Academic: RBNZ Currency Printing Will “End in a Train Wreck”. Modern Monetary Theory Would be Better?

Estimated reading time: 10 minutes

At the start of June, we reported how the RBNZ Chief Economist had said the central bank might continue buying government bonds for some years, even once its currency printing (LSAP) programme ends in 2022.

We also discussed how the central bank could keep the currency printing going (which holds down interest rates) while also increasing interest rates via the Official Cash Rate (OCR). Even though they are meant to do the exact opposite of each other!

This week came a further report on this topic:

Those from within the banking world don’t see problems with the RBNZ having to keep buying bonds on the back of its LSAP programme; But an academic worries NZ’s headed for a train wreck

“Bond market experts generally aren’t concerned about the fact the Reserve Bank (RBNZ) will likely continue buying New Zealand Government Bonds (government debt) for some years, if not decades.

The current and former bankers and economists interest.co.nz spoke to recognised the RBNZ was never going to suddenly pull out of the bond market, having become such an active player from the time it launched its Large-Scale Asset Purchase (LSAP) programme in March 2020.

While some had criticisms of the LSAP programme, they didn’t believe the RBNZ continuing to buy bonds once the programme officially ends in June 2022 will pose new problems.”

Source.

This was in stark contrast to Senior associate at Victoria University of Wellington’s Institute of Governance and Policy Studies, Geoff Bertram…

“He believed the continuation of a flawed quantitative easing programme would only end in a train wreck.

…this stems from him being a proponent of money financing – the RBNZ printing money at the Government’s request and stimulating the economy more through fiscal policy.

Had the Government and RBNZ decided to take this less conventional route, the RBNZ could write off the debt and we could all move on, Bertram said.

He maintained this would be better than the current “charade”, through which the Government is effectively still financing itself.

This would prevent banks from clipping the ticket as the RBNZ buys the government bonds from them in a “money-go-round” that boosts asset prices rather than consumer inflation.

Bertram believed taxing wealth would be the best way of soaking up excess liquidity from the financial system. While he maintained this was fair and clean, he recognised it was “political poison”.”

Source.

To us it sounds like Bertram is a proponent of Modern Monetary Theory (MMT). Or at the very least he wouldn’t disagree with it too much.

What is Modern Monetary Theory?

With Modern Monetary Theory, the theory goes, central banks can print currency to the government debt to fund whatever the government wants to spend, without going through the banks (as QE/LSAP currently does). So effectively government spending is totally funded through currency printing. Then they argue they can then tax us to dampen inflation if (when!) it arises.

This theory might sound great at first blush, but there is a world of problems with it.

Jim Rickards has perhaps written the best debunking of MMT we have seen.

Here are his refutations against the arguments put forward by proponents of MMT.

Arguments Against Modern Monetary Theory

MMT Fallacy 1: Citizens must pay taxes so they cannot avoid the dollar (or whatever their currency is)

“The MMT claim that U.S. citizens cannot repudiate the dollar because they need it to pay taxes is also nonsense. Nothing is easier than the legal avoidance of taxes.”

Rickards argues there are many ways taxes can be avoided. Which includes not selling shares that have risen in price. 

Going one step further you could do what wealthy company owners do and borrow against the shares you own to fund your lifestyle. Thereby avoiding income taxes.

MMT Fallacy 2: Government Bonds are not needed

“Another baseless claim of MMT is that government bonds are not needed to finance government spending. The Treasury can just spend what it wants by ordering the Fed to send funds to suppliers and contractors.

In fact, the government bond market is the benchmark for every fixed income market in the world. Interest rates on government bonds are a critical signal of whether government policies are working (or not), whether inflation is gaining a foothold, and whether monetary policy is too tight or too loose.

The existence of a liquid government bond market signals that private investors regard the government as creditworthy. The idea that the Treasury market is an unnecessary frill shows how out of touch the MMT academics are and how little monetary history they have absorbed.”

MMT Fallacy 3: A government deficit is an individual’s surplus

“One of the more bizarre MMT claims is that “a government deficit is an individual’s surplus.” The idea is that the government is the sole source of money, and if the government didn’t spend it, you wouldn’t have any. The corollary is that the more the government spends, the more money you have.

But if the dollar becomes dysfunctional, as has happened with many currencies in the past, people abandon it for a better substitute.

Gresham’s Law, “bad money drives out good,” is an explicit recognition that citizens are always ready to dump one type of money and hoard another when they are being shortchanged by the former. So, just because the Treasury spends money, it does not mean citizens have any confidence in the money being spent.”

MMT Fallacy 4: Taxes are not for balancing the budget or to pay for anything. They exist solely to cool down inflation and redistribute income from rich to poor.

