The ALP are not friends of the working class

I’ve been working on a project with UnionsNT strongertogethernt.com.au The last week has been foucsed on breaking down economic jargon and giving a decent analysis on the governments ‘budget’.

Anyone that has had some introduction to economics knows government budgets are not like households. MMT states the difference between a currency issuer and a currency user. The latter has to finance its expenditure while the former can always spend. That doesn’t mean it should always spend. Though its spending represents a socio-economic agenda.

MMT uses the sectoral balances as a tool to assess the context of the governmnets spending. The sectroal balances was developed by British post-keynesian economist Wynne Godley. The rule holds as a matter of accounting.

When assessing governmnet fiscal policy we need to look at whether spending in aggregate supports full employment and is meeting our desired social objectives. The image to the right shows the inflows (injections) into the private domestic sector and the outflows (leakages) that subtract from spending. Injections are Government Investment and Exports. Leakages are Taxes, Savings and Imports. If leakages are more than the injections the private domestic sector is in deficit.

Current Account

A nation like Australia commonly runs current account deficits. This is our exports – imports. Imports are foriegners saving Australian dollars. When we purchase a good from say the USA a currency exchange needs to happen first. An Australian entity changes an $AUD for a $USD and then hands over the $USD to purchase the desired good. The $AUD is then accounted for in the US Federal Reserves account at the Reserve Bank of Australia. That is why imports are foreigners desire to save $AUD. The process in the real world is vastly more complex but this is a simple explanation of how foreigners end up saving $AUD.

Government Spending

Governmnet deficit spending is the Australian government spending more than it taxes. Australia on average runs current account deficits of between 3-4% of GDP. If we in the private domestic sector desire to save overall the government deficit spending has to be larger than the current account deficit. That is just accounting.

Governmnet spending plays a significant role within our economy. (pictured above) It is the largest injection into the private domestic sector. As an issuer of the currency, it has the power to maintain spending in aggregate sufficient with full employment. Government deficits aren’t relevant in terms of future governments ability to spend. However, entities like businesses and households have to finance their expenditure. The fiscal position of the private domestic sector matters. I have graphed the sectoral balances based on treasury projections in their budget papers for the next 4 years.

The solid coloured lines are the results of the various sectors. The dotted lines are treasury projections. Except for the current account (red line) years, 24/25 and 25/26, which I have assumed the long term aveargage of 3.5%. Treasury does not predict those years. The red line is positive because a current account deficit is savings of Australian dollars non-residents (see above). The government deficit (green line) is an injection to the private domestic sector (blue line). While the media focuses on the governments fiscal position, which is irrelevant in terms of its ability to spend, it neglects what is happening with the balance of the private domestic sector.

In this neoliberal era it is ‘normal’ for the private domestic sector to be in deficit as the government pursues surplus. This policy objective is unsustainable as it deprives the non-governmnet sector of its ability to save and destroys the net financial assets, leaving the sector financially poorer. We can analyse the domestic sector further between the distribution of wages and profits. Though because we run current account deficits the Australian government needs to deficit spend if we want the private domestic sector to save overall. That is not a theory, it is a matter of accounting.

Further Analysis

I wrote a simple analysis of what is driving the inflationary pressures in the economy here. I’ll repeat the conclusion of what I said there.

Inflation is driven by price increases. Price increases are administered by those with enough power to raise prices. Take a simplistic economy where we have no new production. If corporations hike their prices by 6% and workers achieve a 6% wage increase there has been no change in the wage and profit share of the economy but prices have increased. What is currently happening is as production costs increase, those with enough power are able to pass on those costs.

What we are interested in is relativities between sectors. Inflation is redistributive. If someone is paying more, someone is receiving more. Our current inflation has nothing to do with wage rises or government spending. Our governments have enormous power (as currency issuers) to set domestic prices. It made childcare temporarily free over covid and we saw a fall in the consumer price index as a result of that decision.


Narratives that depoliticise current events that harm workers

Governments need to reduce deficit to save to build savings for the future.

This is one of the most recited points in relation to a governments budget. It is nonsensical. Savings are an act of forgoing current expenditure to spend at a later date. It does not apply to a currency issuer that can always spend. As shown above, as a matter of accounting, the government deficit equals the non-government sector income. We should question where it is spending and the distribution of that income but the notion it needs to save is irrelevant. It issues the currency!! Its fiscal policy should be determined as to whether it is meeting ouer desired socio-economic objectives and by how well the bottom of the income spectum are doing. Discussion around taxes should be around how we should redistrute income and wealth more fairly. A progressive position would be to tax unearned income (capital gains, rent, dividends et ceterea) at higher rate than waged labour. These are what we call economic rents and are extractive. The recipients of unearned income have not contributed to the output of that product and thus it is referred to as unearned income. i.e. They have not laboured to produce a good or service but still derive a financial benefit.

Global economic slowdown

Another reason citied is because of changing global economic ‘headwinds’. This is a term used in the budget papers. ‘Changing headwinds’ is a sailing terminology that refers to a turn in the weather for the worst. The current global circumstances of the war in the Ukraine has led to increased prices for

Petroleum refining and petroleum fuel manufacturing (+31.5%) due to a decrease in global crude oil supplies and increased demand in response to easing COVID19 restrictions. abs import price index – June 2022

That has now eased. The September import price index notes

The main offsetting contributor was:
Petroleum, petroleum products and related materials (-2.6%), reflecting an easing in global oil demand.

The increased prices for imported necessities has labour and capital fight over who should take the real income losses. The data shows for the trade price index Petroleum, petroleum products and related materials reflected an easing in global oil demand.

The current global slowdown does not change the domestic capacity of the local economy.

World gas prices are high because of Ukraine war.

The largest increases to prices for the trade price index – exports are

Through the year, the Export Price Index rose 25.9%. The main contributors were: Coal, coke and briquettes (+134.8%), and Gas, natural and manufactured (+98.6%)

These rises reflect a rising world spot price because of the war in the Ukraine. The gas companies are charging the domestic market world spot price which in the Consumer Price Index has led to an increase of Gas and other household fuels (+10.9%) for the September quarter 2022.

The Australian government could set a reservation policy and price cap for the domestic market of gas but it has chosen to allow the gas corporations to extort citizens. We are one of the worlds largest gas exporters. A government interested in getting inflation under control and mitigating against climate change would:

1. allow the expiration of long term gas contracts.
2. ban exports at the world spot price
3. mandate a domestic gas reservation and set a price cap.

