In the latest IMF Finance and Development journal (March 2023), there is an interesting article…
Apparently the government has no money but then has plenty
Things are obviously getting desperate out there in financial media commentary land. If one could express written text in graphical terms then there are a number of financial journalists out there that look – like a rabbit caught in the headlights – that is in a state “of paralyzing surprise, fear, or bewilderment.” A good example of this increasingly observed syndrome is an article in The Australian newspaper today (June 30, 2020) by Adam Creighton – Never forget that governments have no money – it is always ours (subscription required). This sort of journalism is becoming an almost daily occurrence as it becomes obvious that capitalism is now on state life support systems and the extremities of government intervention are demonstrating very clearly what Modern Monetary Theory (MMT) economists have been saying – and the only ones that have been saying it – for 25 years or so. I often note that Japan has already pushed the fiscal and monetary policy parameters beyond the limits most countries have explored in peacetime and mainstream economists have systematically predicted various scales of disaster and have always been wrong. Now all countries are at extremes and still no fiscal disaster. But the mainstream mouthpieces – these financial journalists who seem to think the stuff they read in first-year text books from mainstream economics programs are in same way the basis for expertise and knowledge – are in advanced states of dissonance. Drivel follows.
By next weekend, a better article will appear in The Australian – the details of which I will make public soon.
The conservatives and the pretentious self-styled economists in Australia who just mouth mainstream nonsense are having conniptions at present as a result of one of their own seemingly demonstrating some support for MMT.
I refer to ABC finance report and correspondent in The Australian Alan Kohler, who in recent weeks has written a few articles demonstrating he is coming to terms with MMT.
Go back to the March, when I wrote this blog post – It’s Modern Monetary Theory time! No, it always has been! (March 23, 2020).
This was a discussion in response to an article that Alan Kohler had written in The Australian (March 23, 2020) – It’s Modern Monetary Theory time as the state steps in (subscription required).
There were problems with the article which I pointed out.
Alan reached out to me that morning and we had a long conversation on the following Wednesday, which was published by Alan on his high profile podcasting service.
I also made the podcast available – My podcast with Alan Kohler (March 30, 2020) – once it was published by Alan on his site.
It has proven to be a popular podcast and may have shifted Alan’s thinking a little.
He has followed it up with other podcasts and articles that suggest he is no longer hostile to MMT.
On Twitter, he has been getting a lot of flack from various kouky, or should that be kooky, characters who are desperately uncertain now that their standard mainstream narratives are falling apart and MMT is broadening its appeal to people who are seeing evidence unfold that gives them confidence in our work.
It is interesting to see their discomfort.
They can easily ignore academics like me. But they would have thought, given his high public profile, that Alan Kohler was ‘one’ of them. Safely embedded in their Groupthink, and a defender of their myths and fictions.
The evidence is that the club is breaking down. There will be many more deserters as it becomes more and more obvious to people that mainstream macroeconomics has run its race – and came last.
Adam Creighton’s byline tells us he “is an award-winning journalist with a special interest in tax and financial policy. He was a Journalist in Residence at the University of Chicago’s Booth School of Business in 2019”.
Must be a pretty thin field in line for the awards one suspects. And he seems to have over sampled the Chicago monetarist kool-aid!
Moreover, he needs a copy editor. The narrative proves itself wrong as he stumbles through the normal arguments, not realising that statements he makes in a seemingly disconnected way, disprove statements he has made in the previous paragraph.
Never mind consistency.
This is rabbits and headlights stuff.
Creighton starts with this classic:
Governments have become so pervasive it’s easy to forget they have no money of their own. They fund themselves in two ways: taxation and borrowing.
Which raises the obvious question – where do the people/organisations that pay tax get the currency from?
And where do the people who adjust their saving (wealth) portfolio by swapping one or more assets held to add government bonds, get their savings from in the first place?
And what is the Reserve Bank of Australia doing when it credits bank accounts on behalf of the Australian government – typing numbers into bank accounts – which the accountant/statistician records as government spending?
And what does that little piece of legislation – Currency Act 1965 – mean?
