<start of diatribe> I have to confess to being a little long winded myself. I am not an expert and have never been employed in the finance sector or have a degree in economics. But I first encountered naivety and absurdity in my first lecture in an economics subject I took as light relief from applied mathematics in the late sixties. I have retained an unexplained fascination ever since. Notwithstanding talk of mathematical economic models, economics uses arithmetic as economists (historically) never studied it (though now some mathematics skills are being utilised). That fancy formula at the end of the ABC article is simply a summation of some discrete constants. Economists assume economies are in equilibrium because change over time (eg differential equations) is not possible with arithmetic. You might notice that economic projections are current state with little discrete adjustments to a new equilibrium state. No surprise they are almost always wrong. <end of diatribe>
A lot of modern day economics is based on the work of Milton Friedman's Monetary Theory, in which the central
argument is that the only thing that really matters is interest rates. Henceforth responsibility for interest rates was hived to "independent" central banks. Of course monetary theory is pretty much discredited these days, but not many seem to caught up. Politicians were not to be trusted with the economy - and I must admit to have some sympathy with that, but I'm not sure where that leaves democracy.
Monetary Theory is rather extraordinary in that it seems leave out the role of money (despite the naming). Life was pretty simple then. Print money and you get hyper inflation. Increase unemployment and you lower inflation, but raising employment beyond the "natural rate" and you get stagflation, debt is evil and every budget must be in surplus. You can still hear these apparent facts being repeated daily, These are simply unquestioned premises that are drawn on to build on top of. This is background on how we have come to understand (or not understand) the levers of the economy.
Before we look at MMT, let us understand that most countries have since inception on average run deficits, and have not suffered runaway inflation or stagflation as a result. But there is no free lunch. Money is added/subtracted from an economy in three ways: 1. budget deficit adds money, 2. banks lending adds money, 3. Trade surplus adds money. The inverse is true for for the opposites.
MMT argues that there is no necessary or direct connection between money creation and inflation. We have plenty of evidence that they (not just MMT) are correct because when we look at US, ,UK, Euro who have printed significant quantities there is no inflation. My guess is that inflation is multi-factorial. We have a reduction of wage bargaining power and increasing dependence on a global market supplying cheap products - as an example of factors which most certainly have a moderating effect on inflation. The idea that adding a little money to an under-cooked economy will automatically cause inflation is absurd. Such a position is an evidence free belief.
Consider the effect of productivity. If productivity allows us to produce the same number of widgets every year with x% less inputs (eg labour) and subsequently lower the cost and price, we will have less money circulating in the economy. I would argue that an injection of money is necessary to compensate just for this. Whilst inflation may seem a bad idea it seems to be necessary to encourage spending to continue. It is just bad when there is "too much".
Governments have borrowed increasing amounts of money over time and this is perfectly fine as long as government income (and GDP) grows at the same rate or faster. If not you need look no further than Argentina for the consequence - although the IMF has not helped thing by lending money that can't be paid back with inevitable subsequent consequences.
The RBA seems to be a late arrival to the idea that government spending has an effect on the economy (monetary theory says it doesn't). But they have no choice in the matter because interest rates cannot be lowered any further. So now they are printing money to purchase bonds which will have an indirect effect of lowering long term rates. But they are still stuck on monetary theory. Interest rates are not the problem. It is money circulating in the economy and the best agency to put money in the economy is the government.
Sadly, that is not what they are doing. They are giving the banks a free ride to clip their ticket as the government sells bonds to the banks who in turn sell them to the RBA. The government still has a debt and the RBA still regards it to be a moral failure if it doesn't require the government to pay back the loan.
It would be much more simple if the government simply issued a zero interest bond to the RBA, and if the economy did ever look like over heating then the RBA could simply demand to have it's money back (which would then remove that money from the economy). We don't and shouldn't need to go through the charade of QE. And we don't need to worry about evidence free claims that we will experience the end of the financial system as we know it - although that might not be such a bad idea if the banks miss out on their cut (could that be a reason for the claim?). To do that we would need a truly independent RBA with board members appointed by a joint sitting of parliament.
I regard the failure of economists to understand the real economy to be the reason for the fairly dismal economic performance since the GFC. The still don't have a model that can explain the GFC. You can see I have a pretty poor regard for the dismalscience.
'Excessive' government debt is not good. We would be better off without it. But be mindful that only debt is talked about, but not debt/GDP. The latter is what matters, and it is still relatively modest compared with other countries. A much greater concern the younger generation is the price of housing, which despite repayments not being much different from when I was a younger person, they are cuurently faced with the prospect of declining prices on their $1,000,000 house funded with 5% deposit courtesy of the government. My son, who is a research scientist, is currently working from home because his lab was located in a hospital which has cleared him out because of the virus. His funding runs out in June after which he has no job. He is lucky - he reckons he has enough money to last a year. He doesn't have a $1,000,000 house and loan though.
