Money from air

Money from air

The world is weird right now. 

Here in Sydney, we exited COVID lockdown thanks to a sudden spurt in vaccinations and a decision to live with the virus after 18 months, thinking it could be kept out. 

Lockdown is hard for folk used to freedoms. Everyone is over it, and yet the exit vibe felt more cautious than euphoric while fronting to the GP for a double jab.

Then we lost our state premier, Gladys, forced to resign because the ICAC had to investigate her involvement in dodgy deals by a disgraced Liberal MP, her secret boyfriend at the time. That is a shame because she was one of the few pollies holding it together. The federal government ministers, and especially the PM, are just racing to cover their arses.

Now La Nina has dumped weather on us for weeks. We try to be upbeat and say that the cold and wet is better than wildfire. It is, but even that sounds hollow.

Meanwhile, in Australia…

The 2021-22 Budget committed an additional $41 billion in direct economic support, bringing total support since the beginning of the pandemic to $291 billion as of May 2021.

The Treasury, Australian Government

Such large numbers are hard to fathom, so for comparison government revenue was  $472.4 billion in 2020-21 (24.3 per cent of GDP) and in 2021–22, Government revenue is forecast to be at its lowest level as a share of the economy since 2011–12. Submarines notwithstanding, they are hard up for cash.

COVID economic support has cost the government nearly one year’s revenue. 

This is way above the initial fiscal commitment and goes onto the books as debt.

Here is a graph of the government debt loads for OECD countries in 2020, essentially the pre-COVID numbers from the OECD website

Australia is a mid-ranking OECD country for debt relative to GDP. However, the debt load rising steadily since 2007, has spiked with this extra expenditure. 

Alloporus has already mentioned that the global debt load has climbed to nearly $240 trillion, a number so big that it cannot fit on the screen of a standard calculator. Australia has made its modest contribution.

Gran always lived by thrift, a frugal approach that ensured there was no debt. Before people had access to credit there was no option but to live within means. 

Then the economists told us that 

the two primary causes of hyperinflation are (1) an increase in money supply not supported by economic growth, which increases inflation, and (2) a demand-pull inflation, in which demand outstrips supply. These two causes are clearly linked since both overload the demand side of the supply/demand equation.

Investopedia

Not being an economist my naive observation is that borrowing money or printing it to maintain the economy during a crisis that kicks economic growth in the nuts, fits primary cause number one.

But not to worry because…

“In the U.S., the central bank does not pay debt with the money it creates. Rather, it lends money at its targeted interest rate and the private sector employs that capital more productively. The money created is paid back, which is a crucial reason this monetary policy doesn’t produce hyperinflation.”

Economist Asher Rogovy

Truly, the world is weird right now. 

Will financial history repeat like bad shellfish?

Will financial history repeat like bad shellfish?

Hero image by Zlaťáky.cz on Unsplash

It has been 30 years since the 1987 stock market crash that pulled the carpet from under any number of brash high-fliers of the day. Many analysts have compared the precursors of that momentous day to the current conditions in overvalued stock and real estate markets around the world.

The main point seems to be that money is no longer real.

It has been a long time since gold, the hard precious metal, was held in reserve to match with the currency issued. Today 90% of the world’s cash is electronic and unconstrained by the need for a gold standard so central banks print the stuff by the trillions. They did this to save the system after the 2008 financial crisis and have just kept going ever since, with no obvious slowdown.

The global debt load is now three times greater than it was at the turn of the century and grows by staggering sums each year.

Source: Bloomberg 

Governments, companies and households raised $24 trillion in 2020 to offset the pandemic’s economic toll, bringing the global debt total to an all-time high of $281 trillion by the end of 2020, or more than 355% of global GDP, according to the Institute of International Finance.

Here are the gross national debt numbers for the US over a longer time period showing recovery from the impact of WW2 and then some political decisions by both Republican and Democrat presidents since the 1980’s.

Now here is the thing. 

Most of this cash has been used for speculation to give us booming stock markets, crazy house prices and, arguably, Donald Trump. 

Convention says that markets will correct, bubbles will burst, and the politics will burn. 

Or will they? 

If money is only loosely tied to material things (resources, products or services) and governments can print it at will then any correction is bailed out by more ‘printing’. Whatever it takes to ensure the economic system survives.

Why not go all out? 

Print more and more. Give citizens a basic income and do away with welfare for the unemployed. And while at it spend some more money to encourage decentralisation of people away from the big cities by subsidies to services in rural areas. 

After all, many of us just learnt to work from home. So home could be anywhere, maybe even somewhere with a kind rural outlook.

Here is my question…

If governments can mortgage the future to save economies from financial and pandemic crises why can’t they do it to stimulate an economic transition?

Alloporus

Comment below if you feel the urge and please share with your online folks