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It’s Modern Monetary Theory time as the state steps inALAN KOHLER

It hardly seems sensible to be putting numbers on how much the Morrison government will spend to support the economy, whether it’s the first effort of $17.6bn, the RBA’s $90bn last Thursday, or Sunday’s latest number of $66.1bn.

Moreover the precision of $66.1bn is meaningless, beyond being a number big enough that everybody might feel better for five minutes and the Prime Minister can have another one of those grave pep-talky press conferences.

And adding them all up to $189bn (rounded up from $188.7bn) is even more meaningless, since RBA quantitative easing, cash off the budget to pensioners and businesses, permission to withdraw from superannuation and the various other parts of the packages are not just apples and oranges, but a whole basket of fruit.

The economy is likely to be entirely shut down within a few days apart from essential services, in which case government support for businesses and jobs will have to be unlimited, as it is in other *countries. It’s likely that most, if not all, developed economies will soon be shut down, apart from essential businesses.


An economic depression seems guaranteed no matter what monetary or fiscal stimulus is applied, and governments everywhere will be forced to supply unlimited cash to stop people from dying of starvation or a lack of their usual medicines and therapies.

Capitalist, small-government economies like Australia’s will be replaced for a while by a socialist one, in which the state owns the means of production … of money, that is.

The question is going to quickly become: who is going to buy all the debt? Apart from anything else, with yields so low, the price of these bonds is high and the likely return from them very low indeed.

But in any case, the pile of sovereign debt that will be issued in 2020 and possibly 2021 to keep citizens alive will have to be colossal — Napoleonic in scope.

There will also be huge amounts of debt taken on by businesses and households, availing themselves of the various cheap loan schemes being promoted by governments.

So unless there is a wave of debt defaults — sovereign, corporate and personal — either during or after the crisis, to wipe the slate clean again, the lasting legacy of the coronavirus is likely to be much more global debt than we’ve already got, which is saying something (it’s currently more than $US250 trillion, or 320 per cent of world GDP).

Now think about the elements of the Australian rescue packages announced over the past week.

• The government is going to let individuals withdraw up to $20,000 from super, which is a form of borrowing from the future;

• There’ll be three new sets of government spending — cash to pensioners, income support for workers and cash flow support for employers, totalling $50bn;

• An SME loan guarantee (but only 50 per cent of the loans);

• RBA’s three-year facility of at least $90bn for banks to lend to SMEs;

• Quantitative easing by the RBA to target a three-year bond yield of 0.25 per cent.

All of it will be new debt … except for the source of the RBA’s QE, and presumably the $90bn facility. That money will be newly manufactured on the RBA’s computers before being dispatched to banks at the click of a mouse, to be dispatched by the bank at the click of another mouse — for a small margin of course.

It seems inevitable to this armchair epidemiologist that the RBA will have to end up buying the government’s debt as well: no one else will buy it at a yield of 1.1 per cent yield, unless it is stuffed down super funds’ throats — and that would be a form of borrowing as well, since the lower investment returns will mean smaller retirement outcomes.

In fact, I’d say all global central banks will have to buy bonds directly from their governments, instead of from banks as they do now, as part of quantitative easing.

This has a name: Modern Monetary Theory, in which deficits don’t matter because they can be funded with money manufactured out of thin air by central banks.

So far that magic has been confined to supporting share prices through central banks buying bonds from banks to “provide liquidity to the financial system”. More than $US20 trillion has been thus created and now sits as (mostly) government bonds on the balance sheets of four central banks — the US, China, Japan and *Europe. This has led to a historic boom in the US sharemarket, since money tends to flow to the asset with the greatest return, and in the past decade that has been American technology firms, thanks, ironically, to globalisation.

Up to now MMT has been mainly pushed by the lefties in US congress, led by Alexandria Ocasio-Cortez (Democrat, New York), and opposed by the Right, and all right-thinking economists, as the thin end of the socialist wedge.

But all bets are off now — something new has come along. Capitalism has to close for a while and the state has to step up.

Do governments just keep doing what they’ve always done, which is to scrimp and borrow, or do they try something new?

Alan Kohler is editor in chief of eurekareport.com.au

ALAN KOHLEREDITOR-AT-LARGE, THE AUSTRALIAN BUSINESS REVIEW
Alan Kohler is one of Australia’s most experienced commentators and journalists.