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Publisher’s forum:
Opinion:
MMT debate enters mainstream Elizabeth McArthur
s the COVID-19 pandemic continues to A wreak havoc on economies around the globe, Modern Monetary Theory (MMT) is having its moment in the sun, with many questioning its relevance to the situation the world finds itself in. Spurring the discussion, Stephanie Kelton’s The Deficit Myth imagines a world where government spending isn’t limited by tax revenue, where nations can essentially print money. It’s made such an impact on the popular zeitgeist, Reserve Bank of Australia governor Philip Lowe was forced to comment. “The central bank, unlike any other institution, is able to create money and the resource cost of creating that money is negligible. So the argument goes, if the government needs money to stimulate the economy, the central bank should simply create it in the public interest,” Lowe said during a speech in July. “The reality, though, is there is no free lunch. The tab always has to be paid and it is paid out of taxes and government revenues in one form or another.” He said the community would pay for the “free lunch” MMT offers as inflation rose. Lowe argued that while central banks can change how and when spending is paid for, it is not possible to put aside the government’s budget constraints entirely. Somebody always pays. At an Australia Institute event called ‘Economics of a Pandemic’ Kelton said while MMT sounds, and kind of is, radical – it’s not that far away from what’s already happening in response to the COVID-19 pandemic. “The Republicans passed very big tax cuts in the US at the end of 2017… A lot of people, including many economists, said if Republicans were successful in passing these tax cuts it would so increase the deficit and the debt that no future congress would have any fiscal capacity…. Two years later here we are. The coronavirus pandemic started and what did we see?” Kelton said. “We saw congress immediately spring into action…Nobody paused for a moment to argue and fight who would pay, where to find the money or how it would affect the deficit.” She argues the stimulus response to COVID-19 across the world proves that where there’s a will there’s a way. Kelton wants to see a rebalancing of income and wealth through progressive tax policies and she
argues that the traditional way of thinking about government budgets “holds the progressive agenda hostage” to the idea that every dollar of spending needs to be matched by a dollar of tax income. Macquarie Business School specialised lecturer and senior research Hamid Yahyaei says the MMT thought experiment is worth having but he stresses he is not an advocate or an opponent of MMT. Yahyaei says in theory, Western central banks could undertake MMT policies without inducing Zimbabwe-style economic chaos and sky high inflation. “But, we are a little in the dark about how the market would actually react if a country were to suddenly undertake MMT,” he says. “We already know what happens to a certain extent when we print a lot of money by selling bonds to the central bank, from the government. What tends to happen to the currency is that it depreciates on a relative level because you’re effectively bringing the interest rate environments lower.” However, Yahyaei says MMT isn’t overly concerned with international currency markets. Instead, it’s about a nation not relying on international markets but having faith in its own currency. Commonwealth Bank chief economist Stephen Halmarick says the devaluation of currency in MMT theory could be a good thing, making the nation more attractive to trade partners. “MMT is having its moment in the sun because every major central bank in the world has got interest rates at extremely low levels, every major central bank in the world is buying government bonds through a quantitative easing program – so we’re already quite a long way along the spectrum of monetary policy towards MMT,” he says. “The next step from where central banks are now to MMT is not that large.” Proponents of MMT argue if there’s any moment to see whether MMT works, the current pandemic is it. The central bank of Indonesia has already agreed to make new money to cover part of the nation’s deficit. “Years ago the idea that the RBA would have interest rates at 0.25% or be actively participating in the bond market… People would have never thought that would happen,” Halmarick says. fs
31 August 2020 | Volume 18 Number 17 www.financialstandard.com.au 20 January 2020 | Volume 18 Number 01
Feature:
Executive appts:
News:
Profile:
Advisers bolt to cash, gold Annabelle Dickson
Stephen Halmarick
chief economist Commonwealth Bank
Advisers seeking to de-risk portfolios have sparked mass inflows to defensive assets and an almost equal amount in outflows of riskier assets, namely Australian equities. The BetaShares Australian High Interest Cash ETF (AAA) and ETF Securities Physical Gold (GOLD) were the top two ETFs receiving $166 million and $133 million respectively in July, according to the latest BetaShares Australian ETF Review. Interestingly there was almost the same figure flowing out of the BlackRock iShares Core S&P/ASX 200 ETF and the State Street SPRDR S&P/ASX 200 month at $159 million and $131 million respectively. The total outflow for Australian equities in July was just shy of $193 million while the total inflow for cash was $151 million and over $200 million for commodities. For the year to date, GOLD has recorded $606.2 million flowing in, followed by AAA at $517 million. AAA has been gaining popularity particularly in ending June 30 where it took out the number one Continued on page 4
MySuper winners, losers revealed Ally Selby
In a survey of 40 MySuper strategies and products, an $80 billion super fund has outperformed its peers to return 7% per annum in the three years to June. According to Rainmaker’s June 2020 RiskMetrics report, UniSuper achieved the highest three-year return (but with the third highest volatility of 9.1% per annum) while REI Super was the lowest returning product (3.6% per annum returns, and median volatility of 7.5% per annum). The median MySuper single strategy product returned 5.5% per annum, with a median volatility of 7.6%. While UniSuper had the best returning product over the period, WA Super achieved the highest risk-adjusted return and also had the lowest volatility of any MySuper offering. WA Super returned 5.6% per annum, and was ranked first for the Sharpe ratio (returns per unit of risk), third for the Sortino ratio (returns per unit of downside risk) and first for the Omega ratio (the Continued on page 4