Purple House and MMT: new money creation is real, it is not a “leftist” conspiracy

by | Jul 6, 2020 | Economy & Markets

It is happening now, MMT. The Reserve Bank is making new money. It ought to be called Modern Monetary Practice, not Modern Monetary Theory. In an address last week, and questions afterwards, central banker Guy Debelle explained it. Michael West reports on the debate over MMT and how it is being used to combat the impending deep recession.

In the corporate press they are indignant. They think purple houses are a “Leftist” conspiracy.

“You can’t paint the house purple,” they cry. “You just can’t do it!”

They are doing it though. There is Reserve Bank chairman Philip Lowe, right before their eyes, paintbrush in hand, decked out in bib overalls, painting the house purple.

“You can’t do that,” they wail.

Yet the purple paint is veritably dripping off Philip’s paintbrush.

He can do it. He is doing it.

What Philip’s doctrinaire critics really mean is that they don’t like it. They hate Philip painting the house purple, they hate purple. Purple is leftist. Purple is irresponsible, purple doesn’t work.

Guy Debelle endorses MMT

Reserve Bank Deputy Governor Guy Debelle ticked every purple box last week in an address to The Economic Society of Australia: We have prised out the relevant excerpts to demonstrate what the bank is actually doing, and why.

In the corporate media, with the notable exception of Alan Kohler – who has approached the subject of MMT logically – they claim MMT doesn’t work because the national budget is like a household budget and has to be balanced.

However, sensible proponents of MMT hold that if an economy is running below capacity, and if there is little chance of inflation, then new money should be created until that spare capacity is gone.

Guy Debelle, both in his speech about the central bank’s policy actions and in response to questions afterwards, confirmed this is precisely what is going on:

  • The economy is running well below capacity
  • The spectre of inflation is low
  • Therefore, the RBA is creating new money (he calls it liquidity) by buying Commonwealth Government bonds from the major banks.

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An environment ripe for new money

Firstly, Debelle set the scene: “This has been a major event in the economy. It is going to have long lasting effects”.

“We’ve had a really large drop in output, a really large drop in hours worked, a very large rise in unemployment.”

The economy is running under capacity

“The main thing we’re trying to do is to get stronger growth in the economy … that’s the primary objective … The primary issue we have at the moment is that the economy is operating at a very very long way below capacity, and until we can try to address that … that’s going to be the main channel to try to address low inflation expectations and to try to get the economy going again.”

“Our main objective is to get people to jobs and to get the economy operating at full capacity … ”

There is little prospect of inflation

“While the bond purchases by the RBA increase the liquidity of the system [“liquidity” is a synonym for “money supply”], I do not see this posing any risk of generating excessively high inflation in the foreseeable future.

“Indeed, the opposite seems to be the more likely challenge in the current economic climate, that is, inflation will remain below the RBA’s target.”

“Low inflation coming from the “decline in population growth and a slow rate of technological progress … and the ageing of the population, possibly even more importantly … and a large increase in risk aversion, at least for a time.”

”The more likely outcome is low inflation and a subdued economy …. I do see much risk of high inflation coming from any source at the moment.”

What the RBA is doing about it

The RBA buys Commonwealth Government bonds in the secondary market from the banks (it does not buy these on issue, in the primary market, or directly from the Government).

“As was the case with many other central banks, the RBA bought government bonds in the secondary market to alleviate the dysfunction in the Australian government bond market.”

“To date we have purchased just over $40 billion in Australian Government Bonds.”

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“The RBA’s purchases in the second half of March and into April helped to improve the broader functionality in the broader bond market”.

The RBA pays for those bonds by crediting the sellers’ Exchange Settlement (ES) accounts at the RBA – this is new (digital) money. It increases the money supply and provides (potential) liquidity to the banking system. The aim is for the banks to lend it in order to drive activity in the economy.

“As the RBA buys government bonds, the amount of ES balances in the system increases as we credit the accounts of the banks that we buy them from.”

New Money

“The $50B of bond purchases have increased the ES balances and provided a substantial boost to the liquidity of the system.”

“As I said in my speech, when we buy government bonds, that puts more deposits in the banking system, so that adds to the money supply”.

“The higher level of ES balances in the system … anchors other money market rates.”

“Since late March, ES balances have moved in a very wide range between $40B and $90B.”

Meanwhile, in corporate media, they continue to claim the national economy is like a household budget and must be run like a household budget – ignoring that households can’t raise taxes or issue their own currencies.

The reality is that the central bank is creating new money, as are its peers in US UK Japan and Europe.

The question now is, how much money will the government create to stimulate the economy? This is a guessing game, though the under-capacity is enormous at the moment, so the answer is plenty.