Narratives on persistent inflation being something the government can not do much depoliticise falling real wages and blame ‘global’ factors outside our governments control.

Supply-Chain Disruptions

The latest consumer price index notes

Strong price rises were seen across all food and non-food grocery products in the September quarter. These increases reflected a range of price pressures including supply chain disruptions, weather-related events, such as flooding, and increased transport and input costs. In the 12 months to the September quarter fruit and vegetables prices rose 16.2% and dairy products increased 12.1%.

While supply side constraints and severe weather is indeed a problem, what are we doing to mitigate against these types of disruptions (e.g. more locally based production, climate change mitigation) The government can target income to lower income households to ease cost of living pressures.

Interest rates need to rise to ‘tame’ inflation

The use of interest rates to control spending in aggregate is class warfare. The Reserve Banks role to maintain inflation within a particular range is a development that started from 1993

In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of the role of monetary policy.

The latest irritation of targeting an inflation band in the belief that rises in interest rates dampen demand holds no empirical evidence. We do not know the outcomes in aggregate as businesses pass on costs to service loans used to invest in capital equipment and borrowers are forced to pay more in interest. There is also the outgoing payments on the interest of government bonds that needs to be factored in.

The only way monetary policy would work to lower inflation is if enough people were to becoming unemployed and businesses would be forced to concede profit margins as they lost sales. Then because the current dynamic on inflation is driven by climate related weather disasters and unregulated gas prices – I doubt the current profit share for these corporations would decline.

The Marxist economist Pat Devine describes it as below.

The attribution of the cause of inflation to asocial abstractions like the money supply,-” or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “”cured”” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses. Of course, if these things were possible there would be no problem of inflation to cure in the first place. It makes no sense to propose “”technical”‘ cures for inflation which depend for their implementation on the absence of the very socio-political pressures which cause the inflation they are supposed to cure; no sense, that is, except as a means of mystifying the nature of social reality and holding out the forlorn hope that it is possible to control inflation without fundamental changes in that reality.

Inflation and Marxist Theory, Marxist Today, 1974, p.87

Conclusion

Our government is using a depoliticisation strategy and avoiding any discussion on policy that would help stabilise prices and bring about real wages growth.

The current fiscal policy settings will see a return of the private domestic sector in deficit. It is sold as a neccisitty and ‘good’ economic management. A lack of investment in climate change and rising unemployment is not my definition of ‘good’.

The war in the Ukraine and broader global economic factors are being used as cover to avoid having policy that stabilises current gas prices and the need to reduce government spending (aka surplus). The Australian government has the power to regulate gas prices. Meanwhile the faux progressives are out calling for taxes on ‘excessive’ profits. I am not sure how that would bring about price stability. These things would.

1. Allow the expiration of long term gas contracts.
2. Ban exports at the world spot price
3. Mandate a domestic gas reservation and set a price cap.

The government needs to stop working within the interest of gas corporations and control domestic prices. Further, slowdowns of growth in other countries do not affect the Australian governments ability to spend and invest in our domestic economy.

The paradigm of rate rises depoliticise policy to be the decision of ‘expert’ technocrats so our elected representatives can shift blame to unelected officials. Rate rises will do nothing to address currently inflationary pressures.

What we need now is targeted income payments to lower income households to assist with the rise to food prices resulting from climate related weather disasters.

The ALP is currently using a strategy of shifting blame to external factors it has no control over (or pretends it has no control over. i.e. interest rates) as it presides over the largest fall to real wages, and a dramatic drop in the wage share of national income, to their lowest levels in our history.

We Need to Organise and Attack Current Fiscal Policy

I’ve been busy working on a project that tries to bring progressive organisations together and critique Governments fiscal policy from an MMT perspective. It focuses on two key points. The first is the Australian Government issues currency. It spends with an appropriation bill and the RBA uses a computer to mark up the size of the relevant account. There is no ‘printing’.

Printing money is one of those divisive terms that gets used to invoke a fear of inflation. The reality is there is no alteration to the way the government spends. Whether it runs a deficit or a surplus; Or the conduct of any operation by its central bank. The issuance of bonds and taxes by matter of logic needs to come after the fact the currency issuer has spent! There is a history lesson on monetary operations I wrote about in this post.

The second part of attempting to change the narrative is too redefine how we view the economy. One of the most idiotic questions that has always bothered me is which party is better for the economy and which is better for society? One of the most successful aspects of the neoliberal era has been to have the masses believe ‘the economy’ is something that sits above us and we are reliant on profits and taxes to fund our public infrastructure.

So I’ve developed my graphic design skills to try and redefine that.

It is obvious to many people we now face a poly-crisis. Climate change, rising inequality, a housing crisis, job insecurity and a lack of enough work for many. We look at our aged-care, disability and child care systems and see that they’re directed toward profit over doing what is best to help those in need.

We really need to be breaking the orthodox economic framework by attacking our elected representatives and treasury departments for targeting balanced budgets which avoid funding and skilling people in the areas we need to prosper into the future! Surely at some point in the future we will look back at the 2020’s at think ‘how could people be so stupid to think government insolvency was a risk’ That is the aim of what I have been working on.

The project will have two components;
1. what is fair? and;
2. why it is possible.

The fair will start looking at ecological sustainability and working within our ecological limits as well as a strong focus on worker rights and falling real wages. The issues of climate change and workers rights are intertwined. To build a sustainable future we need drastic action and we need well paid workers to do it!

Why it is possible will be the MMT aspect with a slogan ‘People Go Broke! Governments Don’t.’

Then of course you always get arguments regarding inflation. This has been the most difficult to come with simple explainers to help redefine. I don’t think within the general public inflation is very well understood at all. I’ve settled on describing it as a conflict.

The project will attempt to redefine how we talk about fiscal policy.

We need to view fiscal policy in respect to what it is doing to mitigate against climate change and restoring greater equity. We shouldn’t be targeting balanced budgets!

Government’s and capitalist institutions use the fear of debt and deficit and nonsense about inflation as excuses to stop public expenditure. It has led to privatisation of previous public goods. The nonsensical neoliberal economic framework is so set in that we see what should be public goods set up for profit! Think the unemployment industry, childcare, aged care and disability services. These are set up as industries that allow vulnerable to suffer all while a few make handsome profits from government spending.