And for that matter the – Reserve Bank Act 1959 – if the Australian government has no currency of its own?
Then, next paragraph, as he launches into characterising MMT as part of a ‘loony left’ type fantasy he effectively contradicts his opening line.
Modern Monetary Theory, a set of ideas with growing appeal, especially on the left of politics, posits a third way: simply creating money. Governments can instruct their central banks to create money, which their treasuries can spend on whatever they want, ideally soaking up spare capacity in the economy, so the argument goes. It would be wonderful were this true, but there is no third way.
Okay, it sounds like governments do have their own currency and the central bank is part of government (not the attribution “their central banks” and “their treasuries”).
The ‘left-wing’ narrative is clearly part of Creighton’s agenda – as if he thinks the old ‘Cold War’ stuff goes down these days.
But he thinks that:
MMT is the left-wing version of the extreme supply-side economics of the 1980s that propounded that government could raise tax revenue by lowering taxes.
The reference to the 1980s is apparently to the Laffer curve.
Problem is that this is a decade or more out.
In fact, Arthur Laffer, who was an economics professor at Chicago, who had dinner one night in 1974 with Donald Rumsfeld, Dick Cheney and journalist Jude Wanniski at some swish hotel in the capital.
The topic was President Ford’s tax policy and deficit fears. Laffer apparently drew a diagram on a serviette at the restaurant which purported to show that if the government cuts taxes it would increase its tax revenue.
Evidence has never supported the diagram. But never let some facts get in the way of a theory – that has always been the mainstream way!
Wanniski, who was at the dinner with Laffer and co, was the person who promoted the term ‘supply-side’ economics in his book – The Way the World Works (published 1978) – after Nixon’s economic advisor, Herbert Stein introduced the term to give succour to Laffer’s ideas in 1976.
In fact, Reagan never really pursued ‘supply-side’ fiscal strategies to deal with inflation in the 1980s. The Federal Reserve boss Paul Volcker used what was then conventional monetary policy to purge inflationary expectations, which really only were purged during the 1991 recession.
What really defined the 1980s in the US was not so much supply-side economics but the ‘starve the beast’ strategies that Ronald Reagan, on advice from Dave Stockman, pursued in those times.
Dave Stockman thought he was a genius by devising what he thought was a devilishly clever strategy whereby the government would cut taxes and run the fiscal deficit up, and then, after people were used to the lower tax regime, the government would have political support to introduce massive spending cuts based on a fear campaign about deficits.
That way, the Republican dream of small government would be achieved.
The only problem the strategy didn’t work.
So how this relates to MMT is rather obtuse to say the least.
Apparently, Creighton thinks that MMT is best characterised as claiming there is a “costless way to finance government spending” and channelling, presumably one of his ideals, “there are still no free” lunches.
And, coup de grace (apparently);
“Money creation” is just another form of borrowing.
I gave an interview for the ABC this morning which will be featured in the coming days. The Deputy Governor of the RBA, who I supervised as an honours student way back in time, is also a guest. It will be an interesting juxtaposition.
But part of the interview was aimed at disabusing the notion of “money creation” or ‘printing money’.
The mainstream textbook rendition is that governments do not have their own money unless they print it (go wild)!
So they have to either ‘spend taxes’ or ‘spend borrowed funds’ if they have ‘overspent taxes’. Alternative, they can go wild and just ‘print the stuff’.
This characterisation is totally inapplicable.
Governments are spending every day by crediting bank accounts (as above).
They don’t need tax revenue or bond sales to do that unless they introduce voluntary accounting rules that say that accounting records of tax receipts have to be a certain set of numbers before they can instruct the central bank to credit bank accounts as spending.
Similarly, with bond auctions.
But even with these artificial institutional arrangements, the funds from taxes and bond sales are irrelevant from the perspective of the intrinsic capacity of the currency-issuing government to spend.
So they are always ‘creating currency’ and spending it into existence, irrespective of these accounting gymnastics.
The no ‘free lunch’ argument provides a segue into one of the important distinguishing features of MMT, which makes the claims by many that there is ‘nothing new’ or ‘we knew it all along’ pale.
