QED

This Can’t Go On Much Longer

Déjà vu all over again, I thought, as I contemplated writing about it again. But no, I couldn’t do it. I keep up to date on the data by looking at Worldometer. I’ve just looked now, at 8pm Sunday evening, and Australian deaths are recorded at 16 and the number of critical/serious cases at 23. At the same time, on Sky News, I saw Prime Minister Scott Morrison announcing a tightening of  public-gathering restrictions from ten to just two people. Go figure, I thought to myself and couldn’t so didn’t.

Instead I will go to economics and ask where is the money coming from and what are the implications of governments spending so much of it. I note that some commentators have referred to Modern Monetary Theory for guidance (watch for lefties coming out of the woodwork to promote it). Consult my article in the last July/August issue of Quadrant if you want to know about this theory; but, sufficient to say, it sheds more obscuration than it does light.

Governments are giving vast amounts of money to businesses and individuals to try and make up for their loss of revenue and income. Is it a good policy? Yes, it is. Governments have shut economies down and, thus, there is no option. Otherwise, people would starve and businesses across the board would collapse. At the same time, the character of giving matters. Some is sensible; some wasteful.

A formula being used in the US, and maybe elsewhere, seems by far the most sensible. Small and medium sized businesses are being given loans to cover their costs, including their wage costs, which will be forgiven if they keep all their employees on. Support to large businesses is also vital to ensure they do not collapse; and support to individuals thrown out of work. Much less sensible is giving extra money to those already being totally supported by government assistance.

Even if you’re a misguided Keynesian you would realise that giving pensioners extra money will do little good, when they are all being hounded to stay at home and shops are mostly shuttered. Of course, they could splurge online on Chinese-made goods. Make Xi Jinping happy!

Back to the main game. Governments can spend any amounts they like because they can create the ultimate form of money. Called base money, this is the only form of money that can be used to pay taxes. Notes and coin in your wallets and purses qualify, as do deposits of banks at central banks. Government spending creates this kind of money dollar for dollar.

There are normal times and there are these times. In these times, the securities issued by governments to back their spending are bought up by their respective central banks. Extraordinary circumstances call for extraordinary measures and government debt held by central banks could be cancelled later on. In any event, we will not be left with an overhang of massive amounts of government debt left in private hands.

What happens between governments and central banks is within the government paddock. It’s what happens outside that’s important. This time is different because there has been no need to make room for government spending by selling securities into the private sector. Governments have directly crushed private sector activity.

Business shutdowns and interruptions to supply chains are causing shortages of particular goods. This will lead to some price rises as a result of black markets emerging and price gouging. There will be no general price inflation. And afterwards?

Too much money chasing too few goods is the old textbook of inflation. It is applicable. But we have to remember that the money in the hands of individuals is in the form predominantly of bank deposits. We no longer live in the cash economies of revolutionary France or of the Weimar Republic.

Bank deposits are predominantly created by bank lending. It is hardly likely that bank lending will upsurge in view of the risk-averse conditions that this crisis will have caused and the damage it will have done to bank balance sheets.

So, what am I saying? I am saying that the normal implications of government overspending do not apply. This situation is unique. Think of it as an enforced sojourn, albeit on hard rations in solitary confinement. Most everything shuts, we sit on our hands, and the government gives those made destitute free money to pay bills and buy food and medicines. When the sojourn is over, we will have suffered a sharp loss of production but can make up for that over a period of time.

The trick is to ensure that business collapses are kept to a minimum; that most are in shape to start up again, and that individuals are kept whole. Every day will make it harder for some businesses and people to bounce back. This means the sojourn can’t go on much longer; only a few more weeks at most. Trump knows this, and could provide a lead for other countries, including Australia; if the hate-filled American media don’t deter him from acting as speedily as we need. And need it we do. Morrison, in the announcement I referred to, mentioned restrictions being in place for six months.

28 comments
  • Stephen Due

    My local cafe has put up a sign saying “Forced to close by the government – this business will not reopen”. The owner has thoughtfully papered the inside of the plate glass window with pages from current newspapers. More succinctly, I recently saw on a closed kiosk the sign “Shut happens”.

