Economics

Money Printing in the Age of COVID-19

Debasing gold and silver coins and printing fiat notes has a long history of feeding the reckless spending ambitions of rulers and governments. It has never ended well. Governments today are again creating money out of thin air. Will it end badly or are these times different? We will need to wait and see. However, as I will posit, there are reasons to believe that the outcome, while cheerless, will be relatively benign.

Governments have spent big to provide succour to the citizens they threw out of work and the businesses they closed down in their overwrought response to the Wuhan virus. To be precise, this is not stimulus spending, though it is commonly so described. I am not sure what to call it; relief spending, perhaps. Stimulus spending is a modern-day Keynesian term used to describe government spending intended to boost economies which have fallen into recession. If economies, once reopened, struggle to regain lost ground, as seems inevitable, then further government spending, particularly of a capital nature, can be described as stimulus spending. And we are likely to see plenty of it.

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It is important to make a distinction between the two types of spending. Relief spending, absolutely essential in the unique circumstances of an economic lockdown, crowds out no private sector economic activity; there’s none to crowd out. Stimulus spending, on the other hand, can crowd out and distort private sector activity. But, that to one side, there is a common factor whether government spending is by way of relief or stimulus.

The common factor is that each dollar of spending without offsetting taxation (“deficit spending”) increases the money supply by one dollar. That dollar appears in the bank account of the recipient and also in the bank’s account with the central bank. In this latter iteration it is called base money, because banks, in a fractional reserve deposit system, of the kind we have, can use it to underpin lending of multiples of the dollar. And each dollar they lend becomes a bank deposit alongside the original dollar, and part of the money supply. The money supply primarily encompasses bank deposits plus the public’s holdings of cash (notes and coin). In normal course, bank lending contributes most to growth in the money supply.

Two questions arise. Will money creation or, to use literary licence, “money printing”, in the age of COVID-19, cause inflation? And also, as a related matter, will borrowing to finance deficit-spending produce burdensome government debt? While my reference point is Australia, a similar account applies pari passu across all countries with sophisticated banking systems.

A first point to make is that Australia, like other advanced countries, does not have a cash-based economy. Cash accounts for only a small proportion of the money supply. What this means, if hyperinflation were ever to occur, is that people would not be delivering wheelbarrows full of fiat notes to buy a loaf of bread, as they did in revolutionary France, the Weimar Republic and, more recently, Zimbabwe. And, precisely because cash is no longer king, hyperinflation, or anything close, is almost certainly a phenomenon of the past. Uncomfortably high and debilitating inflation is another matter and remains an extant risk.

A second point to make is that price inflation cannot occur unless it is driven or accommodated by increases in the money supply. Think of it this way. Inflation can be equivalently expressed as untoward rises in the prices of goods and services or, alternatively, as falls in the exchange value of a unit of money. Obeying the normal laws of economics, the more money there is, the lower is its exchange value and thus, conversely, the higher are prices. As Milton Friedman definingly put it in Counter-Revolution in Monetary Theory:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

A third point to make is that the only effective constraint on governments engaging in deficit spending is inflation. Inflation signals that the demands of government cannot be met by the economy’s capacity to produce goods and services. This is not to say that any amount of government spending, sans inflation, is beneficial; simply that only inflation impedes spendthrift governments.

Government spending itself does not cause inflation. Inflation jumps, if it jumps at all, as a result of increases in the money supply contingent on the spending. When governments offset their spending with taxation, or by mopping up increases in the money supply by bond sales into the marketplace, inflation remains dormant. No increase in the money supply means no inflation. Can it be more complicated than that? Well, scenarios can be dreamt up in which each dollar turns over more rapidly than normal and hence produces inflation. But, in practical terms, the answer is no. Only increases in the money supply can produce, accommodate and sustain inflation. And only marked increases in the money supply can result in marked inflation.

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. Correspondingly, and equally, it is manifest in an increase in the money supply. The money supply is variously defined.

Money narrowly defined (“M1”) encompasses cash in the hands of the public and on-demand deposits with banks and other depositing-taking institutions (building societies and credit unions in Australia). There are broader definitions of money which include a range of term deposits. However, it is the narrower definition of money that I will focus on. It is the category of money spent.

