Printing money is not a free lunch
Inflation is caused when the request because real (i.e. tangible) resources precede supply of real resources, thereby causing prices to rise.
So while people spending the money you created will increase the demand for real resources, it won’t cause inflation. provided you do it when demand is low. It is only when you reach the point where demand catches up with and exceeds supply that you will have an inflation problem.
This is the purely pragmatic reason why most economists disapprove of MMT. Once politicians got the idea that they could keep spending without worrying about debt and deficit how would you get them to stop adding to inflation by continuing to create money rather than going back to borrowing and paying interest?
How would you get them to do what Chalmers is doing right now: look at all the spending plans of his Liberal predecessors that are unreasonable and stop them, to make room for Labour’s own spending plans ?
Even so, as the Ecocrats would rather I not point out, the MMT Brigade scored a qualified victory. As part of the Reserve Bank’s reliance on “unconventional” monetary policy during the pandemic — aka “quantitative easing” — it bought more than $350 billion worth of used government bonds.
Bonds he paid for simply by crediting the “foreign exchange settlement accounts” that each of the banks he bought the bonds from has with the central bank.
Why all the hype about budget deficits? Who said that the gap between what a government spends and what it collects in taxes must be covered by public borrowing? It’s just a rule someone made up.
So indirectlythe Reserve did what the MMT people say it should have done: cover about $350 billion in budget shortfalls by creating money.
This means that $350 billion of the $1 trillion government debt – and the corresponding interest payments – are owed to the Reserve Bank, which happens to be owned by the government. About a third of the government’s debt is owed to it and must eventually be repaid.
Thus, the government’s liabilities are offset by the assets of its subsidiary. That’s what I wrote a few weeks ago, and it’s true. But, as a fossilized central banker explained to me, that’s not the whole truth.
When you go through all the double-entry bookkeeping, you see that the created money that the Reserve paid into the banks’ exchange settlement accounts in exchange for the bonds it bought is still there. It’s still a liability on the Reserve’s balance sheet and an asset on the banks’ balance sheets.
This money is part of what monetary economists call “base money”. Base money consists of all “currency” – banknotes and coins – issued by the central bank, more all the money banks hold in their foreign exchange settlement accounts at the central bank.
And the trick of base money is that its quantity can only be changed by a transaction with the government or the central bank at the other end. In other words, nothing that a person or a company or even a bank can do of their own accord can change the quantity of base money.
It is true that Bank A and Bank B can enter into a transaction that reduces Bank A’s account balance, but only by increasing Bank B’s balance by the same amount. That is, banks can move base money among themselves, but they cannot change the amount of base money held by banks as a whole.
OK, but why is this a problem? Because banks have money they own locked in bank accounts with the central bank, on which they pay little or no interest. They would like to lend it to someone else at a much higher interest rate.
They are therefore tempted to enter into very artificial and very risky arbitrage arrangements that involve borrowing short and lending long. The Yanks call it “picking up pennies in front of a steamroller.”
All is well until there is a financial crisis, which brings down the banks and causes enormous damage to the rest of the economy, as we saw with the global financial crisis of 2008. One more another case where there are no free meals.
Ross Gittins is the economics editor.