One smart cookie believes we should keep interest rates at zero.

I know what you’re thinking.

How can we do that and not have crippling runaway inflation?

But she’s one step ahead of you.

To quell inflationary pressure, once in a while we can just tax people…A LOT.

It’s fool proof!

Yeah…as you can imagine, this scares a lot of people, myself included. And it’s these views that are gaining momentum in the US.

New York Representative Alexandria Ocasio-Cortez says we should consider modern monetary theory.

It’s the theory based on government’s ability to print their own currency. With such an ability, they have access to an unlimited pool of money. So, there should be little to no risk of bankruptcy and a lot more spending.

Oh yeah, the modern monetary theorists also don’t believe deficits are all that bad either.

Give me a break…

 

Mo debt mo problems

What happens when a business runs at a loss?

If it happens for long enough, eventually it’ll go bust.

So why should it be any different for the government? Government spending should be making or breaking decisions.

Governments shouldn’t throw money at the popular vote. They should be using the capital they have as effectively as possible to achieve the greatest possible outcome for the majority of people.

If they continue to rack up debt year after year, then let them go bust.

But can’t the central banks just print our problems away?

No, they can’t. You cannot create money in a vacuum. Money creation has effects on the value of money, it pushes asset prices every which way and it destroys savings over time.

Oh, but inflation won’t be a problem, the modern monetary theorists say. We can just tax people when inflation gets too high, which will likely be all the time with free money forever.

Yet what happens when governments try to tax the rich today?

The rich move their money into tax safe havens like municipal bonds (more debt for government). Or they move it offshore where taxes are lower.

Under the modern monetary theory, we would get extreme boom and bust cycles.

With zero interest rates forever, everyone is incentivised to spend all the time. They buy assets (pushing prices up), they speculate in financial markets (pushing stocks up), they fund terrible ideas and fund debt with debt.

Why even work? Money is free, just take out a loan and don’t pay it back. If it’s good enough for the government, why not you too?

Again, where’s the plug to pull on inflation?

Oh, that’s right. When inflation gets too high the government will come in and tax everybody. Yet who are they going to tax? As soon as people get a whiff of higher inflation, they’ll move their cash off-shore or into non-taxable assets.

So, what you get is a huge monetary pile on and a massive monetary shortage when inflation gets too high.

You won’t have to wait a generation to see extreme booms of speculation and severe depressions. They’ll happen within years of each other because everyone will be on a knife’s edge.

And for those people that sit tight through it all, they’ll have their wealth destroyed.

Geez, I wish we lived in that world…

 

The transition China has to face up to

Even the communists over in China wouldn’t do such a thing. And they love taking money from people.

But right now they wouldn’t dream of taxing people any more. From South China Morning Post:

‘China is planning to roll out a new set of incentives this year to encourage the country’s 1 billion consumers to buy more items like cars and home appliances as part of a wider effort to stabilise economic growth, a senior state planner said.

‘The comments by Ning Jizhe, vice-chairman of the National Development and Reform Commission (NDRC), China’s top economic planning agency, followed the decision by the Central Economic Work Conference last month to expand domestic consumer spending this year to achieve “high-quality growth” and offset the impact of the trade war with United States.’

But China needs to get used to this reality. We all are. Trade war or not.

China growth has for a long time been export-led. Chinese businesses are producing more goods, which, along with services, drives economic growth. And a lot of it is for export overseas.

The sad truth is China’s export-led growth cannot last forever. And it’s because we’re just way too productive for demand to keep up.

Manufacturers everywhere, not just in China, are getting more efficient. They’re producing more goods with fewer workers and resources.

Sooner or later you’ll see a turning point. It will be as cost effective to produce something in the US as it is in China.

And when that point comes, China better hope their growing middle-income class is all grown up. With globalisation in reverse, China’s 1.3 billion people will drive demand for new goods and services, spurring on economic growth.

It will be tough, moving so many people up the socio-economic food chain.

But if China can forget their communist roots, tax people less and incentivise aspirations, their dreams of becoming the superpower might not be so farfetched.

Your free market friend,

Harje Ronngard