Then we’ve the nonsensical framework applied to renewable energy. There is this madness where I live about building a sun cable to export renewable energy to Singapore. Solar panels will be built in Tenant Creek and energy moved along a cable several thousand kilometres to export to Singapore. It is framed with the belief the Northern Territory Government needs to reduce its dependancy on the Federal Government for its source of revenue. These arguments can be dispelled with an understanding the Australian Government issues the currency! Taxes aren’t a funding mechanism.

That’s all from me!

The Flawed ‘Logic’ of Capital

My last two posts, Capital Rule: Interest Rates, Inflation and The RBA ,and Inflation is a Conflict looked at how inflation is a conflict over national income (GDP) and the tools used to ameloriate the conflict (monetary policy) between labour and capital benefit capitalist. The labouring class over the neoliberal era are almost powerless to protect their real earnings. I used the excellent article Inflation and Marxist Theory by Pat Devine published by the British Communist Party in Marxism Today, 1974 that analysed this dynamic from an understanding that inflation isn’t a monetary phenomenon but a result of conflict.

I’m not a formally trained economist but with enough ‘self study’ you can easily see the nonsense paraded by our political elite that use language to frame inflation as some external phenomena and how they are working tirelessly to ‘fight’ it.

If our governments were concerned about rising prices, why didn’t our governments keep (or restore) free childcare, that had a negative impact on the consumer price index as it removed that costs from households, why hasn’t the government decided to keep gas for domestic purposes for our short term energy problems on the east coast and claimed ‘sovereign risk’ as a reason why it can’t.

CHRIS BOWEN: Well, those contracts are private, and the mechanism is about uncontracted gas by and large. And you know, you do have to be careful about sovereign risk and you can’t create sovereign risk. That’s a challenge.

https://www.abc.net.au/7.30/energy-minister-chris-bowen-speaks-to-7.30/13922844

Sovereign Risk is a term used to describe the risk of governments defaulting on their own debt. A nonsensical proposition when you understand the difference between the currency issuer and currency user. When you can grasp that, you can see the governments decision is about protecting the profits of a corporation over meeting the energy needs of our population.


Lowe’s Woeful Interview

The Governor of the Reserve Bank of Australia was interviewed on our public broadcaster recently.
I think the dynamics of the class conflict can be highlighted by the framework and commentary made by the RBA Governor.

“Well I think Australians need to prepare for higher interest rates. We had emergency settings during the pandemic – that was the right thing to do – but the emergency is over and it’s time to remove the emergency settings and move to more normal settings for monetary policy. “

This is a statement of intent. The RBA chooses the cash rate and can set the yields on government bonds. It is literally the decision of the monetary policy committee at the RBA which is chaired by Lowe. So if Lowe thinks rates need to be higher, they will be higher.

The question remains as to whether higher rates will bring down the current rate of inflation (see previous posts). And I remain doubtful that they will. The Governor himself admitted there are households that will struggle.

“We certainly are and we spend a lot of time looking at the disaggregated data because we know that even the increases in interest rates so far are putting pressure on some families’ budgets. They’re coping with higher interest rates, higher fuel prices, higher food prices, so we know already for some households they are finding it difficult.”

As a unionist and someone that feels we need to empower the working class, why would we use a framework that places real pressures on individuals and families to help bring down a general price level. The RBA strategy of hiking rates will cause unemployment in the hope it curtails enough demand off our energy usage it drives prices down!

There are regulatory tools we can be using to control prices. A cut to real wages (via bargaining processes and increasing mortgage rates) causes a multitude of social costs. This method (real wages cuts) was tried over the 1930’s with disastrous results. Have a read of The Struggles of the Unemployed published in the UK’s ‘The Labour Monthly’ in 1932!

Real Wage Cuts For the Working Class

This is the first time since the post war boom Australian workers have experienced real wage cuts.(wages adjusted for movements in the CPI) It will be interesting to see what happens. Over this neoliberal era ad wages failed to rise with productivity (but maintained real growth) Capital maintained sales growth (and profits) by deregulating the financial markets and foisting more debt onto workers. That becomes more difficult in an environment where your real wage is falling.

https://www.theguardian.com/australia-news/2022/feb/09/we-just-get-nothing-why-australias-falling-jobless-rate-isnt-translating-into-higher-pay

Conclusion

Sometimes people speak of inflation as an abstract phenomena. It is important to remember the current inflationary pressures are caused by Capitalists able to pass on increasing costs. Inflation is a redistribution of purchasing power. If I am paying more, someone is getting more. It isn’t necessarily because there is ‘too much’ spending. If anything, we need more public expenditure as we are well below full employment.

I am supportive for the responsibility of full employment (more hours of work available than demanded) to be given to Treasury (with a Job Guarantee in place) and removing it from the responsibility of the RBA. I’d then have a zero interest rate policy and for the RBA to monitor inflationary pressures in supply chains, labour underutilisation, and to manage the payments system because our current institutional arrangements are benefiting the wealthy!

Word War II and Post War Reconstruction

As part of a project into the history and development of Australian currency I have written a little more of the events that took place over WWII that led to Australia’s post war reconstruction. The events start at the end of the thirties and go through to just before the Commonwealth Bank was created and a Central Bank in 1945.

The Commonwealth Bank Act 1945 repealed the previous Commonwealth Bank Act 1911-1943 and recreated it as a central bank. A well known public servant H.C Coombs was largely responsible for the rationing system over the war and the creation of Australia’s post war reconstruction. He trained as a secondary teacher but over the 1930’s received his PhD in economics and went on to work in various capacities for the Commonwealth Government.

If you can obtain a copy of his book Trial Balance (now out of print) he details these extraordinary events and the shift in thinking not only of a defunct economic paradigm that was used over the 1930’s but also in society more broadly.

The finished paper will be a more coherent narrative some of which feature in the following posts and more!

Currency Issuing Governments Finance Themselves
A History of Australian Coinage and Note Issuance- Part 1
History of Australian Currency – More Detail
Let’s have a rational debate on government spending.
The Mainstream are Trying to Stay Relevant

Preparations for WWII and War Rationing

Various financial statements and budget speeches in 1939 and 1940 were stating that with a given workforce and existing pattern of technology and industrial organisation there was a maximum real Gross National Product (GNP) which would for practical purposes be reached when available labour was fully employed. 

(Insert EXAMPLES OF THESE SPEECHES)

The National Security Act 1939 had given powers to The Governor General to make regulations for securing the public safety and the defence of the Commonwealth and the Territories of the Commonwealth, and in particular— (h) for preventing money or goods being sent out of the Commonwealth except under conditions approved by any Minister of State; as well as other mechanisms to make provision for the Safety and Defence of the Commonwealth and its Territories during the present state of War. 

