Currency Issuing Governments Finance Themselves

There have been a lot of stories in the media around the debt and the ‘cost’ future generations will bear as a result of the spending required during the covid-19 crisis.

Each and everyone of these sports the same neoliberal garbage that taxes need to rise and suggest tax changes that work in favour of capital. Some more left leaning economist state things like we will to ‘invest’, in a financial sense, as a nation and ‘value add’ to our exports or we ‘borrow against future productive capacity’. This language is tied up in the neoliberal assumption governments need to find tax dollars in order to spend or need bond markets to borrow from.

For reasons perhaps of ignorance, it appears financial commentators haven’t yet grasped there have been different types of currency systems. There has been a gold standard, a system of fixed exchange rates, and fiat currencies, the latter of which we operate under today.

There were a number of economists during the mid-twentieth century that expressed under a fiat currency we were not restricted by tax collection. The below is a quote by Chairman of the NY Federal Reserve in an article from the American Affairs Journal.

The necessity for a government to be prepared to tax in order to maintain both its independence and its solvency still holds true for state and local governments, but it is no longer true for most national governments. Two changes of the greatest consequence have occurred in the last twenty-five years which have altered the position of the national state with respect to the financing of its requirements. The first of these changes is the gaining of vast new experience in the management of central banks. The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold or into any other commodity.

Ruml, B. The New Economic Insight, American Affairs Journal 1950

Under a gold standard governments promised gold in exchange for their currencies. The standard was adopted by the UK in 1844 and was the system used up until WWI. Countries would express the ‘value’ of their currencies in terms of gold. $1 may equal 30 grams of gold. The monetary authority could set it at whatever it liked. Domestically it needed to ensure sufficient gold reserves to back the currency in circulation.

It was the principle method for making international payments. Trade deficit countries would have to ship gold to trade surplus countries.

Say NZ ran a current account deficit against Australia. NZ would literally ship the equivalent gold on ships to the surplus country. This would have effects on the money supply expanding (without an increase in productive capacity) and the loss of gold reserves for the trade deficit country would force a country to withdraw currency domestically (decrease spending/increase taxes) which is deflationary and cause unemployment and falling output.

The economist Bill Mitchell described the system as such

This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline.

From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved.

During the gold standard era countries balanced their external account (trade or what call today the current account) to maintain their gold reserves. In the meantime trade deficit countries experienced domestic sessions and rising unemployment.

WWI interrupted in the gold standard and currencies were valued at whatever each country wanted to set it at. Some tried a return to the gold standard – some floated their currencies – the USA had a floating exchange rate in 1945 before deciding to go with the Bretton Woods System in 1946.

After the WWII (where countries abandoned the gold standard) Western countries formed the International Monetary Fund and created the Bretton Woods System.

This was a system of fixed exchange rates. Rather than convert directly to gold, countries converted their currencies to US dollars and the US government would convert $USD35 to an ounce of gold.

This was the nominal anchor for an exchange rate system. Countries would then build up USD reserves. If running trade deficits, they would intervene in foreign exchange markets to ensure their currency remained at the agreed parity (running down US dollar reserves) Other options would be to reduce imports (usually via tax cuts/decreased public expenditure to cut spending), increase exports (a loss of a real good or service) or alter monetary policy (interest rates) to attract foreign investment.

Monterey policy was about helping target the agreed exchange parity. It meant fiscal policy (in contrast to a fiat currency) was more restricted.

The fixed exchange rate system however rendered fiscal policy relatively restricted because monetary policy had to target the exchange parity. If the exchange rate was under attack (perhaps because of a balance of payments deficit) which would manifest as an excess supply of the currency in the foreign exchange markets, then the central bank had to intervene and buy up the local currency with its reserves of foreign currency (principally $USDs).

This meant that the domestic economy would contract (as the money supply fell) and unemployment would rise. Further, the stock of $USD reserves held by any particular bank was finite and so countries with weak trading positions were always subject to a recessionary bias in order to defend the agreed exchange parities. The system was politically difficult to maintain because of the social instability arising from unemployment.

So if fiscal policy was used too aggressively to reduce unemployment, it would invoke a monetary contraction to defend the exchange rate as imports rose in response to the rising national income levels engendered by the fiscal expansion. Ultimately, the primacy of monetary policy ruled because countries were bound by the Bretton Woods agreement to maintain the exchange rate parities. They could revalue or devalue (once off realignments) but this was frowned upon and not common.

Let’s take a step back in time and look at the history of The Bank of England. This was the world’s first central bank. Created in 1694 . The BoE website says

The Bank of England began as a private bank that would act as a banker to the Government. It was primarily founded to fund the war effort against France. The King and Queen of the time, William and Mary, were two of the original stockholders.

