As people start to grasp the power of a currency issuer thoughts lead to the idea of a universal basic income. Rejections against it are based on ‘not wanting to give money to millionaires’. Then there are those that advocate for a basic income. An income for people that choose not to work.
The first step in understanding why currency has ‘value’ (why we use it) is because of the coercive nature our governments use demanding the currency they issue back in taxes. In order of operations a tax liability comes first, then the spending, then the taxes.
In helping to understand that concept I use the story of ‘the hut tax’. When the British colonised Malawi, to create labourers they needed a mechanism to coerce the locals into needing to accept the colonisers currency. They placed a hut tax on the dwellings and if the tax wasn’t paid they were removed by force. (source) There are other examples of tax liabilities to drive a currency. The colony of New South Wales had liquor licensing to quell the unruly behaviour that stemmed from the production of spirits (the rum trade) In 1824 an act was set up introducing the ‘Spanish dollar’ as a currency and liquor licensing brought in to drive its acceptance. note: the early colony didn’t have a means to mint their own coins. Spanish pesos with holes drilled through the middle were used.
The first reason why I disagree with basic incomes, universal or otherwise, is it undermines the coercive nature of the tax liability. This is a contrived example but it is to emphasis a point. Imagine a society where most people chose to remain on a basic income but we are short of nurses. What coercive mechanism would we use to drive people off basic income into work. The payment of an unconditional income after the tax liability undermines the reason for the tax liability in the first place. That is an error many people make.
The second reason is that ‘work’ however defined is intrinsic to our own identity.
When we try to formulate the psychological effects of unemployment, we lose the full, poignant, emotional feeling that this word brings to people.
The study cited above is from 1938. I chose that study to demonstrate that the effects of unemployment have been studied for quite a while now. The paper discusses unemployment leading to an increased instability and lowering an individuals moral. We create social networks through work, use it to develop and improve skills and create a sense of purpose for ourselves. Not only in terms of a self-identity but through social networks we develop and the sense of contributing to something bigger than ourselves. There are also issues with respect to children and youth growing up in unemployed households. You witness lower self-esteem and declining grades amongst children in unemployed households and of course poverty as a result of insufficient income.
Another point basic income advocates miss is the idea we need to redefine the definition of productive work. The definition of what constitutes productive work was part of the debates happening around the 1930s. It was deemed anyone working and creating a profit was ‘productive’.
Overtime we’ve advocated for social services and provisioning of education, healthcare and utilities to be provided as public goods. This is often seen as a ‘cost’ to society under flawed framing of ‘tax and spend’. Though we would say that workers in those sectors are productive. However, overall ‘work’ as we define it today is viewed as needing to be earning a profit or it is otherwise ‘subsidised’ by taxes.
Work can be defined as something much broader. We can include parenting, the arts, cultural and indigenous knowledge, community work. The list is endless. Basic income advocates use arguments that ‘someone should be allowed to create and develop their art’ and I am all for that. Though there is an idea of reciprocity. We could develop a Job Guarantee where someone can choose a job to develop their artistic skills, undertake courses and provide work of community benefit. They may be required to assist in designing the artwork for a community festival and working with others to discuss ideas and theory. Art isn’t created in a vacuum. There is a social context and artworks often reflect social upheavals and social movements from the era they were created.
Work is about giving back
I chuckle at the idea that if someone chooses not to work we should support them in that endeavour. There are various migrant communities were work is essential in terms of defining their place within their communities and contributing to the survival of those community.
I am a generation removed from subsistence living. My grandparents with their children grew up in a rural village with no electricity. They produced most produce themselves. They would make the bricks to build their houses, locals (usually family) taught in the school and each family took turns in producing various agricultural products. Fruit trees, vegetables, chickens, goats, cheese, olives were all part of the mix.
My grandmother tells me her street, which was made up of her brothers, would take turns in milking the goats to make the cheese. One week it was her turn and it would move up and down the street until it came back to her house. Imagine within that setting you refused to make a contribution. You would be ostracised by the community and not allowed to share in the rest of the produce that was grown.
The basic income undermines the coercive nature of the tax liability that is implemented to create workers in the first instance. That is just a technical fact.
Work is responsible for more than just an income. It allows for social mobility, a setting that allows personal and skill development, it gives us a social standing within our communities, it assist in the development of social networks, and allows for children to grow up in households were they see value in what their parents create in a broader community. This stuff is immeasurable.