This act in conjunction with the changes to the Commonwealth Bank amendments 1929, in effect abandoning a gold standard allowed for the Commonwealth to implement a system of rationing.  There was contention within the Fadden Government. 

By 1941 preparations were being made for a wartime economy. Chairman of the Financial and Economic Committee Lyndhurst Giblin had been in contact with Keynes regarding propositions that if the war effort was to be accomplished an additional transfer of resources amounting to 10 per cent of the total available would from civil to war purposes had to be achieved. 

In a response to Giblin, Keynes had replied

to deprive the economic system of the freedom represented by uncontrolled prices through rigorous price control supplemented necessary by rationing and by strong propaganda in favour of increased saving out of the margins of income preserved in favour of individuals by price fixing policy.  (Coombs, 1981 p.11)

In a statement submitted to cabinet Fadden regarding his budget proposal submitted

There is a physical limit to our resources of manpower, equipment and materials and…the new programme will impose a severe strain on those resources. Last year (40/41) 15% of National Income was devoted to the war effort; this year (41/42) it would be 23%. The transfer of resources to achieve this must mean a substantial fall in civil production. The financial measures chosen must be designed to effect the necessary transfer. (Coombs, 1981 p.12)

In terms of an economic strategy the Finance and Economic Committee was preparing for a system of rationing as per the correspondence between Giblin and Keynes.  There was awareness that rationing as a result of trade restrictions and production would need to occur. As a result of this Keynes had pointed out to Giblin ‘fairness of distribution social security would necessitate rationing’ In February of 1941 the Committee advised ‘Direct rationing or restriction of supplies of specific goods or services, chosen because the resources they use are most adaptable to war purposes.’ (Coombs, 1981 p.12) 

‘There was a view within the Committee that direct rationing to consumers appeared inevitable and that plans to introduce and organise it should be prepared in secret by the Department of Customs’ (Combs, 1981 p.13)

The ABS 1301.0 Year Book Australia No. 35 1942-43 Commonwealth Food Control (1939-49 WAR) notes; 

‘Australia began in 1938 to prepare for food control in the event of war, not only to safeguard her economy, in which exports have always occupied an important place, and to protect primary producers against market collapse, but also to ensure that essential supplies moved quickly to the United Kingdom. Plans were laid then for mass marketing to replace individual enterprise, and understandings were reached that as far as shipping was available, the United Kingdom would take the export surpluses of most of our principal foods.’

The Year Book Australia 1944-45 notes the reasoning for rationing. 

‘War conditions necessitated civilian rationing of clothing and certain foodstuffs in Australia. The main reasons for clothing rationing were the serious falling off in imports, increased Service demands, and reduced labour for local production of textiles and making up of garments. The supply to the United Kingdom and the Australian and Allied Services of maximum quantities of foodstuffs necessitated the rationing of sugar. butter and meat, while reduction in imports, consequent upon enemy occupation of Java, necessitated the rationing of tea. In addition to the controls exercised by the Rationing Commission, rationing of certain other commodities is directed by other departments, e.g., petrol, tobacco, liquor, etc.’ (ABS 1301.0 Year Book Australia,Clothing and Food Rationing, 1944-45)

As the concern built within the Committee around the Fadden Government’s failure to implement rationing measures onto the civilian population and the political constraints within the Parliament, the Fadden Government’s 1941/42 budget failed to pass the House of Representatives. Two independent members of the House, Alexander Wilson and Arthur Coles crossed the floor.  Fadden resigned from office and the support of the two independent members of the house gave support to John Curtin and Ben Chifley delivering  the ALP under Curtin and Chifley Government. 

By 8 May 1942 Prime Minister Curtin had announced Australia would enter a system of rationing and by 17 May 1942 a Rationing Committee was formed. It was decided that a coupon system be introduced with interim arrangements being proposed before clothing supplies were depleted. (Coombs, 1981 p.20-21) 

A coupon system was devised in respect of Clothing, Food and Petrol. 

‘Coupon Rationing. After examination of the systems of rationing operating in other countries, it was considered that coupon rationing was preferable to a system of consumer registration, since it allows consumers to purchase from any retailer and also provides a comparatively simple control of traders’ replenishment of stocks by means of the passage of coupons to their suppliers. Food coupons are provided in the general Food Ration Book issued each year.’  (ABS 1301.0  Year Book Australia,Clothing and Food Rationing, 1944-45)

This coupon system would last throughout the war and was the means by which Australian citizens would obtain essential goods and services. The Food Ration Book provided each year per household negated the need to spend currency that was earned. 

Australia’s Post-War Reconstruction

Following the end of the war the Government was seeking a means to continue it’s control over the economy with similar wartime powers.  A failed 1944 referendum sought an insertion of a Chapter 1A in the constitution 

“CHAPTER IA.—TEMPORARY PROVISIONS.
POWER TO MAKE LAWS, FOB A LIMITED PERIOD, WITH RESPECT TO CERTAIN MATTERS.
6oA.—(i.) The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to—
(i) the reinstatement and advancement of those who have been members of the fighting services of the Commonwealth during any war, and the advancement of the dependants of those members who have died or been disabled as a consequence of any war ;
(ii) employment and unemployment;
(iii) organized marketing of commodities ; etc…  (ABS 1301.0 Year Book Australia No.35 1942-43 p.65-66)

The failed referendum required another means to continue the Full Employment achieved over the war. 

There was a shift in thinking as a new economic paradigm emerged. The collective conscience within our society was driven largely by remembrance of what was experienced over The Depression, what was possible as seen over the war and a desire to maintain the same level of production during peacetime. Within academia, elected representatives and a new generation of public servants – Keynes’ General Theory gave them the authority to implement what only a decade prior was seen as ‘radical’.

These events led through to the 1945 Tax White Paper on Full Employment and The Commonwealth Bank Act 1945 which created the Commonwealth as a central bank. Coombs in his text Trial Balance writes

‘Generally the functions of a central bank are: to print and control the issue of legal tender notes; to hold the country’s international reserves of gold and foriegn currencies; to act as banker to other banks, holding deposits from them; to exercise control over banks’ lending policies; to act as banker for governments and their major agencies, and frequently to arrange their borrowing; and to influence the policies of non-bank financial intermediaries which make loans.’ (Coombs, 1981 p.142)

A position that was resisted by capital for decades was finally defeated and our elected representatives had more discretion on controlling an interest rate and fiscal policy (having been subject to various impediments prior) to achieve their socio-economic outcomes.