Mainstream economists talk about a ‘government budget constraint’ as an a priori (before the fact) financial constraint on government spending.
In fact, it is just an after the fact accounting record of a number of spending and monetary operations.
But the important point is that it is without doubt that the government has the capacity to type big numbers into computers and call it spending. That breaks us from the mainstream myths.
But there is no ‘free lunch’ at full employment. If there are idle productive resources – then the lunch can be very cheap indeed.
The way that MMT economists correctly characterise this is to say that financially there are no constraints on government spending but there are real resource constraints and if the government wants to maintain price stability then it has to calibrate spending to fit within the real constraints.
In other words, the numbers that appear in fiscal statements that the mainstream call ‘costs’ are not what MMT calls a cost.
We calculate the ‘cost’ of a government policy decision in terms of the change it makes to current real resource usage.
For example, the extra food a Job Guarantee worker might be able to consume as a result of having a job and an income is a cost of the program.
Typing numbers into computers to operationalise government spending is not a cost (although the energy needed to run the computers is).
The real resources that are deployed as a result of the spending represent a ‘cost’ because they might have been used in another use.
So, in what way then does this mean that the government always has to borrow?
Creighton offers an example:
Imagine the government made JobKeeper payments without issuing bonds or raising taxes. The Reserve Bank would have to “create money” by making a loan to the Treasury, recording it as an asset. At the same time these billions in JobKeeper payments would be recorded as an increase in the value of banks’ deposits held with the Reserve Bank, an offsetting liability of the Reserve Bank.
The private banks in turn would allocate these payments to their customers’ deposit accounts.
The recipients could spend their JobKeeper payments as they wished, causing money to shift among banks, but in aggregate the banking system cannot get rid of the additional money.
Meanwhile, the central bank must pay interest on commercial banks’ deposits. So what started out looking like “money creation” ended up being a loan from the private banking system to the central bank, which increased its asset and liabilities in the process.
This just relates the discussion that entered the early MMT literature about the impossibility of so-called ‘debt monetisation’.
I discussed that issue in the introductory suite of blog posts:
1. Deficit spending 101 – Part 1 (February 21, 2009).
2. Deficit spending 101 – Part 2 (February 23, 2009)
3. Deficit spending 101 – Part 3 (March 2, 2009).
Obviously, if the central bank wants to target a positive policy interest rate, and fiscal deficits are adding net financial assets to the banking system, which shows up in the reserve accounts that the banks have to hold at the central bank, then the central bank has to drain those excess reserves by offering to exchange government debt instruments (or any acceptable collateral actually) in exchange for the reserves.
The banks will make that swap because typically the excess reserves earn nothing or earn below competitive interest rates.
The reason the central bank would do that is because in trying to find a competitive return on the excess reserves, the banks will seek to loan them to other banks on the interbank market.
But as Creighton correctly observes, these intra-bank loans cannot rid the system of an overall excess of reserves.
So the competitive efforts by the banks, which shuffle reserves around drives down the short-term interest rate to zero (if there is no central bank support rate paid on excess reserves), and, as a consequence, the central bank loses control of monetary policy (expressed as some positive short-term interest rate target).
Of course, in recent times, most central banks have shifted to paying a competitive rate on excess reserves.
Only MMT accurately described all of that in the literature.
And this led us to note that whether the government issues debt to the non-government sector or just instructs the central bank to pay interest on excess reserves is functionally equivalent in a conceptual sense.
The difference is that numbers are in one account (debt) or another (excess reserves).
But what happens, in the context of on-going fiscal deficits, if the central bank neither conducted open market operations (drained the excess reserves with debt sales to the banks) or didn’t pay a support rate on excess reserves?
Then the short-term interest rate would be driven down to zero and the banks would build up increasing reserve balances – which in aggregate they could not get rid of and for which they earned no return.
Then the story is different and Creighton ignores that obvious option.
He does acknowledge what has been going on for years around the world and which has just begun in Australia in March 2020 – central banks buying up the government debt in secondary bond markets.
