Do the grandchildren really pay the debt? The problem with Scott Morrison’s plan for recovery, and MMT

by | Jun 21, 2020 | Finance & Tax

The Government’s plan for economic recovery is wrong. Michael West investigates Modern Monetary Theory (MMT) and the false assumption that the national Budget is like the household budget, or a business. They are already creating new money while denying the proposition that creating new money will expand the economy; preferring to punish casual workers and Arts students, and pursue austerity instead.

Mathias Cormann: “What I would say though is that the Labor Party and the Greens right now want the Australian Government to keep borrowing from our children and grandchildren to fund consumption today”

Scott Morrison: “The period of this term could well prove to be the tipping point on the trajectory of debt our children and grandchildren will be saddled with”.

Josh Frydenberg: “Future generations should not be forced to pick up the tab for the last”.

We hear a lot from our politicians about grandchildren and how grandchildren will be lumped with horrendous debts unless the Budget is balanced. Never mind that the politicians cited above have presided over an astronomical rise in Australia’s debt. Balancing the Budget sounds eminently sensible to the shopkeeper from Liberal Party base.

Yet the problem with the grandchildren assertion is that it is a half sentence. If our grandchildren are to be paying off the debt, whom will they be paying? Will Josh Frydenberg’s grandchildren be paying Mathias Cormann’s grandchildren?

It is a question of enormous importance now as Australia is in deep recession and, come September, two million people will be coming off JobKeeper perhaps straight onto JobSeeker, underemployment is through the roof; and the Morrison government’s plan to fix all this appears to be cutting corporate taxes, wages and red tape and pursuing austerity rather than expansion.

Will the passage from JobKeeper to JobMaker finish at JobSeeker?

 

Amid the looming spectre of the “September Cliff”, there’s a debate. On one side, there are those who look at what central banks worldwide (including the Reserve Bank of Australia) are doing – the banks which are now creating new money, effectively implementing MMT (Modern Monetary Theory) – and, on the other side, the adherents of conventional economic theory. In very crude terms, conventional economists accuse MMT proponents and the central banks of “printing money” with impunity, as part of their effort to minimise deflation, bankruptcies and the unemployment that comes along with recessions.

The MMT brigade accuses the old guard of not understanding that it’s the Reserve Bank which creates new money, not the government, and that any new money should only be spent to the extent that there is unused capacity in the economy. And that there’s a limit on how much stimulus any new money can provide – the limit kicks in when the RBA’s target 2-3% inflation is in sight – and, according to the RBA Governor, there’s still a long way to go before that limit is reached.

And no, it’s not any country that can do this. Only countries which borrow exclusively in their own currency and tax in their own currency, like Japan, the UK, the US and Australia (and not Italy, Spain or Denmark which use the Euro) or NSW, Victoria or Queensland, California, Arizona or Florida (which don’t have their own currency).

The reality is that MMT is poorly named. It is not a theory and should be called Modern Monetary Practice (MMP) because, at its core, its central proposition is that it describes what central banks do.

Is it true that MMT means governments don’t need to tax? No. Tax is central to the way the economy works, in taking money out of the private sector and redistributing it as government spending, whether to build submarines, pay JobKeeper to businesses or pay doctors their Medicare money. Is it true that MMT means that the government does not need to borrow? No. Government bonds (borrowing) are central to what the RBA does. It needs to buy and sell government bonds to keep its 0.25% target interest rate under control. And it has has bought around $50 billion in 3-year government bonds over the last few months. How did it pay for the bonds? By digitally crediting the banks’ Exchange Settlement Accounts.

By getting the private banks involved in this Quantitative Easing (QE), it is effectively privatising the creating of new money, or at least a part of the process.

Privatisation Fetish and QE: will government surrender the economic rescue to the banks?

 

Looking at the actual practise of creating new money, let’s say to finance an infrastructure project such as a railway, there are elements of the PPP (Public Private Partnership). The Government issues bonds. The banks buy the bonds. Meanwhile, the RBA stands in the market ready to buy the bonds from the banks. When the RBA buys the bonds, new money is created.

It could issue $5 billion worth of bonds. The banks and other investors would buy them. Then the Reserve Bank would create $5 billion in new currency by crediting their accounts when it buys the bonds from the banks.

The upshot? The Government has raised $5 billion worth of funds from the banks for its infrastructure project and the RBA has created another $5 billion which the banks can now lend to the private sector, perhaps to finance their contribution to the railway PPP.