E is for Effort

Alan Kohler wrote his first piece for The New Daily. It’s a rather optimistic piece where he says thankfully we haven’t entered a long depression as many feared. Irrespective of labels and what you define 2020 as, it has demonstrated that currency issuing governments always have financial capacity to deal with a collapse in spending.

First, 2020 wasn’t the beginning of another Great (Long) Depression, as understandably feared in March.

Why not? Because after the GFC, monetary authorities (central banks) decided to do whatever it takes to combat recessions.

Central Banks (The Reserve Bank in Australia) have the powers to deal with monetary policy. That is interest rates. They choose a ‘target rate’ for banks to loan to each other. In the same way you have an account with a bank, that financial institute has an account at the central bank (these are called exchange settlement accounts [ES]). These accounts need to be positive at the end of each day. If a bank is short it will borrow from another bank with surplus reserves. This is the rate the central bank aims to set. Currently the offical rate is 0.1% in Australia. Though the actual rate is much lower because of the banks QE program (more on that below)

What is Quantitate Easing?

As described above financial institutes hold exchange settlement accounts with the Reserve Bank of Australia. I’ve describe detail of various operations here, here and here. The RBA not only is able to set the rate of interest banks loan to each other (Cash rate) it can also set the yield on any Government bond. It currently has a target of 0.1 percent on 3 year Australian Government Securities (bonds)

What does this mean? As treasury spends via fiscal policy it adds reserve to the system by marking up these exchange settlement accounts. It is then a choice to issue a bond. These are offered for various lengths 1, 3, 5 year etc…by The Australian Office of Financial Management. The RBA has purchasing these bonds on the secondary market. So the steps are

  1. Treasury spends by marking up accounts at the RBA
  2. AOFM issues bonds – in Australia they are called Australian Government Securities (AGS). Financial Institutes purchase these from currency in their ES Accounts
  3. This operation drains ES Accounts and adds them to securities accounts
  4. The RBA has then been buying AGS to lower their yields and ensure the target rate on a 3 year AGS is 0.1 percent. You can read about it here

It is important to note that when the RBA is purchasing bonds it is switching the asset portfolio. More reserves in ES Accounts as it purchases back AGS that have been issued by the AOFM and it now ‘owns’ bonds that were issued by treasury.

This is usually called ‘money printing’ however by definition all spending by treasury is ‘new’ money entering the financial system.

Treasury spends via appropriation bills and the central banks use a computer to mark up the relevant bank account. This process is the same irrespective of past fiscal positions. It’s ‘cost’ in terms of the real resources used is the same irrespective of the interest rates. 

Bond issuance (govt debt) is an after the fact operation. It switches currency in reserve accounts (that financial institutes hold with the reserve bank) to securities accounts (which earns interest).

There isn’t a need to issue debt. Ask yourself where financial institutes obtain currency to purchase bonds? 

Treasury departments hold public accounts with the central bank. These are purely there to record the transactions that take place. The balance in that account is irrelevant to the governments ability to spend.

Seeing the powers that central banks have is to target an interest rate and NOT direct fiscal policy, there is very little they can do to deal with collapses in spending. The mainstream parade that interest rate movements will encourage or discourage spending. That is ridiculous. The manipulation of a rate banks loan to each other or a yield on a bond in no way encourages or discourages investment. The power lies with fiscal policy and that is held by treasury.

So, massive fiscal stimulus (which should really be called compensation) followed massive monetary stimulus from central banks – that is, money printing and rate cuts to zero and below.

It is true treasury engaged in spending to a level most of us haven’t seen before. None of this was financed by central bank operations. None. Bond issuance intrinsically has to work after the fact the issuer has spent. The fact interest rates are 0 or the RBA is purchasing bonds via QE program is irrelevant in treasury’s ability to spend.

Businesses are getting ready to catch that money and transfer it to their own bank accounts: Private sector job vacancies in Australia rose 24.2 per cent between August and November to a record high of 228,800.

That’s only a quarter of the 942,100 people still unemployed – but even in good times there are usually three unemployed people for every vacancy.

Obviously you are going to have a large increase in job vacancies when you emerge from a lockdown. That figure isn’t telling us much. It’s just a big number. The reality is there are still millions of under and unemployed. This is a policy setting by the government of the day. The Australian Government as a monopolist of The Australian dollar can always purchase idle labour. It chooses the unemployment rate.

The savings ratio is the inverse of consumption expenditure. Obviously when the lockdown happened people couldn’t spend and that caused the unemployment in the tourism, hospitality, arts sectors etc…It doesn’t tell us much more than that.

Meanwhile, the Reserve Bank is still pumping cash into the system.

In December it bought $20 billion worth of government bonds, bringing the total bought in 2020 to more than $100 billion, using freshly created money. That’s about half what the government actually issued.

Central banks pumping money into the system is, as descried above, switching currency in accounts at the Reserve Bank of Australia. It’s a smokescreen. QE has had The RBA purchasing bonds that are issued by the AOFM. Now treasury ‘owes’ money to the RBA. Yet within the mainstream media there is no acknowledgment that all spending has to originate from treasury as it marks up an account at the central bank. That is what the banks use to then purchase bonds!

Australia is only half pregnant with MMT because the RBA governor Philip Lowe insists that there is no such thing as a free lunch. Meanwhile governments elsewhere are munching on cost-free cash for lunch.

This is one of those myths that gets paraded around to invoke a fear of inflation. If we keep spending and if we continue to ‘fund’ treasury, eventually we will impoverish future generations and there will be inflation.

News flash: We have literally seen the Australian Government spend billions of dollars from nothing – we have seen the RBA engage in bond buybacks (QE) to expand the balance sheets of the banks and we had deflation.

Kohler gets that correct

Maybe the bill will be presented later in the form of inflation, as Dr Lowe confidently predicts, maybe not. But central banks have been printing money for 10 years so far and inflation hasn’t stirred.

I don’t describe it as ‘printing money’ but his comment that what central banks told us, that inflation will stir as a result, is spot on.

Conclusion

The policy prescriptions that you can advocate are thus different by viewing government spending through the lens that issuers spend first and tax and issue bonds after the fact.

The policy positions we need to wind down support measures (unemployment benefits) are shown to be purely spiteful. They ignore that governments choose the unemployment rate and can always purchase idle labour. We thus force people into poverty and punish them as a result of failed government policy to ensure enough jobs.

