How Covid Blew A Gaping Hole In Central Bank Policy

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MMT or Modern Monetary Theory is the new orthodoxy embraced by all the major central banks. The idea is that governments that can borrow in their own fiat currency do not need to rely on tax revenues or debt to fund their spending. They can just print as much as they want.

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While this sounds great, ultra-easy money has been creating some unpleasant distortions. In response, central bankers have simply buried their heads in the sand, arguing the medicine their prescribing (zero interest rates and endless QE) is less bad than the disease.

However, their response to Covid has really exploded the idea of ever larger amounts of fiat money as the solution to our problems. In fact, it is increasingly clear that MMT is actually making our economies worse: shrinking them, distorting them and destroying personal wealth.

When Money Dies

What is money? Money is a concept. For money to be money, it must possess three qualities:  a unit of account, a store of value and a medium of exchange. The money itself can be represented by anything – sea shells, precious metals, banknotes, salt or a pip on a computer screen. What matters is that society puts its trust in the value of that money.

Because money is just an idea that requires society to believe in, it is inherently fragile. If people no longer believe it represents those three qualities, then money dies. Instead of being an incredibly valuable social tool, it becomes worthless or counter-productive. This has happened many times through history (e.g. Nero’s Rome, Weimar, Zimbabwe and Venezuela).

Money As A Unit Of Account

One of the three qualities of money is as a unit of account. Having a unit of account allows us to prioritise our wants and it keeps us honest.  If you don’t go to work, you don’t get paid. If your company produces things people don’t want, the company will lose money.

In this way, money optimises production and cuts out waste. If there are too many apples and not enough oranges, the price of oranges goes up and apples go down. Farmers grow more oranges and fewer apples. Money rewards those who give us what we want.

And therein lies the real problem with MMT: endless money printing means that for those on the receiving end – especially governments - money is no longer a unit of account. They can have as much (more!) than they could ever want.

Without a unit of account, there is nothing to keep them honest, and no way to prioritise or allocate our resources wisely. For them, money is no longer money.

The Pandemic Response

It is these differing attitudes to the value of money that explain the different responses to Covid-19.

China was the first to be hit. Not knowing what it was dealing with, China locked down hard and fast. But the government soon calculated that the mortality rate was around 0.4% (seasonal flu is typically around 0.2%). Even if it did nothing, and 75% of the population got Covid, it would kill at most 0.3%. Hence, China quickly lifted lockdown and went mostly back to normal. Most developing economies did the same.

Contrast this with Europe and the UK, where repressive lockdowns have been running continuously for over a year. Millions of businesses and jobs have been destroyed. Many people have been left destitute, and vulnerable children have been locked out of education and support. Life is miserable, with almost all forms of recreation, culture and social gatherings banned. Health problems such as undiagnosed cancer, mental illness, alcoholism and obesity have exploded. This is before the economic damage. In the UK, the cost to the government is over $500bn and rising.

Because this is an airborne virus, and many people still have to move around, lockdowns are not particularly effective. Models would suggest if the UK government had done nothing, up to 200,000 lives would have been lost. In practice nearly 130,000 deaths have occurred anyway.

So have societies’ resources been well spent? Assuming lockdown has been effective,  the cost of each life saved is over $7m. As Merryn Somerset Webb noted, “The standard way to compare the effectiveness of different types of healthcare spending is through assessing the number of additional ‘quality adjusted life years’ – QALYs – achieved by the spending.” As most victims are old and have severe health issues already, this amounts to at least $700,000 per QALY. Before the pandemic, government budgets allowed for $20,000-$80,000 per QALY. So even before all the negative knock-on effects of lockdown, the government budget for a Covid life is about ten times what it would spend to save a victim from, say, cancer, or traffic accidents. A death is always a tragedy. But why is a Covid death ten times worse than a Leukaemia death?

While it may seem crude to talk about pricing lives, society does it all the time. This is how we set healthcare budgets, road safety and environmental pollution levels. It is why we allow unhealthy food, alcohol and tobacco. There are always trade-offs.  As  lawmaker Desmond Swayne asked: If Covid is the 24th biggest killer in the UK, why does it justify shutting down everything , putting everyone in a state of imprisonment and consuming almost all the government resources?[i]

Oddly, the UK and European governments have repeatedly refused to perform holistic cost-benefit analyses to justify their responses. However, many private parties have done. Some of these are incredibly well researched, yet even  the sympathetic ones have found that beyond the initial lockdown, the response has been massively over the top, doing far more harm than good.[ii] Many of these problems will reverberate for years to come.