  • en passant

    Peter,
    This is the economic destruction of the West (and Australia) that the globalists, climate Cultists, Fabians, Totalitarians (of every ilk) and Socialists have dreamed about since forever. Greta can now go back to skool as the capitalist world has deliberately suicided at the behest of our politicians.

    It appears to be relatively easy to prophesise our future, so here are some of mine in this Orwellian Brave New World:
    a. The Chinese are already buying stocks in key American (and Australian) companies.
    b. They are offering big loans and support to those supporting their Belt & road initiative – like Victoria. All you have to do is bow and kneel. How easy is it to just bow and scrape in order to be saved?
    c. The ‘Oz stimulus package’ will turn out to be a massive ‘hot shot’ heroin overdose that will economically ruin Oz.
    d. The Oz $$ will become valueless
    e. The Chinese will call in their markers and will take key assets as payment (Ports, Communications, Infrastructure, and whatever else they want that destroys our sovereignty). The Greens, the Left and the ABC will cheer this on as a ‘good thing’.
    f. Emergency ‘Social Control’ measures will become more draconian and possibly permanent
    g. Pollie pensions and benefits will NOT be cut …

    Welcome to the future …
    As usual, my solution requires ‘risk-taking’, which my children condemn as cavalier. When their arguments have no effect on me, they then (justifiably) ask, ‘But what about Mum?”
    Anyway, I think that applying a harsh Triage approach has statistical merit and would contribute to achieving the prime practical objective of decreasing the ‘Rate of Increase in Infection’ through the period of Peak Hospitalisation Demand. This would maximise the number remaining at work and minimise the permanent damage to business and industry. However, as we import so much from China our industries will probably collapse anyway as materials are already in short supply. The owner-builder next door has stopped as he cannot get – wait for it – roofing screws.
    We have destroyed the Australia I knew because 1,800 people are known to be infected and 16 have died.

    The look of self-satisfaction on ScoMo’s face at the destruction he and Parliament have wrought on Oz beggars belief. Why not add a super-tax to our last productive industry and finish the job? Kill off mining and we will have destroyed Oz to save the planet.

  • Peter OBrien

    Peter, you are right but I fear we are now at ‘lie back and think of England’ stage. Re the ‘stimulus’ (why is anyone still calling it that?) is concerned, it demonstrates a fundamental misunderstanding of how the free market works. It’s all very well to pay employers to keep staff on in these times but businesses aren’t in business to employ people – they are in business to sell products and services and to make money for themselves and/or their shareholders. My brother, who runs a motor dealership gives a good example of this distortion in good times – paid parental leave. The government says why should you care – we pick up the bill for the wages. But they don’t pick up the bill for the lost earnings while someone is on PPL.

  • Peter OBrien

    This employee payment is nothing more than the dole. The businesses are not making money and not paying taxes.

  • Stephen Due

    Trump is our best hope. He knows what to do. This morning he had to abandon the Easter deadline and move it to the end of April on expert advice. At least he chooses the good experts though. But he still has a deadline that is realistic, measured in weeks, as opposed to vague talk about ‘months’. That deadline is important. What he needs is hospital beds (in place), ventilators (in place), and masks (currently in mass production). He needs test kits that are cheap, self-administered and fast (result in 15 mins) and he is trialing them now. The final requirement is good stats which should start coming through in the US in a few weeks. Trump has vast resources at his disposal in the US in terms of money and intellect. The US has led the world in medical research for a hundred years, its lead increasing every decade. No other country can match the US in medical science or even come close. Australia is a provincial backwater. Our best hope is that Trump succeeds and we get in through the back door.

  • Peter Smith

    I have to reiterate Stephen that I agree with you that Trump and the USA is our best hope. We simply can’t afford to be out of business for months on end. I nearly fell off my chair when Morrison said six months. Where in the world did that come from. I assume from panicky premiers most of whom you wouldn’t want running one of those cafes they’ve closed down. Also, public health officials have their place. Their advice must be listened to and taken into account. But there are many things to take into account in the affairs of a nation.

  • March

    I find it hard to fathom that so few journalists are not asking questions about the test results that are demonstrating that like 2009 H1N1 this current pandemic has been over cooked. The data coming from Germany and Iceland and elsewhere and indeed Australia are clearly showing the effects of covid 19 for countries with open space clean air and separation between old and young have been exaggerated. It is not appropriate to compare Australia to Italy and Spain. A scandel of epic proportions and no one in the mainstream media can think to ask a hard question. Have China bought them off?