The positions taken by the mainstream economics that we should ‘spend now because rates are low’ are wrong too. Watch as they begin to attack government spending again at the first chance they can. We should spend as much as is politically desired on public infrastructure and full employment. Removing the lens that taxes fund our expenditure (rather than government spending funding our ability to pay tax) and ending the nonsense that states ‘bond issuance (government debt) ‘funds’ the government’ allows us to have better, more truthful discourse on the public services we should be providing.

Sectoral Balances

One of the most important concepts to understand within macroeconomics is the concept of sectoral balances.

Macro can be divided into three distinct sections Government and Non-Government with the latter being divided into domestic and foreign. These divisions come from the system of national accounts (an international standard) and the way GDP is calculated.

GDP is a measure of national income, which we can conceptualise as the output we produce and the unit of account or a nations currency is the measurement we use to measure that output.

We can get more complex and analyse what we produce as contributing to the real economy and what doesn’t contribute to the productive process. The latter is what is considered economic rents (e.g capital gains) and hasn’t actually produced anything.

Broadly speaking GDP is a measure of what we produce and it is divided up between labour and capital. It omits a lot of things we as a society should place more of a value on (care work, parenting etc..) and it includes what I would consider undesirables (fossil fuel activity, environmental destruction) but never the less it is the calculation for what it is we make and what we also call ‘national income’. it is a flow over a given period of time.

Now we’ve divided ‘the economy’ into three sections – we can take the idea that someone’s spending is somebody else’s income. Government spending is non-government sector income – and foreign spending (our nations exports) is domestic sector income.

The Government deficit is a measure of spending over a given period of time. Dollar for dollar the Government deficit is equal the Non-Government sector surplus – this is just an accounting rule. What matters is context and whether total spending from all three sectors is contributing to fully utilise all available resources (including labour) within an economy.

The accounting framework I’ve taken from the textbook Macroeconomics and it is as follows

(1) GDP = C + I + G + (X-M)

Which means the total national income (GDP) is the sum of total final household consumption spending (C), total private investment including inventory accumulation (I), total government spending (G) and net exports (X – M). X are exports and M are imports.  Think of it as the sum of all our production over a period of time.

Households also consume (C) save (S) and pay taxes (T) these are ‘uses’ of income. 

(2) GDP = C + S + T

If we equate uses for income with with the sources of income we get

(3) C + S + T = C + I + G + (X-M)

Using some algebra we get the the sectoral balance view of national accounts. We can then divide our economy into three sectors:

  • The Government Sector: (T – G)
  • The Private Domestic Sector: (I – S)
  • The External Sector: (X – M)

(4) (T-G) = (I-S) + (X-M) = 0

Rules of accounting state all balances must sum to 0.

Clearly, what we are interested in is the income of the private domestic sector. (That’s us!) 
This is how the sectors interact with each other.

A transaction between two individuals or businesses does not alter the net financial position of the non-government sector. For example, I purchase a car for a $10. My account is debited by $10 and the car dealers bank account is credited with $10. I receive my car. The net financial position of the non-government sector has not changed. 

However, If a Government spends $100 into an economy and taxes $30 there is $70 in the non-government sector.  The government deficit is (100 – 30 = 70) Spending by government equals income for the non government sector. (-70(blue) +70(green) = 0)

Under a fiat currency (that is by decree) all Government spending is appropriated by an act of Parliament. The Government does not source ‘funds’ from anywhere in order to spend.

Now say the government is dismayed. It doesn’t like running deficits. So it runs a surplus. In year two it spends $100 and taxes back $110. (100 – 110 = -10) A surplus of $10!

That surplus has contracted wealth by $10 in the non-government sector.
The total savings in the non-government sector, $70 from year 1, has been contracted by $10, as a result of the surplus, and is now $60.

Government SectorYear 1Year 2
Government Spending100100
Taxation30110
Budget-7010
Non-GovernmentYear 1Year 2
Saving70-10
Overall Savings7060

We can see in the first year the Government deficit enabled the non-government sector to save, In the second year the desire for surplus resulted in the non-government sector decreasing their savings by $10. 

If we focus purely on what we observe in the non-government sector it is far more accurate to describe a deficit as an injection and a surplus as a contraction. A government budget increases or decreases wealth in the non-government sector. 

The Government can not ‘save’. Saving is an act of forgoing current expenditure to spend at a later date. This can not apply to The Government who is a currency issuer. It can always spend. $ – $ The Government deficit (injection) matches the savings of the non-government sector.

Sectoral balances are usually measured as a percentage of GDP.

In our example below, In Year 1 the Government has run a deficit (injection) of 4% of GDP and the private balance equals 4% of GDP. $-$ The Government deficit (injection) has matched the savings in the non-government sector.

In Year 2 the Government has run a surplus (contraction) of 3% of GPD and by the same amount the private balance has declined by 3% of GDP.

In Year 3 the non-government sector begins importing goods and services and runs a current account deficit (X<M) This is a leakage and a flow of funds goes to the rest of the world. It represents a foreigners desire to save our currency.

In Year 4 the non-government sector runs a current account surplus (X>M) which enables the government to run a small surplus (contraction). Current account surpluses mean foreigners are spending Australian dollars they have acquired through imports and/or borrowing.

In Year 5 the non-government sector has run a current account surplus of 4% of GDP but the Government ran a surplus (contraction) of 4% of GDP. The private sector has not been able to accumulate any net wealth.


In Year 6 the current account surplus wasn’t enough to generate full employment and the government ran a deficit (Injection) of 1% of GDP. The current account surplus (X>M) is the external sector supplying the private sector with our own currency. It receives our currency through imports. 

Year 1Year 2Year 3Year 4Year 5Year 6
Government Balance
(T-G)
-43-414-1
Private Balance (I-S)4-32304
External Sector (X-M)002-4-4-3
Zero Sum000000

As a rule of accounting the sectors must all sum to zero. The Governments spending is the non-government sectors income. It is the source of net wealth. Spending within the other two sectors merely shuffles wealth.

If the non-government sector is to run current account deficits (X<M) (Australia has since 1974) The Government must replace this leakage with spending more in the private domestic sector to achieve full employment. Imports represent a desire for the rest of the world to save our currency.

The only reason a government should run a surplus (contraction) is if the current account was in surplus and generating enough income to sustain full employment and thus the Government needed to contract spending as an inflation control. 