In Australia, in the year to the end of April 2020, M1 money increased by a whopping 37 per cent (in the US it was 29 per cent) compared with just 3 per cent (4 per cent for the US) in the year to the end of April 2019. Bank lending did not account for this disparity. In each year, outstanding loans grew by only about 4 per cent. It is all down to deficit spending. And deficit spending will likely go on adding markedly to the money supply in the months and immediate years ahead. The government will struggle to get anywhere near to balancing the budget and the Reserve Bank will continue to buy bonds in quantity to prevent interest rates from rising.

Monetary growth of the magnitude of 37 per cent in just one year, and more of the same ahead, lays the groundwork for inflation. Unless, that is, each dollar turns over much less frequently than in the normal course. The turnover of each dollar on average is called the velocity of circulation of money. It is conventionally calculated as GDP divided by the money stock. An increase in velocity cannot of itself fuel inflation. At the same time, velocity does tend to increase during the upswing of an economic cycle and decline during a downturn. This is to be expected. Money more quickly leaves bank accounts when times are buoyant and tends to sit for longer when times are depressed.

The upshot, in these depressed times, is that we could expect velocity to fall and partially offset the increase in the money supply. But to fall by as much as it has? Absolutely not. GDP (the numerator in the calculation of velocity) is falling as a result of the lockdown and is unlikely to rebound into robustly growing territory very soon. At the same time, the money supply (the denominator) has been soaring. Throw away textbooks. Unsurprisingly, textbook theory never envisaged governments taking the extraordinary step of closing down their economies. We are in uncharted waters, which makes it difficult to predict the outcome. With that proviso I will go back to the two questions I posed above: Will inflation take off? Will government debt burden the future?

Inflation is unlikely to take off, at least over the next few years. The government has crippled the Australian economy, as other governments have crippled theirs. So, leaving the inscrutable case of China aside, not much mutual transnational help can be expected. Additionally, the need for banks to repair their impaired balance sheets will keep their lending contained. Moreover, inflation cannot sustain itself unless wages keep pace with prices. To elaborate, prices cannot go on rising unless wage increases underpin spending. The unemployment hangover from the lockdown and the longer-term malaise of the tourism industry and, no doubt, the government’s eagerness to ramp up immigration again, will keep wage rises in check—as, in the Western world more generally, will the inevitable resumption of immigration from the developing world.

We will see a rising money supply offset by low and falling velocity for some considerable time. Result: no inflation. Does this contradict Friedman’s dictum? Not really. The dictum says that inflation can only be caused by the money supply increasing faster than output. It is silent on whether a rapid expansion in the money supply must cause inflation. Mind you, as Friedman considered velocity to be “a relatively stable magnitude” (Monetary History of the United States) he would undoubtedly have thought that the current monetary expansion would be inflationary. But then, like textbooks, he did not envisage a scenario in which governments would create so much money while, at the same time, crippling their economies.

As to the debt burden, government debt as a result of this episode of “relief” deficit spending is unlikely to burden future generations, despite the popular wisdom to that effect. Much of the debt will be held by central banks; effectively, a government-sector in-house arrangement. Stephen Grenfell, a former deputy governor at the Reserve Bank, wrote in the Australian on May 11 that paying interest can’t be avoided because the “cash created when the central bank buys bonds finds its way directly to banks’ reserves at the central bank, which earn interest”. True enough. However, the current interest rate on the banks’ exchange settlement account balances at the Reserve Bank is just 0.1 per cent. Treasury Note yields are a few tenths of a per cent.

Similarly, interest rates on Australian government bonds are extremely low (the yield on ten-year bonds was around 1 per cent in early June) and will not burden the future, even if held in private hands, provided the economy starts growing again in nominal terms, even slowly. It will be a different matter if the government throws money around on ill-considered stimulus projects once the lockdown is over. Such projects might hold the economy back and in so doing add to the debt burden. Decreases in red and green tape and in business taxes are the best way to get the economy growing, and to more easily service the debt and progressively reduce its level in proportion to the size of the economy.

