The world’s free-spending, money-printing spree will cost us dearly in the end

The world has mortgaged its economic and monetary future to uncertainty in the hope that the global economy will come roaring back after the pandemic
In reality, the cost of these well-intended but ultimately irresponsible policy actions could be inflation, financial crisis and a deeper recession

Anthony Rowley

Published: 1:30am, 22 Feb 2021

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Bravery can be difficult to distinguish from foolhardiness until the consequences prove the action to be coolly courageous or rash and recklessly bold. So, does unlimited fiscal and monetary stimulus signal an entry into a brave new world or a foolhardy plunge into disaster?

Everything points to the latter. The spectacular blow-up in stock prices is matched only by an explosion in debt while fiscal and monetary stimulus is heading into space. Inflation warnings are flashing even as upstart cryptocurrencies threaten to displace gold as stores of value.

It seems we are intent on shedding all traditional economic and financial anchors at the same time and setting sail upon a sea of change and uncertainty with few or no navigational aids. To end up in anything other than a shipwreck would be little short of a miracle.

The world has mortgaged its economic and monetary future to uncertainty in the hope that the global economy will come roaring back after the pandemic. In reality, the cost of these well-intended but ultimately irresponsible policy actions could be inflation, financial crisis and a deeper recession.

The International Monetary Fund has acknowledged that the US plan for an additional US$1.9 trillion of fiscal spending has raised concerns about an overheated economy that could push inflation well above the comfort zone of central bankers. While this is unlikely, such concerns cannot be ignored, said the IMF.

The 2008-9 global financial crisis and the subsequent recession had their roots in the greedy actions of Wall Street wolves and their promotion of financial derivatives. These slick manoeuvres matched the egregious lending actions of bankers who triggered previous financial crises.

Monetary authorities monetised or “socialised” the 2008-9 crisis by pumping fiscal and financial aid into distressed financial institutions and boosting the prices of financial and other assets to heights that even today remain well above sustainable levels.

A decade later, even while market distortions were still apparent, came the Covid-19 pandemic and policymakers threw all caution to the wind and embarked on an orgy of fiscal and monetary stimulus to avoid present pain, albeit at the cost of almost certain future suffering.

It is possible to sympathise with the humanitarian motives behind fiscal support for businesses and households. But the tsunami of government aid during Covid-19 has coincided with the widespread acceptance of a convenient theory that it really doesn’t matter any more.

Magic money is blinding us to the dangerous reality of inflation

Modern monetary theory (MMT) teaches governments that it’s fine to blow out their balance sheets because countries that issue their own currencies can never “run out of money” the way people or businesses can. Governments have duly done just that.

The IMF’s recent “Fiscal Monitor Update” cites the latest figure for fiscal support globally at US$14 trillion while central bank balance sheet expansion in the so-called G10 advanced economies has been around US$9 trillion plus a further US$160 billion in emerging markets.

MMT is too theoretical for most people to understand but somehow the idea that governments can continue to pump out fiscal largesse indefinitely does not feel right. It hints at coming inflation and that is being borne out now by rising bond yields and upwards pressure on some consumer prices.

The calm before the storm that pervades current fiscal behaviour is more suspect by virtue of the fact that central banks have embarked on an orgy of money printing that exceeds even the wanton excesses of governments. There are just no spending limits any more, anywhere, it seems.

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Officials and analysts play down the massive inflation in asset prices that has seen the S&P 500 index hit records in recent days while Japan’s Nikkei 225 index has breached 30,000 points for the first time in 30 years. Corporate earnings have been hammered but, supposedly, will leap back post-Covid-19.

Most ominous of all perhaps, the very basis of money is being questioned, even at the level of governments, by a growing belief that digital currencies such as bitcoin are the future and that they are as good as (or better even) than gold because only a limited quantity of them can be “mined”.

As though all this were not enough, governments, businesses and households have been borrowing as though there were no tomorrow, pushing global debt (especially during the pandemic) to a record US$281 trillion or 355 per cent of the global economy, according to the Institute of International Finance (IIF).

Legions of “zombie” companies are avoiding bankruptcy only by dint of government grants and loans. But as the IIF notes, “sustained reliance on government support could pose systemic risks to [the] financial system as well. A prolonged period of loan guarantees – coupled with sustained low interest rates – could well encourage still more debt accumulation by the weakest and most indebted corporates.”

The coronavirus has blinded us to the huge debt obligations we will meet in an era of recovering interest rates. It is but small consolation to know that we are all in this together – up our necks. We are about to learn what a reality check really means.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs