Save Economy: Is There a Cure-All Move?
The current pessimistic sentiment is very strong, from the stock market to the economy, everyone is waiting.
Waiting for the ultimate move to save the economy.
The question is, is there still an ultimate move to save the economy?
Many people believe that there is still a big move, and this big move can cure the disease, but this big move should be saved for the last.
For example, economists such as Gao Shanwen and Liu Yuhui, their prescriptions are: QE or MMT.
Is this really a big move that can cure the disease?
What is QE or MMT?
What is the biggest difference between them and previous policies?
In a word: the central bank directly buys government bonds, the central bank buying government bonds in the secondary market is called QE, and the central bank buying government bonds in the primary market is called MMT.
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Essentially, it is the central bank providing financing for government bonds.
To put it bluntly, the purpose of MMT is also to let the water flow, but the way to let the water flow is not through "central bank-commercial banks-real economy", but "central bank-government-real economy".
How to understand the difference between MMT and previous policies?
At first, fiscal and monetary policies were relatively independent, how much money you spent on finance, all depended on how much money you could collect back, and monetary policy had little to do with you.
Later, monetary policy could be coordinated with fiscal policy, and when fiscal policy expanded, monetary policy could also be loose to better stimulate the economy.
In the final stage of MMT, monetary policy completely becomes a vassal of fiscal policy, and the currency needed by the fiscal policy is coordinated with what it needs.
So we can see that the concept of MMT saving the economy is to let the water flow.
If the economy doesn't rise, it must be that the water is not let out enough.
There is only one constraint, inflation.
As long as inflation does not rise, water can be let out indefinitely, infinitely let out.
That is, continue to issue government bonds, and then let the central bank buy government bonds in the primary market or the secondary market.
There is a question, is MMT really a panacea for economic growth?
MMT only solves the problem of financing (finding money), but to drive economic growth, it still depends on investment (spending money).
In fact, this concept is still the same set of Keynesianism.
MMT strengthens the government's ability to mobilize resources and emphasizes the government's ability to spend money.
More importantly, it also weakens the role of the market at the same time.
Internationally, countries that practice MMT are generally considered to be the United States and Japan, and the economies of the United States and Japan have quickly recovered from the epidemic, and Japan has even achieved the inflation it has long desired.
Therefore, everyone believes that MMT is a panacea for saving the economy.
In fact, the United States and Japan have implemented a weakened version of MMT, at most it can be called a large-scale fiscal stimulus plan.
The key points of the so-called MMT implemented by the United States and Japan are: 1.
The scale of fiscal stimulus is very large.
During the epidemic, the monetary policy of the United States was ineffective, and the economy fell into a recession.
From Trump to Biden, a huge fiscal stimulus plan was launched in a short period of time, causing the scale of U.S. government debt to soar.
From the end of 2019 to the end of April 2024, U.S. government debt increased by more than 10 trillion U.S. dollars, an increase of nearly 50%.
Japan has had a fiscal deficit for many years, and during the epidemic, it also launched a huge fiscal stimulus.
For example, the Japanese cabinet approved an economic stimulus plan with a scale of up to 108 trillion yen.
In this round of economic stimulus plans, fiscal expenditure reached 39.5 trillion yen.
2.
Fiscal stimulus, the United States and Japan are short of money, we are short of projects.
Over the past few decades, the economic growth of the United States and Japan has mainly depended on the power of the people, that is, it is mainly driven by consumption.
In economic growth, the fiscal stimulus or government-led "iron public infrastructure" construction projects in the United States and Japan are very few.
When you go to the United States, you can see that airports, highways, subways, and so on, many infrastructures were built 50 years ago and are dilapidated.
In other words, the United States has long reached the stage of infrastructure renewal.
But why doesn't the United States renew its infrastructure?
Because the government has no money, the United States and Japan belong to the big market and small government, and the infrastructure construction that their governments can undertake is quite limited.
This means that if the government has money, if the government is allowed to lead the investment, then they can undertake a lot of projects.