President Reagan’s economic policies provide a case study. Reducing government spending and a tight monetary policy to curb inflation were in his armoury but primarily his policies were to cut regulations and taxes to spur economic growth. Under the eight years of his presidency, from January 1981 to January 1989, real GDP grew at an average annual rate of 3.5 per cent. Government revenues grew strongly. Of course, predictably, he failed to control spending. Nevertheless, but for the high interest rates prevailing at the time, the ratio of debt to GDP would have fallen significantly. Then the average interest rate on outstanding US federal debt was about 8 per cent. Now it is less than 2 per cent and falling as new issues are made. Ten-year US government bond yields were around 0.75 per cent in early June.

To be clear, being sanguine about deficit financing in the age of COVID-19 does not in the least back up Modern Monetary Theory (MMT). MMT, embraced by a section of the modern Left, is an economic theory which postulates that permanent full employment can be achieved without undue inflation through the application of expansive fiscal and monetary policy settings allied with a buffer scheme to employ additional people on the public payroll during economic downturns and release them onto the private-sector job market during upturns. Cut down, MMT is a theory which sees no limit to applying government spending, borrowing and money creation to remedy unemployment. Does any of it have merit? No, not in normal times. But this time is far from normal.

In 2009 Carmen M. Reinhart and Kenneth S. Rogoff gave their well-known and impressive account of eight centuries of economic and financial cycles the ironic title of This Time is Different. In 2020 it is the plain truth. This time really is different.

Extremely low interest rates and deliberately damaged economies have combined to allow debt issuance and money creation much more scope before they come up against the economic roadblock of runaway inflation. Where it will end is another matter. Abnormally low interest rates will allow economies to grow; and grow enough, with any luck, to outgrow debt. Reagan’s policies of deregulation and lower business taxes would help if they were implemented in part or in whole. But, under any likely scenario, it’s hard to see a return to vibrant economic growth in the near future.

If history is any guide, continuing stimulus spending will fund value-sapping public-sector investments. Low interest rates will encourage low-value private-sector investments. Anaemic growth probably lies ahead for most countries. Though you can’t discount the lucky-country effect coming into play for Australia courtesy of China. Nor can you discount the marvellous-Trump effect coming into play for America—provided the American electorate is savvy enough to keep the forty-fifth president around beyond January 2021. However, best not to pin too many hopes on serendipitous developments. Somehow we need to get back to balanced budgets, to normal levels of interest rates and to accompanying vibrant growth. That seems a long way off.

Peter Smith wrote “Making Sense of Bottomless Interest Rates” in the December 2019 issue

20 comments
  • Warty

    ‘Have you read Sheridan? Have you read Sheridan?’ Credlin yesterday quoting her lemming-like colleagues.
    Well yes, I had read Greg Sheridan and I’ve come to despair of this once almost conservative, now a seeming CINO.
    Perhaps he had had a bad night on the 15th. Perhaps he had been watching too much CNN or MSNBC or scouring the New York Times, but the end result is that he has joined the ranks of the catastrophians in their multitudes.
    With great certitude he tell us that belief in ‘herd’ immunity is the biggest load of bunkum ever conceived of, and this after consulting two medical scientists . . . two of all those experts who insisted on the shutting down of our economy in the first place. Incidentally, when was the last time you consulted your local GP on your investment portfolio? You did? More fool you.
    It seems that common sense, that old fashioned yard stick, is the last facility to be consulted in this age of experts. It seems more like common sense to allow your immune system to ‘do its thing’, rather than spraying half a can of Dettol on kitchen counters, kitchen floors, smudgy walls and your son’s smelly socks . It seems eminently sensible to allow the dying to fall dead in the muddy streets, as we were accustomed to a century or two ago; but no, we have to tidy then away from overly sensitive eyes. My wife won’t allow me one, but I’m very much in favour of having a memento mori above my desk; perhaps I might download one on my iPhone.
    I acknowledge my children’s children support AntiFa and BLM, but I don’t want to totally trash their economic future because I am afraid of my own mortality. I’m not even in the octogenarian age group yet, and Greg is younger than I.
    What on earth has happened to us? We call a flu variant a pandemic and we collectively collapse in the street. Give it a name and it becomes a nightmare.
    Come on Greg, put a bit of cement in your bones.

