Daily Bulletin


The Conversation

  • Written by Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW Australia
image

Economists did not predict the financial crisis of 2007, nor did we predict that advent of secular stagnation that has followed. Those events have shaken the economic and political world. Our theories need work. Maybe a lot of work.

But those events, and the failings of economists, have given a bunch of cranks the chutzpah to claim that they do know the answers – and that they knew them all along.

These folks sometimes refer to themselves as “heterodox economists”, “neo-chartalists”, or proponents of “modern monetary theory”.

Support has even made it to the UK Labour Party, with Jeremy Corbyn’s proposal for “people’s quantitative easing”. This would see the Bank of England simply “print” the money that would be used “to invest in new large-scale housing, energy, transport and digital projects”.

But, alas, some supporters are peddling falsehoods that warrant a blanket response.

Modern monetary theory, a term coined by Australian economist Bill Mitchell, says the following: (1) Countries that control their own currency cannot default on sovereign obligations because they can always print more money. (2) Thus, said countries can provide unlimited resources, pay for whatever they want, and create full employment. Nirvana, here we come!

There are many ways to critique this notion. For starters, it is not formal, it is made in prose and is subject to all the pitfalls that come with attempts to make precise statements with imprecise tools.

But it also begs an obvious question: if it is so easy to fix a nation’s economic ills – just run the printing presses round the clock – then why doesn’t everyone do it?

The modern monetary theory crowd argues economists have misunderstood how the government interacts with the economy. The rest of us just don’t get it! It’s all a big conspiracy, it would seem.

But here’s the essential substantive problem. Suppose a government wants to pay for some “stuff”. If the government prints money and doesn’t back that by issuing bonds then there is inflation. That inflation leads to the government needing to print more money to pay for the stuff. Which leads to more inflation. And pretty soon that leads to wheelbarrows of cash being pushed around, hyperinflation, the destruction of all savings in the economy, and (in some notable cases) world war.

Just think about it. If you expect there to be inflation do you want to hold cash, or spend it. Hint: spend it. You can wait until tomorrow and have something much less valuable, or spend it today. But that spending drives up prices, which drives up the desire for everyone to spend today, and on and on…

For a recent example, just take Zimbabwe: in late July 2008 a Zimbabwean (second, or “ZWN”) dollar was worth 688 trillion times less than it was in August 2006.

When one issues bonds to back a deficit one has to convince investors that, at some point, revenues will be raised or spending will be cut. Otherwise investors won’t buy the bonds at the prevailing price. And a higher price means that less deficit spending can be financed.

It is the discipline of market expectations. And it is a fact.

I won’t go through the math here, but the problem with modern monetary theory is that, in short, there is only a finite amount of real economic resources that can be extracted through seigniorage (the difference between the face value of physical money and its production costs). Or, to quote the late, great Zvi Griliches: “one can only get so much lemon juice out of a lemon.”

So here’s my challenge to the modern monetary theory crowd. Please state a formal, precise, economic model in which a monetary authority can extract an infinite amount of real resources through seigniorage. Or be quiet.

I understand that “mainstream” economists have some work to do. That’s how science moves forward. Einstein didn’t say Newton was a knucklehead, he came up with a better theory.

What modern economics has going for it is that it is a formal, falsifiable theory. People can understand exactly the assumptions, the chain of logic, and the predictions.

One can’t say that about modern monetary theory. Or is it “neo-chartalism”? Perhaps it’s really just neo-charlatanism.

Authors: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW Australia

Read more http://theconversation.com/printing-more-money-isnt-the-answer-to-all-economic-ills-71334

Writers Wanted

From 'common scolds' to feminist reclamation: the fraught history of women and swearing in Australia

arrow_forward

Different Ways to Incorporate Natural Stone into Your Home

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Kieran Gilbert, Sky News

KIERAN GILBERT: Kieran Gilbert here with you and the Prime Minister joins me. Prime Minister, thanks so much for your time.  PRIME MINISTER: G'day Kieran.  GILBERT: An assumption a vaccine is ...

Daily Bulletin - avatar Daily Bulletin

Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Business News

Nisbets’ Collab with The Lobby is Showing the Sexy Side of Hospitality Supply

Hospitality supply services might not immediately make you think ‘sexy’. But when a barkeep in a moodily lit bar holds up the perfectly formed juniper gin balloon or catches the light in the edg...

The Atticism - avatar The Atticism

Buy Instagram Followers And Likes Now

Do you like to buy followers on Instagram? Just give a simple Google search on the internet, and there will be an abounding of seeking outcomes full of businesses offering such services. But, th...

News Co - avatar News Co

Cybersecurity data means nothing to business leaders without context

Top business leaders are starting to realise the widespread impact a cyberattack can have on a business. Unfortunately, according to a study by Forrester Consulting commissioned by Tenable, some...

Scott McKinnel, ANZ Country Manager, Tenable - avatar Scott McKinnel, ANZ Country Manager, Tenable



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion