Why do currency-issuing governments issue debt? – Part 1

One question that continually comes up when I do interviews is this: If governments are not financially constrained in their spending why do they issue debt? Usually, the question is expressed in an incredulous tone, meaning that the person asking the question considers this to be the gotcha moment, when they pierce the impeccable logic of Modern Monetary Theory (MMT) and show it for what it is – a sham. One problem is that there is a tendency to confuse motivation with function and many people sympathetic to MMT reduce it to simple statements that belie the reality. One such statement, relevant to this topic, is that government’s issue debt to allow the central bank to maintain a specific short-term interest rate target. Central banks have traditionally used government debt as an interest-rate maintenance tool. But that is a function of the debt rather than being the motivation for issuing the debt in the first place. So we explore those differences today as a means of clarifying the questions and confusions around this issue. This is Part 1 of a two-part series, which I will finish tomorrow.

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The Australian government is increasingly buying up its own debt – not a taxpayer in sight

In the wake of the $A60 billion bungle, the Australian government has turned its attention to creating smokescreens. Yesterday (May 25, 2020), the Treasurer released a statement – Temporary changes to continuous disclosure provisions for companies and officers – which effectively allows corporations to withold information from the public and investors about the state of…
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The Weekend Quiz – May 23-24, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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The Weekend Quiz – May 16-17, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Australian labour force data – underutilisation rate rises to 23.4 per cent

Whatever way you want to interpret it, the Australian labour market fell off a very steep cliff in the four weeks from around March 12 to April 12. The latest data from the Australian Bureau of Statistics – Labour Force, Australia, April 2020 – released today (May 14, 2020) is shocking. Like all the data releases at the moment. All the main aggregates moved in extremely adverse directions. Employment fell by 4.6 per cent (594,300). Unemployment rose by 104,500 thousand. But that is a gross understatement of the problem given that the participation rate fell by 2.4 points, which meant the labour force fell by 489.8 thousand. Without the fall in the participation rate in April 2020, the unemployment rate would have been 9.7 per cent rather than its current value of 6.2 per cent). Monthly hours of work fell by 9.2 per cent. And the broad labour underutilisation rate is now at 19.9 per cent, after underemployment rose by 4.9 points to 13.7 per cent. There are now 2,639.4 thousand workers either unemployed or underemployed. That number swells to 3,142.6 (or 23.4 per cent) if we add the rise in hidden unemployment back into the ‘jobless’. Any government that oversees that sort of disaster has failed in their basic responsibilities to society. Its fiscal stimulus is totally inadequate.

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Never trust a NAIRU estimate

It is Wednesday, so only some snippets today as I have deadlines and some travel to deal with. We have been finalising a Report on our latest estimates of the investment required to introduce a full-scale Job Guarantee in Australia. As part of that work, I have been going back through my NAIRU (Non-Accelerating Inflation Rate of Unemployment) estimates and updating data. I am also going to talk about that a bit in my presentation to the Economic Society of Australia tonight. That talk is about ultimately aimed at explaining the inflation fighting mechanisms inherent in the Job Guarantee, which is a centrepiece of Modern Monetary Theory (MMT). But to understand why that option is superior in efficiency terms, one has to know what the alternative buffer stock mechanism is. And that, of course, is the NAIRU orthodoxy. Also today, I am announcing some more detail about our plans to launch MMTed Q&A, as a weekly live program that will help people interested in our work to achieve better understandings. And some RIP style music with a suprising inflation result! Who could ask for more on a Wednesday. Tomorrow, the ABS release the Labour Force data and we will see how bad things have become in the Australian labour market over the month (more or less) just gone.

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The coronavirus crisis is just exposing the failure of neoliberalism

The – RAID (Redundant Array of Inexpensive Disks) – technology marks best-practice in data storage and backup systems. It replaced SLED (single large expensive disk) to improve performance and insure against data loss from hardware failures. I have a series of RAID disks backing up the IT systems that I manage within my research centre. But when it comes to humanity, we do not follow this practice. Neoliberalism clearly subjugates human development and opportunity to the interests of profit. It has created a ‘Just-in-Time’ culture in manufacturing, in work (the gig economy), in our personal finances (debt vulnerability) as part of the deliberate strategy to gain a greater share of national income for profits at the expense of workers. But, in doing so, it has demonstrated a remarkable myopia and created the conditions for massive crises to wreak havoc. In this blog post, I outline my thoughts on how capitalism is now on life support and that we should end this charade forever and ‘reclaim the state’ for progressive ends and build in the essential redundancy that allows us to minimise the damage that arises when unpredictable events confront us.