One could make the assumption the reason for private bankers holding shares in that original entity was to profit every time the government spent. There would be an accounting arrangement whereby the Treasury issued gilts (we call them bonds, treasuries or securities) the BoE would hand over £ and the bankers in turn would ‘own’ the government debt collecting the repayments. The bank was always governed under Government legislation and it was nationalised (removing the private stock holders) in 1946.

Pre-1844 any private bank could issue their own banknotes. Customers would deposit gold in a private bank and receive a ‘note’ that specified the amount. It was until 1725 that the BoE began to issue their own partially notes for amounts of £20 and upwards. These partially printed notes increased in denominations of £10, up to £90 and a bank cashier could increase the value of the note in writing by a maximum of £9 19s 11d

For the uninformed there were 12d to a shilling and 20s to the pound. You could further divide pence into farthings and there were 4 farthings to the pence. For the sake of staging it the (d) symbol for pence comes from the Roman ‘denarius’ a coin used in the Roman Empire.

Up until 1844 private banks had the ability to issue their own notes. The Bank of England began to open its own branches in 1826 as a result of banking crisis in the 1820’s that saw many country and provincial banks fail. The BoE website states:

One of the main reasons for establishing branch banks was to enable us to take further control of the banknote circulation, in order to prevent another crisis.

In 1844 (the formalisation of the gold standard) the UK Parliament introduced The Bank Charter Act which formalised the issuance of banknotes in the UK. It started to place restrictions on private banks issuing their own notes and stopped new banks from issuing their own notes.

In 1931 the BoE suspended the the Gold standard as confidence collapsed as a result of the depression, the Bank lost much of its reserves. The simplest way to spend when you don’t have gold in a currency system backed by gold is to remove the gold standard.

Governments that issue their own currency have always been able to finance themselves, even under a gold standard. Over the period of WWI the BoE issued war bonds to ‘finance’ the war. The public didn’t buy enough war bonds and the BoE used its own gold reserves to purchase treasury war bonds. I suppose this was to remain the rouse that governments are ‘borrowing’

In January 1915, the Treasury prohibited the issue of any new private securities without clearance, and UK investors were banned from buying most new securities (Morgan (1952)).  As the war dragged on, and capital became increasingly crucial to the Allies, the net would tighten further. And this episode was to be the first of several instances during the war where the Bank used its own reserves to provide needed capital.

Over the period 1797 – 1821 the UK entered a period known as ‘The Restriction’ As a result of the panic over the war there was a rush on withdrawals of gold and the BoE reserves depleted by £14 million. They suspended the convertibility of gold as they entered a war with France.

To try to preserve the already depleted gold reserves, the Prime Minster, William Pitt the Younger, placed a Privy Council Order on the Bank of England, ordering it to stop paying notes in gold.

The power of the state by legislation ended a system that restricted supply of currency to gold and by legislative fiat they had a free floating exchange rate giving them the capability to invest in their productive capacity. In this case to fund war efforts against Napoleon.

A fiat currency is a currency that a government issues is not convertible (to gold) and floats it on foreign exchange markets.

The float allows a government to target domestic policies such as full employment without the need to worry about ensuring the exchange rate remains at an agreed parity. It means rather than needing to find foreign currency to purchase back its own currency to defend the exchange rate, it is the exchange rate that takes the hit. It means it doesn’t need to ensure gold reserves to the currency in circulation.

The modern fiat currencies began when Nixon ended the Bretton Woods System in 1971 and no longer promised gold in exchange for US dollars. Australia floated its dollar in 1983.

You can appreciate that under previous regimes like the gold standard, taxation ensured the spending the government did was offset to ensure the currency in circulation was in line with the supply of gold. Under a fiat currency the obligation to watch a gold supply is no longer there. The government can purchase whatever is for sale in the currency it issues. There is no need to find gold.

These types of monetary regimes are different. There is no point applying ‘gold-standard/fixed exchange rate’ thinking to a modern day fiat currency. Under a fiat currency a governments limit to spending is limited by the available real resources. There is no need to defend an exchange rate or maintain a gold supply.


Over the 19th century The British Government (through its agent the BoE) started to crack down on private note issuance (under a gold standard) to stop prevent financial crisis. Similar things where done in the USA and Australia to ensure ‘integrity’ of the financial system. It was the nation state that held power (and still does) not the financial sector and private bankers.

Australia used its wartime powers to establish a central bank and forced financial institues to hold exchange settlement accounts with the Commonwealth Bank (and in 1959 handed the role over the newly created Reserve Bank of Australia) This allowed the Commonwealth Government to have control of monetary policy (the overnight interest rate).

