Ted Oakley - Oxbow Advisors - Interview with Dr. Lacy Hunt May 22, 2023

With a comment to the interview by the Editor to Facts & Arts

The interview focuses very much on government debt. Too much debt will slowly paralyse the economy. At about minute 56 Dr Hunt says, with words he says he doesn’t like to use, that the Federal Reserve has been “printing money", and is now sucking in money and “burning it". These two words, print and burn, bring to my mind the much despised New Monetary Theory (NMT), which I happen to think describes well the workings of money. Another question is how the theory should be used in practice. 

The fact of the matter is that the Fed, and the European Central Bank, and others, have been ‘printing' money, with which they have bought their governments' debt. The newly ‘printed’ money distributed this way into the economy has had both positive and negative consequences. One consequence has been that the governments are now much in debt. But the indebtedness is actually very much to themselves, as central banks are in the end of the day government institutions.

There was no cost for the central banks to buy the government debt as they simply ‘printed’ the money needed for the purchases. But for the governments there are very real costs for to pay back the loans: They have to tax people, that means mainly higher income taxes, in other words higher taxes for work executed by the citizens. This will decrease economic activity. 

It is right to say that the money the central banks will receive from their governments the central banks will ‘burn’, i.e. the money will vanish from the economy. In earlier times taxes were paid with notes, which in fact were burnt.

But if the fact is that excessive amounts of money has been put into circulation, it does not necessarily mean that the right remedy is to suck in the extra money from the economy. The extra money has had its consequences, to reverse the consequences is not possible. It has been said that it is easy to make an omelette with two eggs, to do it the other way around is difficult.

For me the situation is absurd. Why not force the central banks to write-off their receivables from their own governments to solve their governments' indebtedness problem. If the book losses for the central banks would feel too much to swallow, in spite of the fact that they can always print some new money, why not convert their government debt holdings into perpetual loans with little or no interest and let time to solve the problem. Maybe it is feared that by doing so the governments would in the future take it as given that they can always cover their deficits with newly printed funny money, which would in the end destroy their currencies. However, if it is so that the high government debt level will little by little paralyse the economy then the question is almost existential for the Western world, which would call for undogmatic thinking,

Maybe the Germans got it right. Maybe the central banks should concentrate in their core task: to preserve the value of their currency, and leave the workings of the economy to the economy itself. In the U.S. the Fed’s preoccupation with the markets and the economy started with Alan Greenspan. 

Olli Raade

Editor to Facts & Arts

@olliraade