Treasury ignorance!

How bad is it when the Treasurer of the nation fails a test in basic national accounts (the material that is covered in Macroeconomics 101)? And how bad is it when he also reveals a fundamental ignorance of the basic operations of the monetary system? When the Senate moved to block the luxury car tax yesterday, the Treasurer Wayne Swan was quoted (see as follows: “If the surplus is raided to a significant extent that will be on the head of Mr Turnbull and the Liberal Party, who are clearly saying that into the future, they prefer a higher level of interest rates than we otherwise might have”. In fact, if he had even the remotest understanding of the way the modern monetary economy works he would know that surpluses put upward pressure on interest rates, other thing equal, while deficits put downward pressure.

The economy is now slowing fast because the Treasurer persists in running surpluses while at the same time the unelected and unaccountable central bank has been scorching expenditure with the sequence of interest rate rises. The problem is that monetary policy is so blunt and indiscriminate that: (a) you only find out that things are bad when it is too late; and (b) the poor are the worst hit.

Another term for macro policy in Australia over the last decade or more is economic vandalism. We have had all this growth yet labour underutilisation remains close to double figures and we are now about to see official unemployment increase quickly.

This Post Has 2 Comments

  1. I discovered reference to your blog today (4/28/2010) quite my accident. When I read the blog I was floored by the simplicity,logic, and resonance it had with my own economic ideas. I am not an economist and had only rudimentary training in accounting. But sometimes I listen to financial news or what politicians are saying about the economy and think “They can’t be that stupid”. And then I am forced to acknowledge that I am a College drop-out. How can I be right and they be wrong. The joy of seeing my own thinking being mirrored was a rush. I know that you are Australian and the Banking system undoubtedly have differences from the US but money is a mental concept and is fluid in nature. Different banking systems may create different channels of flow but in the end the system is hydrological and the pressure will reach an equilibrium. I went back to your beginning blog and now I have a lot of reading to do, but it is an opportunity that I look forward to. But I will have to read faster – I am already 68 years old. Thanks

    William Hodge

  2. Hi Bill

    I’m a recent discoverer and instant convert of MMT. It’s the only logical and rational analysis I’ve encountered of macroeconomics. However as an engineer turned lawyer with minimal economics education, I at times need a bit of help keeping up. Can you explain why surpluses put upward pressure on interest rates? My understanding is that surpluses depress the economy by reducing aggregate demand. Is the upward pressure the result of a higher demand for and thus increased cost of borrowing due to this reduction in demand ie. income?


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