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.

Economists are as Trustworthy as Astrologists

Every economists and his dog has written something on inflation and wages. Opinion on what *should* happen is as colourful and as mixed as a fruit and nut mixture and tends to reflect an ideological preference for either workers or capitalists.

I’ve documented my understanding of inflation as a conflict between labour and capital over national income in my last three blog posts.

Capital Rule: Interest Rates, Inflation and The RBA
Inflation is a Conflict
The Flawed ‘Logic’ of Capital

The increasing costs that result from a rise in fuel prices have capital pass on those costs rather than reduce profit margins.

Today unlike the 1970s, the legislative and institutional arrangements leave labour unions without much of an avenue to effectively ‘fight back’ and gain real wage rises.

I think it is important to recall from an MMT perspective to remember the source of the price level

With the state the sole supplier of that which it demands for payment of taxes, the economy needs the state’s currency and therefore state spending sets the terms of exchange; the price level is a function of prices paid by the state when it spends. 

There are two primary dynamics involved in the determination of the price level. The first is the introduction of absolute value of the state’s numeraire, which takes place by the prices the state pays when it spends. Moreover, the only information with regard to absolute value as measured in units of the state’s currency is the information transmitted by state spending. Therefore, all nominal prices can necessarily be traced back to prices the state pays when spending its currency. 

The second dynamic is the transmission of this information by markets allocating by price as they express indifference levels between buyers and sellers, and all in the context of the state’s institutional structure. 

The price level, therefore, consists of prices dictated by government spending policy along with all other prices subsequently derived by market forces operating within government institutional structure.

https://docs.google.com/document/d/1sySbx6EHOAYpAjE4FGnYApdZNyY6rh79KzajZxSU884/mobilebasic

From the above perspective and understanding the Government through its regulatory powers has a lot of non-monetary tools to administer prices. That train of thought seems to be absent amongst the public intelligentsia that comment within the mainstream media. The public discourse is as simplistic as wages can and should rise by inflation, or real wages need to be cut because it is/isn’t inflationary.

However little comment is made to the understanding Inflation is distributional. If someone is paying more, someone receives more. The question should be focused on who is benefiting.

Then there’s the discussion on interest rates. I haven’t read a mainstream commentator dismiss monetary policy as useless. I summarised the effect of interest rate in my post Capital Rule: Interest Rates, Inflation and The RBA

The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means; 

1. Increased income for asset (bond) holders; 
2. Rewards markets that have placed bets on rates rising;. 
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits; 
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

https://jengis.org/2022/06/09/capital-rule-interest-rates-inflation-and-the-rba/

Monetary Policy is a blunt and flawed policy Instrument

The flawed framework of using monetary policy continues to hurt the working class. The ALP Government has now conceded that wages will need to be cut in real terms, (source) agreeing with the Governor of the RBA.

“Three-and-a-half per cent is kind of the anchoring point that I want people to keep in mind,” he says. In other words, it’s a continued real wage cut for most workers in the short term — if we’re to stay on Lowe’s preferred path.

https://www.abc.net.au/news/2022-06-23/rba-boss-philip-lowes-plan-out-of-economic-trouble/101175018

The way we use monetary policy is effectively a threat to The Australian working class. Accept real wage cuts or we raise rates on your mortgages and take your income via another means. It is the most perverse framework and anti-working class.

Though Capital isn’t terribly clever. Their cuts to real wages undermine pushing increasing debt onto households. Australians have enjoyed real wages growth (despite failing to match productivity increases) – The difference between real wages and productivity growth has gone to profits. To maintain sales and realise that profit (as workers haven’t earned enough to purchase that output) Capital has deregulated financial markets and placed increasing debt onto households. Australians are amongst the highest indebted households in the world. Pushing debt onto households becomes harder in an environment of wages falling in real terms. That may manifest as a recession.

Deficit Myth Prevails

In this article Brakes on spending: Albanese warns of budget cuts it seems our newly elected Government falls into the same trap as the previous Government that it’s spending needs to be constrained by revenue. The word revenue is derived from the latin ‘re’ meaning back and ‘venire’ meaning come; Revenire literally means come back. That is your taxes come back to the monopolist of the currency that had to spend it in the first place.