  • Alice Thermopolis

    Thanks Peter

    A fascinating situation. One hopes that economic theory is superior to climate theory, especially with regard to its “CO2”, the velocity of money.

    How long before the public becomes cynical about all the fabulous central bank money-printing machine and begins to fret about “store of value” issues?

    Perhaps it is already doing so, hence the asset-price inflation, the “incredible risk rally” recently in equities and commodity markets, particularly iron ore and gold, and long-term bond rate trends.

    Surely signs of a bubble about to burst, with more financial-market carnage than the GFC?

    Gold is a “store of value” because it is natural scarce. Governments and/or central banks cannot create gold ex nihilo as they can – are doing– national currencies.

    Yet the last thing they want is a surging gold price. It could seduce folk away from super and the stock market. Remember it was illegal for private citizens to own gold in the US from 1 May 1933 under the President’s gold-confiscation proclamation, until the early 1970s.

    Nor will they allow a genuine market interest rate, which would degrade government budgets further and make repayment of their massive debts even more unlikely.

    Yet having “debased” money – zero interest rates – they do not appear to have an exit strategy, or a route back to more sustainable levels of national debt.

    Where this is leading only God, MMT, and/or St Corona know, she being the patron saint of epidemics and money (“crowns”).

  • ianl

    ” … In the age of COVID-19, bonds sold to finance deficit spending are being largely or wholly bought up by respective central banks …” [quote from this article]

    I’ve seen this statement, or close variations, quite a few times in recent months.

    Yet not once has it been posited as to from where the “central bank” garners the money to buy the bonds. Perhaps it just gestures like Mandrake, (seriously – magic money), and edits the Treasury’s electronic books to show a more positive balance. Pretend money. Where is any useful production in that ?

    I have a side-bet with a colleague that I get no sensible answer to this question.

  • Peter Smith

    ianl,
    “as to from where the “central bank” garners the money to buy the bonds”
    Answer: 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 acount. 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.

  • pgang

    Isn’t this how the Chinese operate their fake economy? All they have in reality is a bunch of US dollars.
    Anyway it just sounds like socialism, with government taking ownership of what was once the private sector.

  • pgang

    ‘No increase in the money supply means no inflation. Can it be more complicated than that?’
    .
    I still don’t see how this can work given our dramatic decrease in output. Surely the money has to filter into the shrunken ‘real’ economy. It can’t all just disappear into the reserve bank, never to be seen again or until such time that it is magically called upon. Nor is it going to sit dormant for long in private accounts. The velocity will surely not shrink that much – people need to live. What if we were all gifted money for doing nothing? Money would be infinitely worthless. But maybe you’re right – maybe the insanity of effectively zero interest rates will keep inflation under control. I guess we are in this position already as a result of public debt. What difference will more make?
    .
    Low interest rates are a form of slavery for private working people. Few of us living now will ever be able to leverage our own production to increase, or even to hang onto our wealth, and it will be worse for the younger who don’t possess any assets. We must work and spend, like slaves working for their bread.

  • Peter Smith

    pgang, close to zero interest rates will not keep inflation under control. In ordinary times keeping interest rates so very low through central bank purchases of securities in the marketplace would be inflationary. What is keeping inflation down, despite untoward growth in the money supply, is a parlous economy and unemployment / underemployment.
    As a derivative matter, this is reflected in a falling velocity of money.
    Of course, if very low interest rates retard adventurous investments, then through this circuitous route they might keep the economy subdued and less prone to inflation. It’s all difficult to get a handle on. The times are different and there is no precedent to call upon.