And what about the grandchildren and the debt the RBA does not buy? If Josh Frydenberg’s grandchildren inherit the debt (the bonds) and Mathias Cormann’s grandchildren pay tax, then the obligation to pay out the bonds out becomes a “zero sum grandchildren game”. One lot of grandchildren pay and another lot of grandchildren receive.

To complete the circle, if we assume the Reserve Bank has bought some of the bonds and held them to maturity, then Mathias Cormann’s grandchildren will pay their tax and the money will go to the bondholder, this time the Reserve Bank.

It then pays the money back to the Government, this time as a dividend, ergo more money for infrastructure, or maybe to help future grandchildren receiving JobSeeker in 2060.

This may be too much to expect from and Morrison, Cormann and Frydenberg who, with their sponsors in big business, seem quite determined to pursue a path of austerity. This is a deflationary path, as has been Treasurer Josh Frydenberg’s attempt to create a Budget surplus (where the government, by definition, takes more out of the economy than it puts back).

Hospital Pass: Josh Frydenberg and the Coalition as, ahem, superior economic managers

The question then becomes, why? Why would they make the greatest accounting error in Australian history and budget for $130 billion in JobKeeper subsidies only to find they were spending $70 billion then claimed the humungous error was a victory because they’d saved $60 billion? That’s half a dozen Brisbane to Melbourne railway corridors passing through National Party seats.

Why?

This why is the far more complex question. Partly, the answer lies in a slavish adherence to neo-liberal dogma. Wilful blindness if you like. Perhaps more insidious though is the idea that, because they espouse the notion of small government and are largely funded by big business, the Liberals simply don’t like the social implications that government can fix things itself. It might crowd out the private sector’s eagerness for profit and direct the national infrastructure towards enduring economic benefits for everybody’s grandchildren.

The grand irony in all this is that the failure of the Government’s economic management was clear well before the coronavirus.

Australia’s performance on a number of key metrics had been sliding for six years. The RBA had been consistently prodding the Government to start stimulating the economy throughout 2019, but the Treasurer wanted to save a few more billion dollars to get the Budget in the black. Now a spend of $200 billion plus seems to be no problem, as long as casual employees or pesky Arts students don’t get it.

This fixation with balancing the Budget – the very thing which they deemed so critical in managing the economy – was the very thing which has been damaging the economy.

There are two ways to balance a budget: cut spending or raise taxes. The latter ran counter to party ideology, so Josh Frydenberg cut spending. Cutting spending withdraws money from the community. It is deflationary. So it was that lower spending meant lower economic activity. Growth drifted lower, so did inflation, so did interest rates. Lending criteria got tighter. Then the housing market got an attack of the wobbles.

The Libs are fond of talking about their Shopkeeper Theory; that is, that every shopkeeper must balance the books. Or they go out of business. So it is that the Government too must balance its books, they say, and the idea of balanced budgets is deployed as a weapon to bash political opponents.

The fact is that shopkeepers don’t issue their own currency. Shopkeepers don’t have a banking system to buy their bonds. Shopkeepers can’t create money.

The consummate paradox is that, while they deny the efficacy of what central banks are doing, what MMT describes – and espouse  ShopKeeper Theory, the world’s central banks are actually creating new money anyway via QE. They are watching it happen while denying they can see it.

 

ABOUT THE AUTHOR

Michael West

Michael West

Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

55 Comments

  1. Avatar

    I highly recommend MWM readers check out Prof Stephanie Kelton’s lecture at the University of Adelaide earlier this year. She’s one of the most influential economists in the world. Her latest book, “The Deficit Myth” is a must read. Kelton explodes the myths that deficits will harm the next generation and undermine long-term growth. Westy has done a brilliant job in summarising just how simple and effective MMT (or, as he says “Modern Monetary Practice”) can be. With a recession looming, surely now is the time for a game-changing approach to deficits.
    https://www.youtube.com/watch?v=sLTCZhdz6zo&feature=emb_logo

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      PLEASE explain to me how the resuting debts we owe to foreigners and the resultant massive sell-off to foreigners of our mines farms and key industries, is a good thing?:??????? Please ask Ms Kelton. Anyone who thinks deficits are not a problem is a myopic moron with an over-simplistic notion of what an economy is.

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        Highly recommend you read her book. Pulitzer Prize-winner, David Cay Johnston says: “The Deficit Myth” is simply the most important book I’ve ever read. Stephanie Kelton carefully articulates a message that obliterates economic orthodoxy about public finance, which assumes that taxes precede spending and deficits are bad. Kelton’s work is on a par with the genius of DaVinci and Copernicus, heretics who proved that Earth revolves around the sun.”

