INTHEBLACK April 2022 - Magazine - Page 29
CLICK HERE
TO ACCESS
an INTHEBLACK
article on
inflation
COVID-19
AND MODERN
MONETARY THEORY
The fiscal measures taken by governments globally to pump
money into their economies during the COVID-19 crisis have,
largely, been necessary and effective.
Ferlito says the combination of low interest
rates and fiscal monetary policies will lead
to higher inflation. “The inflationary effects
created by expansive policies would become very
evident when the economy restarts, which could
undermine the stability of the recovery,” he says.
“When inflation rises to the point of being
dangerous, and the government support will be
withdrawn, then businesses will collapse, and
with it there will be damages to the connected
businesses.”
INFLATION AND TAPERING
Dr Shane Oliver, AMP Capital’s head of
investment strategy and chief economist, says
a permanent increase to significantly higher
inflation will mean lower price-to-earnings
multiples for assets.
“However, while the surge in global money
and fiscal stimulus poses the longer-term risk of
higher inflation, what we are seeing now looks
mostly due to distortions to global supply and
demand caused by the pandemic.
“In the pre-COVID-19 world, the global
supply system was a very finely tuned and
highly efficient machine. COVID-19 threw
it off with outbreaks (people can’t go to work)
and their response (enhanced unemployment
benefits encouraging people not to work) causing
disruptions to production, and demand swinging
to goods from services.
“It saved us from a depression,” says
Professor Bill Mitchell, chair in
economics at the University of
Newcastle and director of the Centre of
Full Employment and Equity. “The fiscal
expansion saved us from a massive
collapse in economic activity.
“Could it have been more?” he asks.
“Much more. It could have been 4 per
cent to 5 per cent more of GDP, and you
would have had fewer people losing
their jobs and their incomes.”
More to the point, Mitchell says
currency issuing countries such as
Australia could have gone about things
a different way, because they have the
ability to print money whenever they
need to in order to provide greater
economic support and reduce
unemployment levels.
That is a central pillar of Modern
Monetary Theory (MMT), a
macroeconomic framework that Mitchell
has helped develop, which challenges
conventional economic thinking.
MMT claims that spending by wealthy,
stable countries that use currencies
backed by their own governments is not
operationally constrained by revenues
from taxes or other sources.
Mitchell also says that, rather than
being an unconventional monetary
policy tool, government spending to
support economic stability and growth
should be the mainstream policy.
Mitchell says that, instead of being
a more effective approach, policy
movements in interest rates designed
to either increase or decrease spending
levels in the economy are highly
ineffective.
“This period of monetary policy
dominance has only been around for
30 to 40 years,” he says. “The longest
tradition in recent history has been that
fiscal policy has been used to maintain
full employment.
“The idea that the cost of funds is the
only factor businesses take into account
when making investment decisions is
just not evidence based.
“Obviously it’s one of the factors that
businesses take into account, but they
also take into account expectations of
earnings and the state of the sales
environment and longer-term
projections, especially with large-scale
investments in heavy industry, for
example.”
The large-scale bond buying
programs around the world as a result
of COVID-19 are inefficient, Mitchell
says, because they effectively amount
to one arm of government buying the
other’s debt.
“The Reserve Bank has bought about
92 per cent of the Australian
Government’s debt issued since
February last year,” he says.
“So, in effect, the government owns its
own debt, and the RBA [Reserve Bank of
Australia] is getting interest payments
from the Treasury, and then each year it
pays the Treasury back its dividends.
“And so, it’s just the government
paying itself back these rewards – it’s
just accounting stuff and not anything
functional at all.”
intheblack.cpaaustralia.com.au April 2022 29