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AIMN Interview: Bill Mitchell – an unreasonable man

George Bernard Shaw observed that; “A reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself.  Therefore, Shaw argued; all progress depends on the unreasonable man.”

Within Shaw’s definition, Bill Mitchell is an unreasonable man.

As an economist, Mitchell has persistently argued against the Chicago School theory of ‘trickle down’ since the mid 1980s and continues to do so today.  He remains in his own words; “One of a few trying to pull together post-Keynesian theories with other insights to create what we now call Modern Monetary Theory.”

“However,” he adds “there’s now a lot more than five people talking about it and reading about it, following our work, and I get a lot more invitations to speak overseas. There’s now a second generation of MMTer’s who are our young Ph.D. graduates going out and spreading these ideas.”

As someone who is wary of giving interviews and who guards his written work closely, it came as a surprise when Mitchell agreed to my request to talk about MMT.

“A lot of what I tell them often goes over their heads” says Mitchell referring to the MSM. “They rarely if ever mention my name, and then they go to my blog site, paraphrase what’s there and write it up as their own work.”

The plan was to ask Mitchell a range of general questions across a broad spectrum of MMT, rather than a detailed explanation of two or three of the finer points of a controversial discipline that is rapidly gaining popularity as an extremely powerful counter argument to neo-liberalism, especially among the unemployed.

Economics tragics may visit Mitchell’s blog site http://bilbo.economicoutlook.net/blog/ should they wish to examine Modern Monetary theory in greater depth.

I found the softly spoken Mitchell not only generous but also patient, for which I offer my sincere thanks.

(Italics are the author’s}.

I began by asking Mitchell: “What are the most common misconceptions about MMT?”

Mitchell: It’s not so much misconceptions about MMT but rather peoples misconceptions of the capacities of governments.

The classic analogy that people have whether they articulate it or not, is that the government is like a super sized household, and I’m talking about currency issuing governments here, not Eurozone governments,” he emphasised.  “And are subject to the same constraints that a household is.

We all know about budgets. They’re things we have to continually manage on a weekly basis in our households. We give our kids a ‘budget’ to teach them the value of money.

So it’s natural that we personalise our integral understanding of how the government approaches things, and the first thing that we presume is that the government can run out of money. After all, we can run out of money, and we know that if we want to spend that we’ve got to earn income and we relate that at government level as raising taxes or that we have to sell assets.

If we want to raise money we have to sell some stuff on e-Bay, and so we interpret that in the government sense as privatisation. The third option is that we have to go to the bank and borrow or use our credit card and we interpret that as government borrowing.

So from this, we build a picture of government being like us. We see it as bigger than us but we see it financially constrained in the same manner that we are, and just like us it can’t ‘max our credit card out’ or ‘spend like a drunken sailor’ and that ultimately we’ve got to pay the piper, and all these morality tales that we build into frame the narrative.

That’s the biggest misconception. We don’t appreciate that the Government has no financial constraints.”

AIMN: MMT always draws fire from its critics through its insistence that governments can simply print more money to cover debt.

Mitchell: This is the second misconception. The average person has a total misconception of a ‘cost’. So, when MMT says that the government has no financial constraints, that’s not the same thing as no constraints. For example, you and I can’t buy anything and everything that we want in Australian dollars because we can only buy what our spending resources allow us to.

As a currency issuing government though, we can buy whatever we want. Whatever is for sale in the currency of issue – we can buy, and… that’s all it can buy! This means that it is not constrained by how much money it can spend but what is available for sale.

In other words, we’ve converted the concept from a financial constraint to a real constraint. Material things, goods and services.

For the individual, cost is calibrated in monetary terms, how much did it cost for this phone? What is the cost of a holiday?

These are real costs for us because if we spend the money on them we don’t have the money to spend on other things because we’re financially constrained, whereas for a currency issuing government, the numbers that go on the financial statements they punch into the “Budget papers” are not costs at all.

AIMN: How is money creation accounted for?

Mitchell: Someone in an office types it into a spread-sheet. They (Reserve Bank and Treasury), have double accounting ledgers for seignorage and notes.

The accounting’s important, because it has to equal the accounting that shows dollar for dollar the government deficit equals the non-government surplus. It’s very important that people understand this.

If you want the non-government sector to run down debt, then the government sector has to run-up debt. It’s wrong to say that the accounting is irrelevant, but it’s trivial in the extreme.

When the crisis hit the US, the Federal Reserve immediately transferred 80 billion dollars with one key stroke into the American private banking system – boom! – just like that.

When Ben Bernanke appeared before Congress to explain where the money had come from, he was asked; had it come from taxes? No, said Bernanke. Then where did it come? Bernanke replied that; ‘you’re best to understand that it came out of thin air.'”

Notes and coins are trivial. They’re just a small part of it.

The other really important issue is what the concept of a “cost” is because we always talk about what the cost to government is. The cost isn’t something that appears on numbers statements or balance sheets. The cost is the real resources that are being deployed by that spending.

The “cost” is a real resources concept, not a financial concept.

So when we say ‘what does it cost for the Government to run a program?’ It’s not the dollar outlay that appears in the papers. The cost is the actual real resources that are diverted or used in that program.”

AIMN: Define real resources.

Mitchell: Well, I would argue that the federal government of Australia and all currency issuing governments should make an unconditional offer of employment at a fixed wage to anyone who can’t get a job.

Then the question becomes ‘well, how can the government afford it?’

My argument is that while the typical narrative will assess the cost in the terms of the wages paid, the overhead costs and the supervisory costs and say the cost of the program is 20 billion but this is not the cost at all.

The cost is what extra food are the workers who are converted from unemployed to employed going to consume? What extra clothing are they going to require? How much extra transport are they going to use? What materials and equipment are those workers going to use, and working capital to convert into productive output?

That’s the real cost.

The real resources of a  Job Guarantee program would be the extra tools the worker’s using or the materials needed.

So when people say ‘How can they afford it?’ Of course they can afford it as long as those real resources are available and one of the clearest indications that there is a massive amount of real resources available, is unemployment.”

AIMN: You’ve been highly critical of the Job Network System/Jobs Services Australia in the past, do you think that the new model, Jobactive will fare any better than its predecessors?

Mitchell: When governments at different periods over the last decades abandoned the post WWII commitment to full employment, they created a head ache for themselves because even though they were intent on reducing public outlays, short of leaving people to starve or shooting them, they had a huge pool of unemployed that they had to manage in some way.

And consistent with all of the ideology of outsourcing and privatisation etc… they created this nightmarish system of managing the unemployed, which I call an industry. The Job Network system, Job Services Australia and the latest incarnation which has just started to unfold. It’s a new industry and it’s one that has zero productive output.

Its sole role is to manage the unemployed, rather than get them work which was the stated aim since it began in 1998.

The vast array of empirical evidence reveals that it has failed dramatically. Before the GFC, the headlines in the MSM continually featured statements from industry stating that we had massive skill shortages in Australia.

How do you get skill shortages when you’ve been spending billions of dollars allegedly re-training people, and preparing the unemployed with new skill sets? All of the evaluation, one way or the other, indicate that it’s a parasitic, failing industry.

It’s creating a profit seeking behaviour or if it’s a not for profit organisation, some sort of rent seeking behaviour which is somewhat different but always manifests in high executive salaries and high management fees and captures public funding. We also know of the massive fraud in the scheme.

It was meant to be a private market for job services, and it was using all the ideological took kit from the mainstream economics textbooks about the benefit of free markets.

Yet, it wasn’t a market at all.

The government set the price because it set the contracts, the firms weren’t allowed to compete in a market, there were no competing job services. It was all stage-managed. The consumer set the prices and fixed them, there was no competition. It was just a nasty little way of deflecting public responsibility into the private providers who will have a socio-pathological bias in the way they treat the unemployed.

The whole concept of being unemployed was re-framed and suddenly the unemployed became clients or customers.

They’re not customers! They’re unemployed – they haven’t got a job!

Yet, now they’re clients, as if they’re consumers, as if they’ve got choices. In the first model of the JNS, they didn’t have any choices about placements, which is also seems to be the set up with the latest model.

The unemployed are not are a market, they’re not a product!”

AIMN: How does MMT circumvent further unemployment and create jobs?

Mitchell: First you have to understand why unemployment arises. The Neo-liberal ideology that supports this harassment of the unemployed through this unemployment ‘industry’ has created the narrative and the construction that the cause of unemployment is the individual cause. If the person hasn’t invested in skills earlier in life, has a lackadaisical attitude to life, doesn’t want to work, prefers to live on the dole even though its well below the poverty line, that somehow this is created as some sort of Shangri-la that people aspire to as a life style choice.

The unemployed, who are the victims of systemic failure, are suddenly in the media and therefore in the public eye, as the cause of the problem.

You can’t search for jobs that aren’t there. You can push and shove and harass people to search harder but if there’s only 100 jobs and there’s 120 people chasing them, bad luck! You can rev up people through fear and income support loss but if there’s a shortage of jobs – there’s a shortage of jobs!

