There’s some big shifts going on in the way we understand how the economy works. The playing field is about to get turned on its head.
Let’s pick up where we left off last week. As I was saying, we’re on the brink of
Anyway, our understanding of what the economy is and how it works is about to change. And the drive for this change is coming from a massive failure.
It comes from the massive failure of money printing (Quantitative Easing) following the GFC to juice the economy and to create any inflation at all.
It comes from the massive failure of central bankers to predict that first failure, or even to come up with a plausible story with the benefit of hindsight.
And it comes from the massive failure of policy makers to stop the tidal wave of money they unleashed ending up in the pockets of the ultra-wealthy.
Big fat ‘F’ for failure.
This has sort of been obvious for a while now, but it now feels like there’s a shift in the collective consciousness. Maybe it’s those catchy milestones. We’ve now had ten years of money printing in the US and Europe, and 20 years in Japan – to most reasonable people, ten years seems like a fair amount of time to let an experiment run before you call it off.
And that’s where we’re at now.
And central bankers and orthodox economists are still scratching their heads. Policy makers are at a loss. Everyone’s wondering what the hell is going on.
Now enter MMT.
Take note of that acronym. You’re going to be hearing a lot more about it.
MMT stands for Modern Monetary Theory. From what I can gather it’s a pretty broad church. MMT proponents (I’m going to call them Munters from now on) tend to be more of your ‘soft hearted economist’ version, though people will point out that MMT is just an analytical framework. What policies you want to throw into that framework are up to you.
Anyway, MMT has actually been around for a while, but the Munters are now in a position to claim that the QE experiment that’s been running since the GFC proves that their lens for viewing the world is the clearest lens on offer.
They’re giving us three observations (that seem important to me):
1. Inflation comes from capacity constraints, not money.
The old view of the world said that all money-printing results in inflation, but QE showed us this is not the case.
Munters say that inflation comes from capacity constraints – when demand for goods and services outstrips labour and capital’s ability to produce those goods and services. Money doesn’t necessarily come into it.
QE failed because it did nothing to address this demand-supply balance.
2. Interest rates are impotent if there’s no demand.
QE was the end game in a doctrine where interest rates were seen as the primary tool for managing the economy. Lower interest rates means people borrow more and do more economicy stuff like spend and consume.
And QE was very effective at lowering the price of money and creating the (ongoing) era of super-cheap money. However if firms have nothing worthwhile to invest in, then it doesn’t matter how cheap money is. And if consumers feel like they’re over-leveraged already (which they were following the GFC), then you do literally have to pay them to borrow money.
So lower rates do nothing, which is kind of what they did.
And so this is where the QE transmission broke down. All that money didn’t make its way into the real economy where it might have been able to generate inflation. Rather, it got caught up in the financial sector, where it simply bid up the price of financial assets (including real estate).
3. If money printing doesn’t create inflation, then governments are not constrained in the way that we thought they were.
We used to think printing money was a pure evil. Munters say that we now know that’s not the case. It’s more nuanced than that.
However if that’s true, then governments are not constrained in the way we thought they were. It may be possible for governments to print money, to consume and invest, all in a way that doesn’t lead to an outbreak of inflation.
This is a game-changer.
The New Rules
I think you can probably get a sense of how this could fundamentally recalibrate the economy.
It’s going to be massive. But I’ll go in to that, and the quirky politics of it all, next week.