Where’s the elephant in the room? He’s gone - we paid him off.

There was a severe storm that struck greater Brisbane on the night the Budget was handed down and spruiked across this great, diverse and ‘resilient’ land. The BOM said the storms were “ferocious and violent”. I had never seen such fervent lightning chorused by bellowing snaps of thunder in such a short amount of time. And yes, in the middle of May. We just experienced a 28degree day in the last days of autumn with an afternoon “summer” storm. Is this La Nina? Just another symptom of “climate change”? Or something more eerie, more sinister, more macabre? Should I be reading this as a sign? I don’t know. There is just something not right about all of this. I just feel it in my waters.

The treasurer of our great country handed down the 'most significant' and 'most poignant' budget of our time. Aren’t they all? But this was different. There were some big problems that needed to be addressed and, of course, budgets solve everything, don’t they? “It's the economy stupid”. Just like those who attended the sermon on the mount, anyone who had a vested interest in listening received a free lunch.

There were some BIG numbers in this budget with some very worthy schemes and there’s this new economic panacea going around since the GFC and it’s called Modern Monetary Theory, aka: Quantitative Easing, aka: Trickle Down Economics.

The accusations were flying around the government who was 'shamed into spending on NDIS, Aged Care and the measures for women' after recent royal commissions, and misdemeanors that came to light in the halls of parliament house. And they are probably true. But this is not a political piece dear reader. Trust me. Let’s try to put the politics aside for the moment and try to read the signs.

The BIG number that has me so disturbed and perplexes me is the Net Debt. I dread to think what the Gross Debt is but anyway here is the number (I’ll put in the zeros so you can see how awesomely big it is): $729,000,000,000. In Clive Palmer’s language that’s 729 thousand million dollars. This is set to climb to $980,600,000,000 by 2025 and economists predict we can finally add another three zeros to the number by 2026 and beyond. In Clive Palmer language that is one million, million dollars in net debt.

This raises a lot of questions, and I am stumped if I can work it out. I am not an economist by any stretch but my senior high school and university economic professors have lead me up the garden path! I was taught an age-old principle that economics is the management of the scarcity paradox: scarce resources, goods and services that must satisfy our collective unlimited and insatiable desires, wants, and needs. And to manage this paradox in a free market you will see cycles of prosperity (a boom) and depression (alright let’s not go that far), recession (a bust).  

This basic tribal, “yin and yang” analogy works for me. What goes up, must come down. For every buyer there must be a seller. There will be bull markets, there will be bear markets. High demand and low supply drives prices up, if prices are too high the government restricts your access to money and incentivises saving so that you can allocate more of your income towards your needs rather than your insatiable wants and desires.

And this principle worked for me for the first half of my life. I was born in the early seventies, and I remember things weren’t exactly opulent, but it was certainly a happy existence. My parents were in their twenties, my father’s federally funded law degree allowed him admission into the Legal Profession. My mother quit nursing to raise my brother and I, yet still worked part-time. My father, probably on an Article Clerks wage, was provided a mortgage from a prominent bank and bought a house for ~$30,000 (now worth at least $1.5million) this gave him the credit history to obtain another loan to buy into a legal practice. Opulent? I would say “no”, not exactly. Privileged? "Certainly", but that was my experience of those times. And I think there was a recession or Global Oil Crisis but it didn’t seem too much of a 'crisis’ compared to what I have endured in my adult years.

The last decent recession I experienced was in 1990 just as I was finishing my Senior Economics Exam: “the recession we had to have”. Of course, I get it. You spend too much, you borrow too much (and boy-o-boy didn’t they spend and borrow in the eighties) you need to slow down inflation. We were told by our economic leaders that Australia’s exports were too reliant on selling raw materials. I observed banks getting nasty driven by a force of fear to foreclose on borrowings before things got worse. Westpac was nasty and broke – a lethal combination for farmers to deal with at the time. Tycoons were exposed for stripping out all of the cash from their businesses, they put the money into their offshore accounts and fled the country. Others had heart attacks and died from the stress of events. Others were put under house arrest awaiting trial for fraud and misappropriation.

The tide went out. Things got tough. Jobs were scarce. Especially if you had just finished high school and weren’t eligible for Austudy. Every day I walked past the sign outside the ANZ bank wishing I had a spare $100,000. I would have put it straight into the five-year fixed term savings account paying 18%p.a. (I mean not even junk bonds pay that anymore). On the other side of the coin, so to speak, those people with a mortgage were going through hell meeting their basic need – a roof over their heads. I had never seen so many "For Sale" (due to foreclosure) signs in my life. 

Now let’s fast forward to 2008 where a different kind of recession was unfolding. Interestingly, a crisis involving ‘credit’ was unravelling. At the beginning of 2008 I was paying 7.8%pa on my variable home loan. By the end of 2008, I was paying 3.2%pa on my variable home loan and I was given $1,500 in cash from the RBA to quickly spend in the economy. Enter Modern Monetary Theory. Here’s where I scratch my head and my left eye starts to twitch. Something just doesn’t seem right about this…..

Today in 2021 we are fighting a different type of crisis but how we are fighting it remains essentially the same. You cure a crisis (particularly when it halts the wheels of international commerce) with low or no cost credit and preferable plenty of it. The signs of variable home loan rates offered to me today are between 1.5% to 1.99% pa. The cash rate in Australia is 0.10%!! The cash rate in the US is 0% !! That's 0%.