If you understand the systemic failure – and when there’s systemic constraints individuals have very little power – one person against the system. Why does the system fail to produce enough jobs? Marx knew the answer, and later in a more acceptable form in the West, so did Keynes.

An economy is an input generating, output generating, spending machine.

If the income that’s generated in some period isn’t re-spent the next period, then the production plans of the firms that were based upon that expected spending will fail. They’ll overproduce. When they have unsold inventory, they lay off workers.

It’s so basic. Spending equals income and that equals output It’s the most basic rule of macro – economics that’s been lost in all of this.”

AIMN: Critics of Keynesian economics are quick to point out that Keynes theories eventually led to stagflation. Why would MMT be any different?

Mitchell: Keynesian economics were developed during the fixed exchange rate period, when governments did have financial constraints because of convertibility issues, the tying of currency stocks to gold stocks. Nixon ended Bretton-Woods in 1971 even though it continued to live on for another few years in various forms.

That meant that the central bank was no longer required to maintain the exchange rate, and that monetary policy was no longer tied to the need to attract capital inflow and to suppress imports to maintain the currency position. The Keynesian economics of the ’50s and ’60s was within a fixed exchange rate system, whereas Modern Monetary Theory understands that, but talks about the implications of the break down of Bretton – Woods. The world changed dramatically in 1971 but economic thinking didn’t change with it.

Keynesian economics didn’t create stagflation. The commitment to full employment didn’t create stagflation. Most people have this idea that if the government ‘spends too much’ it creates inflation.

The only way you can attach meaning to that is if you think of inflation as a certain amount of goods being available for sale and too many people wanting to buy them. In economics this is called ‘demand-pull’ inflation. Too much demand for the supply.

Inflation makes sense in that context and therefore you understand that if any of the components of total expenditure like the consumption, investment, or government spending or export spending are in sum greater than what’s available for sale, then there’s got to be some rationing device because we know that the production process responds by increasing output when there’s more spending but if it can no longer increase output it has to ration that demand somehow and that’s by price rises.

That’s a sensible thing and therefore we understand that all expenditure components generate inflationary forces if they outstrip supply. The stagflation of the ’70s, stagflation being inflation and unemployment, the inflation component had nothing to do with the demand being too strong, it was the oil price rise. and so we had up until then the relatively rarer concept of ‘cost pushed’ inflation where oil prices rose, raw material costs rose, the costs of production rose, that pushed up prices and then the government responded to that with contractions to fiscal and monetary policy which caused the unemployment.

As long as you don’t have raw material shocks, and spending is keeping pace with productive activity then there wont be inflation.”

AIMN: Does MMT think it’s worthwhile chasing the very wealthy for their taxes providing they aren’t spending their gains, rather, why not run an increased deficit over a over a short term. What about the rest of us?  Why can’t we have the option of saving rather than paying taxes?

Mitchell: The fundamental principle is that if the non government sector which is made up of the external sector and the firms and households all together and all of their spendings and savings plans, don’t spend as much as they earn each period, then there’ll be a spending gap.

If that gap’s not filled then there’ll be unsold goods produced  from last season, leading to worker lay-offs. So the fundamental idea relates back to the causes of unemployment. If the non-government sector isn’t intent on spending all their income each period, then the government sector has to fill the gap. Typically, it has to run a deficit.

Then you say; what about all those rich people who have got lot’s of savings? Why don’t you tax them more and run a smaller deficit. But if the government reduced its deficit to tax individuals who aren’t spending, then you’re going to get another spending gap and then the level of spending will fall below what’s required to maintain full employment.

Progressives love the idea of taxing the rich but MMT’s builds on the work of Abba Lerner’s 1940s work, Functional Finance and what Functional Finance tells you is governments never tax to raise funds.

The function of tax is to reduce the spending power of the non-government sector. Why do we want to reduce to spending power of the non-government sector? So that you can create more space, real resource space for the government sector to spend, so you keep the economy below the  inflation constraints.

The level of taxes that you’d want to raise in total are calibrated by the amount of spending space that you want the  government to have to maintain full employment. So taxes aren’t to raise revenue. That argument implicitly assumes that you could reduce your deficit because you’d have more money.”

AIMN: So you’re not in favour of the ‘Buffet Solution’ to tax the the rich?

Mitchell: It completely misunderstands the role of taxation and that’s an understanding that MMT completely re-orientates your thinking about.  It’s to reduce spending power to create more real resource space. Given that there’s got to be an overall tax take to make real resource space available for the governments program, it’s not to fund the government’s program, it’s to make the real resources idle that the private sector may have been using, labour and other resources. Because if you don’t make those idle then the government will just create inflation.

Given that there’s got to be some level of taxes commensurate with your aspirations for a public sector program then the question is valid; how do you raise the revenue?  What principles might be bought to bear? One of them is fairness and equity. Do you want low income earners having less purchasing power and the higher income earners paying tax disproportionate to their income?

Is it better to deprive the high income earner the third BMW in the garage or the yacht? Or the latest holiday to Aspen, relative to taking the food off the table of a low income earner? These are equity issues and MMT can’t guide on equity issues. They’re moral philosophies that you have to bring to bear on public policies and society has to develop its own set of norms for that.

I believe that I have a progressive leaning and I think that fairness tells me that I would much rather a low income earner having more food on the table or going to a cafe once a week or attending a sporting event or the cinema than a high earner going to the best restaurants in Aspen every a year.”

AIMN: Finally, any thoughts on the style of economics currently being taught in high school?

Mitchell: It’s consistent with the problems in the undergraduate programs in universities in that it’s essentially teaching a wrong paradigm, it’s ingraining students with invalid constructions about the way the monetary system operates. It uses metaphor and terminology that are plain wrong and it reinforces the inapplicability of the paradigm being taught. My view is that students would be better off not studying it at high school.

 


176 comments

  1. Ricardo29

    I really wish I could get my head around this. I own to being an economic illiterate but intrinsically I know there has to be a better way than what is happening in the world today. Thanks Edward for the interview and thanks Bill Mitchell for trying to make it comprehensible to someone like me.

  2. edward eastwood

    @ Ricardo29. Glad you liked it. Spread the word.

  3. Ross in Gippsland

    Thank you Edward and professor Mitchell.
    The phrase “taxpayers dollars” seems to allow politicians to get away with pretty much anything these days, except maybe the odd chopper flight to a party fund raiser.
    A trawl through the comments sections of the MSM reveals that most people are still in the 50’s and 60’s gold standard era thinking on how taxation and the economy works and it’s reinforced by the so called economic experts on the TV.
    But I have noticed more and more people linking to professor Mitchell’s blog, the MMT word is slowly leaking out to the great unwashed through sites such as AIMN.
    Please keep up the good work

  4. edward eastwood

    Thanks, Ross. Yes, there are more and more people accessing Bill’s blog and glad that you liked the interview. Spread the word.

  5. edward eastwood

    @ John. Thanks for posting the Steve Hail video. It’s a good lecture and gives people an opportunity to explore both MMT and economics in a simple and straight forward manner.

  6. silkworm

    These ideas or points can be put into a circular flow chart. Then track all the Neo-liberal lies in response to these points.

  7. Florence nee Fedup

    Could it be the teaching of economics, especially in lower grades be the reason they can’t get past debt/deficits. Nearly 60 yrs ago, all I remember, is money goes around, creating wealth on the way. That what people though, had big effect on economy. A little about Lever Bros etc. Most of all, economy doesn’t work same as personal budget. Can’t recall debt getting much mention.

    Outside school, I recall banks being hated, along with a lot about over production, too many goods.

    This confused me, as it was clear there was plenty of things people needed. Starting with lax of housing. Lack of money, seemed to me, to be root of the problem. But then I was still a child.

    Then came record wool prices, and we could have all we ever dreamt of, in spite of taxes that would astound many today.

  8. petermartin2001

    Thanks for writing this up Edward. A good interview with Bill.

    I’m not a professional economist but its always been an interest of mine. I always considered myself to be vaguely Keynesian but I must say that I hadn’t quite grasped it all properly. A few years ago I happened, purely by accident when I was looking for something else, to come across a series of these videos of Bill and his MMT colleague Prof Randall Wray.

    https://www.youtube.com/watch?v=4Ap0ymmVlwA

    It was a real eye opener. Suddenly everything I’d struggled with previously started to make sense. I thought “yes of course – why didn’t I think of that?” It was rather like going down the rabbit hole and then popping up again. The world never quite seemed the same.

    Then I moved on to the harder stuff of Warren Mosler’s “Seven Deadly Innocent Frauds” and everything was clearer still.

    A word of warning though: Knowing all this MMT based economics is bit like believing that the world is round when nearly everyone else thinks it’s flat. You know you are right but many people think you are quite mad!

  9. costa narmanleg

    always enjoy your stuff edward.i still remember my excitement when i first came across bills blog a few years ago and allthough it was difficult and somewhat counterintuitive to understand i immediately saw the opportunity it offered for the political left to counter the neoconservative narrative.imagine my teeth grinding frustration to see wayne swans inanely grinning face as he bragged about getting back to surpluss as if he deserved a wombat on the wrist for it.i have had a bit of dental work since and expect to get a bit more done but you and bill are right,there is a steadily increasing interest in mmt.we can only hope.

