Viewpoint by Jonathan Power*
There is “Magic Money” around in case you didn’t know. Not quite made out of thin air, but getting on that way. This is a phrase invented by the economic writer, Sebastian Mallaby, in the new issue of Foreign Affairs, America’s leading foreign policy bi-monthly journal. It is a usually important and well-researched article. All policymakers should read it.
We see the first of this “magic money” being created as the European Union agreed in the early hours of July 21 morning to give €390 billion in non-repayable grants and a further €360 in low-interest loans (about the same in US dollars) to the southern countries of Europe as they battle the economic and financial fall-out from the coronavirus, just when they were recovering from the economic disaster brought on by the American-led economic crash of 2008.
Three months ago the big hitters in the EU, Germany and France, said the money wasn’t there. Then last month they said it was and it could even be given not lent. Thus they set the way to created “magic money”.
Mallaby probably wasn’t thinking of this brand new EU initiative when he penned his article, but his analysis applies to it as much as it does to what he concentrates on which is the economies of the developed world as a whole.
Mallaby doesn’t mention the word Keynes – perhaps he is scared of frightening some policy-makers away, in particular the German ones who unfortunately have been turning their back on him for at least the last decade. Keynes is ‘verboten’.
John Maynard Keynes is regarded in the economic profession as the greatest economist who ever lived, save for Adam Smith, the originator of the science in the eighteenth century. Keynes said in effect, “Let’s look at the problem this way. In a recession, a family has to cut its budget to survive. But, paradoxically, if a nation is in recession, the government must spend. Even though it will run a deficit and increase its debt if it’s growing, it will outrun the new debt”. We must add to that that Keynes could never have imagined the big bonus of today’s situation when interest rates are practically zero. The cost of a country borrowing is historically the lowest it’s ever been.
Moreover, inflation, for reasons not properly understood, has practically vanished. In short, the spending power of the state has been transformed. In the pre-2008 world, governments that spent more than the taxes they collected were creating a risk of inflation, which often forced central banks to raise interest rates and thus slow the economy. Therefore, as a form of stimulus, budget deficits were viewed as self-defeating.
To deal with the crisis of 2008, America under the government of President Barack Obama became a 100% Keynesian. The central bank, the Federal Reserve, pumped 85 billion dollars into the economy. When asked if the Fed had that amount on hand, its chairman Ben Bernanke said, “We have 800 billion”. In fact, he had more – unlimited more. The Fed could just print money, as many dollars as it wants. So too can the European Central Bank and Japan. By the end of 2008, the Fed had pumped 1.3 trillion dollars into the economy. Since 2013 the Bank of Japan has created more money relative to GDP than any other economy.
The coronavirus has made this relevant again, even more so than in 2008. Already the present chair of the Fed, Jerome Powell, has said: “When it comes to lending we are not going to run out of ammunition”. During March and the first half of April this year, the Fed pumped more than 2 trillion dollars into the economy. Yet it has been able to do this at virtually no cost. Even though the stimulus has caused government debt to rise very fast, the cost of servicing that debt has remained stable.
The same argument could be used not only about the US and the EU with its impending “coronavirus hand-out” but also about Russia, China, Japan, the UK and Canada. (The Group of 7.)
This is conjuring money out of the air. As Mallaby says, “It is mocking the normal laws of economic gravity”. Budget deficits are in. Even Germany, after a big U-turn in Chancellor Angela Merkel’s conservative policy, is going along with the “magic”.
Unfortunately, poorer countries are not in such a benign situation. Their room for manoeuvre is much more limited. They can’t borrow easily when many of them have such high levels of debt already. During the first two months of the pandemic, 100 billion of investment capital fled the developing countries. More than 90 countries have asked the International Monetary Fund for help. Enforced austerity is like an albatross around their neck. In Africa, it could be crippling. In South Africa it already is.
But if the EU can help the southern European countries, it can also help Africa. The other developed countries should do the same. Some of the “magic money” should be spent there.
* Note: Copyright Jonathan Power. Website: www.jonathanpowerjournalist.com. The writer was for 17 years a foreign affairs columnist and commentator for the International Herald Tribune. [IDN-InDepthNews – July 21 2020].
Collage of Magic Money and Sebastian Mallaby (Twitter), inventor of magic money.
