Unlimited government spending? Modern monetary theory is a seductive but dangerous idea

As recession looms and monetary easing options dwindle, the theory that governments can ‘borrow from themselves’ to finance unlimited spending is becoming attractive. But it hinges on complicit central banks buying up government debt

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Freshly printed US$20 notes are processed for bundling and packaging at the US Treasury's Bureau of Engraving and Printing in Washington, DC, in July 2018. Independent central banks provide a check on governments’ money creation. Photo: AFP

Published: 10:30pm, 1 Sep 2019Updated: 11:44pm, 1 Sep 2019

The end of the world (or, at least, the collapse of the global economy) has often appeared nigh, as one financial crisis succeeded another in recent decades. However, each time, Armageddon was averted by financial or monetary sleight of hand. Could this happen again now, as a recession looms?

The question has particular relevance because just about every key driver of global growth – trade, investment and production – is slowing ominously and central banks (our “saviours” in more recent crises) are commonly supposed to be out of ammunition.

As the world cowers at the sight of US President Donald Trump and Chinese President Xi Jinping hurling tariff thunderbolts Jove-like at each other, as stock markets shudder, sending spooked investors scurrying for cover in bonds, and as the debt mountain looms ever larger, the day of reckoning does indeed seem at hand.

Yet, an increasing body of academic opinion argues that all can still be well, provided that the governments of the world's most advanced economies open the taps of fiscal spending as wide as they have already opened the sluice gates of monetary easing.

This is a frontal challenge to the notion of central bank independence from finance ministries – a concept that has been severely eroded in Japan in recent times, and which arguably never existed in China, where the two institutions appear to think and act as one on matters of fiscal stimulus.

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