Written by Hudson Adviser Phillip McGann
Modern Monetary Theory has popped up (again) as a solution to the world wide problem of lower economic growth and inequality of outcomes.
Many on the Left of US politics (including a few Presidential hopefuls) have been pushing it as a solution to the inequality that exists in much of US society. The recent Green New Deal is a perfect example – spend up big and get what we all want and don’t worry about how we will pay for it.
So what is Modern Monetary Theory ?
Well there is no agreed definition amongst MMT adherents but the basic theory revolves around the role of money in a modern economy.
In most western democracies money is “created” by an independent central bank (think the RBA in Australia or the Federal Reserve in the US) that controls the amount of money in the economy by its relationship with the banking system – where loans are written and credit supplied to the economy.
MMT argues instead of a central bank controlling the money supply that the government itself should control the currency.
A government that does this is in effect in full control because if it issues its own money it can never not meet it obligations.
Why? Well because it can print its own money and pay its obligations with that money.
That’s right MMT proscribes that governments can simply print money and pay for everything their populations want!
And what about inflation when the government actually issues too much money into the economy and the value of that money decreases due to inflation?
Well MMT says the government can use its ability to levy taxes to curb the money supply and curb any inflationary impacts. Presently this role is assumed by central banks via their movement in official interest rates to either stimulate or contract the economy due to too much or too little inflation.
Various theories similar to MMT has been around for over 100 years but of late they are getting rehashed - particularly in the US.
The scenario where a government can simply print money to pay for everything they ever wanted to give there people appeals at present in the US where the federal budget deficit is running at $US1 trillion per annum. Accumulated US debt is over $US20 Trillion.
The US economy is going gangbuster presently growing at close to 3 % and unemployment is at decades lows - and yet the government cannot balance the books.
So MMT adherents say; “ don’t worry simply print more money and pay for everything your people want”.
The problem is that the finite constraints in an economy will catch up with you and whilst you can perhaps control the money supply via taxation you cannot control the actual level of goods and services in an economy.
You end up having too much money chasing too few goods / services.
A good example has been provided in relation to medical services.
Say the government decided tomorrow that we should have universal free dental services in Australia. Now there would not be many people who would say this is a bad idea. It would be good for general health and well being given research linking poor dental care to poor health outcomes etc.
However if dental services was suddenly free the demand would overwhelm the supply of dentists offering those services.
You cannot suddenly create thousands of new Dentists and so inevitably the price of dental services - for those willing (or desperate) to pay to get to see a dentist sooner than those who will have the government pay for it – would lead to inflation in the price of the services
This is true of other limited supply goods and services.
So why is this current interest in MMT important for investors?
Any uptake of this sort of economic policy to cure the ills of society will lead to massive economic upheaval and would impac t severely on the investment markets if it was ever implemented
It may well be causing a stir in the US but how long until these “cures” are exported around the world?
At a time when economic stimulus from monetary policy (ie lower official interest rates) appears to have reached its limit the only lever (according to MMT adherents) available to governments would be via fiscal policy (i.e. massive injections of money via budget deficits) funded by the printing presses.
If governments don’t have to worry about how they pay it back then they will likely decide to open the floodgates.
Welcome to Venezuela!
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Written by Hudson Adviser Michal Park
With Australia currently in the grip of a crisis in wage growth, with real wage growth for Australian workers at near all time record lows (with nominal wages having grown at about 2% since 2015), the Labour government have again floated the idea of a “living wage” to benefit the 1.2million workers currently on the minimum wage of $18.93 per hour.
I hesitated before writing this article given the political nature of it. Rather, I wanted to focus on the humanitarian aspect of it – the idea that a living wage is a socially acceptable wage designed to keep minimum wage earning workers out of poverty which I wholeheartedly support.
To clarify, the difference between the minimum wage and a living wage is:
- Set by the Fair Work Commissions each year (latest rise in the minimum wage was 3.5% from July 2018 taking it from $18.29 per hour to the current $18.93 per hour)
- Based on factors including business competiveness, employment growth, and the needs of the low paid.
- Would replace the minimum wage (unlike models in the US where minimum wage and living wages co-exist and the UK where the Low Pay Commission recommends a national minimum wage increase each year)
- Based on factors including internet and mobile phones but, primarily, to eliminate poverty among those who work by raising the wage floor.