  • Lacebug

    I find it hard to believe that the left finds it racist when we refer to the virus as the Wuhan Virus. They say it causes unrest. I say, what really causes unrest is a virus that kills thousands of people.

  • Lacebug

    China must be held accountable for this virus.

  • Peter OBrien

    Ironically, the stars are lining up for Morrison following his ‘summer of discontent’. We are likely to emerge from this quicker and in better health than most commentators expect. Most people will accept that the destruction of our economy was a necessary part of that success and will not punish Morrison for doling out the cash. And Labor can hardly criticize the government on the financial front – most people will believe they would have gone harder. They will carp about the targetting of the spending and so on but it won’t wash with the great unwashed. In this circumstance, Morrison would have to be Turnbull to lose the next election.

  • Peter OBrien

    Adam Creighton, whom I generally admire, has an extraordinary piece in today’s Australian. Here’s a sample:
    “Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant. Unlike the Spanish flu 90 years ago, it seems coronavirus is of little threat to the vast majority.”

    We didn’t ask for it Adam. Most of us have been happy to self-isolate and protect ourselves.

    And more:

    “Everyone will suffer in degrees during this crisis, but it’s only fair that those who are being saved, ­especially if they are financially equipped, pay a disproportionate burden of the cost.”

    And:

    “Other options might include a significant inheritance tax imposed, say, for the next 20 years to help defray the gargantuan tax burden that has just been put on everyone who is not going to die in that period.”

    The oldies most likely to die, and thus the ones who are being ‘saved’ by the sacrifices of the young, are those at the bottom end of the social scale. They are not unworthy recipients of all this government largesse. By all means argue that some benefits to retirees could or should be means tested, but don’t do it under cover of this overblown crisis.

    You could argue that the government’ economic response is over the top but don’t blame retirees for that.

    What a crock of an article!

  • Guido Negraszus

    It’s pretty hard to read the Oz these days. Commentators and readers alike can’t stop praising the government for handing out the mother of all socialist packages this country has ever seen. Nobody seems to care. It’s free money. Who wouldn’t love it? What if this crisis goes on for another year or two? What if there won’t be a vaccine within a year? How many more bailouts will the government provide with money it doesn’t actually have? Kevin Rudd’s GFC response will look like pocket money once this government is through with the virus response.

  • Peter OBrien

    And what about if we have a different Wuhan next year or the year after?

  • STJOHNOFGRAFTON

    How much longer will we endure the relentless media updates on CV-19? I stopped CV-19 update consumption weeks ago on the basis that it was not worth the misery and that was hazardous to my psyche.

  • Peter Smith

    I had just finished reading Adam Creighton when I read Peter Obrien’s comment. It is, as Peter says, an extraordinary piece. For a long time the relatively young Creighton has raged against the old getting so much “concessional” treatment. Never letting a crisis go to waste, he has upped his ante. I can’t cover all of the destructive idiocy he preaches, which would harm so many vulnerable people if it were ever put into effect, read it for yourself. But, his economics is wanting. He thinks this government spending will burden the young into the future. It won’t. It won’t because this time really is different. The debt will be held by the Reserve Bank and may never be sold into the market. And it won’t unless inflation takes off, which is most unlikely, as I’ve written in my piece.

  • Peter OBrien

    On the subject of those whom Creighton categorizes as ‘those who are being saved’ it is as well to remember that to date, no one has been saved by the extraordinary measures taken by the government.. Until the 2200 ICU beds that we had before the crisis erupted are fully occupied, then no-one is in this category. And I doubt that after it’s all over, anyone will be.

  • lloveday

    Peter Smith suggests of Creighton’s article “read it for yourself”.
    .
    It’s paywalled if you go to the Australian’s home page; I subscribe and could copy and paste here, as could others, but that may be in breach of copyright. However, you can get a “freebie” at:
    .
    https://www.theaustralian.com.au/commentary/coronavirus-perks-and-loopholes-cant-endure-as-we-run-up-debt/news-story/544881ae9626b1d9588e118ae1d7b231

  • Peter Smith

    Got to come in again Peter. Yours is one of those comments that I had not thought of. Of course, we have not yet saved one person by closing down the economy and regular human discourse. By the way, what is more depressing than government madness is the number of people who gladly go along with it. I am off walking to meet a friend this afternoon for a take-away coffee and chat outdoors. Is this allowed? Well, its exercise you see, so they can’t fine me. Can they??

