Opinion: Money printing is a flawed experiment that has done America more harm than good
Investors are captivated by modern monetary theory (MMT) and its practical non-responses to the thorny problems of economic stagnation, unsustainable public finances and debt. People’s savings are guaranteed by high asset prices, thanks to this new form of economy.
A state, MMT argues, does not finance its spending with taxes or loans, but by creating money. Nations cannot go bankrupt when they can print their money. Therefore, a country with its own currency can run deficits and accumulate debt at almost any level deemed necessary.
Not much is new about MMT. Keynesian deficit spending has been in use since the 1930s. A country’s ability to print its own currency has been accepted since the end of the gold standard in the 1970s. Public spending financed by the central bank through easing have been widely used by Japan since 1990 and globally since 2008.
MMT advocates that in the face of insufficient demand, governments spend to bring the economy to full employment. It is the job guarantee that requires that anyone willing to work has one. An alternative, unpopular among MMT advocates, is the government-funded Universal Basic Income (UBI), offering every individual an unconditional lump sum payment regardless of the circumstances.
MMT ignores several problems. First, it is not clear where the useful and well-paid work will come from and how the jobs will be created. Government influence over the productive sector which produces real goods and services is limited. The impact of technology reducing jobs and competitive global supply chains is overlooked. It is not clear whether deficit spending is to be productive or how it will achieve an acceptable financial or social rate of return.
Second, critics point to the risk of inflation. Large deficits financed by money creation exceeding changes in economic production can lead to hyperinflation. MMT recognizes the risk, but only when the economy is at full employment or there is no excess capacity. The government, MMT members argue, can raise taxes or cut spending to control inflationary pressures.
Third, the idea only applies to states capable of issuing their own fiat currencies. It could not be applied to the European Union, where individual nations have ceded monetary sovereignty to the European Central Bank. It is also not accessible to private companies or households, unless the state subscribes to private debt.
Fourth, the exchange rate can be a constraint. When a country borrows in its own currency from foreigners or engages in cross-border trade, investors must have confidence in the government, the monetary authorities and the stability of the exchange rate. As the periodic U.S. dollar DXY,
weakness shows, excessive deficits and money printing can cause financial markets to lose confidence and force a devaluation. Businesses may not be able to import goods at an affordable cost or to repay debt denominated in foreign currencies.
Fifth, there are operational challenges. In addition to creating the right jobs, it is necessary to fix the natural rate of employment or the level and structure of UBI. Measures used to define policy, such as unemployment, the inflation rate, money supply statistics or output gaps, are complex to calculate.
Finally, the switch to MMT can create instability. A currency or inflation shock would affect existing investors and trade. Policy makers may be unable to control the process once it gets started. When supply constraints are met, excessive deficit-financed spending would lead to inflation, higher rates and a currency correction. As with any policy, delays in data availability, which can be ambiguous, make management difficult. It is not known what would happen if MMT failed. The feedback of any experience is problematic and the difference between theory and practice is greater in reality than in concept.
Governments and central banks have stealthily adopted elements of MMT. It guarantees high asset prices which, in turn, guarantee unprecedented levels of borrowing.
Unfortunately, if printing money and spending a deficit were enough to ensure prosperity, then it is surprising that it was not thought about and enthusiastically adopted sooner. Whether they recognize it or not, investors are now unwittingly participating in an economic experiment that will affect the value of their investments and savings.
Satyajit Das is a former banker. He is the author of “A Banquet of Consequences – Reloaded: How we got into this mess we find ourselves in and why we need to act now ” (Penguin 2021).
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