With the conventional policy arsenal now exhausted, the coronavirus outbreak could see the rise of “heterodox” Modern Monetary Theory (MMT).
Decried as “voodoo economics” by former US Treasury secretary Larry Summers, Modern Monetary Theory holds that monetarily sovereign countries (that is, countries that issue their own currency) do not need taxes to finance their spending since they can always print more money, and that the only thing they actually need to worry about is inflation – and inflation won’t occur as long as there’s unused capacity or unemployed labour.
And while MMT remains more or less untested, current economic conditions could be a call to action.
“With the central bank policy toolbox empty, we think we are on the verge of full Modern Monetary Theory (MMT), when politicians take the reins from obsolete central banks and expand spending without constraint from debt issuance (true money printing!),” wrote Saxo Bank chief economist and chief investment officer Steen Jakobsen.
“The UK budget was an early indication of this and was drawn up even before the coronavirus impacts began to crystallise. And the concept of the government filling the gap left behind on demand is now even accepted in Germany, which issued its own form of Mr Draghi’s 2012 ‘whatever it takes’ speech in vowing infinite support to German businesses large and small through the KfW or government development bank.”
Mr Jakobsen invoked the post-WWII Marshall Plan, where the US issued infinite credit to European countries in order to create demand and aid the reconstruction effort.
“In economics, this is Say’s law: the idea that supply creates its own demand,” Mr Jakobsen said.
“And that will be the solution here because failure via debt deflation and a credit implosion is not an option. Governments will create money far beyond any on- or off-balance sheet constraint.”
In recent years, MMT has enjoyed the support of a number of left-wing American politicians, including Alexandria Ocasio-Cortez and Bernie Sanders.
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