There is an idea of reciprocity. I find it difficult to comprehend that someone that expects a high level of social services and public goods feels that they can choose to opt-out of work and be provided with a subsistence living. That wouldn’t fly in a small rural village and I don’t see why it is a valid argument in our modern societies.
The idea should be to redefine productive work and include things that have public purpose and enhance our communities making them better places to live.
If you demand a high level of public services and want our government to ensure enough work for all the other end of that bargain is contributing to your potential to make our communities desirable places to live.
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.
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!
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)
‘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.
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
Treasury spends by marking up accounts at the RBA
AOFM issues bonds – in Australia they are called Australian Government Securities (AGS). Financial Institutes purchase these from currency in their ES Accounts
This operation drains ES Accounts and adds them to securities accounts
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.
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.
I’ve been neglectful of this blogging project as my mind has been pre-occupied with other projects. I finally have one space to get back into writing.
A little while ago I did an interview with US based podcast macro ‘n cheese on a general chat about MMT and an understanding on how we understand and perceive value.
The podcast spoke about value in the sense of valuing forms of employment tied to cultural customs, particularly around different groups of people. I used my experiences of my own observation with my family and some lateral thinking that a similar concept could be applied into a formal Job Guarantee structure.
For example in the podcast I discussed ways family members interacted with each other at a social level and how that interaction brought meaning and provided for their families. I recall my grandmother would pick broadbeans with friends and prepare them for dinner but this activity was done as a social task amongst a group. The labour input required brought about other socially beneficial outcomes. Conversations were had, food was prepared, people felt a sense of purpose and meaning.
That sort of activity and outcome is similar to the lived experiences from the Jefe’s program in Argentina. The income aspect was a secondary benefit by the participants who valued the sense of self and community the employment program brought about. Many of the participants then used those skills to develop further projects such as bakeries, textiles – making clothes etc…
The program has allowed local and municipal governments who are most familiar with the economic needs of their communities to administer the program. In addition, it has recognized certain kinds of activities as socially useful, thereby helping redefine the meaning of work –
If we use some lateral thinking the sorts of tasks described above that this communities value, such as agriculture/permaculture, cultural services – such as crocheting and sewing can be brought into a JG structure alongside a skills development framework and can be used to create ‘public value’. Things like community gardens, arts workshops etc…
Adapting that thinking to bring about employment to communities that are heavily disadvantaged (such as indigenous communities in Australia) a voluntary JG – democratically run at a local level, could have those communities deciding what they consider productive employment.
I draw that from the paper The Uluru Statement: “A First Nation’s perspective of the implications for social reconstructive race relations in Australia.”
“…we believe that Aboriginal people and Torres Straight Islanders will be able to refocus their energies on the everyday requirements for self-determination. Importantly this will include participation in the labour market and, for many, forms of employment that occur on Country in ways that strengthen and add contemporary value to Indigenous forms of knowledge.”
That understanding of value that contributes to our well-being is neglected when studying economics. It’s not really something you can measure. How do measure the social impact children gain by seeing a parent go to work each day? How do you measure the social and community relations people develop by going to work? How do measure the impact employment brings on someone’s sense of self?
In today’s societies a sense of self is largely tied to employment and the institutions you belong to. I use the sociological definition of the term institutions. An institution in this context is an entity that a collective belongs to. For example education, law, family, religion, politics, economics all are institutions or contain institutions within them.
What it means to be a person is anchored in your belonging to an institution. An institution is lasting. (e.g A widow belongings to the institution of marriage even though her partner has passed away. They’ve participated in an institution that has approval of the collective consciousness and this forms part of their identity.)
Using that same structure our identities are intrinsically linked to our occupations. We already know the devastating effects unemployment and underemployment brings on an individual’s physical and mental health and the social implications that not being able to provide for yourself or family and participate in society brings.
The institutions we belong to bring about a ‘social solidarity’. Durkheim outlines this in his Division of Labour that “being imbedded in a group that provides cohesion, a sense of participation, togetherness” is how societies provide for integration and regulation. By virtue of being employed it brings about a sense of self identity and being gainfully employed allows one to participate in a meaningful way in society.