However, if the current account surplus was not enough to sustain full employment, it is vital the Government runs a deficit (injection) to achieve that end goal.

The charts below show the interaction between the sectors for Australia from 1960 to 2012. (apologies for the change in colour of the sectors) The have been sourced from CofFEE. (I apologise and I don’t exactly remember where I sourced these)

You can see the relationship between the three sectors. Since 1996 as the Government began running surpluses (contractions) and the external balance (X<M) was acting as a leakage (current account deficit) the private domestic sector began to lose net wealth. 

The only way to sustain growth in this instance is for the private domestic sector to get into debt by using credit. 
Which I described in this post here.

Conclusion

The federal governments fiscal position in isolation is meaningless.
It tells us nothing about the domestic sector (us!), savings ratios, household debt and so on and so on.

We need to look at what the current account (external sector) is doing and if the domestic sector wishes to save overall the governments fiscal position needs to account for the leakages.

If the current account deficit is running at 4% (as Australia’s has averaged since about 1974) then the deficit at least needs to be >4% to account for the leakages from that sector and allow that sector to save.

Solving inequality requires getting macro right!

The ACTU last year in April released this report into inequality in Australia. It starts with the statement “Extreme inequality – which is what we are now experiencing in Australia – slows economic growth, creates social havoc and undermines faith in our political institutions.” Which I wholeheartedly agree with. In this post I aim to show why the report is flawed and how that can lead to flawed policy proposals.

The report in its summary recommends policy reform:

  1. Ensuring that real wages rise in line with national productivity improvements through the introduction of a new Living Wage, tackling insecure work, restoring penalty rates for 700,000 low paid workers, raising public sector wages and reform the collective bargaining system so it can deliver rising living standards;
  2. Making sure everyone pays their fair share of tax including corporations and the wealthiest members of our society. This includes reforms to capital gains, negative gearing and family trusts;
  3. Lifting the very poorest Australians out of dire poverty including through an increase in Newstart and an increase in the aged pension for those without adequate superannuation;
  4. Increased expenditure on health and education;
  5. A comprehensive Jobs Plan to reduce underemployment and unemployment; and,
  6. Measures to tackle excessive corporate power. The Banking Royal Commission has shown the extent of corporate excess and law breaking. Australia is also littered by firms with oligopoly power in certain sectors. Stronger competition policy is required to ensure people are not being ripped off by excessive prices.

Point 1 is what used to happen through institutionalised arrangements in Australia. I quoted in this post that the attack to decouple this arrangement began in the mid seventies were The Age newspaper quoted Friedman as saying .”….led the professor to opine that our long cherished arbitration system ‘seems to be highly unfortunate’ in the way it sets wages…”

Productivity is output level per hour worked. So for every hour, if you output $X, you need $X in wages in order to purchase that output. Real wages (wages adjusted for inflation) need to rise in line in productivity increases in order for the wages share of national income (GDP) to increase. Real wages can continue to grow below productivity but it means a growing share of the output we produce with our labour goes to profits. Arrangements that make bargaining difficult, make wage rises harder to negotiate and Government policy to cut spending and therefore public sector wages and employment (surplus) contribute to this.

http://bilbo.economicoutlook.net/blog/?p=2723.

The above graph is what has happened with the real wage and productivity levels since 1980 to 2009. There hasn’t been substantial change over the past decade to 2020 and share of wages is at historic lows.

http://bilbo.economicoutlook.net/blog/?p=43621

When wages fail to grow with rising productivity levels it means we need credit to purchase the output our labour produces and in Australia we have seen record levels of rising household debt. One of the highest in the OECD.

https://www.rba.gov.au/speeches/2019/sp-ag-2019-03-20.html

Pre 1980s capitals dilemma was how do you ensure workers can still purchase what they produce and suppress wages. Thus began a process of breaking institutionalised arrangements around wages growth with productivity, ending full employment policies and allowing a reserve army of labour, deregulating and privatising financial services (e.g the commonwealth and various state banks), and what I think is the key contributing factor, leaving fiscal policy out as a tool and using the analogy that a government is like a household and a surplus obsession and fear mongering around debt and deficit.


One of the analogies used to ensure public spending remains low is the household metaphor, which assumes the currency issuing Governments face the same constraints as a household and a ‘surplus’ is desirable.

Under a fiat currency, that is clearly non-sensical. A currency issuing government promises nothing in return for the currency it issues (not in gold or a foreign currency) and it can spend regardless of past deficits or surpluses. As a monopolist over the currency it can always purchase whatever is for sale in the currency it issues.

When we look at sector balances, assessing the macroeconomy as a relationship between three sectors (Government, private domestic and Foreign sector), accounting wise the total sum has to add to zero. For example if the government spends 100 and taxes 30 we record that as a deficit of -70 though that +70 has to sit somewhere. All deficits go somewhere but the question that should be asked is where and for whom?

Looking at the data for sectoral balances in Australia we get the below picture.

Image from this lecture:

The period of government surpluses in Australia was a result of private sector deficits. The hallmark of ‘good’ fiscal policy isn’t whether a particular fiscal outcome is reached. It is a meaningless irrelevant statistical artefact. It is whether we have our resources, including labour all in use, whether we a meeting our objectives in terms of ecological limits, and we should judge fiscal policy based on how well the bottom of the income spectrum are doing.


Point 3 relates to increasing Newstart and the aged pension for those without adequate superannuation.

Increases to the unemployment benefit need us to assess why unemployment exists in the first place.

Unemployment is a systemic issue that can ALWAYS be resolved by the government of the day. Involuntary unemployment is not an issue that is beyond us to solve. The Government of the day chooses the level of unemployment because it can always purchase whatever is for sale in the currency it issues. We can still have generous unemployment benefits, a welfare system that ensures for those unable to work are provided with living wages, guaranteed housing, and other public provisioning.

Keynes noted in his General Theory of Money, Employment and Interest, that it was aggregate spending levels that determined economic activity, and that inadequate spending levels could lead to high periods of unemployment. 

From a national accounting perspective at the macro level the sources of income are Government Spending (G), Investment (I), Consumption (C) and Exports (X). Are all these sources of expenditure sufficient to full employment?

Modern Monetary Theory will note that as a monopolist of the currency, the federal government can always purchase whatever is for sale in the currency it issues and thus can always employ any idle labour. It is a political choice. The Government of the day chooses the unemployment rate.

Unless we ensure more job vacancies advertised than demanded, we will not have enough work for all those that desire to work. As a society we can not achieve equality, fairness and a public purpose unless that is what we set out to do.

