Over the break I read Stephanie Kelton’s ‘The Deficit Myth’. Released this past June and heralded as the Modern Monetary Theory (MMT) bible.
Professor Kelton’s core premise is that countries with monetary sovereignty, issuers of their own currency, can and should issue more of that currency whenever required. Limited only by inflation and available resources.
It’s a capacity that, in theory, renders any immediate fiscal challenge moot. Social security, infrastructure spending and even jobs programs can be created by the press of a central bank keyboard.
I believe the crucial question isn’t “can we?” but rather “should we?” and MMT has definitely rubbed many Austrian Economists the wrong way. They’d argue the end-game for profligate money printing is hyper-inflation and currency collapse.
There’s a diverse range of economic opinion as to whether today’s stimulatory, post-COVID fiscal and monetary policies will be inflationary or deflationary. I’m going to suggest something a bit different – that both sides could be correct.
Money lubricates the gears of our economic machines but money absolutely…. does not…. fuel our economic machines.
We should be increasing our money supply but those dollars must be accompanied by a commensurate increase in Energy Wealth.
Energy Wealth is what creates the stuff we value. Just like financial wealth, we want to earn more energy while spending less. Energy however is a difficult concept for people to observe and quantify. Money makes trading energy and the products and services it creates a lot more efficient.
Inflation and deflation are actually caused by relative differences between the growth in monetary wealth and Energy Wealth, not absolute changes in either.
When monetary wealth grows faster than Energy Wealth it leads to inflation (prices rise). If Energy Wealth increases faster than monetary wealth, it leads to deflation (prices decrease).
Crucially, money supply can increase within a deflationary environment. Technology is inherently deflationary because it makes us more energy efficient or allows us to access new forms of energy.
In recent decades, automation, smart phones and soon autonomous vehicles will continue to drive prices down by creating more Energy Wealth. Information Technologies have largely offset the Energy Wealth slowdown due to fossil fuel production over the same period, they’ve allowed us to make more energy efficient decisions.
The problem with loose fiscal and monetary policy is that they can deincentivise Energy Wealth creation. Building roads and bridges can increase Energy Wealth by reducing the energy spent transporting people and goods. But roads and bridges to nowhere create no Energy Wealth. Building ghost cities might create short term monetary boosts but won’t increase Energy Wealth. The products of spending must increase access or minimise the use of energy.
The greatest opportunity to create Energy Wealth right now is a once-in-a-century technological disruptive deflationary force, solar + batteries.
As of 2020 solar + batteries can earn a better Energy-Return-on-Investment (EROI) than coal, oil and gas. This is a new way to access energy not a new way for us to use less. Solar + batteries is the new oil.
It would have been impossible for solar + batteries to compete with fossil fuels and create more Energy Wealth just a few years ago. The technology simply wasn’t good enough (wasn’t energy efficient enough).
The countries and its policy makers who realise this opportunity will herald in a new era of wealth for its people. Australia should definitely be one of those countries. We’re one of the few that have a sovereign currency and also blessed with a bounty of natural resources and sunshine.
We’re going to need a lot more money to trade the new things this Energy Wealth can creates for us. If we focus on Energy Wealth we can justify huge increases in our monetary wealth and we absolutely should.