Wheelbarrows Full of Dollars

According to Bloomberg Business a radical economic theory is coming back into vogue.

“There’s an acknowledgment, even in the investor community, that monetary policy is kind of running out of ammo,” said Thomas Costerg, economist at Standard Chartered Bank in New York. “The focus is now shifting to fiscal policy.”

That’s where it should have been all along, according to Modern Money Theory. The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.

Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds.

The long-run implication of that approach has many economists worried.

The thinking of the modern money theory people is that the nations that print dollars, euros, yen and pounds could simply print more to pay off debts and stimulate their economies. For the implications of this theory think of the German Weimar Republic in the 1920s and then think of wheelbarrows full of dollars.

German Hyperinflation in the 1920s

When the fledgling German government ran short of cash in 1922 to 1923 it simply printed more money. The result was hyperinflation in which it required a wheelbarrow full of Deutschmarks to buy a loaf of bread. The Economist wrote about this era and Germany’s subsequent hyperinflation-phobia.

HYPERINFLATION is among the worst catastrophes that can befall an economy. It can destroy output and destabilize societies. The hoarding of real assets, such as property and precious metals, wrecks business and financial investment in countries afflicted by it. Business costs soar, as wages and prices have to be increased on an hourly basis, reducing productivity. Foreign investment evaporates as the financial risks of doing business rise. The sudden redistribution of wealth from creditors to debtors can eat at civil society and discredit political institutions. John Maynard Keynes, as early as 1919, recognized the threat inflation posed to modern capitalist societies.

Gold bugs like to refer to this period as a reason to hold gold and not paper currencies. If the USA, Europe and Japan of today decide to simply print more currency in order to pay bills and stimulate their economies the end result in inflation and in the extreme wheelbarrows full of dollars, euros or yen.

Guess Who Just Started Printing Money

In regard to wheelbarrows full of dollars and potential hyperinflation, China just began printing an unexpectedly large amount of money according to Business Insider UK.

In January, M2 growth – or cash in circulation, essentially – reached 14%, a 19-month high, exceeding analyst expectations of about 12%.

The money was injected into the economy in the form of renminbi loans.

In a note to clients, Deutsche Bank argued that this growth in cash was unsustainable and threatened financial stability.

According to data from Deutsche Bank and Macquarie:

New loans surged to 2.5 trillion renminbi, compared with 1.5 trillion in the prior year. The expectation was for only 1.9 trillion.

New loans set a record, more than quadruple the December total of 598 billion.

In January, the ratio of debt to gross domestic product increased by about 5 percentage points, “the fastest pace since Jan 2010,” according to Macquarie.

It is of note that it is the Germans who are pointing this out and raising concerns about hyperinflation. It would seem that they have long memories.