With budget deficits forecast to reach $261.4 billion over the four years to 2025, the incoming government is rejecting some spending options despite pressure from state leaders and community groups for long-term boosts to outlays on health and social services such as Newstart.

https://www.smh.com.au/politics/federal/brakes-on-spending-albanese-warns-of-budget-cuts-20220623-p5aw7s.html?utm_medium=Social&utm_source=Facebook&fbclid=IwAR1pF6_ay8xqU3FSM50VEnNOWSumIG3WpvxAhWc3aRC_fJsbPxppunatd5A#Echobox=1656013729

Under the guise the government needs to ‘save’ money by reducing it ‘s spending and the need to cut spending because of inflation are excuses made that ensure the most vulnerable people in our society continue to suffer and are left poorer in real terms! The Government can engage in providing universal services like free childcare which have a deflationary impact!

Conclusion

It looks like workers (including me) are set for real wage cuts. It is likely this will manifest as increasing unemployment, increasing rates of home foreclosures and all the social impacts these things bring. The Governments fiscal policy of spending cuts make things worse!!

That is 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!

Inflation is a Conflict

I’ve seen texts written by progressive economist on the sources of inflation being driven by supply side issues and not because of demand-pull (wages). They’d be correct!

Their articles detail how rises in rates won’t assist with prices rising from supply side issues. However, one ended by stating the RBA needs to be clear why it is hiking rates and it is for financial system stability. There are issues with the way they are thinking about inflation and the role interest rates play in our society.

Inflation is viewed in terms of rising prices and economic instability. The raising of rates is supposed to ‘cool’ down the rate of inflation. It is often juxtaposed within a context of rising housing costs as the commercial banks often increase their mortgage rates by the same amount. Rising rates are supposed to mean subdued house price growth. Low rates over the last decade have been seen as abnormal which has sometimes been interpreted as one reason for our current high housing costs and a contribution to our inflationary problem. The reality (I think) is very different. The fact that the cost of housing is so entrenched in the public discourse and tied to the cash rate rises makes it difficult for regular people to seperate the two concepts and seek alternate policy for what can be done about rising prices (and housing). There isn’t a level of ‘normal’ rates that needs returning to; nor is there a particular cash rate needed to create some sort of ‘system stability’.

Inflation needs to be viewed by more than just rising prices. It is a conflict between labour and capital over national income. Pat Devine penned Inflation and Marxist Theory, in Marxist Today, 1974 describing inflation as a conflict over competition resources.

Competing Claims on Real Resources
Thus, whether through trade price effects on the real wage, through the influence of international competition on the extent to which cost increases can be passed on or through international influences on aspirations for higher real wages, the international character of the capitalist system impinges on the struggle between capital and labour—the fundamental cause in post-war conditions of chronic inflation.

Inflation and Marxist Theory, Marxist Today, 1974, p.84

I stated in my previous post that we couldn’t know what the net outcomes of the distributional changes of a rise in the cash rate would be. Businesses who have borrowed to fund capital may pass on increasing cost to consumers, we also see an increase to those holders of government debt, as consumers cutback to service increase mortgage costs. So as to whether an increase is deflationary is circumspect.


Today we discuss inflation within a framework where it is the responsibility of the Central Bank to target a particular inflation range.(2-3%) The tool used to do that is monetary policy (interest rates). Historically central banks have not targeted an inflation rate.

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

  • the fixed exchange rate period, which lasted until the early 1970s;
  • a period of monetary targeting between 1976 and 1985;
  • a transitional period which followed the demise of monetary targeting and lasted until the early 1990s; and
  • the inflation targeting regime, in place since around 1993.

The first point shows the first regime was to ensure an exchange rate parity

“As was the case for most other countries, the Bretton Woods System of ‘fixed but adjustable’ exchange rates was operated in practice in Australia in the 1950s and 1960s as a firm commitment to fixed parities. The fixed exchange rate was effectively the linchpin of the monetary policy regime.”

https://www.rba.gov.au/speeches/1997/sp-gov-290997.html

The rate wasn’t altered because inflation was deemed ‘excessive’ rather there was a concrete goal that the exchange rate between the $AUD and $USD should remain at a particular parity. The particular ‘inflation targeting’ we see today evolved from the 1970s oil shocks that sent inflation and unemployment to high levels as the Post-Keynesian framework couldn’t offer a solution.