Broadly speaking we can divide monetary systems into two types

  1. Gold standard/fixed exchange rates – where governments promise a commodity (such as gold) for a fixed value or they agree to maintain a particular exchange rate. These systems place institutional restrictions on governments spending because they have agreed or promised gold or a foreign currency in exchange for their currency of issue.
  2. Fiat currencies – these allow governments to spend up to the productive capacity of the economy.

Today treasury departments have accounts with their central bank. There is usually an institutionalised accounting arrangement where by when the government taxes the equivalent tax collection is marked up in the ‘offical account’ if the account is short a department within treasury will auction bonds to make up the difference between what it has taxed and what it has spent. However, bonds can only be purchased with reserves which are the result of previous deficits.

The flow (deficit) is then represented as a stock (debt). Under current institutionalised arrangements you can view the debt as every dollar that has been spent and not taxed back. It is the savings of the non-government sector.

The British government through this crisis has done away with the bond market and have used Ways and Means facility (W&M)

The Ways and Means (W&M) facility functions as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.

Sovereign currency issuing governments would all have overdraft facilities with their central banks. But why go through the rouse of pretending a currency issuer needs to find funds. Combine the operations of the central bank and treasury and credit the relevant bank account and do away with the bond market all together. All reserves within the financial system are a result of government deficit spending as it is. Why hand out corporate welfare?

Hopefully this little bit of history can help you understand how different currency systems operate and see that the a currency issuing Government can do away with the bond market all together.

© Jengis 2020

The Mythology of Printing Money Part II

This is a follow up from yesterday’s post and aims to dispel the myth of the term ‘printing money’ and the orthodox understanding of inflation. The end looks at what happened in Venezuela and Zimbabwe and identifies the cause of hyperinflation as minimal productive capacity and minimal capacity to purchase imported products. They are supply side constraints and you can’t purchase things you can’t make or have access to!

In part 1 The Mythology of Printing Money we covered how the term ‘printing money’ doesn’t apply to any spending operation in a fiat currency, looked at how all Federal Government spending was an appropriation bill and the operations of treasury and the central bank marking up an account. You may also wish to read the prequel in this series How loans create deposits and why we should have public banking…

All spending by the currency issuer can be considered new currency. This can be a difficult concept to wrap your ahead around at first. You need to break the myth that a government is like a household. It is not. It is an issuer of the currency and can be considered more like a scorekeeper.

When you are watching the football the umpire gives an instruction to mark the scores up when a try is scored. Theses ‘points’ don’t come from anywhere, they are keystroked into existence. The deduction of the points scored don’t give the umpire an ability to award more points.

It can come as a shock when someone hears for the first time ‘taxes don’t fund expenditure’ Please read these posts.
1. Money is a creature of the State
2. The Story of Money

The purposes of bond issuance (Government Debt) isn’t too ‘fund’ expenditure but is used as a tool for liquidity management. The RBA needs to ensure there is sufficient liquidity in the Exchange Settlement Accounts so Authorised Deposit Taking Institutes can pay each other at the end of each day. As banks create loans, they need to be able to pay each other. This is what they use their ESAs for. The image below shows how bond issuance (called Australian Government Securities) move reserves in the system from ESA to securities accounts.

  1. Governments spend by marking up the appropriate account
  2. Bonds are issued voluntarily to match deficit spending changing the portfolio mixture. 
  3. The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other. (see image above)
  4. The RBA uses a corridor system to defend an interest rate.

The RBA from 20 March has embarked on Quantitative Easing (QE) – sometimes this is called ‘printing’ money. In the image above we can see when treasury issues AGS it takes reserves from ESAs and places them in AGS accounts. There is what is called a primary bond market. There is a list of approved ADIs that can participate in this first round of issuance to purchase AGS and they can then trade them in what is called the secondary bond market. It’s important to note that QE is the RBA specifying a yield on a AGS maturity. You purchase AGS for a specified amount if time. For example a three year maturity. As the demand for AGS increases it raises the price and lowers the yield.

QE undermines the target rate when it chooses a particular maturity, in this case three years and purchases as many AGS as necessary to meet its target, which is currently 0.25%, its purchases increase reserves in ESAs and the target rate falls until it hits zero. If you’ve understood the corridor system, the current floor rate of reserves is 0.1% so the QE program undermines the target cash rate. *

To date since the 20 March the RBA has bought $25,000,000,000 (that is billion) of AGS it holds on its book. Upon maturity of those AGS, the RBA deletes funds from the OPA. *

There is often a mistaken belief that banks loan out reserves. Previously during the GFC we had all sorts of predictions of inflation taking off, banks increasing their lending, predictions of additional Government spending causing inflation and none of that came to fruition. This is because orthodox economics prescribes to the loanable funds theory that states banks loan from a limited pool of savings and as governments increase their expenditure it raises rates and increases the price which leads to inflation. This is not what happens, Government spending adds to reserves, decreasing the interest rate and banks create deposits when they loan to credit worthy customers.