  10. Sally K

    Thanks for the post which made me read further to try to understand. These articles on Prof Michael Hudson’s website made MMT a bit clearer for me:
    http://michael-hudson.com/2012/02/mmt-theory-as-an-ecb-alternative/

    http://michael-hudson.com/2012/03/mmt-as-the-austerity-alternative/

    quote from the first article:

    “The basic thrust of our argument is that just as commercial banks now create credit electronically on their computer keyboards (creating a bank account credit for borrowers in exchange for their signing an IOU at interest), so governments can create their own money. They can reclaim this proper function without incurring needless interest-bearing debt to private bondholders or from banks that create credit by electronic fiat. Government computer keyboards can provide nearly free credit creation to finance spending.”

    The second article:

    “The political aspect is if governments create money, then they’re creating a mixed economy—a mixed economy of private and public capital investment. This is what made all of the countries of Europe and the United States rich. The government investment in the public infrastructure that has been able to be supplied to the economy at cost; so, you get to drive on most roads for free; you get to use this huge capital investment in infrastructure for free. But if governments are not allowed to create their money, then all of the credit the economy needs is created by the commercial banks. And when the commercial bank credit creation leads to debt deflation and the government cannot finance the deficit to pay the interest, then the commercial banks say: Alright, sell off and privatise your infrastructure. This is what we’re seeing in Greece today, in Ireland. You’ve seen it in Iceland. What you are seeing is a financial grab of infrastructure that is taking place by the ability of commercial bankers to prevent the central bank from creating credit.”

    “And this is vast new bank loans. Most of the infrastructure that is being purchased—the water and sewer systems, real estate—is all being bought with borrowed money from the banks. So, that, first of all, the commercial bank political strategy is to block the central bank from creating money. And then saying the governments need to borrow from the commercial banks and need to pay interest to the commercial banks, instead of issuing interest-free debt. And then, to pay the commercial interest, they have to sell off the infrastructure. And the result is that bankers today are able to seize the property that in the past it took a military invasion to seize.”

    I expect there are no governments that have put MMT into practice? Do they all bow to the finance sector and mainstream economics captured from its inception in the 19th century by the large landholders, bankers and monopolists?

  11. edward eastwood

    @petermartin2001 Thanks for the kind words Peter and also for posting the vid’s of Bill and Randall Wray

  12. edward eastwood

    @costa narmanleg You’re absolutely correct Costa, MMT is one of the most powerful counter narratives to the Chicago School ‘supply side’ economic theory. It’s too bad that ‘Invisibill Shorten and the ALP or The Greens can’t see it.

    1.8 million unemployed can though, and that’s a powerful voting bloc in anyones language. Watch this space. Spread the word.

  13. edward eastwood

    @Sally K. Sincere thanks for the links to Hudson’s site Sally.

    I wasn’t aware of Hudson, perhaps he’s been overshadowed by Stephanie Kelton who’s making great strides in raising awareness of MMT in the public consciousness.

  14. Matters Not

    only way you can attach meaning to that

    This ‘attaching’ meaning to ‘facts’. Is that central to MMT or can that concept/notion be universalised?

    If not, then why not?

  15. Wally

    Excellent article it has filled a few gaps that I was having trying to understand MMT. I would really like to learn more about the effect printing money has on exchange rates. The following indicates that within MMT there are considerations/constraints/complexities related to foreign trading.

    “As a currency issuing government though, we can buy whatever we want. Whatever is for sale in the currency of issue – we can buy, and… that’s all it can buy! This means that it is not constrained by how much money it can spend but what is available for sale.”

  16. John Armour

    Hi Peter,

    Getting queer looks from the Flat Earthers is not the only problem with MMT.

    You start questioning other core beliefs like the existence of Santa and the Tooth Fairy.

  17. John Armour

    “I expect there are no governments that have put MMT into practice?”

    Sally, in one of Frank Newman’s books (which deal with the myth of the so-called “national debt”) he suggests that China uses MMT insights in its public financing.

    He’s a former US Treasury Deputy Secretary and has had extensive dealings with the Chinese banking system.

    Here’s a link to get you started.

    http://neweconomicperspectives.org/2013/10/former-dept-secretary-u-s-treasury-says-critics-mmt-reaching.html

  18. John Armour

    I would really like to learn more about the effect printing money has on exchange rates.

    Here’s a great link to one of Bill Mitchell’s articles Wally, (one more than 2000, and still counting!) that might fill in a few gaps.

    This was my intro to MMT back in 2009.

    Gold standard and fixed exchange rates – myths that still prevail

  19. petermartin2001

    Bill makes mention of the rift with those of a progressive, or even a leftish political inclination, on the question of wealth taxes. Taxing the unused financial assets of the rich effectively. The argument is that governments never need to tax to raise funds. That’s true, but there are other reasons for taxing than merely ” to reduce the spending power of the non-government sector”.

    We apply taxes on cigarettes and alcohol to discourage socially harmful behaviour for example. There are proposed taxes on CO2 emissions in Australia. Some countries tax vehicles according to their exhaust emission standards.

    So why the problem with applying taxes on the wealthy to achieve a greater degree of social equality? It’s really just a political question and doesn’t invalidate MMT in the slightest – at least as I understand MMT. So it’s surprising that Bill can’t at least adopt a neutral stance on the issue.

    Another way of looking at it is to say that taxation is necessary to reduce the spending power of the non-government sector to prevent inflation in the current economy. We just need to extend that concept to future economies and tax unused piles of cash now to prevent the possibility of inflation in future economies.

  20. Sally K

    For balanced debate here is a link to an article by Fred Foldvary, critical of MMT.

    http://notesonliberty.com/2014/05/13/the-problem-with-modern-monetary-theory/

    Both Foldvary and Hudson are geoists (an economic philosophy holding that the economic value derived from natural resources and natural opportunities should belong equally to all residents of a community, but that people own the value they create) yet they seem to have contrary views on MMT.

    Can government money creation be done in a way that avoids hyperinflation as happened in Zimbabwe, or the John Laws hyperinflation that occurred in France in the 1700s, or the Weimar Republic in Germany?

  21. Sally K

    @petermartin2001 I think MMT may be a very good alternative to the imposition of austerity measures but cannot see how it could be a panacea for recessions, unemployment, and the growing wealth disparity inherent in the economic system.

    This link is to an excerpt from a book by Martin Adams which explains how extreme wealth disparity and all our economic woes are due to the privatisation of the economic rents of land and all natural resources. Therefore the solution is not in wealth taxes but in resource rent taxes such as land value tax and mineral/oil resource rents and monopoly rents, allowing gradual reduction of taxation on individual productivity.

    http://www.progress.org/article/economic-depressions-what-causes-them-and-how-to-prevent-them

  22. edward eastwood

    No one’s arguing that MMT is a panacea for recessions, unemployment or wealth disparity Sally. The argument, as you’ve pointed out, is that it’s a very good substitute for the imposition of austerity.

    After all, for three and one half decades it worked very well in providing full employment (2% or less of the workforce unemployed), few recessions and only then when the Fraser government abandoned the policy of full employment in 1978, and a more even distribution of wealth.

    Sally, we’re all aware of the woes created by privatization of public utilities and resources. The solution lies in fixing them through an alternative and workable economic paradigm. To argue over whether or not that either MMT or Adams theories is a better way of approaching this is simply splitting hairs. There’s room for both. As Mitchell says; “Let’s get rid of poverty first, and then we’ll worry about taxing the rich.”

    As for Zimbabwe or the Wiemar Republic, both are irrelevant comparisons. In the case of post-WW1 Germany, the infrastructure of government had been almost totally destroyed preventing a manufacturing and heavy industry based recovery and that which was left could only produce enough GNP to make the crippling repayments to the Allies. France in particular.

    Things changed of course in 1932 when there was a new government. Manufacturing and heavy industry were brought to the fore and the country recovered economically. However, the Germans do like their beer and so what started as a night out with the boys in Munich ended up at Nuremberg and an appointment with the hangman. But not through the application of Keynesian theory to revive the economy.

    As for Zimbabwe; Its troubles can be summed up in two words. Robert. Mugabe.

    The 1700s are a little far back but both the ‘John’ Laws and the ‘South Sea Bubble’ serve as good examples of the dangers of the application of unrestricted, unregulated, Neo-liberal theory to any economy.

  23. silkworm

    Seems to me that the Georgist notion of site value and resource taxation and MMT make a perfect match, with Georgism filling the moral hole left by MMT’s inability or unwillingness to address the issue of tax justice and wealth disparity.

  24. Sally K

    Thanks Edward for your reply and good explanations of those historical examples of hyperinflation.