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The Weekend Quiz – May 9-10, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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MMT critiques need to get more inventive – it’s getting boring

It is getting to the stage that one gets bored reading critiques of Modern Monetary Theory (MMT) by leading mainstream economists. As the critiques have escalated over the last few years, I can safely say that not one has really said anything: (a) that the core body of work we have developed hasn’t already considered and dealt with – about 20 years ago!; (b) which means, none of the long line of the would be demolition team has achieved their aim. And when they write Op Ed articles that basically just say – oh, MMT economists ignore “the demand for money” and “MMT falls flat on its face” when inflation emerges as part of the emergence out of this crisis, I get bored. Really, is that the best they can come up with. The latest entreaty in the boring stakes comes from Willem Buiter, who seems to have left the commercial banking sector and gone back into academic life. His latest Op Ed – The Problem With MMT (May 4, 2020) – is not his best work. Boring is the best descriptor. Why did he bother? Did he think he had to establish his relevance. He would have been better concentrating on the archaic mess that his mainstream framework is in. Anyway, sorry to end the week like this.

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BVerfG decision once again exposes the sham of the Euro system

It is Wednesday and I have a lot of commitments and deadlines hanging over me today. But I thought I would briefly comment on the yesterday’s – Decision – by the Bundesverfassungsgericht (German Federal Constitutional Court) (May 5, 2020) on the legality of the ECB’s Public Sector Purchase Programme. The BVerfG concluded that the ECB has been operating ultra vires and made orders as appropriate, which bind the German government and the Bundesbank and demonstrate once again the myth of central bank independence. There is all sorts of angst being expressed out there about this decision and progressive Europhiles are almost apoplectic. But it won’t surprise you to know that I think the Court made the correct judgement by exposing the complete sham that the European Union and the Eurozone, in particular, has become – an illegal, look-the-other-way, neoliberal cabal that the Union has become.

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The advanced nations should take the lead of Pakistan in job creation

Last Thursday (April 30, 2020), the US Department of Labor’s – Unemployment Insurance Weekly Claims Report – showed a further 3,839,000 workers filed for unemployment benefits in the US, taking the cumulative total since March 14, 2020 to 30,589,000. In a labour force of 164 million odd, that implies the unemployment rate is already around 22 per cent. The highest rate endured during the Great Depression was 24.9 per cent in 1933, which prompted the US President to introduce the major job creation program to stop a social disaster – the New Deal. History tells us that the major job creation programs (starting with FERA then morphing into the WPA) were opposed by the conservative (mostly) Republicans in the Congress. As is now! It wasn’t just the unemployment that mattered. Hours of work were also cut for those who maintained their jobs and some estimates suggest over 50 per cent of America’s labour force were underutilised in one way or another (read David Kennedy’s 2001 book for a vivid account of this period). The problem now is that the US has a Presidency that is unlikely to take the bold steps that Roosevelt took in the 1930s, even though the latter was a fiscal conservative and the former does not appear to be so inclined. However, some nations are leading the way – and they put the more advanced nations to shame in this regard.

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The Weekend Quiz – May 2-3, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points

When Kevin Rudd was faced with the threat posed by the unfolding GFC in late 2008 his government became very pragmatic and immediately ditched the narrative they had been pushing out throughout that year about inflation being a threat and the need for tighter fiscal policy and surpluses. They introduced, in two rounds, a fairly significant fiscal stimulus (around 4.2 per cent of GDP) which effectively saved the Australian economy from entering a recession. A significant part of that intervention was that it had various temporal properties – a cash handout in December 2008 designed to get spending power into the hands of consumers just before Xmas (the famous ‘flat screen’ payment – there were a lot of TVs purchased), which obviously was an immediate focus, and, a longer term component, which included their plan to put insulation into every home. This was aimed at job creation clearly, to address the cyclical needs, but, it was also intended to address the longer term climate crisis, that were beyond the GFC cycle. When appraising what government’s should be doing now – to deal with the socio-economic consequences of the medical crisis – that style of thinking is essential. The questions that need to be asked are: 1. What can be done now to avert an economic collapse? 2. What do we want to change about the pre-structure of the economy into the future? 3. How can we use the stimulus intervention to make those changes, while addressing Question 1. In this blog post, I go through some of that style of thinking. I also provide some specific estimates of the investment needed to introduce a Job Guarantee in Australia.