Why have those governments at the heart of central bank experiments suddenly lost the desire to act rationally, and to allocate societies’ resources proportionately?

The answer is they no longer have a unit of account that they or others can hold them to. Without that measure, there is no balance and no perspective.

And It's Not Just Covid

Watching the news, it becomes clear again and again, that those closest to the printing presses have lost the ability to spend and act proportionately.

  • Would Donald trump have behaved the way he did in the age of Paul Volcker, with 20% coupons and bond vigilantes? MMT has created a system of negative incentives. Run the economy responsibly and the central bank will push against you, raising rates and tightening policy to undo your good work. The more irresponsibly you behave, the more the central bank will support you with ever looser monetary policy. There is zero benefit to doing things well. The worse you behave the more you get.
  • In America, that translates into $3.3 trillion of new stimulus packages. 35% of all U.S. dollars in existence have been printed in the last 10 months. Since the global financial crisis, the U.S. has increased its debt by 170% and expanded its money supply fourfold.
  • It is not just Governments that are awash with newly printed money. Investors have their favourite places too to park the cash, creating some of the biggest asset prices bubbles in history. With so much money to spend, tech companies have lost any need to prioritise or budget in the conventional sense. Every day we get another billion dollar HQ, salaries in the tens or hundreds of millions, record acquisition prices and investment banking fees, and content budgets that dwarf Hollywood.
  • Indeed, another theory doing the rounds is that stocks that pay dividends should be penalised. With more and more money being printed, the last thing investors want is money back! Hence companies like Tesla are seen as places that can consume capital, and appreciate in a way that keeps up with the money printing. Dividends and valuation are no longer relevant. Investors too have lost their real world unit of account. As Dave Iben asks ‘is a market that needs constant government assistance to function really a functioning market?’
  • Elsewhere, the UK’s flagship infrastructure project, HS2 (a high speed railway line) will save barely half an hour on some inter-city journeys compared to current services. After endless delays, environmental protests and execution issues the price tag for this slightly faster railway line, is a staggering $147bn – equating to nearly $400m per mile of track!
  • The UK government has also been in trouble over its Covid spending, after the New York Times exposed the colossal waste.[iii] Tens of billions of dollars of contracts were handed out, to companies without the relevant experiences or knowledge. Many of these were companies had close connections to government ministers and political parties. The deeply flawed ‘Test & Trace’ scheme has cost $32bn –or more than $15000 to find each each positive case!

These sums of public money are huge, almost inconceivable. The point is, when you spend enormous sums like this with no accounting rigour, the waste is eye-watering. Corruption and vested interests inevitably take over. Markets get distorted. This is bad for growth and prosperity.

Endless QE Is Not The Symptom But The Cause

The argument for endless rounds of QE, easy money and government largesse has long been, “So long as inflation is okay, MMT isn’t a problem.” Unfortunately, it has become the problem.

Money represents society’s resources. Everywhere, every day, trillions of dollars of it are being misspent and misallocated. Collapsing growth rates, gargantuan waste, distorted markets, speculative bubbles, corruption, nepotism and record inequality are not being cured by MMT; they are being caused by it.

Without a unit of account, those closest to the printing presses have no need to prioritise or allocate capital and no measure to keep them honest. Rather than being a cure to our economic problems, MMT is making the problem far worse.

When you misallocate society’s resources on this scale, economic growth collapses and wealth is destroyed. We have seen this act dozens of times before across centrally planned economies: The USSR, Maoist China, Venezuela, North Korea...The list is a long one.  There are no happy endings.  If you destroy personal wealth, you destroy the social contract. Anarchy or revolution is the ineluctable result.

MMT is digging its own grave. When money loses the qualities of money, monetary policy is no more.

About the Author

Andrew Hunt is a global deep value investor and author of “Better Value Investing: A Simple Guide to Improving your Results as a Value Investor.”


[i] MP makes astonishing anti-lockdown speech in parliament - YouTube [ii] The UK lockdown and the economic value of human life - Jessop - 2020 - Economic Affairs - Wiley Online Library

Was lockdown worth the cost? | MoneyWeek

The hidden cost of Covid lockdowns - YouTube

[iii] Inside the U.K.’s Pandemic Spending: Waste, Negligence and Cronyism - The New York Times (