    As Mitchell says “Most people have this idea that if the government ‘spends too much’ it creates inflation” and goes on to explain the 1970s stagflation. I am just saying that as a non-economist I find the arguments complex and difficult so your article inspired a search on the topic. Another Hudson article in support of MMT:

    http://mosquitocloud.net/russia-china-mmt-and-gold-against-us-dollar-and-military-hegemony

    Suppose the unlikely event occurred of an Australian government putting MMT into practice with benefit to the economy in line with Mitchell’s priority “Let’s get rid of poverty first, and then we’ll worry about taxing the rich.” Out tax system is set up by subsidy (NGing and little or no efficient taxes on land) to direct investment into land speculation. The effect to make the rich richer and the poor poorer is obvious, as is the detrimental effect on business of high costs of a site to rent or buy.

    So any effect of MMT to increase employment and government spending on infrastructure would flow through to the land values, and ultimately the boom/bust scenario. Therefore I think reform would need to be concurrent, not sequential.

  25. John Armour

    “As for Zimbabwe; Its troubles can be summed up in two words. Robert. Mugabe”.

    Everyone understands that “too much money chasing too few goods” is what causes inflation, but in the two most often quoted examples of the extreme version (hyperinflation) it’s the reverse causality that applies viz, “too few goods…”

    In both cases, the “too much money” bit came later.

    It’s such a common misrepresentation of history that Neil Wilson, a blogger well-known to the MMT community, offered an economics corollary of Godwin’s Law…

    “As an online economic discussion grows longer, the probability of a comparison involving Zimbabwe or the Weimar Republic approaches one.”

  26. Andreas Bimba

    Thanks Bill Mitchell and Edward Eastwood for promoting the worth of MMT macro economics and especially the possibility of achieving near to zero unemployment. So many people suffer needlessly for years and even decades and our economy limps along well below its potential simply because the current system is controlled by an elite that the system enriches at the expense of the majority. The whole world now sits on the cusp of a major economic recession and ecological collapse due to mismanagement by the current financial, business and government leadership.

    Just as the pigs in Orwells Animal Farm helped themselves to the honey jars while the dumber animals were driven mercilessly to work harder, the owners and managers of the commercial banks profit from their interest charges while citizens are forced to pay exorbitant rents or are locked into mortgage servitude by speculative over investment in real estate. Governments also waste a significant portion of their spending capacity on paying interest on their debt which could have been avoided if they had simply created the money themselves to fund deficits. Consumers also end up having to pay the cost of the interest expenses incurred by the productive economy through higher prices for goods and services.

    The pigs have found many more ways to enrich themselves at the expense of the majority for example generous tax concessions like negative gearing and low taxes on capital gains for speculative investments, or the superannuation contribution concession, or the fact that capital can earn wealth more abundantly than labour, or through monopolies or cooperative price fixing, or much of their luxurious lifestyles being funded by their businesses or tax deductions, or generous government incentives for their business ventures or through ample opportunities for tax evasion.

    The unemployed, underemployed, the most disadvantaged, the young, unskilled and semi skilled workers and the poor have been treated the worst by our harsh neo-liberal economy and government policies of the last 30 or more years and most of this was unnecessary and was also counterproductive as it led to economic stagnation due to suppressed market demand.

    Much consumer demand was also diverted to relatively pointless and wasteful consumerism such as the purchase of excessively large cars, too many electronic goods or clothing well in excess of one’s needs while a large segment of society struggled to feed, clothe or house themselves. Note the distinction between worthy market demand and wasteful market demand.

    The middle class has been caught in a rat race of higher prices, stagnant wages, insecure employment, exorbitant housing costs, higher transport costs, having to meet most of the taxation burden and increased costs for government services such as education and health care.

    The working class has been decimated by factory closures, severe erosion of working conditions and now cheap foreign labour using the despicable 457 visa.

    It appears likely that neo-liberalism was in fact an opportunistic scam by the rich elite in the mid 70’s to redistribute national wealth back to themselves in response to rising taxation, rising wages, the welfare state, increased environmental, consumer and workplace regulations and unionised work forces of the post war years.

    MMT economics and humane and Green values offer a much better approach for all of us YET WE ARE STILL WAITING for the opportunity to put this into action. The electorate primarily because of mass media manipulation, ignorance and a corrupted 2 party political system still vote for neo-liberal political parties that continue to defraud them.

    IT’S TIME!

  27. edward eastwood

    It’s long overdue time Anreas and well said!

  28. Kaye Lee

    “AIMN: How is money creation accounted for?

    Mitchell: Someone in an office types it into a spread-sheet. They (Reserve Bank and Treasury), have double accounting ledgers for seignorage and notes.”

    I so wish someone would answer this question properly. When you say the government can create money out of thin air, I need to know exactly how this is accounted for in double entry accounting to help me reconcile it in my own head. In the budget papers they account for seignorage (the difference in value between the cost of producing cash and its monetary value) but this is miniscule. I understand how a bank can create money and account for it but I still don’t understand how the government can. If it is not by the issuance of CGS then I am lost.

    Is there any chance of someone explaining the double entry in the budget papers that accounts for this money creation?

  29. John Armour

    “So any effect of MMT to increase employment and government spending on infrastructure would flow through to the land values, and ultimately the boom/bust scenario. Therefore I think reform would need to be concurrent, not sequential”.

    Sally K, after climate change the greatest threat to a nation’s citizenry is unemployment.

    Neo-liberal ideology deliberately imposes high levels of unemployment through the policy device of the NAIRU, the ‘non-accelerating-inflation-rate-of-unemployment’, the principal weapon the central bank employs to wage war against the imaginary enemy of inflation.

    Unemployment is the single most cause of poverty. Tax reform is a trivial issue in comparison.

    Whilst I agree that tax reform is needed to address perceived issues of fairness and equity, I cannot accept your assertion that government spending would be appropriated by the rentier class via a modern day “Ricardo’s Law” play as a reason for not acting directly on unemployment either through a Job Guarantee, or indirectly through deficit spending.

    I don’t think the unemployed spend much time worrying about negative gearing, except to the extent that they cannot participate themselves, and even less about the causes of boom-bust cycles.

  30. John Kelly

    Great read, Edward and great replies. Head spinning but always informative and motivational. How do I get to meet the Messiah?

  31. Sally K

    John we are land animals. We cannot do anything in life without a site to do it. If the tax system encourages speculation and provides no disincentive to hold land poorly used then the cost of land becomes higher than the economy can realistically sustain, with chronic poverty/unemployment, not just at the extreme of the boom/bust cycle. A population highly indebted due to the cost of shelter has less disposable income to spend on the goods and services capitalism produces.

    The resulting wealth disparity is happening in front of our eyes with now about 60% of mortgage lending being to investors as opposed to 12% in the 1980s. The more and better land you own the more rising land values benefit you and the more you can leverage up to buy even more. If you are landless, like most young Australians, the more you are disadvantaged. Australia becomes an heiritocracy, not a meritocracy.

    Texas USA is an example of when collecting even a small proportion of the economic rent of land as revenue has dramatic benefits. This is from an article by Catherine Cashmore, an Australian real estate analyst:

    “The US state that didn’t boom or bust
    Take Texas as an example —America’s ‘economic miracle sate.’ 9

    Forty-nine of the fifty US States currently employ 275,000 fewer Americans than they did at the start of the recession seven years a go.10
    In contrast, Texas has added more than 1.25 million payroll jobs and more than 190,000 non-payroll jobs.
    While other regions have been losing their population due to the US depression, Texas has been growing faster than just about any other state in America.

    Much of this can be attributed to its tax system. With no state income tax or corporation tax, Texas is a magnet for industry.
    However, the state also has a history of collecting the economic rent from its land and natural resources and using the funds for community investment.

    For example, Texas has two mineral/oil sovereign wealth funds dating from the 1800s usedto support both secondary and tertiary education.
    These are the oldest sovereign wealth funds in the world — financed from oil, gas, mineral royalties and leases on land.11

    Furthermore, with no state income or corporation tax, Texas has shifted a larger burden of its taxation onto property. This has blunted land speculation and assisted in creating a truly decentralised city. In Houston for example, only 7% of jobs are located ‘downtown.’ 12
    Along with liberal supply side measures, it has resulted in Texas containing some of the most affordable land in America.

    Put simply, Texas did not experience a real estate bust in 2008 because it did not have a real estate boom.”

    The article is in Philip J Anderson’s subscription newsletter, so I cannot provide a link.

    You say “Neo-liberal ideology deliberately imposes high levels of unemployment through the policy device of the NAIRU, the ‘non-accelerating-inflation-rate-of-unemployment’, the principal weapon the central bank employs to wage war against the imaginary enemy of inflation.”
    I expect that is true but the neoliberal ideology itself is the ultimate manifestation of the inequity and hierarchical society that results when our culture ignores the principle that the Earth (land and natural resources) should be the equal and common birthright of all humanity.

    The means to implement this principle is relatively simple – essentially taxing land values rather than production.