The process is:
1. Treasury conducts primary issue auctions that push debt out into the dealers.
2. RBA buys the debt when it is traded in the secondary market.
3. Excess reserves are paid some support rate – in Australia’s case below the typical interest on the bonds. Capital gains are made by the holders who sell the bonds to the RBA.
Well Creighton thinks that this amounts to “financial repression” because the commercial banks have to hold larger reserve balances, which pay little interest.
Why do they sell the bonds to the RBA if they prefer them to the liquidity of increased reserves? Capital gains obviously.
No-one is being coerced into anything.
The debate shifts to Japan;
After decades of quantitative easing the Bank of Japan’s balance sheet has exploded to more than 100 per cent of Japan’s GDP without kickstarting inflation.
So, the standard lines that ‘money creation’ in his language is ultimately inflation is rejected by his own observations.
His only problem then, it seems, is that low interest rates do not allow the banks to screw the public and transfer massive amounts of profit to shareholders.
Hardly an attack on core MMT.
We still haven’t been able to detect any logic here to justify his opening assertion that “that governments have no money – it is always ours”.
We have actually had a case built by Creighton to tell us that the government has lots of its own money.
So, still searching for an angle, he decides that fiscal deficits (with central banks buying debt in secondary markets) don’t work anyway, after saying in the previous paragraph that “there is a case for borrowing more and taxing less to fund government payments”.
The reader gets many of these confusing contradictions in the article.
But apparently, fiscal deficits do not work and the evidence is the record from the US, Japan and Europe that:
… have been giving “money creation” a red-hot go for at least a decade without making serious inroads into unemployment.
1. Japan’s unemployment rate in 2019 was 2.29 per cent. It rose to 2.6 per cent in the pandemic (April). It has been through the GFC, nuclear meltdown, and typhoons.
2. The US unemployment rate just before the pandemic was lower than it had been since the 1960s. I am not saying they were at full employment but at the height of the GFC it was above 10 per cent and then it dropped to 3.5 per cent in February 2020.
What constitutes a serious inroad?
3. European unemployment rates are dominated by the Eurozone nations, all of whom use a foreign currency and have strict pro-cyclical fiscal rules that bias policy towards austerity and stagnation. The quantitative easing from the ECB has been aimed to stop spreads on government bonds rising and thus compromising the ability of the Member States to fund themselves through bond sales (given they use a foreign currency).
The ECB bond purchase programs have also been conditional on the Member States pursuing damaging fiscal austerity. So it is little wonder the unemployment rates remain elevated.
This is the antithesis of what MMT economists recommend and the results were accurately predicted by us. The mainstream economists claimed that the austerity would be ‘growth friendly’ and they were manifestly wrong.
So the historical record points to the veracity of MMT not a repudiation.
Finally, we get the ‘MMT economists are politically naive’ line :
And MMT advocates naively place too much faith in the skill of political leaders and policymakers. It would be the death of independent central banks if politicians were setting the scale of money creation. Once unemployment has been eroded by large monetary-financed deficits, policymakers would carefully rein in the ensuing inflation by paring back the budget deficits and lifting taxes, according to MMT. That ignores the political incentives governments face. Once inflation expectations have changed, they are hard to reset.
So we cannot trust our politicians.
So we jump of a cliff!
The central banks are not independent.
Creighton has demonstrated that by taking his readers through the links between fiscal and monetary policy operations
Monetary policy decisions have to be closely coordinated with fiscal policy impacts on a daily basis.
And that says nothing of the fact that the central banks and their boards are always political appointments.
And reflect also on the logic here.
1. Earlier he claims that “money creation” didn’t make “serious inroads into unemployment”.
2. Then in the last citation he says “Once unemployment has been eroded by large monetary-financed deficits”.
A copy editor please. At least keep the stupid argument consistent!
This ‘we cannot trust the politicians’ argument is the last resort really.
Martin Wolf wrote the other day in the Financial Times that:
In my view, it is right and wrong. It is right, because there is no simple budget constraint. It is wrong, because it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint.
There is now a line of critics who acknowledge the validity of core MMT principles but think they are too dangerous for people to broadly share in that knowledge.