Further, as the Government has effectively privatised its QE, or outsourced it to the major banks, will the banks lend it? How much can they lend if there is no demand for loans?

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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.


  1. Avatar

    “RBA pays for those bonds by crediting the sellers’ Exchange Settlement (ES) accounts”

    I don’t understand what happens to the current account deficit when they do this?

  2. Avatar

    Critics of MMT seem to invent their own versions of it and then criticise it as unworkable. Most of the criticisms I see have nothing to do with MMT and more to do with poor management of the economy and other events in the economy that would occur regardless of whether MMT was practised or not.

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    I am so pleased that the “household budget” idea is being eroded in favour of MMT. However, QE into private banks for onward loaning has shown itself to be of limited use. QE into banks, practiced in UK did nothing to alleviate austerity. Direct spending by the government would, at least, allow for less unemployment and greater infrastructure investment.

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    Hi Michael, just wondering, while MMP has the potential to bail out the economy, wouldn’t it depend on the manner on which that new money is distributed. In the United States, it appears to have gone in to asset inflation as corporations buy back bonds and repos, etc. Large infrastructure projects on the other hand, one would expect would be an investment in both the economy and a broader distribution of wealth. Do you know how they decide this and how to go about it and why. It is not something which I have delved into in depth.

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    Hi Michael it would be a good idea if you read a booklet [32 pager] called” The Story of the Commonwealth Bank by D J Amos. The book will show how the private banking system took control of Australia’s money supply.

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    A few corrections of detail Michael – to the best of my knowledge according to MMT.:
    “…While the bond purchases by the RBA increase the liquidity of the system [“liquidity” is a synonym for “money supply”],…”

    Note that the liquidity referred to by Debelle is liquidity within RBA held exchange settlement reserve accounts.
    His statement means that the RBA has effectively replaced some (relatively illiquid) (interest paying) bonds with cash – this has practically no impact on a private banks capacity to make loans to the general public – it simply means the cash balances in the interbank settlement reserve account has been raised to accommodate greater volume of transactions to proceed without putting upward pressure on the target cash rate – thus exerting further downward pressure on the short and long term cash rate.
    The “money supply” Debelle referred to is an interbank money supply – a money supply that is NEVER accessible to the the general public.The whole transaction constitutes an asset swap. Reserve ES balances can never be lent out to the public- they are strictly interbank settlement/interbank loan transaction balances lodged with the RBA.

    “..The RBA pays for those bonds by crediting the sellers’ Exchange Settlement (ES) accounts at the RBA – this is new (digital) money. It increases the money supply and provides (potential) liquidity to the banking system. The aim is for the banks to lend it in order to drive activity in the economy…”

    As above, this transaction constitutes an asset swap – there is no new money available for loan to Joe/Jane Public – the banks cannot lend out RBA held reserves.The resulting lowered interest rates may result in some increased lending activity, but this effect is offset by shortage of viable customers seeking loans – no consumer spending = no business.

    “…Further, as the Government has effectively privatised its QE, or outsourced it to the major banks, will the banks lend it? How much can they lend if there is no demand for loans?….”

    The govt has not privatised QE – buying on the secondary market is simply RBA buying off a non govt. bondholder – it remains fundamentally an asset swap. Again, the banks cannot loan out increased reserve ES balances – they are for interbank transaction/settlement use only.

  7. Avatar

    Good take, but at the end it falls over. Banks do not lend reserves (or deposits) they do their own money creation. The difference is that they balance out by creating liabilities when they create the deposit in the borrower’s account

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    I’m a scientist not an economist and have always been baffled by the delusional neoliberal economic theory of continuous forever compound economic growth on a finite planet – with finite land area, resources to consume, population to be fed and watered and to act as consumers. Seems to me that what’s really happening globally is we’re running up against nature’s limits to growth in the developed world and that degrowth is inevitable and unstoppable (called out by MIT and Club of Rome in 1972). With every catastrophe and financial crisis since the 90’s we’ve seen growth ratchet out of developed world economies. Into the future it seems inevitable that stagnation will become success and recession the norm as we are FORCED to restore the overshoot back to within nature’s carrying capacity. The developing world is the only place where growth can still occur (infrastructure, population, consumers, land exploitation), but since the 90’s this has had to be at the expense of degrowth in the developed world. So it seems to me that both the critics and the supporters of MMT are right! You ultimately do have to have a balanced budget of real land, resources, energy and consumers (Thermodynamics 101). But the value of these in monetary terms can be as creative and delusional as our hubris allows. MMT is just part of the clever delusion – print money (liquidity) to artificially stimulate a stagnant economy to make it seem like there is real growth. AND it works, the statistics tautologically reveal the GDP “growth”, but also print more money and your currency is devaluing (so perhaps GNP growth is not so evident?), but since the same is happening in most developed economies this is not obvious in exchange rates. The currencies that are not devaluing are the developing nations economies – they are catching up! I’m very aware how out-of-my-depth I am here, just trying out a different way of looking at things that might interest folk and hoping for some feedback to learn more from!