By implementing a Job Guarantee with an emphasis on changing the definition of productive employment we can bring about valuing different forms of cultural knowledge and practice that currently go unrecognised or unpaid.
By way of example I’ll recite my examples above, activities such as community gardens, arts workshops, flora rehabilitation, surfing can all be included within a JG framework provided they allow for a public purpose.
It may be that a group of people participate in a community garden and sand dune rehabilitation while studying horticulture with an goal of becoming a Ranger for a National Park. Indigenous forms of land management can be incorporated into this program. Out on country it may be that a community wishes to teach the ways in which they care for country. Learning about this cultural practice and partaking in the program can be a Job Guarantee. It is our imaginations that are the limit to what type of activities are included.
There is a lot more I wish to write and a lot more research I wish to delve into. I should conclude by saying a JG is not there to replace work to lower wages in the public sector. It is there to value forms of work that currently go unrecognised in our society.
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.
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.
Government Balance (T-G)
Private Balance (I-S)
External Sector (X-M)
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.
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.
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!
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.
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.
Governments spend by marking up the appropriate account
Bonds are issued voluntarily to match deficit spending changing the portfolio mixture.
The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other. (see image above)
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.
Treasury deficit spends adding to reserve levels
AGS are issued (voluntarily) to match the deficit
RBA uses its domestic market operations to ensure there is liquidity
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’
Governments don’t fund deficits they are a result of spending more than taxation.
Dollar for dollar Government Deficits have to match the non-government surplus.
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.
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.‘
On the liabilities side of the Federal Reserve’s Balance sheer, the amount of currency outstanding has continued to rise gradually, but reserve balances (deposits of depository institutions) have increased dramatically relative to the prior financial crisis’
The orange line is the increase in deposits of financial institutions in the US equivalent of exchange settlement accounts. Clearly, there has been no great inflationary outbreak, at least never in my life time. Since the GFC the Federal Reserve has embarked on several QE programs the latest of which has seen their purchases of bonds increase from $US700bn to an unlimited number of bonds. This swaps an asset of a bank (the bond) into currency in its exchange account and the bond is held with the central bank.
So we can put increases in the money supply, ‘printing money’ and an inflation outbreak to rest. It’s not a thing.
There are other factors that contribute to inflation and even hyperinflation. The first step is understanding what economist call ‘cost-push’ inflation.
This differs to the demand side in that it is the price level of a good or services increases either via an imported price (something the national government can’t control) or domestically via a fall in production and productive capacity.
Fadhel Kaboub at the Global Institute for Sustainable Prosperity in the linked news article below says
MMT points to a different primary cause of inflation in developing countries: not domestic spending, but foreign debt and a resulting lack of “monetary sovereignty.”
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.
Venezuela had external debt denominated in US dollars and little productive capacity to satisfy the needs of its population. It has nothing to do with Government spending or ‘printing money’ but sanctions imposed upon it that reduce self-sufficiency. A more just world would cancel debt denominated in an external country, aid the country in building productive capacity to be self-sufficient and have the US purchase Venezuelan bolívar on FOREX markets to maintain the currency between a certain range so they can purchase imported products.
Professor Bill Mitchell has detailed post on hyperinflation in Zimbabwe where he identifies one of the major causes of the inflationary outbreak to a fall in the nations productive capacity. In Zimbabwe’s case their agricultural production, that also happened to be one of the nations largest employers.
The problems came after 2000 when Mugabe introduced land reforms to speed up the process of equality. It is a vexed issue really – the reaction to the stark inequality was understandable but not very sensible in terms of maintaining an economy that could continue to grow and produce at reasonably high levels of output and employment.
The revolutionary fighters that gained Zimbabwe’s freedom from the colonial masters were allowed to just take over productive, white-owned commercial farms which had hitherto fed the population and was the largest employer. So the land reforms were in my view not well implemented but correctly motivated.
The output of the nation was decimated and it saw soaring unemployment levels, to over 80%. How do you reduce the demand for food without forcing people to remain malnourished and even starve?
The central bank was using its foreign reserves to purchase food supply, limiting the capacity of other industries like manufacturing on FOREX markets to purchase foreign currency and ending up in the situation where they couldn’t operate their plants. Mitchell goes on
The situation then compounded as other other infrastructure was trashed and the constraints flowed through the supply-chain. For example, the National Railways of Zimbabwe (NRZ) has decayed to the point the capacity to transport its mining export output has fallen substantially. In 2007, there was a 57 percent decline in export mineral shipments (see Financial Gazette for various reports etc).