Because we apparently have reached a point in history where we hate dictators and eulogise the benefits of democracy (à la Churchill in the Commons on November 11, 1947 – “democracy is the worst form of Government except for all those other forms that have been tried from time to time”), but don’t want the politicians we elect to have the flexibility to advance our well-being.
Or in simpler language – “because we don’t trust politicians”.
This has been a long standing view.
Remember the famous quote from American economist Paul Samuelson in the interview he did for the film – John Maynard Keynes: Life, Ideas, Legacy – where at the 52:50 mark into the film, he said:
I think there is an element of truth in the view that the … the superstition that the budget must be balanced at all times … aah … Once it is debunked … takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have … aah … anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by … aah … sometimes what might be regarded as myths into behaving in a way that long-run civilised life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year … in every short period of time. If Prime Minister Gladstone came back to life he would say ‘oh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.
This amounts to a world where the elites can manipulate the fiscal capacity of the state to advance their own interests (procurement contracts at will, bailouts when they mess up, etc) but if we want to do something about unemployment or poverty then the rest of us has to be held in this fictional world that appeals to our instincts of fear and uncertainty.
And, of course we then are encouraged to distrust politicians and so it goes.
My view is that once we expose these myths, more sensible political discourse can take place.
And if we do not like our government – that is they go crazy with their spending capacity – then we throw them out of office (in Australia, every three years of so).
They can hardly destroy the nation in three years.
I also think that if the standard of political dialogue was improved, higher quality candidates would seek election and push out the time-serving careerists who dominate all political parties.
It is an extraordinary world where we accept a deception because knowing the truth might require us to act differently (become more politically engaged and demand quality political behaviour).
I don’t accept that proposition.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 31 Comments
Really like your newsletters. Was thinking of you and MMT when I read Tom Orlik’s piece in the current issue of Bloomberg’s Businessweek. His analysis of how the CCP is dealing with the current economic fallout, is, to my untrained eye, almost textbook MMT. Best Regards
” It would be the death of independent central banks if politicians were setting the scale of money creation.”
My standard line now is whenever you see a mainstream economics type using the word “independent”, substitute the word “unelected”. Then the truth is revealed – these characters want the world ruled by people that are unelected.
Time to break the marketing trick.
Your assumption is that the people will remove bad politicians from office. But although Wolf points the finger at politicians, I think his real worry are voters (although he won’t says so for obvious reasons). He sees citizens not carrying a face mask for ideological reasons, or invading Bournemouth’s beaches in the middle of a pandemic, and he thinks “Should those guys have a say in monetary policy?”. I’m not sure I can blame him, although I do share your view that “once we expose these myths, more sensible political discourse can take place.”
Please let us know which day that Oz article will be out. I am willing to make a one-off donation to Rupert to buy it that day if they are giving you a fair chance! And anyway, we are running out of newspaper for the compost bin, so I can productively use the remainder of his august organ for ecological purposes …everybody wins
“There are no concerns at all about fiscal sustainability relating to the government’s debt” admitted deputy RBA governor Guy Debelle in the Sydney Morning Herald today.
“… although Wolf points the finger at politicians, I think his real worry are voters (although he won’t says so for obvious reasons)”.
I find Wolf’s judgment puzzling. Saying “impossible to manage an economy” implies that managing it is being carried-on by some third party separate from politicians and politics. That third party (he seems to be saying) will not be able to do its job (ie “managing the economy”) properly if politicians ever come to believe MMT’s teaching that there is no financial constraint on a currency-issuing govt’s spending.
But what is “managing the economy” if it is NOT an integral part of “governing”? And what are political parties elected for if not to do the governing on our behalf? So how can the two elements be viewed as if they were in separate compartments?
IMHO Wolf is confused.
For good or ill we elect politicians to – among other things – manage the economy. But implicitly not explicitly: what we elect them for explicitly is to carry-out the programme their particular party puts forward in its election-manifesto. That always leads to the question “how will you pay for that?” as though managing an economy were no different from managing a firm or a household. And so we are inevitably led back to the core dilemma:- how can the electorate be educated to understand what MMT is plainly telling them (if only they could understand it) ie that the constraints upon managing a country’s economy are completely different from those applying to running a family’s or a firm’s budget?
