by Dr jim walker

Plan A-cubed

It is now more than a decade since the onset of the financial crisis which rumbled through the US and European banking systems. Over that decade the long held principles of monetary policy and central banking have been turned on their heads. ‘Price stability’ has been abandoned for the false god of ‘2% inflation’. Lenders of Last Resort have transformed into Sources of Free Money. The financial system, as a result, is widely seen as the most protected and privileged part of Western economies, to the detriment of all other parts of the economy. It is hard to mount an effective counterargument to this perception.

The Left has connected to the popular discontent focused on the Fat Cats and Bankers that almost brought the system down but were then rewarded with zero interest rates, quantitative easing, soaring asset prices and even bigger bonuses. “Now we see the ugly face of Capitalism.” “They are all in it for themselves.” “It is time for them to be put back in their place.” These are the rallying cries of the populist political forces that have swept America, the UK and other parts of the European landmass.

For those of us on the libertarian fringe it is an understandable, if not welcome, reaction. There is no doubt that the prevailing political elite has been guilty of arrogant, institutionalised theft. There has been no balance in policy between bailout (for failures) and austerity (for everyone else). The best response to the financial crisis would have been widespread failures of financial institutions, the imposition of unlimited liability on bank, investment and commercial, shareholders and a reboot of monetary policy centred on a hard asset or, better still, free banking.

But governments were never going to let that happen. Politicians only think in terms of ameliorating short-term pain to their keenest interests, not in terms of long-term gain for the system or ordinary people.

They all believe that government or government institutions such as central banks are the solution

Unfortunately, the pendulum is swinging away from true free-market responses towards much more interventionist solutions. The following report takes a look at a policy prescription that is gaining ground among the ranks of US and British politicians alike. It is called Modern Monetary Theory. Its proponents believe that government spending – financed by costless money printing, the obvious lesson from QE – is the solution to all our problems.

What do the heterodox modern monetary theorists have in common with the orthodox Post-Keynesians, Monetarists and Supply-siders? Simple. They all believe that government or government institutions such as central banks are the solution. That printing more money and spending it through government channels will bring about Nirvana. Plus ça change, plus c’est la même chose.

Heterodoxy enters – Stage left

In Asianomics Strategy Report, The Caravan is Coming, 3 December 2018, we argued that President Donald Trump and other world leaders had greater things to worry about than the caravan of Honduran refugees that was then dominating the headlines. Following the response of central banks and governments to the financial crisis in 2008/09 the world economy has been dominated by extraordinary monetary policies that have, in addition to creating money from thin air, channelled funds from savers and taxpayers into the financial system. The perception, and the reality, is that economic policy has been run for the rich and connected while ordinary people have been faced with zero returns on savings and fiscal austerity programmes. It is not a stretch to argue that many of the ‘surprise’ political events of the last five years in the developed world are a reaction to this reality.