Therefore, when the United States says it wants to implement MMT and fiscal stimulus, it is easy to launch a series of projects.
However, our situation is completely opposite to that of the United States and Japan.
Over the past few decades, our economic growth has mainly depended on investment, which is why we have the so-called "infrastructure mania".
Now, everyone has a consensus that the low-hanging fruit has been picked, and the cost-effective projects are long gone.
The remaining projects squeezed out, such as tiling the river channels, repairing and digging the roads in the city, building a new city on a piece of land, building high-speed railway stations in desolate suburbs, building subway stations, and building super face projects, etc., are all ineffective infrastructure, no matter how much is put into it, it is wasted, and it is meaningless to the economy.
In other words, for us, the current limit on fiscal stimulus is not the lack of funds, but the lack of projects.
In this case, we implement QE and MMT, and the government suddenly has a lot of money in hand, does this change the fact that there are good projects?
Absolutely not.
After making a lot of money through MMT, it is very likely that ineffective projects will be carried out, and all will be wasted.
This is equivalent to the "broken window theory" in economics - breaking the good window, and then buying glass and hiring workers to install it, seemingly "multiplier effect" driving the economy, but in fact causing huge waste and losing other development opportunities.
In the absence of cost-effective projects, hard fiscal stimulus, the result must be out of control of debt, and serious overcapacity.
Think about the 4 trillion fiscal stimulus at that time, not to mention the debt problem, just to eliminate overcapacity, we spent 10 years.
Therefore, in the case of "the United States and Japan are short of money, not short of projects", they can easily drive economic growth through MMT.
In the case of "we are not short of money, but short of projects", we implement MMT again, the driving effect on economic growth is not very obvious, and the side effects are far greater than the positive effects.
3.
Where did Europe and the United States spend the money they got through MMT?
According to statistics, in the more than 5 trillion U.S. dollars of the epidemic rescue plan, the household sector got 1.8 trillion U.S. dollars, accounting for more than one-third; businesses got 1.7 trillion U.S. dollars, also accounting for one-third.
Other rescue plans were focused on medical care and industries severely affected by the epidemic, such as transportation.
See, the money the United States got through MMT, the money subsidized to the American people accounted for 1/3, and the money subsidized to American businesses accounted for 1/3, and the rest was used for infrastructure and so on.
The money Japan got is also almost the same, almost all the money was subsidized to the people.
In the fiscal expenditure of 79 trillion, 22.1 trillion was used to subsidize small and medium-sized businesses affected by health events, 29.1 trillion was subsidized to electricity bills, gas bills, oil bills, etc., and 19.8 trillion was subsidized to children under 18 and so on.
The rise of inflation in the United States and Japan this time, the rise of the economy, and the hot job market, from the perspective of capital flow is: the money of the central bank - first flows to the Japanese government - and then directly flows to Japanese consumers and some small and medium-sized businesses (to avoid their bankruptcy) - consumers pass the money to Japanese businesses through consumption.
Through this capital cycle, the economies of the United States and Japan have risen.
Therefore, if we implement MMT and transfer the money we got on a large scale to the people, and let the people transfer the money to businesses through consumption, then our economy will also rise again.
The problem is that even if we get a huge amount of money through MMT, in the environment of advocating the spirit of dedication of the people, it is also unlikely to give money to the people; in the context of strengthening and expanding state-owned enterprises, it is also impossible to subsidize money to small and medium-sized businesses.
The most likely way is to get a lot of money through MMT, and then to do ineffective infrastructure, a small number of people get rich, and leave a lot of mess.
Therefore, MMT is not the ultimate move, nor is it a panacea.
In summary, from a technical point of view, MMT is just one of the government's financing methods.
To drive economic growth, it is not about financing methods, but about how to spend the money raised.
From the experience of the United States and Japan, only by subsidizing money to the people can the economy get out of the quagmire.
Therefore, relying on ordinary people is the ultimate move to save the economy.