Which is the exact opposite of what all politicians hitherto have been telling them – and winning elections on the strength of.
Bring on the paradigm shift.
A debate about policy options based on evidence and logic just imagine…It will be such a relief.
All part of the belittling of adult people, now they can’t elect politicians who can handle macro when the purse is unlimited. I hope your article destroys this moron’s reputation as an economics commentator, so he can go do a job he is better fit for.
The mainstream financial commentators and economists are in a frenzied panic spouting hyperbole and contradictions. Their macroeconomic myth peddling has been devastated via the powerful lens of macro-monetary reality. As a consequence, politicians are running out of credible economic advisers.
Nice one. I also like doing something similar with “government debt” by replacing it with “private wealth”. For example
The government needs to map out a path to budget surplus so it can reduce private wealth over the medium term.
With private wealth at sufficiently low levels the government has the firepower to respond to economic shocks.
They don’t sound so good by taking the other side of the accounting equation.
I also wonder, what are the politicians going to “go crazy” spending money on? I would reckon it would be things that will get them re-elected, which mean things that voters want. And this is bad because….?
I also like thinking of fiat currency like shares. If you have $x and there is $Y in circulation, then you have a x/Y share in the economy denominated in that currency. If someone else gets more money and you don’t (Y goes up, x stays constant) – your share goes down, and you have less power in that economy.
I think this also provides some indication that general “excess money” inflation might not be a problem if the each units shares aren’t being changed. It’s more when the change is uneven – such as essential goods prices inflating at a faster rate than wages.
I don’t know if the mainstream economists are being honest or objective when they worry about the voters or politicians going hog wild with deficit spending,
I do know that the 1% just looted about $1T of Federal money in the CARES Act.
Yes, I said looted.
The GOP aka Repud leadership are now (and have been for at least a decade) perfectly well aware of the fact that the US Gov. can create dollars at will. They recently proved that they know it. They recently passed a law that gave IIRC 85% of the money to the 1% and 15 % of the money to everyone else. As if the 1% have any need for more money. But then, greed is apparently unlimited.
So, I don’t know if the mainstream economists are being honest or objective when they worry about the voters or politicians going hog wild with deficit spending, but it DOES SEEM REASONABLE for economists to worry about “hog wild spending”, after all their allies the Repuds are a guilty of it.
What do you all have to say to that?
So it all boils down to a simple choice: either the people, through imperfect democracy, operate the economy in furtherance of the public interest as they perceive it, OR the plutocrats, pursuing purely self-aggrandizing ends, are in control. Not a difficult choice for a rational, well-meaning person to make, is it?
I thought you might like to know that Adam was a graduate at the Reserve Bank of Australia working in the Financial System Stability Department. He started the year after me. Adam would’ve sat through the same introductory talks as me on how the payments system works, and the practical problems that needed to be overcome every time social security payments were made. Thus, I suspect he actually would come to appreciate the central themes of MMT quickly if he put his mind to it genuinely. He may simply have been too far removed from the mechanics of our financial and payments systems for too long to recall how it works in reality rather than the textbook or conventional wisdom.
“I also wonder, what are the politicians going to “go crazy” spending money on?”
That’s always the thing to remember about spending,. You can’t spend unless there is something to buy,
It doesn’t matter how many millions politicians have at their disposal. If there are no doctors, they can’t staff the hospitals with them.
When you run out of things to buy at the price authorised by parliament/congress the spending automatically stops.
Unfortunately Debelle also said this:
“The government is borrowing at yields that are very low historically. Importantly, the yields on government debt are considerably below the long-run growth rate of the economy.
“While ever this remains the case … there are no concerns at all about fiscal sustainability from increased debt issuance. This is because growth in the economy will work to lower government debt as a share of nominal GDP.”
Still holding the fort.
Wayne Mcmillan at 21:30
“As a consequence, politicians are running out of credible economic advisers”.
It is so true!
This is exactly what happens in country. Two camps of mainstream economists inside the government are fighting it out who should stay in charge, and who should go, while the public looks on with despair, as we know – both camps should go.