Devine summaries the monetarist theories that would eventually gain hold of the economics profession.

Monetarist Theories
“Most recently at the theoretical level there has been a vigorous offensive by some neo-classicals in the form of monetarism, receiving its impetus from the self-evident demise of the stable short-run
Phillips Curve relationship. An attempt has been unconsciously and influenced by what has become made to salvage the role of excess demand, in the traditional form of a long-run vertical “Phillips Curve” at a “natural” rate of unemployment, by introducing expectations, with the policy implication of the need to stabilise expectations by pursuing strictly a widely-publicised course of expanding the money supply at a rate equal to that of estimated long-run productivity growth. The ideological function of bourgeois economic theory, especially neo-classical theory, is seen here at its clearest.
***
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.”

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

Devine was discussing the idea that monetarist believe it is the money supply that caused inflation and their solutions ignored that rising prices also meant a rising income of those charging higher prices. If the costs of goods and services increase, the labouring class would use their power to combat the rise in those prices. Monetarism was successful in its approach in taking over the profession and using its methodology to combat inflation, rising unemployment. The NZ film In a Land of Plenty provides what happened when the NZ government abandoned its role in providing full employment and targeted inflation as a goal.

Those same flawed arguments rare used today. It is assumed the raising rates will ‘cool’ spending, despite the issues not arising as a result of wage pressures (and despite commentary to the contrary) Arguments today ignore tend to ignore social conflict taking place. It is the price setting power that firms hold that sees increasing costs being able to be passed on. Today the labouring class doesn’t hold the power to ‘fight back’ as union laws have been constructed to limit bargains power and densities are at their lowest points since the post-war boom.


I am in day four of my covid isolation, trapped in a hotel room. I came across this tune I’d forgotten about. I’ve always been a fan of 1950s Jazz and the wonderfull Ella Fitzgerald. I was watching a film (that isn’t worth mentioning in) but it had a remake of the song ‘They all Laughed’ and I was reminded of the Ella and Louis version.

Capital Rule: Interest Rates, Inflation and The RBA

I’ve been absent from my blog for a while. Sometimes your intentions don’t get realised and life gets in the way! I’ve decided to recommence posting as I learn more about macroeconomics and political economy (a lot of self study) and throw my thoughts out into the public. I find it infuriating that the media has economist spouting bullshit and it just seems to be taken as gospel. If any behavioural scientist out there can explain why orthodox economics hasn’t been delegated to the bin after covid (debt and deficit fears, inflation fear mongering etc..) please share your thoughts. Plus I am trapped in a hotel room with covid. The last few days I’ve been knocked out with sore joints and muscles, a sore chest, coughing, fevers, runny nose, headaches. It’s the worst I’ve ever felt from a virus. Nothing has been ‘mild’ (as some like to make out) and I am triple vaccinated – with my last jab some 5.5 months ago.

It’s not all bad. I took this lovely shot from my room of the sunset.

Anyway…. to our topic at hand!

There is a lot of who-ha on interest rates in the media. Economists that think they should go up (or they’ve gone up too fast/slow) endless talk of inflation, printing money, government spending being too much blah blah blah…. It is safe to toss anything paraded by an economist in the media into the bin with the understanding they are full of trash.

Let us take a deep breath and look at what these decisions mean and whether they will have the desired results. First we need to understand the interest rate discussed in the media is – and how we define inflation.

What is the Interest Rate?

The interest rate referred to is known as the cash rate – and the rate the RBA targets that banks loan to each other. That is the 0.85% figure. In the same way you have an account with a financial institute your financial institute has an account at the RBA. These accounts (known as exchange settlement accounts) need to be positive at the end of each day and account holders who are short need to borrow from account holders who have surplus reserves.

The RBA has started publishing the interest rate it pays on exchange settlement accounts. This is 10 basis points below the target rate. Banks with surplus reserves won’t loan below that rate (currently 0.75%) and they attract a higher interest rate 10basis points above the target to borrow from the penalty window (directly from the RBA) This has banks loaning to each other at around the RBA’s target.

What is Inflation and why is it here?

This is a complex question. There is lots of debate, though most of it not worth listening to, about what causes inflation. I detailed some of that in the mythology of printing money part II and you can see more about inflation here and here. Simply inflation is a rise in the general price level. That in itself is an abstract concept however it’s purpose is to try and eliminate price rises so economists can determine whether real output is growing.