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        Please answer the question re the external account. If the book was great you’ll have the answer to a very simple question. I’ve been reading about MMT for 15 years. I have never seen one author, professor, commentator address this issue. I have wasted soooo much time seeking the answer over so many years.
        I once saw a debate on it between Eric Janzen and Randall Wray. As soon as the effect on the external account was mentioned Wray left the debate.
        Re Copernicus et al – correct maths was pretty essential. Maths is the enemy of MMT.

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        The reason you can’t get an answer to your question is because it’s irrelevant to the discussion of MMT. It’s outside the bounds of the theory. If you want to include it, create your own theory.
        Read Kelton’s book and you will understand the scope of what she, and other MMTers, are talking about

  2. Avatar

    I was a macroeconomist in Canberra, surrounded by numpties at the highest levels of RBA, Treasury that destroyed our manufacturing sector, . McKibbin and Makin are both QE deniers.

    Fantastic explanation my friend. Best regards.

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      Thanks Craig. I’ve Tweeted your comment out!

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      Tell me something – it fascinates me. I agree that the highest levels of RBA, Treasury, Banks et al are morons. However how can you calm to be a macroeconomist and, at the same time, not recognise that there are implications in the External account?

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        The implications re the external account may be a ONCE-OFF devaluation.

        No big deal: in fact export competitiveness is improved.

  3. Avatar

    Money is a commodity used to trade other commodities. Goods and services are produced by labour. Natural wealth is owned by the likes of Rio Tinto. Without wealth backing it up, money is worth the paper and coloured ink used to produce it. Bonds are owned by those who can afford to buy them. In effect, the producers of wealth, the working class, are made to think that they are in debt to the bond holders, the upper 10% and the companies that they own shares in. What actually happens is that the wage system operates to transfer the wealth workers product to the employing class. The wage system isn’t meant to be fair anymore than robbery is meant to be fair.

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      You are essentially right Mike as is Mike West. The main function of the RBA, established under the wise head of Nugget Coombs, is to maintain employment and control inflation. Employment in the contemporary context is fashioned around the NAIRU. Inflation is influenced by the money supply as against the demand. “Modern” MT is an economists fad that Bernanke made a name for himself when he was faced with a regressive business cycle that was only offering stagflation.

      (M?) Monetary Practice, as Michael suggests is the correct nomenclature, has been in practice since the 16th century (or even earlier if you include the Chinese introduction of the Yuan) and has delivered deficit budgets in Australia since federation. We wouldn’t be enjoying the roads sewers, electricity and infrastructure we experience today if earlier generations refused the governments the right to borrow for capital works. But historically the amount of borrowing was controlled by Fed Governments plans and tempered by the RBA function to maintain employment rates and moderate inflation…and under extreme circumstances, an extension of the classical Keynesian principle of evening out the ups and downs of the business cycles .

      Up until the GFC proved the bankster’s instruments of torture and profit to be fictions of stability Interest Rate adjustment would frequently suffice to encourage investment and thus employment and currency adjustments and money supply adjustments would aid in controlling imported and indigenous inflation. Now we have a gambler’s paradise called the FX market

      Extensive RBA fiat money creation had become politically benign until the neo conservative used it as whip to thrash the working classes democratic representatives. So now with massive disruptions already occurring and with a raging tsunami of Climate Change disruptions on the horizons we have economists from every bolt hole in the planet looking for something “MODERN” that they can attach to a ‘theory’ to maintain the ‘dismal sciences’.’ relevance and harness the public’s attention., just like a religion.

      Most of the Allied nations had debts that exceeded their annual GDPs after Armistice Day and the subsequent to the Spanish Flu pandemic and the world survived without a ‘(M)MT’, and we aint in the Poorhouse yet, but a fair bit of detritus is gathering around our ankles if you have any interest in thermodynamics.

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      The holder of money DOES have the option to control real assets.

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        and vice versa

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      Re: “Natural wealth is owned by the likes of Rio Tinto” – that’s the other major missing piece in all this – ensuring the rent seekers pay the rent! (And stop shamelessly destroying global human heritage!)
      What shows the scale of theft from the people is how the mining industry only had to spend the equivalent of the revenues made in 30 minutes ($20m) on ad campaigns to defeat Rudd/Swan’s proposal for the MRRT (Mineral Resources Rent Tax).

  4. Avatar

    There is an inherent nasty streak in the heart of the Liberal Party.

    Their first priority is to cut taxes for the wealthy. The next priority is to deny sustainable services and liveable benefits to the public.They dress this nastiness up as economic management. To create a desperate pool of labour who will work for lower wages. More profit. Win-win for inequality.

