Was Mr Barnum talking of the future?” Photo: Wikimedia Commons
By Michael O’Neill
P.T Barnum was an American 19th-century super-star, a pop-culture icon, similar to pop-idols today. He was a master showman, who created a successful entertainment empire using gimmicks, gadgets, and hoaxes to attract visitors to his museums and circuses. He reportedly attributed his success to: “There is a sucker born every minute.”
Whether he coined the phrase or not is debatable. Still, the sentiment is as relevant today as it was in the past, especially when you consider adherents to Modern Monetary Theory.
Modern Monetary Theory (MMT) is described as a heterodox macroeconomic theory, which means it is a theory that doesn’t conform to orthodox standards or beliefs. The operative word is “Theory.” MMT has never been proven, but it is being adopted as gospel by many major governments, purely for political reasons.
Simply put, MMT says that governments that control their own currency can spend as much as they want because they can print as much money as they need to pay the debt. Even better, “deficits are not a problem, because deficits mean the private sector has a surplus.”
The increased government spending is not inflationary because governments can cut back on deficit spending and raise taxes.
Why is printing money such a great idea in 2020?
It has never worked. Definitely not for the Weimar Republic between 1920-1923. They borrowed money to pay for WWl reparations and then printed papiermarks (marks) to pay the bill. That was a great plan until France, and the UK demanded to be paid in gold or foreign currency, as Germany ‘s currency was not backed by gold. Currency that isn’t backed by anything of value is rarely worth the paper it is printed on. That explains why a loaf of bread in Berlin that cost 160 marks in 1922 cost 200,000,000,000 million marks in 1923.
If you think hyperinflation of that magnitude would not happen again, you would be wrong. Ask any citizen of Venezuela. The country has the largest proven oil reserves in the world, surpassing those of Saudi Arabia. It should be rich. It isn’t.
Unchecked, politically motivated spending (possibly MMT at work) raised inflation from the ridiculously high 69% in 2014 to 1.7 million percent in 2018. So yes, printing money does have consequences.
Canadians should be reviewing their economic history books because politicians don’t appear concerned. MMT suggests that inflation can easily be controlled by cutting back spending and raising taxes. It doesn’t say how long it will take, or what economic devastation will ensue while the Bank of Canada tries to control spiralling Consumer Price Index (CPI) rates.
Canadian’s had a taste of how high inflation rates impacted their lives, and they didn’t like it. Inflation climbed to 12.47% in 1981, driving unemployment rates higher for the next few years.
The Bank of Canada reacted by raising the overnight rate to 17.93%, the Bank Rate to 19.29%, and the five-year mortgage rate to 18.38%.
To put that in perspective, the average price of a house in Vancouver over the past 30 days is $1.4 million. A five-year mortgage rate of 18.38% means a monthly payment of $21,443.00 That’s hard to accomplish on a salary less than $750,000 per year.
Graph: Canada Inflation rate 1960-1920
There is no evidence the Canadian economy will experience the hyperinflation like Venezuela, but caution lights are flashing like a disco-era strobe. The Federal budget deficit ballooned to over $343.0 billion between February and September 2020. That’s nasty.
Finance Minister Chrystia Freeland started a speech at the Toronto Global Forum on October 29 telling the audience: “I won’t be giving you a detailed accounting of all the measures our government has taken so far to fight the COVID-19 pandemic. Or a description of our specific economic plans for the coming months. Nor will I offer fiscal projections for the years ahead. Our government has committed to releasing fiscal projections this fall, and those are coming soon.” She wouldn’t provide any information on how the government planned to pay for its massive spending but promised to spend more.
She insisted that she is “not among those who think Canada should have a fling with MMT” “Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite,” she said.
Perhaps a definition of infinite may be needed here, as her government appears to have enthusiastically embraced its principles. That could be a problem for investors buying Canadian dollars, as they may be the “suckers” of Mr Barnum’s phrase.