  • Alice Thermopolis

    “Of course, if very low interest rates retard adventurous investments,..”
    Peter, surely very low interest rates are actually encouraging “adventurous investments” – assuming by “adventurous” you mean speculation or hyper-Keynesian ‘animal spirits’; hence the current asset-price inflation in equities and commodities.
    With regard to what you call “the inscrutable case of China”, the surge in the iron ore price is probably being driven higher as much by Chinese (and other) traders – encouraged by their government to support the country’s stock markets – as other factors, such as domestic steel production.
    Anyway, as for anxiety about what “money” is – and isn’t -, the current crisis may change the public’s perception of it.
    As Pgang asks above:”What if we were all gifted money for doing nothing? Money would be infinitely worthless?”

    John Kenneth Galbraith raised a similar conundrum in his 1975 book, Money – Whence it came, where it went:“There is very little in economics that invokes the supernatural but by one phenomenon many may have been tempted. In looking at a rectangular piece of paper, on frequent occasion of indifferent quality, featuring a national hero or national monument or carrying a classical design with overtones of Peter Paul Rubens, Jacques Louis David, or a particularly well-stocked vegetable market, and printed in green and brown ink, they have been assailed by the question: Why is anything so intrinsically valueless so obviously desirable?”

  • Peter Smith

    I should have been more specific Alice. By ‘adventurous investments’ I meant real (not financial) investments, which carry risk but offer rewards in terms of productivity and innovation. Low interest rates tend to encourage safe, low-value, low return, investments – putting resouces into expanding existing ways of doing things and into commercial buildings and housing. Growth suffers. Or at least that is my hypothesis. Don’t want to pretend I know.

  • talldad

    MMT, embraced by a section of the modern Left, is an economic theory which postulates that permanent full employment can be achieved without undue inflation through the application of expansive fiscal and monetary policy settings allied with a buffer scheme to employ additional people on the public payroll during economic downturns and release them onto the private-sector job market during upturns.

    That’ll be the day! to quote a singer from long ago.

    Once again we see the silliness of “progressive economics” assuming that governments can magically “run the economy” by pushing and pulling levers (thanks, Paul Keating!). What if people, once they are employed by the government, decide that they don’t want to change jobs during the upturn phase? Will they be driven out by force?

  • sfw

    I thought that we have experienced inflation at quite high levels however not the normal measured inflation over a wide range of goods and services but inflation in things that have a restricted supply. The boom in manufactured goods and food etc seems to have allowed for the supply of these things to rise to meet demand, often exceeding demand and reducing in price. That’s why measured inflation is so low, Things that have limited supply and longevity all seem to have increased a lot, property and stocks mainly. So if I’m correct, now that the trade with China will likely slow then the supply of manufactured goods should start to rise. I’m probably wrong but like all inflation those who get their hands on the new money first are the ones to get the assets, this time it’s no different, the insiders get valuable assets and the average punter gets trinkets with a limited life and no resale value.

  • ianl

    > “it [RBA in Aus] creates it out of thin air cos it can”

    Thank you Peter Smith. ” … cos it *thinks* it can.

    You had the grace to stay well away from my corollary on actual production, remaining within fiat boundaries (I do know you are experienced in this area but it doesn’t seem to occur to you why hard-edged scientists regard it as the Land of Alice). I have won my side-bet though, as I suspected I would.

    So:
    the King has no clothes
    Mandrake has gestured hypnotically
    Of course it’s real, you just can’t see it
    through the Looking Glass with Alice
    the rabbit’s in the other top hat
    hahahahaha … etc

    This is quite scary actually, as it’s obvious that this make-believe only works when productivity continually rises so the cheques don’t bounce, even in spurts. COVID-19 has smashed that to pieces, so the answer from the loopies is for the RBA to write more, bigger dud cheques.
    I’ve also been told, perhaps reliably, that bank depositors (ie. the maligned “savers”) are likely responsible for bail-ins in the event of collapse.

  • pgang

    Looks like Alan Moran is less optimistic. From The Spectator:

    ‘In its present policies, Australia is currently pretty much applying MMT prescriptions. JobKeeper/JobSeeker programs are paying 30 per cent of the nation’s employees to produce nothing. In the end, this means around a 30 per cent reduction in incomes.