This has come to a bitter dead lock such that one deputy prime minister (in charge of the economic portfolios) even burst out in public and said – the PM should dissolve the parliament.
He reckons that he can come back with a clean slate, as the public still favors him even though his performance has been so so (he has created a relieved stimulus in time, but nothing more so far).
Credible economists are in short supply, in deed!
Have a nice day!
Thanks again brave knight Sir Bill for slaying one by one the black knights that protect the corrupt king and his ruling circles – an image for the cartoonists?
Trump and the GOP is on board with Krugman now – ie, its OK for big government debts as long as interest rates remain low, because they expect the economy will grow sufficiently over time to render the debt proportionally smaller.
OTOH, I suspect most Dems still believe in the standard MS ‘debt and deficit’ myths.
I made the following comment in The Australian – got 3 Likes! Hope my MMT learning is up to scratch.
“Imagine the government made JobKeeper payments without issuing bonds or raising taxes. The Reserve Bank would have to “create money” by making a loan to the Treasury, recording it as an asset. At the same time these billions in JobKeeper payments would be recorded as an increase in the value of banks’ deposits held with the Reserve Bank, an offsetting liability of the Reserve Bank. The private banks in turn would allocate these payments to their customers’ deposit accounts.”
The “created money”moves from the Australian Government’s left hand pants pocket to its right hand pants pocket. Both the Reserve Bank and the Treasury are part of the Government pants! The private banks are just a conduit between Treasury and their customers, who in turn move the $$$$ around the economy. Some of these $$$ are later taxed and destroyed by moving them through banks back to the Treasury.
To keep up the appearance of independence the Treasury still issues bonds to investors, which then can be purchased by the Reserve Bank!
Keeping up appearances?
Those may all be so. OTOH, the Repuds could be saying that while they in fact do know the truth that “the amount of the deficit doesn’t matter.”
And that the interest rate on bonds can always be kept low.
Cynical me always believes the worst about the Repuds.
Like I knew they would do away with the filibuster for USSC Justices as soon s it mattered for them.
Vice-Pres. Cheney famously said, “Deficits don’t matter.”
Sorry if its old news but I notice Bank Indonesia will be funding $40bn of the Indonesian Government’s Budget direct. Thats right, $40bn at low market rates or even (hopefully) zero interest versus over 7% when issuing bonds, many bought by foreigners. It seems at least they are listening to you. Will be interesting to see how their rates and FX markets react as I’m sure the naysayers will be frothing at the mouth.
” because they expect the economy will grow sufficiently over time to render the debt proportionally smaller.”
Some expect the debt will be ‘inflated’ away?
“By mid- or late 2021 the pandemic should be under control, and a big bounce-back in financial markets, and in aggregate demand and output, is to be envisaged. The extremely high growth rates of money now being seen – often into the double digits at an annual percentage rate – will instigate an inflationary boom. The scale of the boom will be conditioned by the speed of money growth in the rest of 2020 and in early 2021. Money growth in the USA has reached the highest-ever levels in peacetime, suggesting that consumer inflation may move into double digits at some point in the next two or three years.”
“suggesting that consumer inflation may move into double digits at some point in the next two or three years”
I wish there was somewhere where I could take the other side of that bet…
@ Neil W,
“I wish there was somewhere where I could take the other side of that bet…”
Just on a personal level, you can always delay any planned purchases of expensive consumer products for a couple of years, if you think prices will remain flat, or even fall?
(And if everyone else did too, it would become a self-fulfilling prophecy!)
Martin Wolf’s comment was in a short review of ‘The Deficit Myth’, one of several economic books he recommended for summer reading in last weekend’s FT edition. He also recommended ‘Basic Income and Sovereign Money: The Alternative to Economic Crisis and Austerity Policy’!
I recommend that some of us write a letter to the editor: email@example.com, cc firstname.lastname@example.org. If they publish it would probably be in next weekend’s edition. I might do it myself, but since they published one of mine on LVT today I doubt they’ll do so again:o) (Wolf said he agreed with it btw).