I’ve thrown this discussion around with colleagues and some of the key comments back have been:
- Why doesn’t the government pay for it via increased welfare benefits?”
My problem with providing the increase through welfare is that it won’t just benefit those engaged in paid work. It would also benefit those not working and might even encourage more people to drop out of the workforce.
- “A living wage will only increase inflation”
Yes, employers could pass on their increased wages costs to the end consumer, leading to inflation, but given that those who benefit from a living wage would only amount to less than 5% of the population, would it really make such an impact?
- “Nothing will change for the worker as the employer will only cut their hours to account for the increase in pay”
This is definitely a risk, however, only if the living wage is set too high.
The general consensus is that the pros definitely outweigh any cons of setting a living wage. Some are pushing for the living wage to be set at 60% of the median income, however, with the current minimum wage set at 54%, a jump this high would be a major con.
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Written by Hudson Adviser Kris Wrenn
Property values in Australia have definitely slowed in some areas, and with the uncertainty around the upcoming federal election and the outcome from the financial services royal commission and the potential fallout to the mortgage market, the property sector has definitely hit uncertain times. We are in the midst of a housing downturn, with only four capital cities seeing price increases in 2018 with the rest recording declines. The capital cities continuing to record growth are Hobart, Canberra, Adelaide and Brisbane. Interestingly, Hobart has also seen the highest decline in first home owner affordability.
With the subdued sentiment towards housing the best strategy is possibly to hold your property to ride through the wave, and if in the financial position, purchase another property. We have seen a more significant housing downturn within the last 30 years, and any property within the inner circle ring should hold its value and continue to grow in the long term. A lot of buyers are sitting on their hands and waiting for conditions to settle.
Sometimes it is not possible to hold and properties have to be sold for one reason or another. A strategy that has been on the increase in recent times is that of furnishing and styling homes for sale. David McClean, general manager of Furnish and finish, said a professionally styled property can shave about four weeks off a marketing campaign and add about 12.5% on average to the sale price. He recalls two identical studio apartments in North Sydney in the same unit block that were on the market recently; the styled one fetched $100,000 more *1.
To sell a property in this current market for the best possible price you have to consider the way you choose to present your property to the market. Buyers will often pay significantly more for a property packed with visual appeal. It can be difficult to disconnect and view your beloved family home through the eyes of on outsider. This is where it might be worth employing the services of a professional. A lot of real estate agents are offering a new ‘service’ now where they will offer tips to maximise the potential market price of your property. This can give you an objective look at your house, consider buyers in the area and ways to make the home more appealing to as many of them as possible. The aim is to make your home a blank slate so that buyers can imagine themselves there. Professionally styled properties can help buyers overlook flaws in the property by creating a stronger emotional connection. Selling a property is a big decision, and selling in this current market requires a little bit of extra attention and effort. I get asked sometimes if it makes sense to spend money on my property before selling. Because every property is different it is hard to answer this question and of course the deciding factor should be the return on your investment, ROI. It is always going to be hard to gauge which is where you need the help of a local real estate agent who is knowledgeable of the local area and its buyers to offer some guidance. But whether it’s a tidy up or an overhaul, there is one thing that I agree with and that is to present your property as professionally and as stylish as you can. First impressions count and the longer your property sits on the market the more cost to you, and the more damage is done in securing a future potential buyer.
*1 Sydney morning herald
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- I’ll start with the US this week where things have been a little rocky, with the Dow Jones falling nearly 2.5% early in the month but then gradually gaining it back, only to then suffer a blip on 22nd where it fell 1.77%. This was off the back of concerns for the health of the global economy. It started in Germany with an index for manufacturing falling to it’s lowest level since 2012, which pushed the yield on the German 10 year note into negative territory. This sparked a sell-off in European shares. This carried to the US pushing the 10 year treasury note from 2.59% to 2.44%.
- This “blip” occurred on a Friday and by Monday reached Australia. Prior to this we had seen a relatively flat month, but the 25th March saw the market drop around 80 points. So at the time of writing we are now just over 1% down for the month.
- Arguably the sell off was overdue. Markets had been trending upwards off the back of the US fed reserve shifting to the sidelines and also due to hopes of a trade deal between the US and China. But, it’s actually been suggested that tariffs may not in fact be taken off the goods from China, and time will tell on this one.
- The $AUS fell quite sharply early in the month from 72c to 70, but has since regained a little value to a current level of 70.8c to the $US.
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