You can see Alan Kohler on ABC News come to that realisation. The intro to the segment starts with ‘Is it something we can afford [stimulus]? and where does all the money come from?’ and in his concluding remarks Kohler says ‘What Dr. Lowe won’t be keen to do is give politicians the idea there’s a magic pudding – of printed money. There sort of is, just don’t tell politicians’

There you have it, there are no printing presses in any of that.

  1. Treasury deficit spends adding to reserve levels
  2. AGS are issued (voluntarily) to match the deficit
  3. RBA uses its domestic market operations to ensure there is liquidity
  4. RBA is currently purchasing AGS at three year maturites to lower the yield. The debt is now owned by the Government.

It is simpler to simply deficit spend and ignore all the accounting practices that are there in issuing AGS. They serve as a mechanism to deliver unearned income to already wealthy investors. These are the very same people that object to increases in welfare payments and public expenditure in general.

Disappointedly, I heard this radio interview on Radio National fear mongering around debt and deficit with language like ‘we’ve gone from balanced budgets to a blowout in debt and deficits’ and ‘will see the budget deficits balloon…’ This is language the invokes an unnecessary fear and that government spending at some point needs to rein its spending in or we all suffer. This crisis shows we always need government spending.

The interview continues with a nonsense analogy that previous generations had to pay for WWII spending. No they didn’t. There was no scarcity of jobs after the war. Governments used their fiscal positions to maintain full employment and seldom did it rise above 2%. Menzies almost lost an election in the 60’s and was forced to raise the deficit and bring unemployment below 2 per cent.

At the end of the interview Fran Kelly and senior business correspondent Sheryle Bagwell discuss the Governments QE program and how the RBA is purchasing Government bonds. They very clearly make the distinction that they are purchasing bonds on the secondary market and not directly from the Government [treasury]

‘If The RBA brought them directly that would be known as helicopter money, it would basically be firing up the printing presses to fund government deficits…lazy governments could really get used to that’

  1. Governments don’t fund deficits they are a result of spending more than taxation.
  2. Dollar for dollar Government Deficits have to match the non-government surplus.
  3. Whether the RBA purchases bonds on the primary or secondary market, the end result is the same. The bonds sit on the RBA balance sheet and at maturity treasury instructs the RBA to pay itself the face value and interest.
  4. The reason the RBA purchases bonds on the secondary market is that it allows investors to purchase bonds on the primary market and then make a capital gain when that bond is then brought by the RBA.

Stop it with the nonsense printing money analogy! There are no printing presses, there are no helicopters, the government is continuing to spend in the same way it always has, it instructs the central bank to mark up the relevant bank account after an appropriation bill has passed.

Inflation is excess spending (from any source) in excess of the productive capacity of the economy and the economy’s ability to absorb the additional spending. Currency issuing governments have an no financial constraint (they never need to find an income) but they are restricted by what is available for sale.

Yesterday I was involved in this Twitter exchange with Professor of economics Richard Holden from the UNSW.

The orthodoxy usually talks about deficit spending but budget balancing over the cycle. Holden in his tweet states ‘We can borrow at almost zero interest’

The Government never borrows, it spends adding to reserve levels of ESAs and bond issuance shifts those reserves from that account to securities account. The difference between that and a term deposit is that you can buy and sell access to those securities accounts.

If Holden understood that he wouldn’t feel the need to then respond back with the typical fear mongering around inflation ‘tell that to Venezuela or Zimbabwe‘ invoking hyperinflation fear!

Japan, The USA, The European Central Bank and now Australia has been purchasing bonds off the secondary market (QE) and holding treasury bonds on their books, paying the interest to themselves and there has been no outbreak of inflation.

Amongst the orthodoxy they’ll make the case prescribing to the Quantity Theory of Money. ‘the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.’

The federal reserve (USAs central bank) says

‘The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.

Looking at the data for Recent balance sheet trends and the Selected liabilities at the Federal Reserve they note

On the liabilities side of the Federal Reserve’s Balance sheer, the amount of currency outstanding has continued to rise gradually, but reserve balances (deposits of depository institutions) have increased dramatically relative to the prior financial crisis’

The orange line is the increase in deposits of financial institutions in the US equivalent of exchange settlement accounts. Clearly, there has been no great inflationary outbreak, at least never in my life time. Since the GFC the Federal Reserve has embarked on several QE programs the latest of which has seen their purchases of bonds increase from $US700bn to an unlimited number of bonds. This swaps an asset of a bank (the bond) into currency in its exchange account and the bond is held with the central bank.

So we can put increases in the money supply, ‘printing money’ and an inflation outbreak to rest. It’s not a thing.

