Firstly, I’d like to apologise if anyone was offended by yesterday’s Rum Rebellion. In it, I had a go at people for still wearing masks around the streets when it was no longer necessary (by law). I wasn’t referring to those who strap one on to go into the supermarket, as you’re apparently still required to do here, simply to avoid a fine.
I was chatting to some neighbours and we were discussing the slow return to normal in Melbourne and the prospects of recovery. They mentioned that Dan was spending big money to get Victoria out of the hole he dug. This week revealed a $23.3 billion budget deficit.
They asked me, ‘Where are they getting the money?’
Where is the money coming from?
Ah yes, where is all this money coming from?
It’s a very good question.
The simple answer is that it is coming from central bank ‘money printing’. But as I have pointed out before, central banks don’t print money. They swap assets. In the US, the Federal Reserve buys US Treasuries and gives bank reserves in return.
Bank reserves cannot be lent out. Or used to buy assets. These bank reserves are held at the Fed, so in aggregate no new money is created. It’s just an asset swap that changes the liquidity profile of the banking/financial system.
It’s a similar situation in Australia. The RBA buys government debt and gives banks exchange settlement funds in return. But again, these exchange settlement funds must be deposited at the RBA.
So what’s going on?
Well, even though the bank reserves or exchange settlement funds created by central banks must end up back at the central bank, I suspect these funds have a decent amount of velocity. That is, they go through asset prices and bid them up in the process.
It’s the same as money in the stock market. One dollar of cash can ‘go through’ a share (buying and selling it) on a number of occasions, pushing the price up each time. This financial system velocity is also called liquidity. And when central banks and governments have their foot to the floor, there is plenty of liquidity.
The other question relates to how governments can borrow so cheaply, given they are borrowing so much.
Again, the simple answer is that central bank buying is pushing yields down. This is partly true. But the main reason interest rates are so low is because the underlying health of the economy is so poor.
Heaping more debt on a weak economic structure only makes things worse. It pushes the long-term potential growth rate down even further. So what looks like a cheap borrowing cost isn’t all that cheap when you have little growth to fund the debt.
Sadly, politicians don’t think this way. They see these lows rates (and the ease with which they can borrow) as manna from heaven. They will borrow and spend like crazy to get us out of the slump they created. But they won’t realise they’re only digging the hole deeper.
When the spending hit wears off, they’ll find the economy under an even greater debt burden. Which will require even greater spending to ‘fix’.
This virus and the response to it has ushered in an era of ever-increasing government and bureaucratic interference and control over our lives. As Maurice Newman writes in The Spectator:
‘A lasting side-effect of Covid-19 is the universal growth of state power. Despite global death rates peaking last April and immunity building even without a vaccine, authoritarian leaders are clinging to their recently acquired powers. No doubt they view individual freedom as an optional extra not an inalienable right and want their new powers to become a normal part of governing. The Victorian government is legislating to that effect.’
It’s not going to stop. Central banks are rolling out digital currencies, while governments are moving towards full-scale MMT (Modern Monetary Theory). This is the theory that says the central bank is an arm of the government, so why doesn’t it just fund the government directly (rather than indirectly as happens now) and use taxes to control inflation and shape incentives.
That’s where things are heading…
Capitalism is dead. I have no idea what will emerge over the next few years, but it’s not looking good.
There is already a move to use the fear of the pandemic to reshape society to the benefits of the elites. The World Economic Forum is promoting a ‘Great Reset’. As Newman writes:
‘…the World Economic Forum, the United Nations and its various agencies will use the current depressed economic environment, masked as it is by endless government support, together with renewed forecasts of apocalyptic climate change, to push for a “more inclusive social contract”, a decarbonised economy and a “control without ownership” business sector, where companies “serve all stakeholders not just shareholders”.
‘Stripped of the propaganda, the Great Reset is not new. It’s another fascist experiment being pushed by controlling elitists. Economic growth and social mobility must be subordinate to the collective. Connections will be institutionalised and privilege perpetuated. History demonstrates the children of the elites will receive preferential access to higher education and elite positions. “Inclusion” and “fairness”? Forget it. Think inequality, serfdom and misery.’
Put simply. The financial system broke in 2008. Ever since, our money has been abused, debased and corrupted. This corruption is mirrored in our society. And it all starts at the top.
All I can say, in the years to come, beware the sheep in wolves’ clothing. The Great Reset is really the great stitch up of the masses.
Editor, The Rum Rebellion