    It falls down as Mike has shown, because wages drive consumption, and consumption is the key driver of the economy. Not tax cuts, not investment. Lower wages give higher profits in the short term, but leads to economic decline in the medium to long term.

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      We already over-consume and under-produce. We have run a CAD EVERY year for 60 years bar 1971. More consumption creates more foreign debt for which we sell assets to foreigners to cover. How can MORE consumption be a solution? When some of us talk about our children footing the bill, we mean the debts we owe to foreigners and the sell out of resources and industries that no longer belong to the nation and for which our children bear the price.
      Edit: We have managed a small CAS in the last 6 to 9 months. Current policy would be supercharged by MMT in the inevitable result of a return to a CAD.

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      correct…and I’m a Boomer! Mind you please understand that it is CITY Boomers that have been the beneficiaries. Rural and Regional areas have been crucified by the policy of running an over-valued currency to satisfy city voters.

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        “On the contrary, the government at that time will simply take (say) $30 billion annually from some Americans and transfer it to other Americans, as interest on the higher national debt”
        This is patently incorrect. If the debt is held by foreigners, as a result of a CAD – which IS the case in both the US, Australia and UK, then those foreigners will be paid the interest by future generations. Alternately foreigners will own and benefit from the ownership of vast swathes of your natural resources.
        Frankly, Krugman is a myopic BS artist, a moron, or treacherous.

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        A furhter thought re war – the cost is partly passed on to future generations in that we use up resources that will then not be available for their comfort and well-being.
        There is a tendency by modern economists to think that money somehow operates in its own ethereal world and is not connected to reality in the form of resources and command of resources. Unfortunately for those who live in the real world – it is.

  5. Avatar

    I like to copy Michael’s article links to other websites to provoke wider discussion – that tends to see them picked up by a much wider audience so is highly recommended !

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    With respect, this analysis is incorrect or at least, incomplete. The problem lies with an understanding of inflation. It is assumed that inflation is low and that deflation is the real risk, and therefore in effect the monetising of debt has no real consequences. This shows the success of central banks over the last 20 years where they have changed the very meaning of inflation to a point where they may not even understand it themselves.

    The CPI does not measure inflation – I do not mean that it is not accurate, I am saying that the CPI is not a measure of inflation. Increases in the money supply, such as that which result from QE and monetisation, cause price inflation. We all used to know this, until central banks decided that actually setting interest rates to target inflation was both too hard and didn’t seem to work and tried to pretend that there was a ‘decoupling’.

    The CPI measures something completely different, being the theoretical cost of living for a theoretical consumer whose consumption habits conveniently change whenever the Government says they do.

    Money supply inflation leads to price inflation across the whole economy. The trick of the CPI is simply to measure something else and pretend that it is inflation. If you want to get a close as to what the increase in the level of prices of ALL goods are in the economy, have a look at shadowstats.com which restates US CPI figures based on the previous methodologies. Amazingly, past methodologies always show much higher levels of inflation, with each successive change lowering the headline figure. Pre covid, real US inflation was probably 8-10% a year and Australia much the same.

    The next trick is pretending that asset price inflation and consumer price inflation are different things. They are not. They both result from increasing money supply. But if we pretend that asset inflation is ‘good’ and consumer inflation is ‘bad’, it pushes inflation into asset prices. This is why the stock market keeps rising – the inflation in the economy has to go somewhere.

    MMT is rubbish because it supposes that money can be created without cost. In fact, as both Friedman and Keynes agreed, inflation is a tax. Asset price inflation is a massive tax on everyone who wants to guy a house. So yes, the children really do pay for this.

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      Archer
      Also please consider this. Money Printing, over the last 50 years has been anti-inflationary as far as the CPI goes.
      Let’s leave aside the rigging of the CPI for the moment. Considerations of the External account and its effects has totally disappeared from all Economic discussion. It’s a result of everyone thinking all economic wisdom comes out of the US who have the Reserve currency and therefore think that they CAN print to infinity without consequences – demonstrably incorrect of course.
      What has been happening with money printing is as you describe – asset inflation. I THINK that money going in to asset inflation keeps circulating. In fact, in most Western economies the money prinitng has ended up in imports. I have run some numbers in the past and net national debt matches the accumulated CAD’s.
      What we’ve had is money printing resulting in more imports of cheap goods from, in turn, Japan, Taiwan, Korea /Thailand. and then the Mother of all consumer wet dreams China. It’s been the more you print the more you can import so your CPI is held in check by cheap imports. For many years, we had significant non-tradable ‘inflation’ with tradable inflation being very low to almost negative. Put the two together and you get a ‘false’ figure of domestic inflation.
      Of course the big danger would be the eventual collapse of the currency. We have forestalled that waiting disaster by selling assets to foreigners to Balance the Current account.
      It’s been a beautiful virtuous perfect circle.
      Cheers

  7. Avatar

    I’m in the process of reading Prof Stephanie Kelton’s book “The Deficit Myth”. It makes a lot of sense to me but I wonder why so many people rubbish the concept when we practise it in reality. It’s difficult to find out what they object to though. They usually proffer straw man arguments or misrepresent the concepts. It’s as though, as Michael West implies, they have agenda other than financial management (eg, small government for its own sake, picking winners, or helping their friends and supporters).