  9. Avatar

    Our banks do one thing – lend for private housing. So any stimulus through the banks is a stimulus to private housing. When are we actually going to create real businesses and real jobs for Australians? We can’t just be a country of owners of ludicrously expensive (and unproductive) housing…

  10. Avatar

    The problem I see with MMT is that most central bank money creation over the last decade has been used to support asset prices and has mostly helped keep rich people rich.

    The people who are most likely to spend newly created money are the less well off. If the cash is directed towards people who will spend it, MMT might work as a tool to boost GDP by quietly redistributing wealth. I doubt it is as effective in supporting the economy if used as a tool to preserve wealth.

    If MMT is not linked to programmes (welfare or perhaps Job Keeper) to get cash into the hands of people who need it (and will spend it) it easily becomes another subsidy for the rich (on top of negative gearing, CGT discounts, Superannuation).

  11. Avatar

    That the RBA can create money is one thing but by making that money available to the economy via the private banks is another. This approach looks very similar, or the same as what Ben Bernanke (Head of US Fed Reserve) did in the wake of the GFC as detailed by Prof Steve Keen (SK) in his Debunking Economics chapter 12 Misunderstanding the Great Depression and the Great Recession 2nd half. In short putting the new money into the private banks reserve account gave practically no bang for the bucks, about 1.2 trillion of it! All it did was to reduce the debt they had incurred in lending (far far) too much in the lead up to the GFC.
    Presently our private banks had lent far to much before COVID-19 hit and there is instability in the asset markets which comes about because when the debt level gets too high any uncertainty that asset prices will keep rising tends to cause a “collective action paradox” where investors are apt to all head for the exit before they lose money should the house of cards collapses or merely “turns down”!
    SK would agree with the present RBA approach in the use of fiat money if that was part of a “debt jubilee”. What that means in detail is that the RBA would make bond purchase available on condition that the private banks pass on the “stimulus” money to lower the debt of their customers as well as their own debt in some balanced way.
    By not doing that the fiat money lowers the liabillties of the banks but leaves the value of the asset market where is has got to largely driven by private bank lending in the first place. The, apparently “sparkling” growth of the asset market has been called asset price inflation by people like SK. So too much created money, by the private banks, has already caused inflation (in logical terms) but not in a form we call “inflation”.
    SK recognises that the debt jubilee approach will be solidly resisted by the private banks because it means that their major source of income would be cut and I’ve noticed a couple of bank executives have already been “warning” that banks profits are set to fall. He says that the level of private debt is over 200% of GDP and argues it should not be greater than about 50% GDP. That means he’s saying that private bank income/profits should max out about 25% of what it is today!
    There is more to fiat money than just whether fiat money is possible or desirable. Also while MMT is a non-neoclassical economics which SK’s book takes apart virtually all of the above is non-neoclassical economics!

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    MMT is not some new creation. The practice of MMT was applied when the exchange rate was uncoupled from representative valuations and permitted to float. The Australian currency is fiat and only has value by virtue of the need for people and businesses to extinguish their taxation obligations by paying exclusively in Australian dollars. The Australian Government has a monopoly on the issue of Australian currency. This has been the case for decades and so MMT has been utilised for as long as those arrangements have been in place. Governments have been deliberately misleading citizens by promoting the neoliberal mantra of balanced budgets and constrained spending. It is a pack of lies laid bare by the fact that we can all now see that the Government is able to create as much currency as is required to fulfill it’s objectives, provided there are adequate resources (including labour) within the macro economy. MMT describes how the macro economy actually works whereas politicians and illiterate commentators describe the economy as though it is identical to a household, which it is not. It should be mandatory in secondary schools that the truth of how our economy really works is taught otherwise we will continue to believe the blatant lies.

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    Lookout for MMT being used here to prop up banks/finance sector a la QE in the US. Discussion of the concept in the Australian, esp article last weekend by wealth editor James Kirby point to Murdoch press being OK with MMT but this will be as long as it is used to maintain existing economic power structure.

  14. Avatar

    Once JoPublic becomes aware QE=money printing, inflation will take off.
    It’s presently happening in [failed state] Lebanon

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