  • lloveday

    Well, that link does not work from here. I can get it up without logging in to The Australian by Googling
    .
    “Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant”
    .
    Creighton’s article is at the top of the list

  • pgang

    I’m afraid the Donald has lost his nerve on this one. He should have stuck with his Easter deadline.

    ‘By the way, what is more depressing than government madness is the number of people who gladly go along with it’ Amen to that. Do they actually stop to think about what’s happening?
    The big question is: How much of our economic, social and religious freedom has been lost permanently? Because bureaucrats never step backwards in the pursuit of power.

    But Peter I don’t follow your economics. You claim that the money printing of the government will not matter. Now I hear the other side of your argument – that government needs to feed the people it has forced into starvation (which places them only marginally ahead of The Chairman on the moral spectrum). But there has to be an inflationary consequence, surely. All the real wealth that people have accumulated – the real savings and capital – are being undermined because currency now comes out of thin air. Surely this pump priming will not magically evaporate, which seems to be the gist of the argument – because currency is a measure of production and productivity. Sooner or later production will have to pick up the currency slack, or the currency will collapse, and those will be the unhappy times.
    Non production is feeding people? This can’t be. I think we are headed for disastrous currency deflation and national debt, even if this rubbish does’t go on much longer. One day was already too much of this economic outrage.

  • ianl

    @ Peter OBrien

    Yes, Creighton is a whiny, whingey millenial who thinks the oldy, mouldy wrinklies have somehow managed to steal all the money. He’s been on this silly obsession for over 12 months, slowly increasing the angst, as you accurately point out.

    He even thinks that “inheritance taxes”, or “death duties”, or more likely both at once, will cause oldies deserved pain to compensate for the trouble they’re causing. Umm, no, Mr Creighton, only to those whom the property was legally directed – such as yourself.
    I made the point quite some time ago, before C19 – being 65+ has become a social crime.

  • Peter Smith

    pgang, the government is spending or giving out about $300 billion. This will increase base money and the money supply more broadly by the same amount. The total M3 money supply is now about $2170 billion. Usually government expenditure of this huge magnitude would need to be mostly mopped up by govt. security sales into the private sector otherwise it would lead to inflation. My argument and, by the way, I could be wrong, is that this time is different. Why? First, because the demand for liquidity is likely to rise in these fraught times, even after we emerge from hibernation. Second, because bank lending, which would normally build on increases in base money, will remain subdued. And, note, in normal course, bank lending is the largest contributor to increases in the money supply. We shall see of course. And you could be right. These times have no precedent to rely on.

  • Peter OBrien

    Peter Smith,
    “I am off walking to meet a friend this afternoon for a take-away coffee and chat outdoors. Is this allowed? Well, its exercise you see, so they can’t fine me. Can they??”

    Apparently now they can. What a disgrace. Measures that they put in place 2 weeks ago are clearly working so they decide to go even harder now. The logic escapes me.

  • Peter Smith

    Peter, we now see why the framers put in the second amendment into the US constitution – to protect free men from oppressive government. However, they didn’t count on free men losing gumption and becoming as sheep.
    Just popped into Coles. They didn’t have those spaced crosses on the floor and the girl at the checkout told me I was too close to the customer in front. I thought we were spaced out enough in fact, and made a joke of it, said I needed to carry around a tape measure, to lighten the mood, and all went well. Nevertheless, couldn’t help feeling a little depressed when out of the store.

  • Peter OBrien

    And I just heard someone on 7 News saying the government wants everyone to ‘splash the cash’ they just received in their accounts. Can you believe it?

  • Peter OBrien

    Just listened to Peta Credlin advocating that public servants should take a 50% pay cut ‘because we’re all in this together, aren’t we?’. Presumably because they are on the public teat and she is not. But she, on the basis of a long and successful career on the public purse, now has a, presumably, very lucrative job with Sky. Hypocritical?