I didn’t see the piece myself but I was sent a photo clipping by a small publisher because one of the other books recommended is one he published last year: ‘Poverty is Not Natural’ by
George Curtis. George is a member of the Labour Land Campaign – 95 years young (but deaf).
Saying supply side economics doesn’t work is like saying MMT is inflationary.
Dear Tom Nugent (at 2020/07/02 at 7:11 am)
Thanks for your comment.
There is no equivalence in the statements.
My conclusion was evidence-based. All the predictions that accompanied the policies announced as supply-side in the 1970s and beyond failed. And supply-side economics was a distinct set of actual policies not a framework for understanding the monetary system.
To say that MMT is inflationary is a meaningless statement. A framework for understanding cannot be inflationary.
Thank you for this excellent riposte, though not being a News-subscriber I haven’t read the original article. I did however read one by Jessica Irvine in today’s SMH that raised my hackles enough that I wrote a long email to friends taking the thing apart, though not with the level of economic literacy involved here. Ms Kelton and yourself get a brief mention in passing.
It belongs in the same category as Mr Creighton’s effort, a desperate seeming finger in the dyke which seems to this layman remarkably uninformed and risibly unfair in its treatment of the two ‘sides’.
You stated that the principal behind supply side economics was that Laffer stated that cutting taxes increased tax revenues. Hi did not or does not say that. The Laffer Curve is simply a pedagogic device that implies that if the RATES are lowered more people will have the incentive to work and their output will be taxed and revenues will increase. The key is where the relationships exist at a given point in time. There is no fixed point on the Laffer Curve where you know that revenues will go from increasing to decreasing. However logic will tell you, in the extreme, if you lower tax rates from 100% to zero tax revenues will rise. Finding the optimal point for this exercise is trial and error. Many years ago Warren Mosler and I argued with Laffer about the ideas of MMT and he rejected them. After the explosion in the money supply after the financial crisis, Laffer’s editorial in the WSJ forecasting an explosion in inflation and surging interest rates never materialized probably because he is a product of the Chicago school.
The old line that, MMT may be technically correct but is “wrong” — “because you’d have to trust the politicians not to go on a spending spree”, is getting very tired and stale. There is a gulf of difference between the consequences of giving politicians the truth about the monetary system and having them instead believe the myths and act with austerity. In the counterfactual former case the risk of “too much spending” is insignificant compared to the risk to real lives as a result of austerity. The former risk is inflation (which can be often a good thing if demand-driven) while the latter risk is at worst poverty, despair, suicides and death.
In my experience humans generally tend to act more civilized when they know the truth compared to when they believe myths. Same with politicians (they are humans too, in case you forgot). Same with voters. Folks like Kohler and Creighton tend to not trust politicans because politicians are always pandering to the voters, seeking a kind of lowest common denominator. Even if true, (and I doubt it always is so, since genuineness and sincerity also attract voters) that is no argument for withholding the knowledge of MMT from politicians. And how the heck do they think this knowledge will stay hidden? It’s already spreading like crazy, it’s only matter of time before new wannabe politicians get hold of it and hence blow away neoliberalism and austerity for good. For me the only critical question is will this enlightenment happen before catastrophic climate and crop disaster when even full employment will not be enough labour to ward off a huge climate change death toll.
The faux economists crying that MMT is dangerous (because it is true and allows politicians to open up spending) are grossly (and bordering on criminally negligently) ignoring asymmetry of risk. (Probably among the Kahneman–Tversky biases in human reasoning). The falsely perceived risk in inflation tends to be held by older folks who (falsely) think inflation caused the rise of the Nazis, it is a deep reasoning bias I’ve anecdotally witnessed in several older folks in the boomer generation. Plus, I am sure standard schoolbook economics teaches this bias, and takes focus away from the far more severe risks of austerity, even to the point of implicitly teaching that poverty and austerity are not caused by government fiscal policy. The fact our era of civilization has allowed such fallacies to go unchallenged for so long is going to be one of our greatest shames. Thank goodness folks like Bill are shouting out the truth as loud as they can.
Sunday, July 5, 2020 at 16:22
Another good one!