Precarious work conditions exist because we have laws in place that allow such conditions to exist. People don’t have enough to retire on because we have a system that places retirement on the onus of the individual and leave retirement up to the speculations and abstractions of ‘the market’.

It is often overlooked that a Governments spending is representative of a socio-economic agenda. For as long as a society has the real resources to implement its desired policy objectives, these objectives are achievable.

Rather than ‘force’ people to save for retirement, we need to acknowledge the superannuation was set up under the false premise that currency issuing governments need to save. Saving is the act of forgoing current expenditure to spend at a later date. It applies to a user of a currency. A public pension doesn’t have to be a minimal subsistence living. The impacts of the spending whether from a public pension or a private super account are exactly the same. It is a question of whether we have the available real resources to purchase when that spending occurs.

The challenge with providing for an ageing population is not financial, it is rising dependency ratios as a larger percentage of the population exits the workforce and we need to ensure our productivity levels increase to maintain our same standard of material well-being. Current policy that seeks to cut government spending (surplus) and leave youth underemployed or unemployed jeopardises increases in future productivity. That is lost skills, trades and professions we have by leaving youth idle. These will be people we need to provide for elder Australians as they age; In terms of the services they will need to ensure they are cared for in their homes, in terms of services they will need to feel included within the communities they live, the services they will need to maintain their residences, the services they will need in terms of their health, services they will need in the event they are no longer able to stay at home and need greater care. These are the challenges we face with an ageing population not some non-issue finding the ‘money’ nonsense. Obsessions with fiscal balances undermine the very issue we are supposed to be solving. And we are the poorer for it. (In terms of real resources)

A system of subsistence public pensions leaves those that have been out of the workforce at a disadvantage, particularly women, those on low incomes usually in precarious work, and those vested in the system to speculations and the expectations of unearned income.

The early classical economists distinguished between the use of earned and unearned income. From Michael Hudson’s Killing the Host

The guiding principle was that everyone deserves to receive the fruits of their own labor, but not that of others. Classical value and price theory provided the analytic tool to define and measure unearned income as overhead classical economics. It aimed to distinguish the necessary costs of production – value – from the unnecessary (and hence, parasitic) excess of price over and above these costs. This monopoly rent, along with land rent or credit over intrinsic worth came to be called economic rent, the source of rentier income. An efficient economy should minimize economic rent in order to prevent dissipation and exploitation by the rentier classes. For the past eight centuries the political aim of value theory has been to liberate nations from the three legacies of feudal Europe’s military and financial conquests: land rent, monopoly pricing and interest.



Distinguishing the return to labor from that to special privilege (headed by monopolies) became part of the Enlightenment’s reform program to make economies more fair, and also lower-cost and more industrially competitive. But the rent-receiving classes – rentiers – argue that their charges do not add to the cost of living and doing business. Claiming that their gains are invested productively (not to acquire more assets or luxuries or extend more loans), their supporters seek to distract attention from how excessive charges polarize and impoverish economies.

Australia’s superannuation plays into the concept of deriving rentier income, a concept that was thought as immoral and landed power in the hands of a ruling feudalist class during the enlightenment era. A system that was discussed in Moral Philosophy classes during the 19th century. (Moral Philosophy is what encompassed economics).

Today in economics courses concepts of rentier income and earned and unearned income are not discussed or their use in amassing political power for a financial services sector and the bankers and CEOs of major corporations. Why should we be ‘forced’ to guarantee an unending flow of dollars to a sector that is immoral, bloated and seeks to extract the value of our labour in order to engage in speculative activity on share markets, currency exchanges, housing and anything else our society financialises.

This brings me to another criticism within the ACTU report;

The ACTU also supports the right of all Australians to derive income from investments and accumulate wealth. These are fundamental and desirable attributes of a market based economy.”

This fails to define a difference between types of income. Earned and unearned income. You should not, in any moral society, be able to derive an income and amass wealth because of monopoly rents.

Joesph Stiglitz describes economic rents as;

The term ‘rent’ was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his or his ownership and not because of anything he or she does. The term was then extended to include monopoly profits (or monopoly rents)— the income that one receives simply from control of a monopoly— and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production.

https://evonomics.com/joseph-stiglitz-inequality-unearned-income/

It is obscene that a ACTU report into worker inequality would not make a distinction between these two types of income and outright say we need to tax; rents, capital gains, share dividends at a higher rate than that of wages if we are serious about delivering wealth to the labouring class and reducing our levels of inequality.


The report states other incorrect information such as;

“Globally most respected economic institutions believe the risk of recession has increased and some pundits fear “winter is coming”.……Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities

How can a stimulus measure exacerbate debt levels? The Chinese Government issues its own currency. A simple understanding of double entry book keeping will show dollar for dollar the Chinese government deficit is equal to the non-government sector surplus which would reduce private sector debt levels, all other things equal.

The idea that somehow the Chinese Government ‘borrows’ its own currency is nonsensical. It offers investors a bond and moves money from a reserve account at the central bank to a securities account at the central bank. The latter pays interest. It is an entirely voluntary choice.  Where do financial institutes obtain Chinese yuan from to buy government debt? 

Any government that issues its own currency can always deal with any financial crisis no matter what the size.

The below statement is in relation to Australia.

“Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges.”

The statement above discusses monetary policy (interest rates) The evidence is clear. Monetary policy is an ineffective way to stimulate aggregate demand. It is blunt, you can’t control where the spending goes and you are relying on already indebted households to go further into debt to spend.  

The report ignores fiscal policy (spending and taxation decisions) For a currency issuing government it is a tool that is unlimited. It is constrained by what is available for sale. What limited tools is the report referring to? Monetary policy has a limit, which is zero. Then it is a useless way to try and direct spending where you need it to go.

Conclusion

I’ve run out of time to discuss all the points above but I’ve given an overview of why I think the report is flawed.

An incorrect understanding of macro leads to incorrect policy prescriptions and the non-sensical idea that somehow a currency issuing government is constrained by revenue. It is never nor can it ever be short of the currency it issues. We have a series of analogies and metaphors in place that are there to ensure, despite the real resources exisiting we can’t deploy them for a public purpose.  This includes the government is like a household, mortgaging our future and leaving our children in debt, budget black holes that need to be filled, deficit spending / government spending is inflationary, pulling out a credit card from the bank of China etc…I hope to write a post on each of these analogies and state why they are wrong.