    Regarding MMT, thanks for the links, especially the “Weimar” link which through following comments sections led me to this exchange between Mike Beggs and Mitchell stemming from Mitchell’s criticism of the Greens economic policy:

    https://scandalum.wordpress.com/2009/05/30/mitchellnomics/

    No apology for breaking “Godwins law of economics”. After all this is an AIMN comments section not an academic journal. Also the “Z fear” (Z for Zimbabwe) as Mitchell calls it is just what the press would use to crucify any political party that put MMT in its economic policy.

  32. John Kelly

    Would someone answer Kaye Lee’s question in a way that satisfies her need for an accounting entry…..PLEASE!

  33. Michael Taylor

    If I knew exactly, I would try answering it. I have a fair idea, but I’m not that conversant to be able to explain it in less that 2,000 words. 🙁

  34. Kaye Lee

    I am trying hard to understand – not to derail.

    I understand that the Reserve Bank can make money available to commercial banks thus creating money in the private sector but I come unstuck when I get to the government creating money. I have always believed that they did this by issuing CGS but MMTers say this isn’t so. I don’t actually need the double entry, just how money creation for the public sector is recorded.

    The reason I am harping on about it is because, until I understand this, it seems to me that government spending IS financed by CGS (which the general public view as debt) and taxation.

  35. Wally

    Does the government create the money or is the money created by the reserve bank as directed by the government or as required by the money market?

    If the latter is correct the money created would be in the reserve banks ledger and any of that money consumed by the government would be a loan from the reserve bank.

    I would be very interesting to hear Bernie Frasers opinion of MMT.

  36. petermartin2001

    Kaye Lee and John Kelly,

    “Would someone answer Kaye Lee’s question in a way that satisfies her need for an accounting entry”

    Suppose we consider the creation of a new currency from scratch. Say we have an economy of 1000 individuals who elect a government and the govt introduces the ‘crown’ as a currency.

    So the government issues 1 crown as a sample to each individual. Then sends a tax bill of 2 crowns to establish a demand for the currency and then gives jobs to 100 individuals which who are then each paid 20 crowns for their work.

    So the government’s liability is 3000 crowns. Its assets are 2000 crowns from those tax bills. Net debt 1000 crowns
    The non government assets are 3000 crowns. Its liabilities are 2000 crowns due to tax bils. Net assets 1000 crowns.

    Essentially the government creates an asset/liability pair when it creates the crown, so naturally total assets always have to equal total liabilities.

    Is this what you mean?

  37. edward eastwood

    Thanks, John. I notice that you’re still doing your bit as well. The more the merrier!

  38. Kaye Lee

    ME,

    I studied economics at school and for a year at uni and accounting when I had to start doing the books for my business, but I think that is probably a detriment in trying to understand MMT. Your link reinforces what I think is the case but what MMTers tell me is not – that the government creates money by issuing CGS.

  39. edward eastwood

    @ petermartin2001. Many thanks Peter. An articulate and erudite answer to a complex but ephemeral query. As Mitchell says; “Notes and coins are trivial in the extreme.”

  40. Kaye Lee

    petermartin,

    Thanks for trying but analogies don’t help. It should be so simple to answer but apparently not. How do government’s account for money creation on their balance sheet?

    Notes and coins ARE trivial but I least I have an answer for how that creation is recorded – seignorage. I am not talking about that. And thanks for the “ephemeral” shot. I can only assume that you do not understand what I am asking.

  41. John Armour

    Sally K,

    I don’t disagree with you about how the present tax system exacerbates the already existing inequalities that flow from land ownership. They need to be addressed.

    I haven’t read Harrison’s “The Power in the Land” (the book referred to by Martin Adams in your link) but I have read Harrison’s “Ricardo’s Law: House Prices and the Great Tax Clawback Scam”, so I’m more than familiar with the arguments. And interested enough to have done some research on the topic, albeit some time ago.

    For me though, it’s all about priorities. I just happen to think unemployment is by far the bigger and more urgent problem.

    As you dig further into MMT however you may want to revise your thinking about taxes. At the macro level (federal) taxes don’t fund anything. You can’t take the micro example of a state (Texas) and extend it to the national economy. This is the classic fallacy of composition, no different from the flawed “household analogy”, because the state is the “user of the currency” not the “issuer”.

  42. Kaye Lee

    No-one has ever answered my question John. Your answer was about banks, not governments. The RBA is a separate entity from Treasury with its own balance sheet. I want to know how this creation is recorded on Treasury’s balance sheet.

    It seems to me that the Reserve bank can create money for the private sector but how does the Treasury create money for the public sector if not through the issuance of bonds. What on the Treasury balance sheet represents this creation of funds in public accounts.

  43. John Kelly

    Kaye Lee, it must be that I enjoy failure because I’m going to have another crack at your question. Let’s look at Bill’s answer:

    AIMN: How is money creation accounted for?

    Mitchell: Someone in an office types it into a spread-sheet. They (Reserve Bank and Treasury), have double accounting ledgers for seignorage and notes.

    To avoid seignorage and notes, let’s forget he even mentioned them. He said, “Someone in an office types it into a spread-sheet.”

    So when treasury pays my pension each fortnight, the RBA executes an electronic transfer to create an asset for me in my bank account and Treasury executes an electronic entry to create a corresponding expense. That’s it!

    I don’t consider myself all that clever but I get it. You should too.

  44. Kaye Lee

    Treasury and the RBA are different things John. What account was the pension paid out of and where did the funds for that account come from? The RBA doesn’t just open an account that says Government $500 billion.

    Yes your pension will be an expense for Treasury – it will be a debit to their RBA account. But until someone shows me otherwise, my understanding is that these accounts come from government revenue and bond issuance.

  45. edward eastwood

    Why don’t you e-mail Treasury and ask them. You studied accountancy and economics – should be a snap. Either that or Google ‘Answers for the terminally obtuse’ maybe it’s in there.

  46. Kaye Lee

    Thanks once again for your rudeness Edward,

    Have any of you ever looked at the budget papers? They add up. There is NO “creation of money out of thin air”. The government’s accounts with the RBA come from government revenue and CGS issuance. What am I to ask Treasury? It is MMTers that say government spending is not funded by taxation or bonds, not Treasury, which is why I am asking those who make this claim. It is not borne out by the budget papers.

    Treasury says “The Government finances its activities either through receipts or by borrowing. When receipts fall short of payments, the Government borrows by issuing Commonwealth Government Securities (CGS) to investors.”

  47. edward eastwood

    Yawn… What was the question again? I fell asleep halfway through your second sentence.

  48. Kaye Lee

    Never mind Edward. I will leave you to your ennui and not concern myself with MMT again. It is apparent none of you understand the mechanics of it so it’s pointless asking you.

  49. John Kelly

    Actually Kaye the RBA and Treasury aren’t all that different. The Treasury has an RBA account like all its other customers. The pension, however, wasn’t paid out of an account. It was spent into existence and the Treasury account was debited. It doesn’t matter whether funds were in the Treasury account. The debit offsets the credit in my bank account.

  50. Kaye Lee

    To say that an account was debited but the money wasn’t paid out of that account makes no sense – that’s what a debit means. If there was no money in the account it will have a debit balance. I know you like to call it creating and destroying money and I understand your reasoning but that’s not how a balance sheet works. You say taxation is destroying money but when I pay my tax I pay it into an account – that government account is credited with that amount – it doesn’t disappear. Even Bill Mitchell concedes that there must be double entry accounting for money creation but apparently no-one knows how this creation is recorded other than “Someone in an office types it into a spread-sheet.”

  51. edward eastwood

    That will be a blessing. btw, Mitchell said; “There’s a double entry” and not “there must be a double entry.”

  52. Matters Not

    edward eastwood I am late to this debate but I think your responses, or lack of same, harms your cause.

    It seems to me that Kaye Lee is again asking a reasonable question. I say again because she asked the same question some time ago and then, as now, responders are ducking and diving, including some attempts with great degrees of difficulty (in the diving sense).

    Is it the case you don’t know the answer to her question? Is it the case that you think her question is irrelevant? Not worthy of a response? (Apart from insults.) Has anyone asked Mitchell? If not, then why not? One assumes this isn’t about ‘religion’ or ‘faith’.

    I don’t pretend to understand MMT in any depth but I do understand that it’s a ‘theory’ broadly defined to suggest it’s a way of constructing or representing ‘reality’. It’s a way of generating ‘knowledge’. And giving ‘meaning’ to the ‘facts’ generated’

    I have no problem in understanding that theory is ‘a priori’ the generation of ‘fact’, given that it’s impossible to count ‘red’ objects, for example, unless one has a ‘theory/concept/ mental construct’ of what is ‘red’ as opposed to what might be ‘blue’, ‘green’ or whatever colour you may be wishing to ‘count’ (for whatever reason).

    So when it comes to MMT, I accept that it is a theory’ (nothing wrong with that because it’s impossible to proceed without one) but I find it somewhat strange that those who advance this ‘theory’ can’t respond (reasonably) to what I see as a fundamental question. If the ‘theory’ can’t accommodate basic questions, I wonder how ‘useful’ it is?