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      Baz – We DO practise it in reality – that’s true. It’s also why we are so deeply in debt to foreigners AND have already sold off most of our worthwhile national assets. It’s also part of the reason we have houses that are too damned expensive for our young people to have a HOME!

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        flawse. You confuse me. What has debt and selling assets have to do with MMT? MMT is about creating money through the banking system; not borrowing money to finance spending. It’s not necessary for the government to borrow to finance that expenditure. Borrowing might be necessary to withdraw money from the economy to manage inflation and to manage interest rates but is unrelated to the concept of MMT.

        The private sector borrows for investment purposes and sells assets to rationalise their portfolios. Private sector debt has nothing to do with MMT. But MMT is about government expenditure. Government deficits are surpluses for the private sector and the conversely, Government surpluses are deficits for the private sector.

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        PLEASE read my post above. Can we make this an intelligent discussion instead of just ‘Rah! RAh MMT!’
        You have an over-simplistic view of the economy. Governments print money, shove it into the economy and it’s ALL good!!! In our economy, depending on where its put in, a greater, and not much lesser, share of that money ends up as imports which, in Australia’s case is straight debt.
        Edit: Oh hell!!!! Same ole sameo! My post has been deleted. I didn’t realise. I don’t know what is happening with this world – the great silencing I guess. It was reasonably detailed on how the debt arises. Note that I don’t abuse or use undesirable LANGUAGE. It’s just a deletion of logical writing that happens to disagree with the great Globalist MMT move.
        We can’t have a discussion of ideas anymore it seems.
        My opinion of Michael West was quite high. I’ve had a few discussions with him back in time and mostly I agree with him. My opinion has just taken a huge dive.

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        I’m certainly no expert and I a certainly have no axe to grind.
        I know my comment was simplistic. All I would say is that just because the government prints money doesn’t preclude it from then managing the economy, including the aspects about which you refer. If the money created is used in ways that cause problems for the economy or the population then that’s a matter of government policy and for which it should be answerable.
        As far as I can see, MMT is about how the government can create money and spend it and has no need to get the money from tax or debt. And MMT certainly doesn’t preclude the government from taxing or borrowing for the purpose of managing the economy.

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        Baz
        My post explaining how the debt arises from government printing (particularly in Australia’s case) was quite extensive. It debunks the simplistic notion that govts can just create money and spend it in the economy with no debt consequences.
        Money does not stop at the first intersection where it is exchanged. We have to understand how it is moving and where to. The simplistic nonsense of MMT is based on an understanding that money does not flow.
        Money keeps moving through the economy and, in the end, ends in two major categories barring the actual minor increase in the cash on hand. It will end up either as taxes in the hands of government – which is recycled as spending OR it will end up as imports and leave the country. ( Now the current system is nuts in that the RBA just prints up the missing money – Nuts – so I am not promoting the status quo here)
        At that point we foreigners hold our money, and, if it is going to be worth anything more than a big zero, they have to be able to nbuy something they want. We already have a chronic Current Account Deficit so there is nothing more they WANT from us in terms of produced consumption goods, so they buy our assets More than 92% of our mining RESOURCES (Lowy Institute and other respected sources) are owned by foreigners. Our food processing industry outside the farm gate is totally owned by foreigners. Vast sections of our electrical infrastructure is controlled by foreigners and that proportion grows every day. Vast areas of our best farmland is being handed over etc etc etc. Then MMTers tell us there is no such thing as the external account and, even if there is, then imports are all good and an addition to our economy (Bill Barnacle)

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        Poor government policy and economic management. Nothing to do with MMT.

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        Baz
        The article is argui9ng there is no limit to govt printing money becaue it DOESN’T create debt. Just by way of explanation, from a macro viewpoint, I conflate RBA and Government. So of course it CAN print – MMT thinks this is some great new revelation. The point is what are the consequences? Measuring whether it is govt debt, on its own, is irrelevant. However the act of printing has nasty debt consequences in other parts of the economic model.
        Of course all the academics and Government now love MMT. It’s a government recipe for total control of everything.