  • en passant

    As deaths in Oz hit an ‘unprecedented’ 19 and the country is locked down in an economic death spiral. So, why am I not following the herd and panicking? After all, I am in the medium to high risk zone of over 70.’s
    We still have less than 5,000 people who have tested positive (from a population of 25,000,000) in the 60 days since Covid-19 hit Oz. For arithmetical ease let’s say that by the time I post this deaths have climbed another 5.5% to 20 (the power of statistics and using percentages This is less than 25%of road deaths in Victoria alone for this year). Also 250 people who tested positive have now been cleared (and no doubt have been ‘vaccinated’).
    So let’s play with the pandemic numbers:
    No. of days since Oz Catastrophe began = 60
    Population = 25,000,000
    Covid-19 Positive results = 5,000
    Recovered = 250 (no doubt many more are just waiting out their quarantine period)
    Deaths = 20

    Here we go:
    1. Percentage of population infected – (5,000 x 100 / 25,000,000) = 0.02%
    2. Percentage of population who have died of the infection to date – (20 x 100 / 25,000,000) = 0.00008%
    3. Percentage of positively tested people who have died of the infection – (5,000 / 20 x 100) = 2.5%
    4. Average number of people infected per day in Oz – (5,000/60) = 83 [Yes, I know it is supposed to be exponential and not linear and I also know that this is just the positive test cases, so let’s factor in these unknowns based on epidemiological guesses concerning China)
    5. Number of untested people with a mild case they don’t know they have or had – (Known cases x 50) – (5,000 x 50) = 250,000 (why am I supposed to be terrified of a disease that the majority of people get over it without even knowing they had it? So, let’s stick with real illnesses, shall we?)
    6. Percentage of people who have died if we take the epidemiologists ‘Chinese’ estimates into account – (20 x 100 / 255,000) = 0.008% Yawn ….
    7. Percentage who have had it [14-day illness + 14-day quarantine] and listed as recovered – (20 x 100 / 5,000) = 5% (But as the lag from positivity, through illness to recovery and quarantine is 30 days, then in the next month this will approach 95% of the 5,000 known cases + all new case added to the infected rate {less the 20+ who die})
    What price has Oz paid for being saved by this lockdown (or exercise in population control)?
    1. A wrecked economy of incalculable consequences.
    2. Closed businesses that will never reopen resulting in broken lives and a predictable increase in suicides far in excess of Covid-9 deaths as people see their lives and families blighted by a smug government praising its economic and cultural destruction of Australia as ‘Success”. My investment income has dropped as some people are taking up the government offer to save themselves from hardship by passing it on to me.
    3. A wrecked debt-laden budget of incalculable consequences that will rely on draconian taxation, austere measures, crippling taxation and the impoverishment of Oz for decades to repay it – if ever;
    4. A clear (and very sad) example of how easy it is to panic the masses and impose draconian Orwellian controls on us. Surely everyone can now agree that we need Concentration Camps and Gulags for Quarantine breakers?
    5. We great Australians always cheered ourselves with the thought that Communist Russia, totalitarian China, the murderously psychopathic Pol Pot, the Nazis and every tin pot tyrant and dictator were aberrations that could not happen to the bronzed Aussie larrikin of myth and yesteryear. Yet many fell for the climate cult predictions of catastrophe – and we spent $Bns building bird slicers and desalination plants we didn’t need and NOT building dams and the infrastructure we did. Now we meekly accept a devastated economy and social controls as the price we have to pay to fight a minor Chinese bio-weapon virus with a ‘kill-rate’ of 2%-3%? Poor simpleton stupid fellows, my country, I am not one of you anymore.
    6. In just two months our debt is already now such that we must inevitably be sucked into the vortex of the Globalists Financial Black Hole. The price we must pay (because we can never repay the ScoMo cash-splash debt) is to relinquish our sovereignty and cede control of Oz to either the Chinese or to the supra-nationalists of the One World Order. Fortunately, many of them are Australians, so the oppression will probably be by one of our own, so that’s OK …
    Enjoy the rest of your day … I am off to my safe space to whimper and panic … although apparently thumb-sucking is not allowed.

  • Geoffrey Luck

    March: See my forthcoming article.

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