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Bank of England official blows the cover on mainstream macroeconomics

It is quite amusing really watching the way orthodox economists who know the game is up work like gymnasts to avoid actually spelling out directly what the facts are but spill the beans anyway. Last week (April 23, 2020), an ‘external member’ of the Bank of England’s Monetary Policy Committee, one – Gertjan Vlieghe – gave a speech – Monetary policy and the Bank of England’s balance sheet. If the message was taken seriously, then the way monetary economics and macroeconomics is taught in our universities should change dramatically. At present, there is only one textbook that seriously caters for the message that is inherent in the speech – Macroeconomics (Mitchell, Wray and Watts). The speech leaves out important insights but essentially allows the reader to appreciate what Modern Monetary Theory (MMT) has been on about, in part, for 25 years.

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The European Commission non-stimulus is a waiting game before new austerity is imposed

Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.

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Why does anyone read the New York Times?

It is Wednesday and I offer a few snippets for readers today. I have a number of projects on the go at present and time is short today. Apart from introducing a stunning guitar player (now long dead) that very few people have ever heard of but is one of my favourites (what does that say?), I ask the question: Why does anyone read the New York Times? I also announce the development and publication of our latest Employment Vulnerability Index (EVI) now in its third iteration. You can look at colourful maps as a result of this work! And tomorrow I will be trawling through employment losses around the world. All along the path to releasing my 10-point plan later next week.

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Progressives should never work within the mainstream macroeconomics straitjacket

There was an interesting article posted on Alternet (April 12, 2020) – Leftist policy didn’t lose. Marxist electoral theory did – in response to the dismal showing by Bernie Sanders in the current Democratic Primaries. I think it summarises the confusion that is now abundant on the progressive side of the political struggle. The arguments presented highlight the dilemma facing the progressive side of politics. Should Leftists compromise with centrists to get more traction? Compromise with what? If you read between the lines, there is no argument being made for Leftists to challenge the basic macroeconomic myths of neoliberalism that social democratic politicians around the world have adopted and straitjacket by. Rather, Leftists should accept these constraints and work at local levels to make small gains for better housing etc. It is a defeatist agenda – a surrender to the main game. I reject it.

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The provenance of the Job Guarantee concept in MMT

As the public scrutiny of the body of work we now refer to as Modern Monetary Theory (MMT) widens there is a lot of misinformation abroad that distorts or otherwise undermines what has been done to date. Most, but not all the misinformation or emphasis comes from those who attack our work. Their criticisms usually disclose an incomplete understanding of where MMT came from and what the core propositions and logic are. They stylise, usually using terms and constructs that are present in mainstream thinking, but inapplicable to an MMT way of thinking, and end up spitting out things like ‘printing money’ etc, which they think represents a devastating rejection of our work. As part of my own work, and I do this in liaison with Warren Mosler, I am interested in documenting the train of events that led to what we now call MMT. I love history and think it is very important in helping us understand things. So today I am continuing to examine archives to trace the provenance of key MMT concepts. And I am continuing to document the idea of a Job Guarantee, which is central to the MMT framework, despite many who claim to be MMTers thinking otherwise. I have noted in the recent press, claims that the origins of the buffer stock employment approach that became the Job Guarantee was the work of Hyman Minsky. Nothing could be further from the truth as you will see. It is important, in my view, to make the provenance very clear and that is what this blog post is about.

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Australia labour market – data release not representative of where we are today – Government stimulus underwhelming

The survey week for the – Labour Force, Australia, March 2020 – data, released by the ABS today (April 16, 2020) was before the major policy interventions (lockdown etc). In other words, the data released today is not likely to resemble where the economy was by the end of March or where it is now. Even so, the results are indicative of a slowing economy with weak employment growth failing to outstrip the underlying population growth. As a consequence, unemployment rose by 20,300. Those numbers will be dwarfed in the coming months. The broad labour underutilisation rate (sum of unemployment and underemployment) rose by 0.2 points to 14 per cent. There were a total of 1,924 thousand workers either unemployed or underemployed. This is a deplorable result. My overall assessment is that the Australian labour market remains a considerable distance from full employment and that that distance is increasing. With the coronavirus about to dwarf everything, the prior need for a fiscal stimulus of around 2 per cent has changed to a fiscal stimulus requirement of several times that. There is clear room for some serious fiscal policy expansion at present and the Federal government’s attempts to date have been seriously under-whelming. I estimate the Government will have to inject at least another $A130 billion into the economy (around 40 per cent more than it already has). Not good times ahead.

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The Weekend Quiz – April 11-12, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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