    Over time, there have been all sorts of ‘theories’ that were ‘fashionable’ (phrenology for example) which were discarded because they were no longer useful. Lakatos, Kuhn, Popper and the like provide examples and explanations.

  53. edward eastwood

    @Matters Not; As you’ve noted, Ms. Lee raised this question sometime ago and similarly to her past enquiry, responders did not duck and dive as you put it but took pains with patient explanations
    http://theaimn.com/the-mystery-of-money-or-how-i-learned-to-stop-worrying-about-debt-and-deficits/

    Now, as then, Ms Lee has chosen to be deliberately obtuse.

    “Did anyone ask MItchell?” Yes,I did, and I did so with Ms Lee’s argument in mind. Save for the sounds of coffee cups rattling and chairs scraping on the floor, all of what Mitchell has argued has been painstakingly transcribed verbatim.

    Why Ms. Lee remains deliberately obtuse when it comes to question, one can only speculate. Perhaps Ms. Lee feels that a theory that argues currency issuing governments can never overspend or run out of money – as opposed to real resources which are finite – which Mitchell points out- robs her of argument that the NLP have ‘over spent’, despite many and may I add polite advice that such an argument plays directly into the hands of the Conservatives perpetuation of the myth of government debt as the same as household debt.

    As for theories, yes, you’re correct, they come and go but let me ask you this; which would you prefer, a theory which for three and one half decades provided full employment, fully funded government education, health and welfare or the one we have now?
    I’m not interested in championing or advancing causes, I am a disinterested seeker of the truth so when the opportunity arose to interview Mitchell and get the argument straight from the horses mouth so to speak – I grasped it. The results of which can be read above.

  54. John Armour

    Kaye Lee,

    My transcript from Wray’s book was a bit more than just “about banks”.

    It was about how money creation and destruction is accounted for at the central bank.

    I accept that Wray’s description doesn’t meet your specific needs so we’ll just have to leave it there.

    Your oft stated belief that spending is funded through bond issuance however is easily dismissed from sources outside MMT, like the RBA itself.

    Here’s a link to a speech by Guy Debelle of the RBA where the purpose of bond issuance is discussed.

    This paper totally contradicts the commonly believed purpose of bonds, but to this audience of “insiders” there doesn’t seem to be any controversy.

    Open Market Operations and Domestic Securities

    “The operational target for monetary policy in Australia is the overnight interest rate on unsecured loans between banks, known as the cash rate. The target for the cash rate is established at the monthly meetings of the Reserve Bank Board, currently it is 6.75 per cent. To keep the cash rate as close to this target as possible, the Domestic Markets Department of the Reserve Bank conducts operations in the cash market every day.”

    “With the bids lodged, the Bank then determines which of the bids it is willing to accept, to ensure that the aggregate level of exchange settlement balances is at the level we feel will ensure that the cash rate remains at the target rate.”

    Guy Debelle in this speech is just confirming what Stephanie Kelton wrote.

    When one of your main premises is shown to be incorrect then surely this must raise doubts in your mind that you are coming at this issue from the wrong angle.

  55. Kaye Lee

    The RBA is the bank that holds government accounts. It does not issue CGS, it trades in them. This affects the amount of money available to the private sector. It is not the currency issuer – treasury is. The idea that treasury and the RBA are the same thing I disagree with.

    I am sorry you feel I am being deliberately obtuse and could I suggest that ridicule makes a poor teacher.

    I am not trying to disprove MMT, as some seem to think. I am not questioning that resources are finite or suggesting that government spending is constrained by the cash it collects.

    “The accounting’s important, because it has to equal the accounting that shows dollar for dollar the government deficit equals the non-government surplus. It’s very important that people understand this.

    If you want the non-government sector to run down debt, then the government sector has to run-up debt.”

    The government runs up debt by issuing CGS, not by just having accounts in debit at the RBA. That’s what I don’t get. Are you suggesting that the RBA runs debit accounts for the government or that they just arbitrarily start an account with a credit balance pulled out of nowhere?

    I understand that MMT sees all government spending as money creation and all government revenue as the destruction of money. I can accept that way of looking at things from a theoretical point of view but not from an accounting point of view.

  56. John Armour

    “The RBA is the bank that holds government accounts. It does not issue CGS, it trades in them”.

    That’s really splitting hairs Kaye Lee and leads nowhere. The job of the RBA is to manage monetary policy, and it does this by managing the cash rate, which requires it to issue bonds to participating banks. So Treasury just issues bonds on behalf of the RBA.

    “This affects the amount of money available to the private sector.”

    This is incorrect. An open market operation (which is what you are talking about) is just an asset swap.

    More tellingly however it suggests that you are still getting your information from text books whose authors don’t understand the implications of the collapse of Bretton Woods.

    “It is not the currency issuer – treasury is. “

    I’m sure you know that’s not correct.

    But back to your main concern, earlier you quoted Treasury as saying:

    “The Government finances its activities either through receipts or by borrowing. When receipts fall short of payments, the Government borrows by issuing Commonwealth Government Securities (CGS) to investors.”

    When you know that this is total bullshit, why would you expect to ever find somewhere in the budget papers, a Treasury document, an entry clearly indicating ex nihilo creation of currency?

    That would be really letting the cat out of the bag.

    But if you think it has merit, perhaps it’s time to go back to basics and ask where does money come from.

  57. Harquebus

    As I stated over on John Kelly’s page, expanding the money supply erodes savings and reduces purchasing power. This is why wages need to constantly grow. It is a never ending game of never catch up.

    The technical definition of inflation is inflating the money supply which, results in higher prices.

    What you could have spend your earnings on today will cost a lot more tomorrow when you finally get your superannuation. It will not buy what it could have when you deposited it and the interest earned on it after factoring inflation is a pittance and is paid from other people taking out ever more loans.

    There is no such thing as a free lunch and MMT is just another bullshit economic theory that has no basis in physical realities. As the saying goes, if it sounds too good to be true…

    If all debts were repaid, there would not be any currency in circulation. This is why Joe Hockey has urged us to borrow more. So that the banks can create more fiat from thin air and keep the currency supply expanding. The mother of all ponzi schemes.

    How money is created in Australia:

    “Almost overnight, the same Bankers who had no money for housing, food and clothing, suddenly had millions to lend for Army barracks, uniforms, rations and weaponry.”
    http://www.sosnews.org/library/banks/money.htm

    “When money is borrowed from a bank, the bank actually creates new money or credit out of nothing.”
    It remains as an insidious truth that the vast majority of people remain blissfully unaware of the fact that when banks lend money, they in fact create most of it with the scribble of a pen at no cost to themselves.
    http://www.sosnews.org/library/banks/money2.htm

    “When a debt is repaid, the loan and the dollars, euros, yen, etc that the loan created, all cease to exist. They are cancelled out. Other loans create more currency by the same process to replace it, and so on. The repaid money is not in the bank. It is no longer anywhere and it is certainly not in circulation. All debt repayments reduce the money in circulation by that amount.”
    http://www.sosnews.org/library/banks/money3.htm

    This half hour episode explains how currency is created. It uses the U.S. as an example but, does state that all governments use basically the same principle.
    http://hiddensecretsofmoney.com/videos/episode-4

    I do recommend starting at episode 1. Each episode is about a half hour long.
    http://hiddensecretsofmoney.com/videos/episode-1

    Search criteria: australia currency creation
    or: currency creation

  58. John Armour

    “It remains as an insidious truth that the vast majority of people remain blissfully unaware of the fact that when banks lend money, they in fact create most of it with the scribble of a pen at no cost to themselves”

    The author appears also to be one of the blissfully ignorant himself: the truth is banks create all of it with the ‘scribble of a pen’.

    And there is a cost, that of maintaining their capital base.

    But so what? It’s got nothing to do with MMT, which seems to be the object of your annoyance.

    MMT just describes the system we actually have but seeks to inform people that under a veil of lies and deceit, the system has been turned against their interests.

    The best example of that is the NAIRU, where unemployment is deliberately maintained at high levels to satisfy the interests of the neo-liberal constituency. But we’re told it’s to fight inflation.

    I watched about 5 minutes of your video. It might’ve been an eye-popping revelation for you but for anybody familiar with MMT and the peripheral literature it was all old news, but initially basically correct.

    However, when the presenter started to explain that the deficits that create the so-called “national debt” would have to be repaid (to whom I wondered) out of future taxes, I realised that we were being led back to the same old neo-liberal bullshit.

    The uninformed and ignorant viewer is given some interesting insights into the mechanics of money creation as bait, then seamlessly recruited into the neo-liberal myths about debt.

    If you had spent a fraction of the time you have wasted seeking to find holes in MMT on reading some of the actual MMT literature you would’ve had the knowledge to spot the deception, to know when you were being had.

    I stopped the video just as the presenter was informing us that banks lend out depositor’s funds, which I know from reading the MMT literature, is total crap. Why would they do that when they can, within the Basel constraints, create as much money from thin air as they like?

    Finally, it’s not the quantity of money floating around that causes inflation, it’s the spending of it, as the current situation in the world’s major economies clearly illustrates.