There are other factors that contribute to inflation and even hyperinflation. The first step is understanding what economist call ‘cost-push’ inflation.

This differs to the demand side in that it is the price level of a good or services increases either via an imported price (something the national government can’t control) or domestically via a fall in production and productive capacity.

Fadhel Kaboub at the Global Institute for Sustainable Prosperity in the linked news article below says

MMT points to a different primary cause of inflation in developing countries: not domestic spending, but foreign debt and a resulting lack of “monetary sovereignty.”

Why Government Spending Can’t Turn the U.S. Into Venezuela, In these Times, 7 January 2019;

A country that is monetarily sovereign issues its own currency and floats it on an exchange rate.

There are some countries which use a currency they don’t issue, such as the eurozone countries and there are countries that fix their exchange rates to maintain a parity to another currency.

Countries that don’t issue their own currency, like the eurozone, are reliant on taxes and bond markets to fund public expenditure.

Countries that fix their exchange rate have to ensure foreign currency reserves to maintain the peg. Countries then need to obtain foreign currency either by purchasing it on foreign exchange markets (FOREX) using their own currency or through exporting goods and services.

Provided spending doesn’t outpace an economies productive capacity you won’t have a period of accelerating inflation.

Any country that issues its own currency can purchase what is for sale in the currency it issues. This includes idle labour. A country that issues its own currency always chooses the level of unemployment.

That doesn’t mean because a country at full employment is materially prosperous. You need to consider the skills of the labour force, the raw materials it can access and what it is able to produce.

For a country that relies on imported products, they are reliant on their exchange rate or exports to be able to obtain foreign currency and purchase the goods and services they are unable to produce domestically.

Exports are a loss of a good or service, it is something a nation exchanges for a foreign currency, it means unless you are able to produce an excess of that product you are depriving your citizens of the use and instead giving it to foreigners.

For developing countries, the problem begins with trade deficits and resulting debt owed in foreign currencies.

Those deficits are the product of fundamental economic shortcomings, themselves often a legacy of colonial rule. Postcolonial countries are typically unable to produce enough food and energy to meet domestic need, and they face structural industrial and technological deficiencies. Because of this, they must import food and energy, along with essential manufacturing inputs. For example, Venezuela lacks refining capacity, so—while it exports crude oil—it must import more expensive refined oil, contributing to trade deficits.

Importing more than they export causes these countries’ currencies to depreciate relative to major currencies. With a weaker currency, new imports (like food, fuel and medicine) become relatively more expensive. This imbalance is the real driver of inflation, and often of social and political unrest.

The International Monetary Fund (IMF) historically steps in at this point with emergency loans coupled with painful austerity measures. To get out of IMF conditions, even progressive policymakers typically prioritize acquiring foreign currency reserves in order to honor external debt payments. They promote tourism (tourists bring foreign currency) and design agricultural and manufacturing policies to support export industries. Meanwhile, industries that would build self-sufficiency (and thus fix the trade imbalance), like food crops for domestic consumption, receive little government support. All of this decreases self-sufficiency and reinforces the dependence on foreign goods that caused the debt in the first place.

Why Government Spending Can’t Turn the U.S. Into Venezuela, In these Times, 7 January 2019;

Venezuela had external debt denominated in US dollars and little productive capacity to satisfy the needs of its population. It has nothing to do with Government spending or ‘printing money’ but sanctions imposed upon it that reduce self-sufficiency. A more just world would cancel debt denominated in an external country, aid the country in building productive capacity to be self-sufficient and have the US purchase Venezuelan bolívar on FOREX markets to maintain the currency between a certain range so they can purchase imported products.

Professor Bill Mitchell has detailed post on hyperinflation in Zimbabwe where he identifies one of the major causes of the inflationary outbreak to a fall in the nations productive capacity. In Zimbabwe’s case their agricultural production, that also happened to be one of the nations largest employers.

The problems came after 2000 when Mugabe introduced land reforms to speed up the process of equality. It is a vexed issue really – the reaction to the stark inequality was understandable but not very sensible in terms of maintaining an economy that could continue to grow and produce at reasonably high levels of output and employment.

The revolutionary fighters that gained Zimbabwe’s freedom from the colonial masters were allowed to just take over productive, white-owned commercial farms which had hitherto fed the population and was the largest employer. So the land reforms were in my view not well implemented but correctly motivated.

The output of the nation was decimated and it saw soaring unemployment levels, to over 80%. How do you reduce the demand for food without forcing people to remain malnourished and even starve?