The theory, in a nutshell for me is this: to save a national democratic, capitalist economy you borrow like crazy from a central bank and/or issue large capital raising bonds, then administer that money into the economy via tier one (government) and tier 2 (government approved banks and large companies) loans, schemes and grants.

There are so many analogies and metaphors for trying to convey this theory in practice. The best I could come up with is to imagine if I replaced money or currency with another “scarce” resource that all humans need… um let’s say, water.

Imagine you suddenly find yourself in a snap drought. The river you live next to has suddenly dried up of drinking water. Luckily, I have tribal governing leaders who recognize how important water is to the prosperity and survival of the tribe. The governing leaders attend a reserve water well, where water exists in abundance (this is called the reserve (water) bank).

The reserve water is then lent in bulk to the governing leaders at low or no cost. The governing leaders will then administer the water to those who need it to get through the drought and will hand out the water as they see fit: large drums of water will be lent to banks, who will commoditize the water to on-lend to businesses and property owners essential for the tribes prosperity; small cups will be given to families affected by the drought who live along the now dry river; other large drums of water will be lent to institutions or given to large organizations whose employees will need to be kept alive, and are instrumental to the survival of the tribe (such as farmers, builders, hospital workers, carpenters and manufacturers). 

The trick is to make sure that there is a need and a strong demand for the water! The governing leaders can manage and can control the supply. Now here’s where it may be interesting for the tribe: what happens if the water needs to be paid back to the reserve water well?

The governing leaders determine how much water will be required to be paid back over time by how much water is being consumed, exchanged or bartered with in the tribe. Should it ever rain again, and water returns to the river, the governing leaders can make a law for the tribe to pay back and replenish the reserve water well, in higher quantities, known as tax increases or credit interest rate increases. Again, the governing leaders control the supply of water circulating within the tribe depending on the demand for it. Does this water analogy sound familiar? 

Back to Modern Monetary Theory. In summary, the paradox of scarcity is easily managed now just by collectively borrowing currency from ourselves (Reserve Bank) and never paying it back (if your interest rates are at 0%), or at a very little amount (if your interest rates are at 0.1%). So what are the risks to this system? I think this could work so long as we don’t get too greedy, don’t exploit the system with institutions “pooling their cut” or profiting from “investing” in other systems that profit from pooling behaviours. We must not forget why we employed this theory in the first place: (to use the water analogy) a moral and ethical obligation of our leaders to help the tribe survive through a drought, through a crisis. I underline survive. And I reinforce – a moral and ethical obligation of our leaders.

Will we ever see the pain of true economic downturn or recession again? Will interest rates ever return to 3% or greater? Will housing prices ever go down? Is there going to be a generational change to the systems we have adopted or will it be maintained? The budget deficit has produced an economic boom and as I write this article, all major stock indices around the world are at record highs, inflation is starting to be muted in the US, and unemployment rates are returning to pre-pandemic levels. The risks at this immediate point in time are starting to evaporate dramatically. The rivers of prosperity are starting to flow but I can’t understand why I still have my doubts about this system working for the future.

Based on the Harvard Business Review article “The Neuroscience of Trust”, when you pay executives large salaries and bonuses it releases large amounts of oxytocin by both the payer and payee, thus an underlining psychological contract of trust is developed between the parties. The higher the payment, the greater the trust. Ethics doesn't really play a huge part in the transaction because it primarily serves the Limbic system in our brains.

Maybe that is why I am feeling so uneasy. We are not really unpacking the moral and ethical dilemmas but rather relying on the oxytocin hit that comes with throwing money at our immediate social problems.

See a problem?

Throw money at it and watch it become an opportunity.

I don’t have to worry about the next crisis, moral or ethical dilemma, or even cyclical downturn for that matter. The government will pay me and take the pain away of dealing with the long-term consequences so long as I fulfill the trust contract with a vote at the next election. Yikes! This is not a political piece remember.

Despite the huge budget deficit, it can and I am sure it will, essentially maintain the status quo in the immediate term through our reliance on systems that encourage the economic exploitation of raw materials, fossil fuels, poisonous and harmful farming, over-fishing, de-foresting and collective gender, cultural and race biases. The only thing that really stands in the way and can cause economic disaster is this horrible Climate Change problem – “the great moral challenge of our generation”. It can’t be too much of worry as Climate Change initiatives received the least amount of budget funding compared to Aged Care for example. What a difficult paradox to have to manage.

The first legitimate protest to have commenced after the COVID-19 lockdowns was a national student walkout. Students don’t have jobs (not high paying ones in any case) and they are technically persona non grata with Modern Monetary Theory, yet they are holistically resilient to COVID-19 and will likely be paying for the collective public debt in future years in whatever form that may appear. They really did not profit from or exploit this crisis at all. In most cases, students had to sacrifice their education and lifestyle to help the collective tribe survive.

Do I need to worry about the future? Maybe - some of the student protest signs were not spelt correctly at all, and the grammar was just appalling. Are they not learning anything from all of this?

Or, is it me? Am I not properly reading the signs? 

PS - If you get a chance please read Scott Galloway's interview on the Intelligencer: BidenBucks Is Beeple Is Bitcoin In a system rigged by the rich, outsiders have to make their own volatility.