Manufacturing was also roped into the malaise. The Confederation of Zimbabwe Industries (CZI) publishes various statistics which report on manufacturing capacity and performance. Manufacturing output fell by 29 per cent in 2005, 18 per cent in 2006 and 28 per cent in 2007. In 2007, only 18.9 per cent of Zimbabwe’s industrial capacity was being used. This reflected a range of things including raw material shortages. But overall, the manufacturers blamed the central bank for stalling their access to foreign exchange which is needed to buy imported raw materials etc.
The Reserve Bank of Zimbabwe is using foreign reserves to import food. So you see the causality chain – trash your domestic food supply and then have to rely on imported food, which in turn, squeezes importers of raw materials who cannot get access to foreign exchange. So not only has the agricultural capacity been destroyed, what manufacturing capacity the economy had is being barely utilised.
A country like Australia has none of these issues. Fears of hyperinflation are unwarranted. Mitchell describes the situation in Zimbabwe as a result of a supply side collapse, a 45% fall in agricultural capacity, difficulty in obtaining imported materials forcing manufacturing to lay idle and compounding that with a Government interested in spending for political favours while your nations productive capacity has collapsed
“Further, the response of the government to buy political favours by increasing its net spending without adding to productive capacity was always going to generate inflation and then hyperinflation. “
Tax liabilities serve the purpose of creating a demand for an otherwise useless currency.
Government debt is issued after the fact a currency issuer has spent. It moves currency from reserves into a securities account.
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.
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.
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.
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.
Since the beginning of the corona virus Governments around the world have began to spend huge sums without a call from anyone on ‘How are you going to pay for it?’ In a recent 730 interview the reporter asked the question on how a sovereign currency issuing government would ‘pay for’ its spending down the track.
LEIGH SALES: Has any thought been given yet as to how Australia will ultimately pay for this or is that to be worked out down the track?
JOSH FRYDENBERG: This will be paid back for years to come. There’s no secret in that and of course, we will enter into discussions with the credit rating agencies over due course.
When I’ve publicly stated currency issuing governments have no intrinsic financial constraint the retort back is usually something like ‘if you print money you just get inflation’
This post will look at the way in which currency issuing governments spend, how ‘printing money’ does not apply to any spending operation, look at what government debt is.
The first thing to note is that there is a difference between a currency issuer and a currency user.
The Australian Government is a currency issuer. It is a monopolist of the Australian dollar – It faces no insolvency risk
As a monopolist over the currency it always has the capacity to spend (that is not a call for unlimited spending)
Regardless of past deficits or surpluses the Australian Government spends in the same way every time. – There is an appropriation bill that passes through the legislature, Treasury instructs the Australian Office of Financial Management to give the Reserve Bank an instruction to credit the relevant bank account(s)
The very concept of saving for an issuer of a currency is ridiculous. Savings are the act of forgoing current expenditure and are used to spend at a later date. When you issue a currency you always have the ability to spend.
We can conceptualise the process from the above figure. Like you have an account with your bank, your bank referred to as, Authorised Deposit Taking Institute (ADI) has an account with the Reserve Bank of Australia. They care called Exchange Settlement Accounts (ESA). All Federal Government spending marks up reserve levels of ADIs and those ADIs credit the relevant account holder.
Taxation has the opposite effect. Demand deposits decline and Reserve levels also decline. It means less spending power for currency users.
There are institutionalised arrangements where The Australian Government holds an Offical Public Account with the RBA, however this is merely an accounting arrangement and the numbers within the OPA are not included in the money supply. The image below is a screenshot from the notes of the RBAs data on the financial aggregates of the Australian economy.
There are two options for a Government to adjust aggregate spending levels. Fiscal Policy (Spending and Taxing) and Monetary Policy (Interest Rates)
We have seen how Government spending adds to reserve levels and taxation does the opposite. What Government spending also does is effect the RBAs target rate. This is the interest rate that you hear about on the first Tuesday of every month and it is the rate ‘targeted’ for ADIs to loan to each other using their Exchange Settlement Accounts (ESA)
One of the purposes of bond issuance is to defend an interest rate. As noted above all Federal Government spending increases reserves with ADIs.
