In my understanding of what Modern Monetary Theory is and observing the public discourse as journalist attempt to explain MMT, I am encountering the narratives and metaphors I had to break in order to appreciate how MMT helps transform the political debate.
This article by Ross Gittins is a good example. The article starts out as follows
Many people are alarmed by “modern monetary theory”, the seemingly radical idea that the government should cover its budget deficit simply by creating money. But in his new book, Reset, Professor Ross Garnaut, one of our most respected economists, has joined the young turks.
I wrote in How the Mainstream are Trying to Stay Relevant how Ross Garnaut still discusses ‘budgets’ in terms of needing to be funded.
With an understanding of the difference between a currency issuer and a currency user and the institutionalised arrangements of how government spending works – it should lead an economist to understand fiscal deficits are residual. That is they are an outcome and shouldn’t be the target of a particular fiscal position.
The currency issuer spends via an appropriation bill and marks up exchange settlement accounts. These are the accounts Authorised Deposit Taking Institutes (Financial Institutions) hold with the Reserve Bank of Australia. Given that logic, spending has to precede taxation and bond issuance.
When treasury who is authorised to use fiscal policy (spending and taxes) deficit spends (spends more than it collects in taxes) it leads to increasing reserves in the exchange settlement accounts. It is then a choice to issue Australian Government Securities (what we refer to as government debt). This drains the exchange settlement accounts and creates a ‘securities account’. These can be traded and earn an interest paid for via appropriation bills created through parliament. There is no reason (other than political) the Australian government will default on any payment denominated in Australian dollars.
This varied under a gold standard or fixed exchange rate where spending required governments to fix the money supply in relation to a quantum of a precious metal. In Australia Prior to 1945 note issuance required gold reserves or British sovereign of 25 percent of the note issue. Then under the Bretton-Woods system of fixed exchange rates (Post 1945) a governments priority was to defend its currency in relation to a particular exchange rate. Usually the US dollar which was then exchangeable for gold.
Policy settings may have required governments to cut spending as imports rose to reduce imports and avoid using their foreign currency reserves to defend the agreed exchange parity. The cut to government spending creates unemployment and this led to increasing politically instability and the demise of the Bretton-Woods system. You can read about the shift in this article in Vol. 91, No. 4, A Cause for Celebration: A Paradigm Shift in Macroeconomics is Underway (OCT–DEC 2020), pp. 18-29 (12 pages)
By now we should be grasping The Australian Government is a monopolist of the Australian dollar. It can always spend in Australian dollars. Irrespective of past fiscal positions or levels of ‘debt’ (which is really just corporate welfare as it is akin to a savings account for rich people) does not impede it spending now or in the future. Never.
The idea that somehow deficits are dangerous or ‘debt’ will need to be paid back rely on a myth that a government is like a household that must finance its expenditure by taxing, borrowing. Neither taxes nor issuance of bonds finances the Australian governments ability to spend. Rather under our current fiat system of monetary operations the spending creates the reserves that enables citizens to pay taxes.
All of that describes the intrinsic nature of how the Australian Government spends. There shouldn’t be any controversy about that. There are no values anybody holds by understanding the spending operations of the Australian government.
For reason that remain oblivious to me discussing the above has rooms full of awkward silence such as what happened on the latest episode of QandA where Luke McGregor articulated what I described above.
There will usually be an ‘economist’ that interrupts and admits ‘yes, governments don’t face insolvency but…’ and they bring out stories of;
- printing money and hyperinflation.
- rising interest rates and increasing cost of servicing government debt
- limited pools of funds for private investment as government spending ‘crowds out’ the available pool.
- Inflation if levels of unemployment are to fall below the natural accelerating inflation rate of unemployment (NAIRU)
When you grasp the functions of how government spending works under a fiat currency and the shift that happened from gold standard/fixed exchange rate – you can appreciate the term ‘printing money’ doesn’t apply to any spending operation. This used to refer to the operation where governments literally ‘printed’ notes in excess of the legislated gold reserves and ‘devalued’ the currency in respect to the amount of gold they would exchange for their own currencies. I describe in more detail in The Mythology of Printing Money Part II
Rising interest rate arguments links to what is called the Quantity Theory of Money. It is assumed there are a limited pool of funds and as governments deficit spend and compete for these funds it leaves less available funds for the private sector and drives up the interest rate and cost of servicing government debt.
That is nonsense. Central Banks all over the world now acknowledge bank loans create deposits. There are no limited ‘pools’ of funds that are competed for. The second part of the argument is that interest rates begin to rise and costs are passed on to households and businesses creating inflationary pressures.