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        I’m talking about MMT. You seem to be talking about government policy, government economic management, corporate greed etc, etc.

        If you want to talk about all those things I would probably agree with on a lot of what you say. The MMT I’m talking about is simply the concept of government with a sovereign currency not needing to borrow to be able to spend. All those things that you are lamenting will occur no matter how governments sourced their funding (or thought they sourced their funding). If governments have poor policies, bad economic management or there is corporate greed, MMT is irrelevant to the discussion.

        I think people like to discredit MMT by tying it to bad economic policies rather than viewing it for what it is.

        See https://www.forbes.com/sites/miltonezrati/2019/05/28/what-is-modern-monetary-theory/#4c78bbe73186

        As Stephanie Kelton says: “It’s important to recognize that MMT is not a panacea. It won’t fix our broken politics or force lawmakers to invest public money in ways that best serve the public interest.”

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        MMT as proposed IS a bad government policy.

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        MMT isn’t a proposal, it’s a description.

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        Baz You desxcribe what MMT is supposed to do. There is nothing MODERN in that. What is MODERN is the notion that governments can just print money and as long as there is no inflation they can keep on printing money. There was at one stage a branch of MMRT which was supposed to be a reform of MMT to take account of effects in the External Account. Unfortunately all its proponents then just went on to discuss policy while STILL ignoring effects of the external account. If MMT is not weighing up the effects on the external account then it is, fundamentally, little different to current so-called neo-liberal policy.
        If we are talking ‘sectoral analysis’ there is NOTHING new in that. It was a fundamental tenet when I first studied economics 50 years ago. However it must be said that the moce to go down this ‘we don’t need to produce anything – just print money’ had already taken hold in university circles.
        Please note that applying the money printing argument to Japan is a COMPLTELY different issue as Japan has a very productive economy and a chronic CAS.

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        Yes, MMT isn’t modern. It’s just a better understanding of what really happens.
        As I see it, MMT realises that you can’t just print money beyond the productive capacity of the country. This would induce inflationary pressure.
        I suspect there are many versions of MMT. As no country has an official policy of adopting MMT, we can only discuss MMT as “what MMT is supposed to do”.
        One of the reasons I have been trying to gauge the opinions of others on MMT is to discover the unintended consequences of it. But mostly, critics, like you, seem only to point out the failures of government policy and economic management that have nothing to do specifically with MMT. Of course, if you don’t manage the consequences of spending you will get poor outcomes. That’s a consequence of spending, not MMT.

        I suspect that most of the differences of opinion between you and me is where you draw the boundary around MMT. To me, MMT is simply the concept of government with a sovereign currency not needing to borrow to be able to spend. Everything else comes under the heading of government policy and economic management.

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        A few quotes from Stephanie Kelton’s book:
        As former Fed chair Alan Greenspan testified, “There’s nothing to prevent the federal government from creating as much money as it wants and paying it to someone.” His successor, Ben Bernanke, went further, describing how the government actually pays its bills: “It’s not taxpayer money. We simply use the computer to mark up the size of the account.”

        Stephanie Kelton: “It’s important to recognize that MMT is not a panacea. It won’t fix our broken politics or force lawmakers to invest public money in ways that best serve the public interest.”

        Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy . John Murray Press. Kindle Edition.

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        “to invest public money in ways that best serve the public interest.” There is a whole other topic right there. The way our nation is constructed right now, money will always be spent where the population is – more rail in Sydney and Melbourne; more and more complex electrical infrastructure to service them etc etc etc. The money will NEVER be spent in productive and regional areas because, while we are running a deliberately falsely over-valued A$, and we equate actual exports and asset sales to foreigners as being the same thing, then it will NEVER be either popular or mathematically correct to invest any money in productive rural and regional areas.

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        “As I see it, MMT realises that you can’t just print money beyond the productive capacity of the country. This would induce inflationary pressure.”
        Again MMT is just plain WRONG!!! Money printing has NOT produced inflation. It has produced chronic and severe CAD’s. The more we import the lower is inflation. Please look at teh Australian records on this. For decades we have run significant non-tradable inflation that has been offset by negligible tradable inflation. The more we imported the power inflation was.
        Hells bells! You quote Greenspan et al as experts?????? How do you think we got into this mess? MMT just wants to expand on the monumental catastrophe they created.
        In addition you do notice some basic differences between say the US, Japan and Australia?