  59. Harquebus

    Thank you John Amour for pointing out that mistake.

    The links I put up because some were discussing currency creation. Same for the video which, I enjoyed watching but, of course, since you already know everything, it did not benefit you. If you had watched the whole video and series, you would realize that he was explaining the deception and in the simplest terms. Not all are literate in the art of econospeak as you seem to be.

    As you appear to be an advocate of MMT, it is my opinion that is you that has been either conned or lack the ability to perceive the relationship between the economy, a man made concept and physical realities.

    The economy is going down mate and no mumbo jumbo bullshit economic theory is going to change it.

    Cheers.

  60. William

    Inequality has become so great under the current economic system that for certain essential items (i.e. shelter), that the disparity in financial wealth is so great, some classes are not even relevant to the market. Shelter is traded between the rich class, the elite. The middle class and lower are only relevant in terms of rent extraction.
    The elite need not contribute to society, with inequality at the levels that it is now. Should you be wealthy for whatever reason you can live incredibly well and continue to increase your wealth from rent extraction alone.
    The working class, cannot reap the rewards of their labour as it is extracted through rent. They are further burdened to support their nation through taxation.
    How is it that MMT differs from the current inequality dilemma? Or is it merely a new way to say the elite, the aristocracy, shall remain untouched and we’ll continue to work the plebs.

    While writing this it dawned on me, at one point tax was used to fund the military who’s aim was to protect or take land for the benefit of the citizenry who funded the army. If the elites shouldn’t be focused upon to pay taxes, and it continues to fall to the labourer, who only rents the land, it can be likened to paying your gaoler for a bit of extra abuse.

    History shows that us humans do not take well to radical economic change (even in the soviet union, before WW2 private ownership of land and class was already returning! Then there was Tzar Stalin). Because of that, MMT may be a slow move toward a better system, or it could move so slowly that constant reoccurring themes of aristocracy and financially elites will adapt and maintain the inequality inherent in our financial systems.

  61. Kaye Lee

    I quoted Treasury because Edward suggested I ask them. I see little point in that because that is what they would say.

    “An open market operation (which is what you are talking about) is just an asset swap.”

    What it does is create liquidity for commercial banks by swapping a non-liquid asset for a liquid one which, in my understanding, does indeed make more money available for the private sector (or less if the transaction goes the other way) due to liquidity requirements for banks.

    “back to your main concern”

    No-one has ever addressed my main concern – how this money creation is accounted for on balance sheets. Are you telling me that the Reserve Bank credits a government account with an arbitrary sum pulled from nowhere and this is not shown in any balance sheet?

    I understand they COULD do this but I cannot understand how it would not appear in any records.

    For example, it could be called quantitative easing and appear on treasury documents but I can find no such entry. Is that because we are talking about something we could do but don’t?

    I am not asking about the theory behind MMT. I am specifically asking how such an injection of funds would be recorded.

  62. John Armour

    “As you appear to be an advocate of MMT, it is my opinion that is you that has been either conned or lack the ability to perceive the relationship between the economy, a man made concept and physical realities”

    That’s just further evidence that you have no idea what MMT is about. You seem to be railing against a strawman that exists only in your head.

    Ironically, it’s MMT that could give the environment movement the weaponry they need to fight the dominant paradigm of mindless growth and consumption, which I think is what you are talking about.

    Here’s some quotes from an article by Bill Mitchell to illustrate my point…

    “Environmental benefits:

    The Job Guarantee proposal will assist in changing the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by traditional private sector firms because they have heavy public good components. They are ideal targets for public sector initiative. Future labour market policy must consider the environmental risk-factors associated with economic growth.

    Possible threshold effects and imprecise data covering the life-cycle characteristics of natural capital suggest a risk-averse attitude is wise. Indiscriminate (Keynesian) expansion fails in this regard because it does not address the requirements for risk aversion. It is not increased demand per se that is necessary but increased demand in certain areas of activity”.

    And further down…

    “However, the swings in bargaining power that have marked this conflict over many years have no natural limits. But the concept of natural capital, ignored by Kalecki and other Marxians, is now becoming the binding constraint on the functionality and longevity of the system. ”

  63. Harquebus

    You are wrong John Amour. I do have a good grasp of MMT. It is you that is blinded by economic theory.

    Here is something that I have just came across today. Even an economic ideologue such as yourself should be able to comprehend it. I have a lot more similar saved links if you are interested.

    “So 10,000 years of unremitting population growth, frivolous energy spending and economic growth have now met the reality: “Unless biomass stores stabilize, human civilization is unsustainable.””
    “But market economists (and their related politicians) don’t understand the Earth battery metaphor anymore than they do the laws of thermodynamics, says Schramski and his collaborators.”
    http://thetyee.ca/Opinion/2015/08/10/Earth-Battery-Running-Low/

    What is your understanding of thermodynamics? Do factor the environment and the finiteness of resources in your economic calculations? I already know that you do not so, when you do, then you will have the authority to argue your case.

    I would also like to refer you to some links that I have posted here.
    http://theaimn.com/an-economic-blueprint-for-a-sustained-recovery/#comment-380075

    Quotes of mine from the same link.
    “When factoring physical externalities, that is things like the environment and finite resources, the equations used in economics do not produce the required result so, they are ignored. This is why our environment is suffering, resources depleting and economies are struggling for growth which, is only required for corporations to maintain profits and for governments to reduce their proportion of debt to GDP.”
    “basic economic equations are flawed”

    Kaye Lee.

    Was looking for an answer for you. Nothing definitive but, these might help you in your search.

    “When payments are cleared between institutions, they accrue obligations which must be settled. In Australia, final settlement of obligations between payments providers is by entries to their Exchange Settlement (ES) accounts at the Reserve Bank.”
    http://www.rba.gov.au/payments-system/about.html

    “In these cases, the bank will sell bonds back to the central bank or borrow outright through the device called the “discount window”.”
    http://bilbo.economicoutlook.net/blog/

  64. Kaye Lee

    Thank you for trying Harquebus but that does nothing to answer my question. I am not talking about dealings between the RBA and other banks.

  65. John Armour

    Harquebus,

    Thanks for the link to the Earth Battery story. For me it was a trip back into the 1970’s when I first read “Limits to Growth”.

    It was several more years however before I realised we were living with systemic failure and there was bugger all an individual could do about it. I have no doubt that we are basically stuffed. Of this I have become even more convinced as resistance to change rises at an even faster rate than awareness that we have ‘a problem’.

    I’m quite aware that when you factor in the cost of the externalities, GDP growth since the industrial revolution is negative.

    So, Harquebus, I’m not not so much blinded by economic theory, just sadly aware of my own limitations, and giving support to the only economic theory that has any prospect of maybe, perhaps, ameliorating the worst effects of the dominant paradigm in the near term (by liberating ‘fight-back’ from the shackles of imaginary debt).

    In the long run, I won’t care. But I’d prefer to live under a more humane and caring economic regime in the meantime.

    Apart from bagging (without justification) MMT, may I ask what you are doing to advance ‘the cause’?

    Since you seem so impressed by the references to thermodynamics I wonder if you spotted the boo-boo in this sentence:

    “Those plants converted low quality sunlight into high-quality chemical energy stored either in living biomass (forests and plankton) or more lastingly in the dead plants and animals that became oil, gas and coal.”

    If you didn’t then perhaps you need to brush up on the Second Law yourself, rather than make assumptions about me.

  66. John Armour

    “What it does is create liquidity for commercial banks by swapping a non-liquid asset for a liquid one which, in my understanding, does indeed make more money available for the private sector (or less if the transaction goes the other way) due to liquidity requirements for banks.”

    That’s not how it works Kaye Lee but it’s the widely held belief you find rehearsed in all the text books, long since exposed as nonsense by the originators of MMT. It’s an important link in the chain of lies that diverts our attention away from the real purpose of bond issuance.

    If people understood what’s really happening, they might begin to question the debt myth.

    The asset swap is for reserves which have no effect ex-ante on a commercial bank’s ability to lend money.

    Reserves are not loaned except within the inter-bank overnight market and lending is not constrained by reserves.

    Please don’t take this as a cheap shot Kaye Lee but I really think your time would be better spent bedding down the basics before embarking on your futile search for a credit entry under ‘ex nihilo injections’. You might even come to realise it’s something you don’t even need.

    This stuff is covered in depth, endlessly, in the MMT literature, which you must have traversed if you have read any of Bill Mitchell’s stuff as you say you have done.

    Banking is possibly the ‘pons ansinorum’ of MMT; you’ll struggle with MMT unless you get banking sorted out.

  67. Kaye Lee

    I have read MMT blogs and watched videos until they are coming out my ears and none of them answer my query. I find it incredible that no-one can answer me. My “search for a credit entry under ‘ex nihilo injections'” seems indeed futile as none of you can answer it. You all go off on tangents that are nothing to do with what I am asking. It’s like speaking to a politician – regardless of how specific I am in my query I get the same response every time. If no-one knows (or cares) how ex-nihilo injections are recorded then just say so. That is the only thing I am asking about.