    Support programs are reasonable as temporary measures to resolve a crisis, which, rightly or wrongly is largely created by government policy. But the policy is already bringing calls for its expansion and extension beyond September. The economy cannot keep paying itself 30 per cent more than it earns and must either adjust to a lower level of output or remove the lockdown obstacles to this.’

    Alan explained myself much better than I could. I think that ideas of velocity might be useful from a technical perspective, but have little bearing on the big picture.

  • pgang

    If anybody out there is still reading these comments, here is an incredible expose from The Guardian of May 2019.
    https://www.theguardian.com/australia-news/2019/may/07/flu-experts-predict-4000-australians-will-die-from-influenza-this-year
    This puts the lie to everything we are told regarding Sars-Cov-2 and the necessity of lockdowns. Experience and history tell us what a non event this virus is and always was, and this historical article reveals the lies and shockingly pointless scaremongering that our governments/media have subjected us to.
    Perhaps Quadrant could run a piece on this article.

  • pgang

  • pgang

    Here we have the nature of totalitarianism perfectly illuminated, thanks to our politicians’ reaction to an almost harmless virus. One person, anonymous, against a social club involving hundreds of people – the local footy team. Probably not even a ‘parent’ but a disgruntled local who hates sport. And the inevitable, mindless, draconian repercussions. Note also the pathetic group-think at the end. Welcome to the New Australia, enough to make you ill:
    .
    IMPORTANT CHANGE TO COVID REGULATIONS

    The disease is still a threat in NSW. Melbourne community AFL has been put off for at least six weeks, most likely it will be cancelled. If we don’t want to see our season cancelled, then we need to take the community guidelines seriously.
    .
    An anonymous complaint was put into council by one of our parents about lack of social distancing at the earlier games (pgang: there has only been 1 game played so far). The rules are very simple – parents and kids cannot form a huddle together. Kids on the field, parents off except to come and go.
    .
    From this week until rules are relaxed –
    .
    ONE PARENT, ONE CHILD PLAYER at the ground for training or games unless one parent or more has a job for the club or team for that game. Siblings only, no other relatives or friends.
    .
    SOCIALLY DISTANCE.
    .
    PRACTICE HYGIENE.
    .
    You have heard the rules from multiple sources over the past months. Please don’t make volunteers have to enforce them.
    .
    To the parent that chose to write anonymously to council please come and see me. Please put up your hand to help the hardworking volunteers that have put hundreds of hours into making the season run in extremely difficult circumstances, so that your kid can play footy. We would really appreciate your help in policing the grounds for the rest of the season.
    .
    We have all been warned that council and community members would be watching. Follow the rules or we will not have a season, or worse, we will be the next hot spot.
    .
    XXXX

    Club President

  • Alice Thermopolis

    Interesting question: Is the RBA really “independent” of the government?
    We are told we need a central bank to keep the government honest, but it has been walking a very fine line in recent months. If it’s not “independent” and merely dances to the government’s tune, there’s no point having one.

    No surprise, then, to hear the RBA governor today emphatically declaring the RBA is “independent”.

    Matthew Cranston AFR Economics correspondent
    Jul 21, 2020 – 1.18pm
    Reserve Bank governor Philip Lowe has scuttled the idea that a central bank can just go on funding governments without bearing any significant costs to itself or the economy.
    The idea promoted through Modern Monetary Theory poses that central banks can print money and buy endless amounts of government bonds to finance a fiscal expansion that could drive employment before inflation jumps.
    But in a speech on Tuesday, Dr Lowe said this idea of free finance was “no free lunch” and involved huge costs to the central bank and the economy.

  • pmprociv

    I passed this article by my old mate, John Armour, who understands this stuff far better than I do, and, with his permission, have taken the liberty of posting his comments here (Peter Smith’s statements in inverted commas):

    “In this latter iteration it is called base money, because banks, in a fractional reserve deposit system, of the kind we have, can use it to underpin lending of multiples of the dollar.”

    But there’s no such thing as “Fractional Reserve Banking” (more commonly referred to as the Money Multiplier) It’s a myth that was debunked in a well-known Quarterly Bulletin by the Bank of England on 2014. Bill Mitchell had been saying it was bullshit for 20 years at the time and might have been the trigger for its publication.