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        You seriously aren’t reading what I write.
        “What MMT is supposed to do” Maths tells us what it WILL do.
        “unintended consequences of it” That’s what I’m telling you. MMT proponents refuse to discuss the Current Account – which is, and has been, a consequence of money printing in this economy. Because it is a consequence of MMT as it is proposed then you, like ALL MMT proponents just say it doesn’t exist – IT DOES! Fair dinkum! The Current Account exists and is an integral part of an economy and has repurcussions for the whole society in every way one can think of.
        What you are talking about is just whether a Govt can print money. I don’t know why you think we need MMT to understand that? Do you really think nobody has thought of it? As pointed out, from a Macro viewpoint we can conflate the Central Bank and the government. So what do you think Australia, US, UK have been doing for the last 30 to 60 years?
        If I get what you are telling me, you are saying you really have zero understanding of economics but you’ve read about MMT and it promises nirvana so you have grabbed it and refuse to think about anything that suggests it just might not be what its proponents say it is? That’s not a good way to learn and understand.

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      Quite true, Baz. We’ve seen Japan put it in practice after, amongst other triggers, workers refusing a pay cut. Still negative inflation with debt at 240% of GDP.

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    Will some-one show me Australia’s Balance Sheet. What is our Net Asset position?. Debt is a Liability on the Balance Sheet. Analysing Debt as a percentage of GDP (Income) for example I find is a nonsense. Of course our grandkids are not responsible for the Debt but Matthias and Josh’s might be, if they are politicians and never have a real job.

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    Michael – Please tell me how my comments were objectionable or off topic. We’ve talked before. [email protected]

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    Ummm agan! What is the reason for taking down my post except to preclude sensible discussion? It’s a pretty important issue really.
    It’s about whether we are willing to have open discussion or are we trying to just impose a false dogma in the interests of some power? [email protected]

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    “So it is that the Government too must balance its books”
    The government MUST balance the NATION’s books. In fact those books WILL balance no matter what we do. In Australia’s case we balance our books by creating foreign debt and selling assets to foreigners. MMT, as it is promulgated, just wants to make that problem worse.

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    This is not “modern” and it is not a “theory”. It is basically printing money to finance government spending.

    Respectfully, the author of this article would be wise to read more about the lessons of history before making an argument that this “theory” works with no consequences.

    France followed this path twice, the first time under John Law it almost led to complete collapse of society and the second time it caused significant violence and Napoleon coming to power. It has also been followed by Weimar Republic Germany and several countries of the former Soviet Union in the 1990s. It is currently being practiced by Venezuela and Zimbabwe. If anyone thinks there are no consequences of any of these countries printing money to finance government spending then I have a bridge I would like to sell you. Please contact me for further info.

    I don’t think it’s any coincidence that you are starting to see riots and civil unrest in the US now that they have been following these policies for around 10 years now. Often this process ends in the complete collapse of society/government and it’s replacement with a dictator. I hope those who advocate this policy for Australia have a realistic grasp of the consequences.

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      No economic theory works if it is misapplied or abused.

      You cite examples where ”printing money” led to disastrous results, but you can also find examples where other approaches fail. I have reached a stage in my life where the debate no longer centres on the superiority of free markets vs central planning, socialism vs capitalism etc. Rather, the real question is about applying any of these with integrity and minimal corruption. eg our current situation sees governments not playing their part, pervert what they do for short term electoral advantage, leaving it up to central banks to counter it – usually in ways that benefits the same constituents.

      All that MMT does is formalise the rules around how to apply the injection or withdrawal of currency. It is up to the whole political system to ensure any approach is done properly, and as MW has noted, the measures are productivity, equity (social cohesion and fairness) and inflation.

      What is anything worth? Only what people are willing to exchange for it, be it property, gold or cowrie shells.

      The examples you give were either from before the later understandings evolved (pre 20th C) or are examples where the government controlled the currency either directly or controlled the Central Bank and manipulate it for political advantage rather than general prosperity.

      (EG Weimar Germany was having to send massive productivity benefits out of the country as reparations – a mistake not repeated after WW2 by George Marshall. But that same ”squeeze is put on Venezuela by sever US sanctions thereby compounding their issues i.e. there’s rarely just one factor.