What should be obvious to everybody is that the interest rate is a policy decision. The monetary policy committee of the Reserve Bank of Australia makes a decision on what the overnight cash rate (the rate banks pay each other) is. More recently they have been targeting the yields of Australian Government Securities and State and Territory bonds. The yield is rate of return on a financial investment – in this case government bonds. As the Reserve Bank as been purchasing bonds it increases the demand (and cost of the bond) and thus lowers the yield (interest earned over the life of the bond)
The financial markets have no power over central banks when they decide to do this. None. We’ve seen interest rates being held low since the financial crisis in Europe and the USA (and Japan for much longer) as well as more recently in Australia. Remember the issuance of these bonds for an entity that issues a currency is entirely voluntary. The issuer has to spend first and sell bonds that financial institutes obtain from deficit spending.
I won’t repeat NAIRU logic here but will direct you to how a Job Guarantee is a replacement for the NAIRU framework. We do not need unemployed people to be used to discipline the inflation rate.
If fiscal policy doesn’t have to balance and target a particular fiscal balance or debt to GDP ratio as there is no need to issue public debt, what should it target?
Once we break the myths of intergenerational debt, governments needing to borrow to invest and all the usual nonsense that assumes governments need to find revenue sources we ask what real goals should we as a society be targeting?
A starting point is understanding differences between non-monetary base and monetary based societies. In non-monetary based societies we have neither employment or unemployment. If you take an economics class propaganda shoved down you is that money evolved from barter
‘Money’ wasn’t created and injected into some well functioning ‘market’ rather it is a creature of the state. That is it is created via legislative capacity of the state. Taxes then have to serve a purpose other than funding.
“Historians of the African colonial experience have often remarked on the manner in which the European colonizers were able to establish new currencies, to give those currencies value, and to compel Africans to provide goods and services in exchange for those currencies.”Tcherneva, P., Monopoly Money: The State as a Price Setter, Oeconomics Volume V, winter 2002
Tcherneva cites Sticher (1985)
[In Malawi there was an] imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings].
Further evidence of taxation driving a currency can be found during the colonisation of Nyasaland.
“It is sometimes forgotten that the plantation sector in Nyasaland dates from as early as the 1890s. During the early years of colonial occupation, most officials shared the opinion of Sir Harry Johnston, the first Commissioner and Consul General, that “the one hope of this, country lies in plantation work and in the cultivation of coffee, tobacco, sugar, etc., for which cheap labour is necessary”.3 Some 800,000 acres were alienated to settlers in the Shire Highlands, the most fertile and densely populated area in the country; hut tax was introduced from 1891 as a means of introducing “the native labourer to the European capitalist”4 and coffee was grown with such success that in 1900 a thousand to exported worth 62,00 making Nyasaland the centre of European agricultural enterprise in Central Africa” (McCracken, 1982)McCracken, J.,Peasants Planters and The Colonial State: The Case of Malawi, 1905-1940; Journal of Eastern African Research & Development, Vol. 12, 1982, pp. 21-35
A simple way to think about the purpose of taxes is that the tax liability forces citizens to seek the currency to redeem the tax obligation. Thus anyone that has nothing of use to sell to the currency issuer is unemployed. The issuer then must employ those citizens so they can earn the currency to pay the tax. So unemployment is a political choice caused through insufficient government spending.
To summarise government spending happens first and intrinsically must be done before citizens are able to obtain the currency to pay the tax. One purpose of taxes is to ensure labourers as they seek employment to fulfil their tax obligations.
The many myths used to demonise public spending range from insolvency myths and fear mongering about rising interest rates (which are a policy choice) devalued currency (devalued in relation to what? $1 credit will always redeem $ tax liability) and fears of massive debts that future generations will need to pay off.
What really matters is our own well being. Ensuring everyone as access to healthcare and an education. Ensuring secure work for all and the ability to partake in our communities. We need to create work with meaning. We need to ensure affordable housing for all. We need to mitigate against climate change.
Government ‘budgets’ are statements about values. Our values determine how we should organise our societies and the institutions we create. These institutions with our labour set about to create the public services we desire.
Our wealth isn’t a series of abstract numbers in computers recorded in spreadsheets. It is our labour and what we are able to produce. That is our material well being.
As a nation we have enough real goods and services to provide for all. We need to ensure that everyone in our society as an opportunity to contribute. We should not be using a flawed paradigm of assuming we need to find money when we have millions of people with insufficient and exploitative work.