As government spending adds to reserves and increases their level it pushes interest rates down and as taxation removes reserves it pushes rates up.
Obviously fiscal policy can not be used to defend a particular target rate as it would cause all sorts of havoc. It is the RBAs job to ensure the levels of reserves are right so banks lend to each other at the target rate.
Bonds are used to drain and add liquidity. When a bond is issued (sold) it drains reserves. It is the equivalent of an ADI moving dollars from their ESA (The account used to pay other ADIs) to a securities account, an account which earns interest.
The opposite happens when bonds are purchased by the RBA. It moves dollars from the ADIs security account to their ESA. Bond issuance doesn’t alter the supply of funds but merely the portfolio mix.
The activities of Treasury and The RBA need to be very closely co-ordinated to ensure the payment systems functions.
The RBA needs to ensure sufficient reserve levels so ADIs can pay each other. Remember loans create deposits and spending and taxing by the treasury can have huge fluctuations in the levels of reserves.
Rather than relying on bond issuance to ensure a particular target rate is achieved the RBA uses what is called the corridor system. You can watch this video of Katherine from the Domestic Market Operations department at the RBA to understand how it works. Thank you Katherine.
Once you take into consideration the corridor system, bond issuance becomes about liquidity management and ensuring there are sufficient reserves so ADIs can pay each other and our payment system functions.
The RBA will always have an option for an ADI to ensure their ESAs are positive. If they are short of reserves they can borrow from the ‘penalty window’. This is where the RBA acts as a Lender of Last Resort and loans the required reserves to the ADI.
In no way does the bond issuance ‘fund’ the ability of a currency issuer. There isn’t really a reason for treasury to match deficit spending with bonds either. It just means the RBA may have to enter into more repurchase agreements to ensure there are sufficient reserves in the system. Because bond issuance moves dollars into securities accounts, draining reserves, the RBA then enters into what is called repurchase agreements (repos) where it issues bonds and then buys them back the next day with an interest rate to add to reserve levels.
What does all this have to do with ‘printing’ money. I am never too sure what people mean when they use this term.
Governments spend by marking up the appropriate account
Bonds are issued voluntarily to match deficit spending changing the portfolio mixture.
The RBA uses its Domestic Market Operations to ensure there is liquidity in the system so ADIs can pay each other.
The RBA uses a corridor system to defend an interest rate.
The very concept of borrowing for a currency issuer or using ‘this record period of low rates’ to invest is non-sensical. There is no borrowing or debt in the same way it applies to a household. Deficit spending adds to reserves and that deficit spending is what gives ADIs the ability to purchase bonds and that is what we refer to as Government debt!
The article states that the increased costs of government spending in normal times don’t apply to these pandemic times. That’s ridiculous, there is no real cost to government spending, it marks up accounts using a computer. Costs are real resources. Environmental damage, loss of habitat, climate change, individual hardships, unemployment, mental and physical health etc…
The author outlines three reasons in the risk of this ‘pandemic’ spending.
“The first is the potential for increased government spending to “crowd out” the private sector. When governments run budget deficits they are borrowing money from investors, money which is no longer going to other worthy investments. Increased demand on the limited pool of savings, in normal times, means higher interest rates”
The above quote is straight out of the loanable funds theory that states there is a limited pool of savings that banks loan from and Government spending in excess of taxation then uses that limited pool and pushes rates up. That is simply not true. I outlined in a previous post on how loans create deposits and above have described the process of how the RBA ensures sufficient reserves to ensure ADIs have sufficient reserves to pay each other. The loanable funds theory is on of those neoliberal myths that is used to demonise public spending. I like to use this thing called observation of reality. We can very clearly see through the GFC and now this crisis, deficit spending has increased and we have record low interest rates. You can see central banks around the world set interest rates every month, there is no natural reason they will suddenly increase and governments will be powerless to stop it.
“The second potential cost of increased government spending is the future cost of paying interest on that debt.“
The ‘debt’ are securities account that ADIs hold at the RBA. If you don’t like Government debt, don’t issue it.
Furthermore, the RBA announced it will engage in Quantitate Easing – a process where it chooses a particular treasury maturity (say three year bonds) chooses a yield it desires and begins purchasing those bonds from the market. Central Banks around the world have engaged in this practice since the GFC. Many central banks now hold treasury bonds. It is the treasury choosing to issue a bond, an investor buys that bond, it is then purchased by the central bank (with a capital gain for the investor) and the interest payment is then paid from treasury to the central bank who then credits the treasury account.