Orthodox economist will usually come out with nonsense around the money supply growth and ‘printing money’ being inflationary. The first thing to acknowledge is that any spending can be inflationary irrespective of who is spending it. Second ‘printing money’ is nomenclature that doesn’t apply to any spending operation in our economies today. The term has its origins when governments started banning private note issuance on notes issued by private banks and started issuing their own treasury notes. You need only look at the hansards from The Australian parliament from 1910 and the introduction of the Australian Notes Act to see the nonsense paraded how it would end the economy and be destructive! Currency is a public monopoly issued by the state. It spends by marking up bank accounts. Once you’ve disabused notions of the nonsense of printing money we can look more seriously at what is causing prices to rise.

The ABS last released CPI results on 27/04/2022

  • Fuel prices caused by easing of covid restrictions and war in Ukraine
  • Rental markets reflecting historically low vacancy rates
  • Grocery products because of transport costs
  • Rising construction costs mostly because the removal of government construction grants that had the effect of reducing out of pocket expenses for consumers.

We can see quite clearly the price increases are a result of supply side issues, due to fires and floods we’ve had, the oil companies cartel behaviour and even the removal of government spending. When you hear politicians or economist say the government should’ve spent less that is simplistic. Government spending can be deflationary – you only need to see my post on the effect of childcare being made free to see what effect that had on the CPI.

Once you break the myth of deficits accumulating debt and it needing to be paid back by our currency issuing government here are some things that can decrease our cost of living.

  • Publicly owned renewable energy infrastructure with a free quota delivered to every household
  • Universal free childcare
  • Parental leave paid at minimum wage until youngest turns 5
  • Free public transport and investment in mass public transit systems
  • Legislated work from home rights
  • Social housing for the masses with buildings built to suit location and strict environmental standards.
  • Expansion of public services to include building local communities and paying people to work in things we currently volunteer for (e.g community gardens, surf life safety, arts etc..)
  • Free Universal Broadband
  • Public Bank to regulate credit markets

My above list reflective of my value system. Our currency issuing government always has the capacity to finance those services, it is a question of whether we have the labour skill and other resources in sufficient quantities to provide them.

What does the Interest Rate have to do with Inflation?

By now the layperson is usually grappling with why the Reserve Bank would be hiking rates to bring inflation down. The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means;

1. Increased income for asset (bond) holders;
2. Rewards markets that have placed bets on rates rising;.
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits;
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

How we should think about Inflation

Inflation is a conflict between labour and capital. The labouring class has little power to negotiate higher wages because of neoliberal governments that have suppressed abilities to bargain (including striking) and abandonment of full employment where as a society we targeted more hours of work than demanded. Currently, capital has the ability to pass on cost increases (or blindly profit gouge) and workers have little legal recourse to fight for higher wages.

And to make things worse for the working class, our governments claim false fiscal constraints about needing to ‘balance books’ claiming it is too expensive to provide universal social services and allows corporations to profit the services we need!

Conclusion

I’ll let you draw your own conclusions on the RBAs decision to hike rates. I think increasing mortgage costs on heavily indebted households is not a great way to reduce inflationary pressures. Monetary policy is a blunt tool that should be tossed into the bin. Any increase in unemployment will be caused by the contraction in spending and may have a negative impact on the CPI, but it hardly solves any of the supply issues and creates more jobless!

We need a populist left agenda around a public bank option with low to zero interest rates on our homes and heavy regulated credit rules (to keep land affordable). I would also merge the current tasks of the central bank into treasury and create a government body in charge of monitoring supply bottlenecks and preparing the best ways to mitigate them and dare I say it use price controls to keep our essential items affordable.

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’

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

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; http://inthesetimes.com/article/21660/united-states-venezuela-modern-monetary-theory-trade-deficits-sovereignty

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; http://inthesetimes.com/article/21660/united-states-venezuela-modern-monetary-theory-trade-deficits-sovereignty

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.

http://bilbo.economicoutlook.net/blog/?p=3773

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.

http://bilbo.economicoutlook.net/blog/?p=3773

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. “

http://bilbo.economicoutlook.net/blog/?p=3773

Conclusion

  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