    “The common factor is that each dollar of spending without offsetting taxation (“deficit spending”) increases the money supply by one dollar.”
    So what. That’s how the economy (and private savings) grows.

    BUT…
    “In normal course, bank lending contributes most to growth in the money supply.”

    So it’s the private sector that drives the money supply? Correct. The central bank has no control of the money supply except its price, as stated by MMT.

    “Think of it this way. Inflation can be equivalently expressed as untoward rises in the prices of goods and services or, alternatively, as falls in the exchange value of a unit of money. “

    Inflation is the CONTINUOUS rise of prices, month on month, or whatever suitable time interval.

    “Inflation is always a monetary phenomenon” (Milton Friedman)

    Friedman in later life said he was wrong. The “Quantity Theory of Money” was debunked by Keynes in 1937.

    “A third point to make is that the only effective constraint on governments engaging in deficit spending is inflation.”

    Correct. A point emphasised especially by MMT.

    “When governments offset their spending with taxation, or by mopping up increases in the money supply by bond sales into the marketplace, inflation remains dormant.”

    Only taxation can offset the demand effects of government spending. Bond sales are a simple asset swap that have no effect on aggregate spending as the money to buy the bonds was not only injected into the economy by the act of deficit spending but was already sequested in savings.
    Bond issuance is better seen as corporate welfare which is why it’s defended so vigorously by the finance sector. They convinced the Howard government to issue bonds even when there was no debt.

    “In the age of COVID-19, bonds sold to finance deficit spending are being largely or wholly bought up by respective central banks.”

    Bond sales are not even capable of “financing” government spending. As confirmed by numerous papers by the RBA, the purpose of bond issuance is to manage the interest rate, a monetary rather than a fiscal operation.
    The author actually confirms this but doesn’t get the contradiction:

    “The government will struggle to get anywhere near to balancing the budget and the Reserve Bank will continue to buy bonds in quantity to prevent interest rates from rising.”

    “Such projects might hold the economy back and in so doing add to the debt burden.”

    There’s no such thing as a debt burden as the so-called debt is, by accounting, a private sector asset. It represents our savings, and can thus never be “paid off”.

    “In 2009 Carmen M. Reinhart and Kenneth S. Rogoff gave their well-known and impressive account of eight centuries of economic and financial cycles the ironic title of This Time is Different. In 2020 it is the plain truth. This time really is different.”

    I’d call that a monumental ”own goal” as Reinhart and Rogoff were sprung by an economics undergrad cooking their results and have been thoroughly discredited. They were lucky to keep their jobs.

    How could Peter Smith not be aware of that?

    “Somehow we need to get back to balanced budgets, to normal levels of interest rates and to accompanying vibrant growth. That seems a long way off.”

    The ideological pursuit of balanced budgets will ensure that “vibrant growth” will never happen. Economic history is emphatic on that point.

  • Peter Smith

    I haven’t the patience to go through all of the questionable points made by John Armour courtesy of pmprociv. But the final one about Reinhart and Rogoff calls for a response. I did know of the criticism of R&R’s research and economic prescriptions based on that research. However, none of that, well-based or otherwise, goes to the impressive sweeping history of economy and financial cycles, and it is to that that my article made reference.

  • don coyote

    I realise I have come into this discussion late. I hope it is still active.

    A non-economist and non-account (although I have done Ec101 and Acc101), please make allowance for my ignorance. Questions, perhaps silly but…..

    That dollar appears in the bank account of the recipient and also in the bank’s account with the central bank.
    Why? I thought the bank only had to hold its fractional reserve with the central bank.

    The government has obviously made the decision to increase welfare or relief spending. If the central bank is independent, who actual converts this policy into “money”?

    When governments offset their spending with taxation, or by mopping up increases in the money supply by bond sales into the marketplace,……
    Who makes the decision to buy or sell bonds, the government or the central bank?

    … bonds sold to finance deficit spending are being largely or wholly bought up by respective central banks
    The central banks were selling the bonds to themselves? I am confused.

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