“The third cost of increased government spending is that it can be unsustainable (meaning it can cause problems if that level of spending continues) or can destabilise financial markets.“
Government spending can never become unsustainable. It is a currency issuer and literally as infinite financial capacity. Why are financial markets an indicator of sustainability? Fiscal policy shouldn’t be there to appease financial markets, who desire less public expenditure and the ability to make more profits, it should be there to ensure our own well being. You judge fiscal policy based on how well the bottom of the income spectrum is doing and whether we have our desired levels of public services and are reaching our goals to mitigate against climate change.
It is pathetic that the vast majority of financial journalists/commentators get the very fundamentals of the way government spending works wrong.
Adam Triggs in The Canberra Times, Leigh Sales in her interview with the Treasurer, Jessica Irvine in the Sydney Morning Herald who said “These surplus funds can then be used to pay down any existing debt.,”
No, currency issuers can always spend regardless of past deficits or surpluses. Government Debt are bonds purchased by Financial institutions who obtain Australian dollars from Federal Government deficit spending. Surpluses are not savings. It is the government spending less than taxing and removing reserves.
Lenore Taylor of The Guardian who wrote “The country will be deeply in debt, as will many households.” The Taylor article makes an argument “Having seen the life-saving benefit of our public health system, there will surely be enormous pressure to fund it better in the future.” I agree with the overall spirit of the article. However, we won’t achieve greater levels of public services and spending, if we continue to frame economics using a neoliberal perspective.
For an accurate discussion of how our monetary system operates listen to this discussion between financial journalist, Alan Kohler and Emeritus Professor Bill Mitchell.
In term of the term ‘printing money’. It doesn’t apply to any spending operation.
All spending by a currency issuer is an authorisation bill through the relevant legislature.
There is then an instruction from somewhere within treasury to the central bank to mark up the relevant account.
‘Government debt’ or treasury bonds are then issued.
The analogies we use to describe ‘the economy’ separate it as an abstraction from our own lives. Watching 730 I heard an economist state something along the lines of obviously ‘the economy’ takes a hit and health takes priority.
It may seem useful to separate ‘economic’ activity from our lives, health and social relations. That is a very arbitrary distinction and the reality is there is no separate sphere of economic life. Just because there is a health crisis does not mean workers need to lose income, it does not mean we have to have a recession. Currency issuing Governments can deal with any collapse in spending and avoid recessions.
This article on ABC News used classic neoliberal framing when it stated in regards to the measures put in place to stop the spread of covid-19
”Measures might include forgiving taxes, paying a fraction of wages (but also requiring employees to be paid less overall), mandating big temporary rent reductions (landlords are typically better placed to absorb losses than small businesses), providing loans and encouraging — or requiring — banks to suspend loan repayments and perhaps interest payments.”
This is the sort of strategy you would expect from right wingers and faux progressives. The Australian Federal Government is a monopolist of the $AUD. It can always make payment. A progressive response would nationalise industries that fail (e.g airlines) and nationalise banks, removing interest already paid off home loans, setting the repayments at 0 per cent and enact a Housing Guarantee for all. No worker should be forced to concede wages. A welfare system can easily pay replacement wages while we are in lock down.
I find it somewhat ironic that ‘progressives’ have argued for a $75 a week (later increased to $95) raise to Newstart (which still left the unemployed below the poverty line) and Governments since Howard have refused to raise it arguing it would ‘cost’ the budget. Suddenly we have an impending spending collapse where unemployment would sky rocket and all the questions of ‘how do you pay for it?’ disappear. The conservative Government increased Newstart by $360 a fortnight more than what those ‘progressives’ were calling for. The total for what is now the job seeker allowance is $1,115.70 a fortnight. Albeit a temporary six month measure. Change this payment to a basic income for anyone with no employment and institute a Job Guarantee at a living wage.
Progressives moderate demands based on nonsense that we need to ‘find tax dollars’ ‘tax the rich’ and ‘balance the books’. All federal government spending are instructions that mark up the size of bank accounts. Deficits are meaningless irrelevant statistical artifacts.