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    Thanks Michael for this most important article on MMT – let’s hope it hastens along an urgently needed macroeconomic paradigm change.
    Australia is being taken down the same austere neoliberal road as the US – if we are to avoid the social breakdown tearing the US apart today we must rapidly change our macroeconomic course. The cause of Australia’s descent into social decay over the last four decades is the insidious ascendance of Friedmanite ideology within political parties and the perversion of Australia’s democratic process by corporatist elites aided by propagandist media..
    To address the pressing immediate needs of a forsaken generation of workers we are in desperate need of MMT’s Job Guarantee scheme.
    The JG puts the support of a living wage and social purpose under a struggling population where it is most needed – it directly injects funds to the unemployed no matter where they reside. The JG was theorised and developed through the lens of MMT knowledge – a comprehension of national macroeconomic operation that reveals the depth of damage to society by systemically keeping ~10% of the available workforce wastefully unproductive.to stabilise the economy – the destructive NAIRU !!
    There is a better way – stabilise the peoples opportunity for productive employment and harness the ‘economy’ to serve the people.

    The following youtube video sets out the JG detail: “Full employment, the ‘Right to Work’ and the Job Guarantee” – Dr. Victor Quirk
    https://www.youtube.com/watch?v=75k_8TYOas8
    “Dr. Victor Quirk discusses the history of full employment and the ‘Right to Work’ (as outlined in Article 23.1 of the UN ‘Universal Declaration of Human Rights’) both in Australia and across the world.
    A discussion on how the ‘Job Guarantee’ (JG), as outlined in the Modern Monetary Theory (MMT) framework, can satisfy that human right, what the implementation challenges of the JG are and how might they be addressed in the Australian context…”

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    This article seems to be a rational counter to the accepted dogma, and that its points would be worth exploring, in answer to the pandemic, and leading up to elections. Given that most voters are unlikely to understand the argument, at present levels of economic literacy in the general population, who is going to explain it to them?

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    Good piece except for the ”explanation” metaphor using Frydenburg’s and Corman’s grandchildren. A flow chart graphic would’ve helped.

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    (Thank you Michael, I appreciate your contributions…. on tax, Menadue and everything else….)

    Why does our RBA apparently say they can print money for the government ?

    Is this because Australia currently has very low, nearly zero, inflation and if the RBA prints money then our inflation with increase?

    And the RBA will only be constrained if our inflation increases towards the RBA 2-3% statutary limits?

    Michael also has some comment about our $ exchange rate would also be reduced, which he notes as making us more competitive on the world market. Is it also relevant to our discussion that our exchange rate happens to be quite high right now? (of course for this discussion, perhaps inflation and exchange rate are actually the same thing?)

    I am trying to borrow Kelton’s book so maybe I can begin to be a bit less naive on this topic

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      Currently the RBA has added zeroes digitally to its spreadsheet and with that extra ”money”it has enabled thre Australian government to issue bonds (IOUs) to buyers/ lenders. With that borrowed money, they are stimulating the economy (various programs like Jobkeeper, grants etc) .

      As long as ”the lender” places no deadline or limit to the borrowing (rolling over bonds) the govt can keep doing it, spend what it needs, until it reaches its target. Once reached, when stimulus has done its job, hit certain levels of employment, inflation , productivity, service provision,, foreign exchange rate etc etc, – here’s the trick – the government MUST divert funds to repay the debt and the Reserve Bank MUST delete the zeroes it added at the beginning of the process.

      To me the missing element in MMT is ensuring political integrity, that a govt will do what it should do at the appropriate time in the economic cycle. EG Howard – Costello during a boom time could or should have used the extra revenue to either provide better services to society – health, education etc or invest in R&D or infrastructure etc but instead gave tax cuts which went into inflating the property bubble, stock market speculations etc .

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    Thanks Michael for this most timely article on MMT – let’s hope it hastens along an urgently needed macroeconomic paradigm change.
    Australian citizens are being taken down the same neoliberal austerity road as those of the U.S. – if we are to avoid the social breakdown tearing the US apart today we must rapidly change our macroeconomic course. The cause of Australia’s descent into social decay over the last four decades is the insidious ascendance of Friedmanite ideology within political parties and the perversion of Australia’s democratic process by corporatist elites aided by propagandist media..

    There is a better way – stabilise the peoples opportunity
    for productive employment and harness the ‘economy’ to serve the people.
    A forsaken generation of workers are in desperate need of MMT’s Job Guarantee scheme.The JG puts the support of a living wage and social purpose under a struggling population where it is most needed – it injects funds directly to the unemployed no matter where they reside.
    The JG was theorised and developed from insights gained through application of MMT understanding – an MMT lens reveals the needless damage to society of systemically keeping around 10% of the available workforce unproductive to ‘stabilise’ the economy – via the destructive NAIRU !!
    The following youtube video sets out the JG detail: “Full employment, the ‘Right to Work’ and the Job Guarantee” – Dr. Victor Quirk
    https://www.youtube.com/watch?v=75k_8TYOas8 – discusses the history of full employment and the right to work … and how to achieve it

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