The central bank was using its foreign reserves to purchase food supply, limiting the capacity of other industries like manufacturing on FOREX markets to purchase foreign currency and ending up in the situation where they couldn’t operate their plants. Mitchell goes on

The situation then compounded as other other infrastructure was trashed and the constraints flowed through the supply-chain. For example, the National Railways of Zimbabwe (NRZ) has decayed to the point the capacity to transport its mining export output has fallen substantially. In 2007, there was a 57 percent decline in export mineral shipments (see Financial Gazette for various reports etc).

Manufacturing was also roped into the malaise. The Confederation of Zimbabwe Industries (CZI) publishes various statistics which report on manufacturing capacity and performance. Manufacturing output fell by 29 per cent in 2005, 18 per cent in 2006 and 28 per cent in 2007. In 2007, only 18.9 per cent of Zimbabwe’s industrial capacity was being used. This reflected a range of things including raw material shortages. But overall, the manufacturers blamed the central bank for stalling their access to foreign exchange which is needed to buy imported raw materials etc.

The Reserve Bank of Zimbabwe is using foreign reserves to import food. So you see the causality chain – trash your domestic food supply and then have to rely on imported food, which in turn, squeezes importers of raw materials who cannot get access to foreign exchange. So not only has the agricultural capacity been destroyed, what manufacturing capacity the economy had is being barely utilised.

A country like Australia has none of these issues. Fears of hyperinflation are unwarranted. Mitchell describes the situation in Zimbabwe as a result of a supply side collapse, a 45% fall in agricultural capacity, difficulty in obtaining imported materials forcing manufacturing to lay idle and compounding that with a Government interested in spending for political favours while your nations productive capacity has collapsed

“Further, the response of the government to buy political favours by increasing its net spending without adding to productive capacity was always going to generate inflation and then hyperinflation. “


  1. Money is a creature of the state. All Government spending by a monetary sovereign is an appropriation bill through the relevant legislature.
  2. Tax liabilities serve the purpose of creating a demand for an otherwise useless currency.
  3. Government debt is issued after the fact a currency issuer has spent. It moves currency from reserves into a securities account.
  4. Deficits are a result of spending (and aren’t funded) and have a corresponding surplus in the non-government sector. This is an accounting rule and simple 7th grade algebra.
  5. Printing money – referred to by the orthodoxy as the central bank purchasing bonds from the treasury (QE) is not inflationary. Increases in the money supply (Quantity Theory of Money) have not resulted in any outbreak of inflation despite governments embarking on these since the Global Financial Crisis.
  6. Government deficits pushing rates up (Loanable funds theory) and contributing to rising interest rates and therefore costs and inflation is not a thing. Governments have run deficits, larger ones since the GFC and inflation has not happened. That is because loans create deposits.
  7. Hyper-inflationary episodes in Zimbabwe and Venezuela are supply side collapses and those nations had little domestic productive capacity, had debt in foreign currencies, depreciating exchange rates (where they couldn’t purchase imports) and no ability to obtain foreign currency without adhering into bullshit IMF rules to loan them foreign currency under conditions that impose austerity by mandating selling public assets to private corporations and aiming for budget surpluses.

Hearing economists peddle misunderstandings on the way the monetary system functions, like the many I’ve documented over these lasts two posts, continues to reinforce a neoliberal paradigm that will undermine progressive aims.

We shouldn’t have to moderate demands based on a misunderstanding that we need to find the dollars.

Currency issuing governments can always purchase what is for sale in the currency they issue and deploy those resources for a public purpose.

We have seen this during the covid-19 crisis the Australian Government double the rate of the JobSeeker payment (despite 25 years from both parties claiming it was unaffordable), they have temporarily nationalised private hospitals with a $1.3bn takeover, they have made childcare free. It is never an issue of finding the money but whether we have the resources to create the public services we desire.

Old paradigms take time to shift and you can see the economic orthodoxy feeling threatened. Richard Holden, despite pushing progressive aims and goals, is stuck under an economic paradigm that has no empirical evidence.

He felt the need to respond to an amateur that questioned where do financial institutes obtain Australian dollars to purchase Australian Government Securities? and brought up arguments of hyperinflation by referencing Venezuela and Zimbabwe.

I think that is a sign that the orthodoxy knows it is losing power. It is a choice to make that paradigm shift, admit your understanding was wrong and use MMT as a lens to advocate for your values.

*Edit: The initial publication of this made an error and said upon maturity of AGS the RBA credited the OPA. It is in fact upon maturity, the RBA deletes funds from the OPA. These are a liability of the RBA. and their deletion matches the deletion of the bonds, which are assets.

It was also picked up that there was bad phrasing and it was clarified that QE drives rates to zero (or the current floor which is 0.1% in Australia) and this has also been edited. The initial publication mistakenly said the current target rate was zero. It is not, it is 0.25%

Many thanks to Steven Hail for picking up the errors.