“If taxes are just another monetary safety valve (to reduce inflation) or a redistributionist tool, there is no reason for any American to support any level of taxation. Central banks have other ways to cool inflation, such as raising rates.

The idea that the tax code is nothing more than a cattle prod to fight inflation is exactly the kind of mindlessness one expects from academics whose business or real-world experience is practically nil.

This view of the tax code treats citizens like Pavlov’s dogs. We’re not Pavlov’s dogs. We understand the monetary and tax systems better than any MMT proponent because we live with them every day.”

The Biggest Issue with Modern Monetary Theory

The biggest overall issue with MMT is that a government cannot simply print currency to fund everything without it having an effect on the value of that currency. As Rickards notes:

“At some point, investors abandon the dollar for alternatives, such as land, oil, gold, silver, or alternative assets. Interest rates rise sharply, which only increases the deficit. The fact that the U.S. can print the money to pay the debt is irrelevant if the money itself is being repudiated.”

This flight from the dollar is already happening, to some degree, under the current system. It is the reason that share markets, house prices, cryptos, and precious metals have been rising. Many people are choosing not to hold the dollar. 

So then, isn’t it logical that if the system was solely funded through currency printing, and it was clear that currency was being perpetually devalued, that even more people would choose to escape it?

Just Because We Disagree with MMT…

But don’t misunderstand us here.

Debunking Modern Monetary Theory does not mean we agree with Quantitative Easing (QE)/LSAP, or whatever each central bank wants to call its currency printing programme.

We would agree with Bertram that the current RBNZ Large Scale Asset Purchases are for sure a “charade”. 

You see the Government is effectively still financing itself – to some degree anyway. Specifically up to 60%. As that is the limit to which the RBNZ can buy government bonds with the LSAP programme. Currently the central bank has bought about 40-50% of the government bonds on offer. 

So to reiterate we don’t agree with the current set up. But it’s just that MMT would be even worse than the status quo.

The surprising thing, (actually probably not so surprising!), is that in an article looking for anyone who has issues with the RBNZ’s likely very slow exit from its currency printing programme, the writer could only find someone who thought the currency printing just hadn’t been done right! Not anyone who actually disagreed with it altogether!

MMT May Have Already Arrived in the USA

MMT will likely arrive by stealth. Rickards wrote the following back last year before the U.S. election. Discussing the merger of monetary (central bank) and fiscal (government spending) policy… 

“What better way to achieve that merger than to appoint the former Fed head (Janet Yellen) as the new Treasury head with her former Deputy still in place back at the Fed. Multi-trillion dollar deficit spending plans will emerge soon from the new Congress. Treasury will spend the money. The Fed will buy the Treasury debt with newly printed money. The U.S. will go broke. And, a clueless Janet Yellen will supervise the entire operation.”

So far it is right on track, with Biden appointing Yellen, then last month announcing a $6 Trillion spending programme.

Earlier this month we also shared a good argument that the US central Bank is already outright monetising the US government debt.

See: The Fed’s Argument That It’s Not Directly Financing Government Debt Finally Fails 

“What the Fed is doing now CLEARLY has nothing at all to do with executing monetary policy. That argument vanished completely this month because the Fed’s purchases of treasures are now actually driving monetary reality totally out of whack from the Fed’s own stated policy goals.

The Fed’s absolutely massive treasury purchases in recent months are driving interbank lending rates to press below the zero bound that the Fed has set as its target. As a result, the Fed is now having to do half a trillion dollars in overnight reverse repos (effectively reselling those treasuries to banks at record levels) just to keep foundational interest rates from going negative due to all the treasuries the Fed is soaking up.

That leaves not even a hint of room for the Fed to claim it is only buying treasuries as a way of setting market interest rates. The Fed, is in fact, doing it SOLELY to finance government debt (“monetize” the debt) because the government switched to Modern Monetary Theory without discussion at the start of the COVIDcrisis, distributing bucket loads of helicopter money straight to the masses and directly to corporate aid, which it demands its banker (the Fed) finance.”

Source.  

So you could make a good argument that MMT has already arrived in the USA.

New Zealand took a while to follow the USA’s lead with currency printing. Maybe we’ll follow them into MMT a little faster?

How to Prepare for MMT

The last word on MMT we’ll leave to Jim Rickards…

“…MMT proceeds from a false premise, namely that money is a creature of the state and derives its power from the fact that people need money to pay taxes. 

But I argue that money depends on trust, not coercion. And trust in the monetary system can be broken if people fear massive inflation, as is the case in Venezuela today, for example.

The inevitable result of MMT is inflation. Investors should prepare now for an inflationary outbreak if MMT is pursued. That means owning physical gold, silver, land and other hard assets that will protect you against the ravages of inflation.

Once the inflation begins, it’ll be too late to take precautions.”

Check out the range of gold and silver available to buy today.