I thought it a worthwhile exercise to dissect the language we use when discussing economics and to help others purge neoliberal framing from their minds and use new frames. Using neoliberal framing merely reinforces it undermines the ambition within a progressive goal.
Household Analogy The analogy that a Government is like a household that needs an income in order to spend or borrows in excess of taxation. The question posed for public expenditure is ‘How do you pay for that?’
What the GFC and now the Covid-19 pandemic demonstrate is that currency issuing governments always have spending power. They spend by appropriating a bill through the legislature and marking up numbers in a bank account. All the questions for on ‘pay for’s’ have remarkably disappeared. Government spending is more akin to a scorekeeper at a football match. They mark points up when a goal is scored. These numbers come from nowhere and they are not limited by the points they deduct.
Mortgaging the Future of our Children and Grandchildren / Racking up the Nations Credit Card This is the analogy used when discussing Government debt. Federal Government debt (debt held by the currency issuer) is a different operation to a user of a currency. Currency issuers choose to sell bonds to match their deficit spending. Like you have an account with a bank your bank has an account at the central bank – when the currency issuer spends it adds to these reserve accounts. Financial institutions buy bonds from currency obtained through previous government deficit spending. It moves currency from their settlement accounts (accounts banks use to pay each other) into a securities account that earns interest. The national debt is nothing more than the amount spent into existence by the currency issuer. If you have a problem with interest; The answer is to not issue treasury bonds.
Deficit Spending A deficit is the government spending more than it collects in taxes. Some 7th grade algebra shows you that the other side of the equation has to be in surplus. For example if the government spends 100 and taxes 50, we record that as a deficit of -50 however that +50 sits within the non-government sector. All deficits go somewhere.
The deficit itself is not a mechanism to finance something, it is merely the result of spending decisions and the non-governments net desire to save. (it might be in surplus depending on the current account) All spending by the Federal Government is funded by an appropriation through the legislature.
Printing money Printing money is a term that doesn’t relate to any spending operation. Currency issuers spend in the same way regardless of whether a previous deficit or surplus has been run. They don’t spend the proceeds of tax collection or finance themselves via bonds. All these operations require deficit spending from the currency issuer to begin with.
All spending works as follows. There is an appropriation bill and an official in treasury instructs an account to be marked up and the central bank (which is part of the consolidated government) does so.
There are some institutionalsed arrangements where the treasury has numbers in the Official Public Account – this is important from an accounting perspective to show the amount that has been removed from the system. The numbers in the OPA are not included as part of the money supply.
Cost This word gets thrown around and has a dual meaning. There is a financial cost (which is applicable to a user of a currency) and a cost in real resources. So to deal with mass pandemics, you need health workers, cleaners, enough respirators, hospital beds, etc… if any of these things are in short supply you need a strategy to ramp up production and ensure we have the real resources to deal with it. The cost is the labour power, skills and raw materials required to implement this. The financing by a currency issuer has no cost. It marks up accounts.
Welfare dependency / dole bludgers etc.. It is framed that people on welfare (usually the unemployed) are dependent on the ‘tax payer’. Unemployment is a result of insufficient spending. It is a political choice and the Federal Government as a monopolist of the $AUD can always purchase anything for sale in that currency, including idle labour.
This post here outline how the issuers spending creates employment and a lack of spending creates unemployment. In non-monetary based societies you don’t have unemployment or employment. Unemployment exists because we haven’t created enough opportunities for people to engage productively with our society.
Governments can always guarantee employment. Here is an example of the Victorian Government creating direct employment opportunities. It’s a small amount set aside, and $500 million won’t offset the income losses caused by the shutdown but you can easily extend this concept, fund it federally and use it as a transitory arrangement to aid workers seek better employment opportunities even when the crisis ends.
Conclusion This idea that somehow employment needs to generate profits as a marker of efficiency and to ‘fund’ public expenditure is wrong. Provided the real resources exist, they can always be deployed for a public purpose. There are countless tasks that can be performed that make our communities more livable. From work in the arts, to rehabilitation of wetlands, restoring native flora, creating and maintaining public spaces – caring for the elderly etc…
When we talk of public services as a cost (rather than a benefit) we reinforce a framework that is morally bankrupt, views public spending as a real cost on individuals and we trap ourselves in circular arguments of needing rich people to fund our public services. Everyone needs deficit spending, including the rich.