© Jengis 2020

The Mythology of Printing Money

Since the beginning of the corona virus Governments around the world have began to spend huge sums without a call from anyone on ‘How are you going to pay for it?’ In a recent 730 interview the reporter asked the question on how a sovereign currency issuing government would ‘pay for’ its spending down the track.

LEIGH SALES:  Has any thought been given yet as to how Australia will ultimately pay for this or is that to be worked out down the track?

JOSH FRYDENBERG:  This will be paid back for years to come. There’s no secret in that and of course, we will enter into discussions with the credit rating agencies over due course.$130-billion-wage-subsidy/12104458

When I’ve publicly stated currency issuing governments have no intrinsic financial constraint the retort back is usually something like ‘if you print money you just get inflation’

This post will look at the way in which currency issuing governments spend, how ‘printing money’ does not apply to any spending operation, look at what government debt is.

The first thing to note is that there is a difference between a currency issuer and a currency user.

  1. The Australian Government is a currency issuer. It is a monopolist of the Australian dollar – It faces no insolvency risk
  2. As a monopolist over the currency it always has the capacity to spend (that is not a call for unlimited spending)
  3. Regardless of past deficits or surpluses the Australian Government spends in the same way every time. – There is an appropriation bill that passes through the legislature, Treasury instructs the Australian Office of Financial Management to give the Reserve Bank an instruction to credit the relevant bank account(s)

The very concept of saving for an issuer of a currency is ridiculous. Savings are the act of forgoing current expenditure and are used to spend at a later date. When you issue a currency you always have the ability to spend.

We can conceptualise the process from the above figure. Like you have an account with your bank, your bank referred to as, Authorised Deposit Taking Institute (ADI) has an account with the Reserve Bank of Australia. They care called Exchange Settlement Accounts (ESA). All Federal Government spending marks up reserve levels of ADIs and those ADIs credit the relevant account holder.

Taxation has the opposite effect. Demand deposits decline and Reserve levels also decline. It means less spending power for currency users.

There are institutionalised arrangements where The Australian Government holds an Offical Public Account with the RBA, however this is merely an accounting arrangement and the numbers within the OPA are not included in the money supply. The image below is a screenshot from the notes of the RBAs data on the financial aggregates of the Australian economy.

There are two options for a Government to adjust aggregate spending levels. Fiscal Policy (Spending and Taxing) and Monetary Policy (Interest Rates)

We have seen how Government spending adds to reserve levels and taxation does the opposite. What Government spending also does is effect the RBAs target rate. This is the interest rate that you hear about on the first Tuesday of every month and it is the rate ‘targeted’ for ADIs to loan to each other using their Exchange Settlement Accounts (ESA)

One of the purposes of bond issuance is to defend an interest rate. As noted above all Federal Government spending increases reserves with ADIs.

As government spending adds to reserves and increases their level it pushes interest rates down and as taxation removes reserves it pushes rates up.

Obviously fiscal policy can not be used to defend a particular target rate as it would cause all sorts of havoc. It is the RBAs job to ensure the levels of reserves are right so banks lend to each other at the target rate.

Bonds are used to drain and add liquidity. When a bond is issued (sold) it drains reserves. It is the equivalent of an ADI moving dollars from their ESA (The account used to pay other ADIs) to a securities account, an account which earns interest.

The opposite happens when bonds are purchased by the RBA. It moves dollars from the ADIs security account to their ESA. Bond issuance doesn’t alter the supply of funds but merely the portfolio mix.

The activities of Treasury and The RBA need to be very closely co-ordinated to ensure the payment systems functions.

The RBA needs to ensure sufficient reserve levels so ADIs can pay each other. Remember loans create deposits and spending and taxing by the treasury can have huge fluctuations in the levels of reserves.

Rather than relying on bond issuance to ensure a particular target rate is achieved the RBA uses what is called the corridor system. You can watch this video of Katherine from the Domestic Market Operations department at the RBA to understand how it works. Thank you Katherine.

Once you take into consideration the corridor system, bond issuance becomes about liquidity management and ensuring there are sufficient reserves so ADIs can pay each other and our payment system functions.

The RBA will always have an option for an ADI to ensure their ESAs are positive. If they are short of reserves they can borrow from the ‘penalty window’. This is where the RBA acts as a Lender of Last Resort and loans the required reserves to the ADI.

In no way does the bond issuance ‘fund’ the ability of a currency issuer. There isn’t really a reason for treasury to match deficit spending with bonds either. It just means the RBA may have to enter into more repurchase agreements to ensure there are sufficient reserves in the system. Because bond issuance moves dollars into securities accounts, draining reserves, the RBA then enters into what is called repurchase agreements (repos) where it issues bonds and then buys them back the next day with an interest rate to add to reserve levels.

