Submitted by Taps Coogan on the 18th of April 2020 to The Sounding Line.
Enjoy The Sounding Line? Click here to subscribe.
Dr. Nouriel Roubini, chairman and founder of Roubini Macro Associates and Professor at NYU Stern School of Business, recently spoke with Real Vision about how the ideas behind Modern Monetary Theory have become mainstream during the Coronavirus pandemic. He warns that while large deficits and monetary stimulus make some sense during a short deflationary economic contraction, sustaining those policies for years, as he expects will happen, will lead to inflation and economic stagnation.
Some excerpts from Dr. Nouriel Roubini:
“…Modern Monetary Theory was a leftist idea… that essentially said that if you are a country with your own currency and your own central bank, you can run large budget deficits forever, you can monetize them, and then you won’t even have inflation. Now, that extreme view, that you can run it forever, during good times and bad times, even at full employment… doesn’t make sense. But when you have a collapse of economic activity, you have a recession and deflation, and you have a collapse of velocity (of money), we learned a lesson during the Global Financial Crisis that you can do a variant of Modern Monetary Theory: budget deficits and the way you monetize them is through QE. It’s not official Modern Monetary Theory, but it is essentially a variant of it and you avoid deflation and you avoid a deep recession… It used to be called a ‘helicopter drop of money.’ …Guess what? It has become mainstream… They call it ‘coordination’ of monetary and fiscal policy. What does coordination mean? The Treasury is going to issue $2 trillion of bonds, notes, and bills to finance this additional budget deficit… and the Fed is going to buy every single note, bill, and bond issued by the Treasury…”
“In the short run, doing a ‘helicopter drop’ makes sense… because we have had not only a collapse and disruption of supply chains, but we have had a collapse of demand. So, we’ve had recession and, right now, deflationary pressures and therefore, doing a massive stimulus and monetizing it makes sense when you have stag-deflation… But as people say, you can fool some of the people all of the time and all of the people some of the time, but you cannot fool all of the people all of the time. Suppose that this 10% of GDP deficit, fully monetized, occurs not only this year, but… we might actually have them next year and the following year…. Think about this (economic) shock. Overtime, this is a negative supply shock that reduces potential output and increases costs… This is a massive negative supply shock for the global economy. You monetize and fiscallize it for two or three years and eventually you end up not in stag-deflation but stagflation (stag-inflation): recession and inflation, like in the 1970s… By next year we can be in stagflation.”
There is much more to the interview, so enjoy it above.
Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.