests of all of the citizens of a nation are brought into account by their political representatives when they are eliminating trade barriers. The wholeness, integrity and security of the nation-state should not be bartered away for a mess of pottage.

But that is only part of what he is trying to explain. This comes closer, found towards the end:

Globalisation is well on the way to bringing us to ruin. In principle, the remedy is simple. We, the people, need to elect politicians whose overriding goal is to create the conditions which preserve and nurture the life, the liberty and the happiness of the citizens of their nation-state; who will always promote their country’s claims over the claims of others; who, even though President Trump has said it, will always put their country and its citizens first. However, in practice, there is a sting in this tale (to corrupt an idiom). Perhaps, in this current age, most difficulty lies not with a paucity of potentially sound-thinking politicians or would-be politicians. Maybe it lies with “we, the people”.

Seriously, you should read it all.

A round-up of the usual suspects and others less usual

From Kathy Shaidle: If you can read this, I guess I didn’t block you yesterday during #JeSuisCharlie.

From Mark Steyn: The Fire Rages and “I’d Rather Die Standing Than Live on My Knees”.

From Jay Curry: Useful Horror.

From Frank Pledge: The Left’s Unholy Alliance.

From Peter Smith, On Making Hatred Disappear.

From Paul Mirengoff: Four observations prompted by the Paris attack.

From Anjem Choudary: Why did France allow the tabloid to provoke Muslims?

From Stacey McCain: On Anjem Choudary

From Pam Geller: Jihad in America 2014

From Ezra Levant: Slams Media’s #JeSuisCharlie Phonies with must-see video

From Ayaan Hirsi Ali: Charlie Hebdo: West must stop appeasing Islamic purveyors of hatred

From Roger Simon: 2016 and Paris. It’s the jihad, stupid

From Brendon Bordelon: I am not Charlie: Leaked Newsroom Emails Reveal al Jazeera Fury over Global Support

Peter Hitchens: The sinister, screeching mob who want to kill free speech (And no, I DON’T mean the Islamist terrorists in our midst)

Robert Crumb: Legendary Cartoonist Robert Crumb on the Massacre in Paris

From Henry Ergas: Eyes wide shut to Islamist threat

From Clarice Feldman: Je Suis Sick and Tired of Cant

Pope Francis: Pope condemns ‘deviant forms of religion’ in the wake of French massacre, accusing them of causing ‘the breakdown of society and spawning violence and death’

From Victor Davis Hanson: Multicultural Suicide

From Marine Le Pen: To Call This Threat by Its Name: France Was Attacked by Islamic Fundamentalism