Did money-printing work? Yeah. Sort of.
So a few years before Covid started I introduced everybody to MMT – modern monetary theory.
As I said at the time, MMT gave us the rational and the excuse to slash rates, print money and run bigger deficits.
I argued that the next time the poo hit the fan, there’d be money for everyone.
Well, that’s exactly what happened. As Covid landed, governments scrambled. The slashed rates, printed money and ran huge deficits.
In Australia we went from fretting about budget deficits of 1-2% of GDP, with suddenly being fine with deficits of 10% of GDP.
The world, contrary to popular belief and just as MMT had predicted, didn’t collapse.
We still have deficits as far as the eye can see, and I still don’t hear anybody worrying about them too much.
So, is MMT vindicated? Is this the new normal?
That’s the question the NY Times was asking the other day. They wondered if it was time for MMT, and poster-child Stephanie Kelton, to do a victory lap.
The establishment wasn’t happy. Lawrence Summers, who was Treasury Secretary under Clinton, called MMT proponents a bunch of quacks.
His biggest criticism seems to be that MMT doesn’t have enough economic modelling to back it up.
To be fair though, last time I looked economist’s models were pretty useless. They didn’t predict the GFC. They didn’t predict the Covid collapse. So what good are they?
And it seems to be that it’s sort of case closed now. We’ve been running deficits of 10% of GDP for a few years now, and the wheels haven’t fallen off.
Yes, we are seeing the first green-shoots of inflation. Those green-shoots are the first in a generation, but yes, we are seeing the first green shoots.
Whether they go on to be a problem is still an open question.
But even if they do, this is hardly MMT’s fault.
MMT just set out to argue that deficits don’t matter in the way we think they matter, and that it’s possible to print money and run deficits to soak up slack in the economy.
If we go on to create inflation, it maybe just simply be a case of too much medicine, rather than the wrong medicine.
Remember the RBA printed $350 billion through Covid – a massive amount.
So I think it’s a moot point. MMT is vindicated.
And the next time a crisis hits – which seems to be every five years or so – you can expect more money printing, more deficits and hit-the-floor interest rates.
It’s a policy lever no policy maker can ignore.
So yes, this is the new normal.
This is the medicine going forward.
And while it’s true that the medicine does have one important side-effect – it juices asset prices – no one’s going to be too worried about that.
Since the ones doing the policy are generally the ones holding the assets.
So on that, (unfortunate) basis, MMT is here to stay.
JG.
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