Modern monetarists could push world's economy off the cliffby Andrew Wong
Modern monetary theory has become a hot topic in the markets these days.
US Federal Reserve chairman Jerome Powell admits it is difficult to define what MMT actually means but the basic principle is that a government has a
monopoly on its own currency, no budget constraints, and the only limitation to a government's spending power is excessive inflation.Proponents of modern monetary theory argue that a government that runs a large budget deficit though investments in education, infrastructure, and research and development, could end up boosting long-term economic growth. So they have no problem with a government piling up large debts.
But there are hidden problems that these modern monetarists have ignored. A huge number of government bonds will cramp the live space for corporate bonds and investors might lose interest in government bonds. In addition, the government will pay more interest on its debt, which in turn will hurt its coffers.
But forget about debating the feasibility of modern monetary theory. A point more worthy of discussion is:
why has MMT become such a burning issue?Firstly, quantitative easing (QE) has severely curbed the cost of debt, while also making markets less aware of the risks of debt issuance and even assuming that debt is not a problem.
What's even more worrying is that QE has ended and President Donald Trump has rolled out massive tax cuts, but the US and the global economy show
no signs of sustainable growth. However, when governments and central banks start to rely too much on this philosophy, it will, of course, will attract many supporters.
If nations begin to implement modern monetary theory, the market might become averse to these irresponsible policies. This is because monetary policies without budgetary constraints may eventually lead to profligacy and drastic changes in the currency reserves of all countries in the world.
Moreover, many potential crises will erupt.
For example, many countries will choose to leave the European Union because of fewer restrictions on spending. Policies such as free health care and education would be rolled out across the board, but at the same time xenophobic voices would become more vocal in order to protect the country's resources, increasing geopolitical risks.
And the quality of policy in each country will decline. The indiscriminate use of illegal drugs will eventually lead to a decline in the effectiveness of policy, further complicating long-term economic and inflation risks.
If modern monetary theory does take a foothold, it may represent the end of the global economy as we know it, and the end result could be a repeat of 1929 to 1945, with the global economy in a depression and a world war as a solution, which would be an absolute tragedy.
Source: The Standard
http://www.thestandard.com.hk/section-n ... 0401&sid=2
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