What does all this have to do with ‘printing’ money. I am never too sure what people mean when they use this term.

  1. Governments spend by marking up the appropriate account
  2. Bonds are issued voluntarily to match deficit spending changing the portfolio mixture.
  3. The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other.
  4. The RBA uses a corridor system to defend an interest rate.

The very concept of borrowing for a currency issuer or using ‘this record period of low rates’ to invest is non-sensical. There is no borrowing or debt in the same way it applies to a household. Deficit spending adds to reserves and that deficit spending is what gives ADIs the ability to purchase bonds and that is what we refer to as Government debt!

In The Canberra Times Adam Triggs wrote an article Before anyone asks: no, Australia does not have a debt problem. It starts with an incorrect understanding of macro and uses neoliberal or fake knowledge.

The article states that the increased costs of government spending in normal times don’t apply to these pandemic times. That’s ridiculous, there is no real cost to government spending, it marks up accounts using a computer. Costs are real resources. Environmental damage, loss of habitat, climate change, individual hardships, unemployment, mental and physical health etc…

The author outlines three reasons in the risk of this ‘pandemic’ spending.

“The first is the potential for increased government spending to “crowd out” the private sector. When governments run budget deficits they are borrowing money from investors, money which is no longer going to other worthy investments. Increased demand on the limited pool of savings, in normal times, means higher interest rates”

The above quote is straight out of the loanable funds theory that states there is a limited pool of savings that banks loan from and Government spending in excess of taxation then uses that limited pool and pushes rates up. That is simply not true. I outlined in a previous post on how loans create deposits and above have described the process of how the RBA ensures sufficient reserves to ensure ADIs have sufficient reserves to pay each other. The loanable funds theory is on of those neoliberal myths that is used to demonise public spending. I like to use this thing called observation of reality. We can very clearly see through the GFC and now this crisis, deficit spending has increased and we have record low interest rates. You can see central banks around the world set interest rates every month, there is no natural reason they will suddenly increase and governments will be powerless to stop it.

“The second potential cost of increased government spending is the future cost of paying interest on that debt.

The ‘debt’ are securities account that ADIs hold at the RBA. If you don’t like Government debt, don’t issue it.

Furthermore, the RBA announced it will engage in Quantitate Easing – a process where it chooses a particular treasury maturity (say three year bonds) chooses a yield it desires and begins purchasing those bonds from the market. Central Banks around the world have engaged in this practice since the GFC. Many central banks now hold treasury bonds. It is the treasury choosing to issue a bond, an investor buys that bond, it is then purchased by the central bank (with a capital gain for the investor) and the interest payment is then paid from treasury to the central bank who then credits the treasury account.

The third cost of increased government spending is that it can be unsustainable (meaning it can cause problems if that level of spending continues) or can destabilise financial markets.

Government spending can never become unsustainable. It is a currency issuer and literally as infinite financial capacity. Why are financial markets an indicator of sustainability? Fiscal policy shouldn’t be there to appease financial markets, who desire less public expenditure and the ability to make more profits, it should be there to ensure our own well being. You judge fiscal policy based on how well the bottom of the income spectrum is doing and whether we have our desired levels of public services and are reaching our goals to mitigate against climate change.


It is pathetic that the vast majority of financial journalists/commentators get the very fundamentals of the way government spending works wrong.

Adam Triggs in The Canberra Times, Leigh Sales in her interview with the Treasurer, Jessica Irvine in the Sydney Morning Herald who said “These surplus funds can then be used to pay down any existing debt.,”

No, currency issuers can always spend regardless of past deficits or surpluses. Government Debt are bonds purchased by Financial institutions who obtain Australian dollars from Federal Government deficit spending. Surpluses are not savings. It is the government spending less than taxing and removing reserves.

Lenore Taylor of The Guardian who wrote “The country will be deeply in debt, as will many households.The Taylor article makes an argument “Having seen the life-saving benefit of our public health system, there will surely be enormous pressure to fund it better in the future.” I agree with the overall spirit of the article. However, we won’t achieve greater levels of public services and spending, if we continue to frame economics using a neoliberal perspective.

For an accurate discussion of how our monetary system operates listen to this discussion between financial journalist, Alan Kohler and Emeritus Professor Bill Mitchell.

In term of the term ‘printing money’. It doesn’t apply to any spending operation.

  1. All spending by a currency issuer is an authorisation bill through the relevant legislature.
  2. There is then an instruction from somewhere within treasury to the central bank to mark up the relevant account.
  3. ‘Government debt’ or treasury bonds are then issued.
  4. Taxes are there to remove spending power and create non-inflationary space for public expenditure as well as creating a demand for a currency. See The Story of Money and Money is a creature of The State

© Jengis 2020