  68. Harquebus

    John Amour

    My apologies for my mistaken assumptions. It appears that we might agree more than we disagree.
    I oppose fiat currencies and my alternative would be precious metals. I know that is unlikely to happen until after the collapse. I agree that we are basically screwed. We have all but destroyed that which sustains us and are surviving on fossil fuels only.

    I have for a decade, since I first heard of Huppert and peak oil, been reading many and varied articles on energy, the economy and the environment and regularly email politicians and journalists with the links trying to get them to wake them up to the danger but, with only limited success. I also participate in various fora and always with the same message however, lately I have been mainly hanging out here. I no longer bother with the ABC’s theDrum.

    That sentence I did notice and seems to be basically correct but, uses incorrect terminology. Low quality sunlight? I would write it more like this.

    Plants convert diffuse solar energy into a more concentrated chemical form as hydrocarbons of which, some is then converted again over time with additional heat energy and pressure from geological forces into an even more concentrated form that is the energy dense fossil fuels that we use today.
    Please correct me if I am wrong.

    Fossil fuels are after all, millions of years worth of concentrated and stored solar energy that we are consuming rapidly. If there are any of us still around in another 60 odd million years or so, nature might provide us with some more.

    Population reduction was our only hope however, as you say, it is too late to do anything except wear it. I myself am investing in hand garden tools, outdoor cooking equipment etc. and am trying to maintain a vegetable garden with nothing but water, solar energy and the tools that I have. It is not so easy as many will soon discover. I if I lose access to water, it will be impossible.

    Here are three more articles that I have read today. Most of the links that I post have been forwarded in my emails. Tony Abbott and Bill Shorten are two that do receive them but, you wouldn’t know it.
    The first is about arctic methane release which, for some years now I have considered our greatest threat. This event is becoming more probable and worries me greatly. The second I found very interesting as I have a casual interest in history. It discusses the Roman and Mayan civilizations and the similarities with the complexities and diminishing returns of our own.

    “He argues that the probability of a massive methane release is about 50 percent. “It is a high catastrophe, high probability risk.”, he says. “And yet our global political processes have done little to more accurately assess or mitigate this risk.”
    “To slow the release of methane and prevent a methane bomb we need to bring back Arctic sea-ice, and to do that we need to cool the planet.”
    Australian climate scientist Andrew Glikson has also written at The Conversation on Methane and the risk of runaway global warming. But other scientists have also indicated the strong risks of Arctic Methane Feedback amplifying warming.”
    https://www.indybay.org/newsitems/2015/08/10/18775987.php

    “The key question for societies of today and the future is whether we can sustain a way of life that is materially prosperous in the face of scarce supplies of oil and other resources, degraded environments, a changing climate, and numerous major problems that will converge in the near future.”
    http://onlinelibrary.wiley.com/doi/10.1111/apaa.12038/full

    “The “smart fellows” who are in charge of fixing the problem are in fact the very same people who created it.”
    “From the start, the new institution peddled itself as the protector of the people’s interests, but it was quite the opposite. Its purpose from its inception was to control the economy and the government by controlling the issuance of the currency.”
    http://www.zerohedge.com/news/2015-08-08/when-train-wreck-no-accident

    I’m sorry but, Bill Mitchell and his theory just ain’t gonna do it.

    Cheers.

  69. Harquebus

    Kaye Lee
    I haven’t given up yet. I also would like to know.
    Cheers.

  70. John Armour

    “I have read MMT blogs and watched videos until they are coming out my ears and none of them answer my query.”

    And yet you still don’t understand the basics, as you continue to demonstrate. Sorry to be so blunt.

    I think your problem here with the accounting stems from your mistaken belief that Treasury is the issuer of the currency rather the central bank.

    It does explain in a sense why you either ignored or dismissed my response in May when I transcribed what I assumed was the answer to your question from Wray’s book.

    It was an example of the balance sheet of a central bank, not Treasury.

  71. matters Not

    oppose fiat currencies and my alternative would be precious metals

    Really? And what in your view would constitute ‘precious’ metals?

    Are you seriously suggesting that we revert to the ‘gold standard’ or something similiar?

    While I admit I’m still trying to get my head around MMT and its implications re my ‘common sense’, I do understand that the ‘precious metal’ solution is just a nonsense. Precious metals, by and large’ have no ‘intrinsic’ value only an ‘ascribed’ value given (usually) by societies in the past which valued ‘shiny’ objects.

    Do you identify with same?

  72. John Armour

    “I’m sorry but, Bill Mitchell and his theory just ain’t gonna do it.”

    Bill Mitchell would probably agree.

    But an application of some prescriptive aspects of MMT would make things a lot better for the 1 million who are totally without employment, with spin-off multiplier effects that would help another 1 million who are underemployed.

    ‘Work-for-the-dole’ could easily be converted to a Job Guarantee giving socially and environmentally useful employment to thousands at a living wage with all the usual benefits that come with full time work.

    It’s a ‘no-brainer’ but rejected by orthodox economics because of the phoney “money cost”, as discussed in Edward’s interview with Bill Mitchell.

    The Second Law of Thermodynamics deals with entropy, an even more tricky concept than MMT!

    But the point I was making was that short wavelength electromagnetic radiation (light, in this case) is a ‘higher form’ of energy than the chemical bonds formed through photosynthesis, the exact opposite of what the article was saying.

    Don’t give up on MMT. It’s actually a good fit for those other concerns we have in common.

  73. Matters Not

    and his theory just ain’t gonna do it

    Bill Mitchell would probably agree.

    Why?

    What are the barriers that can’t be overcome? Surely ‘common sense’ which is neither ‘common’ nor ‘sensible’ when examined is but a hurdle? Not something that is impenetrable?

  74. Harquebus

    Kaye Lee.
    Governments do not have to issue the currency. MMT is still only a theory and not a very good one so, only when a government is foolish enough to implement such a system, we will get an answer. I imagine there are various ways in which it can be done.
    I hope this helps.

    “Alternatively, the transaction can be completed without the transferral of the bond—just have the central bank automatically credit the government’s account prior to spending. When the government can require its central bank to create money on its behalf, we say that they are effectively consolidated into one entity.”
    http://jpkoning.blogspot.com.au/2013/01/meandering-from-mmt-and-platinum-coin.html

    John Amour.
    Thank you for that little factoid. I understand the concept of entropy.
    Even as a higher form, solar energy is still diffuse. That is why trees need a long time to grow and of the energy that falls on it, only a fraction is used. Hydrocarbons are still concentrated and stored solar energy.

    I disagree about MMT. It erodes savings and reduces purchasing power by infinitely expanding the currency supply just as the current system does.

    Matters Not.
    Gold and silver coins have throughout history, always been a convenient method of exchange and a store of value. The beauty of them is, governments can not create it from nothing thus reducing their purchasing power although, they can be debased by mixing them with other metals..

    Currencies originated with silversmiths issuing receipts to people who deposited their bullion with them for safe keeping. The smiths quickly realized that not every one wanted their bullion returned at the same time so, they just issued receipts as loans and the banking scam was thus created.
    Rehypothecation which, still continues today. From memory, there are about 120 paper ounces of gold for every physical ounce..
    You obviously did not view my link to the hidden secrets of money. Google it if you are interested.

    Please read the last link in my post above.
    “And so, the Fed set about its hundred-year programme of continuous inflation. Although there have been periods of lower inflation (and even deflation), the programme stayed more or less on course, and now, its hundred-year life has all but ended: the dollar has been devalued almost 100%.”

    The technical definition of inflation is expanding the currency supply.

    Cheers.

  75. Wally

    @John Armour “I think your problem here with the accounting stems from your mistaken belief that Treasury is the issuer of the currency rather the central bank.”

    So the bank have a ledger to record money created as per Bill Mitchells statement in the interview.

    The only way to account for government spending money the central bank has created in the budget is as a loan. The budget must balance so if money is credited to the governments account that is not received as revenue it has to be credited as a loan or the governments account would have a negative balance like an drawn overdraft.

    Shoot me down if I am wrong but there is no other logical answer and no one has been able to explain to Kaye Lee of a specific entry in the budget to account for money that has been created for the government to spend above and beyond borrowings and revenue.

  76. Matters Not

    Gold and silver coins have throughout history, always been a convenient method of exchange and a store of value

    Clearly you have a particular and peculiar view of ‘history’. As I recall, ‘significant’ areas of the current State of Victoria were bought by a Batman via offering, and delivering, the equivalent of ‘shiny’, ‘reflective’ objects among other ‘cheap’ but attractive to the locals who attributed significant value to same.

    Not a piece of gold and silver in sight but certainly an exchange of value.

    Last time, I flew to Asia/Europe or wherever I gave the Airline an option of accepting a payment in terms of my herd of goats or gold, or silver and the like and guess what, they preferred my ‘fiat’ currency?

    Please explain.

  77. Andreas Bimba

    @Harquebus you wrote:
    “The technical definition of inflation is expanding the currency supply.”

    If the economy were to grow by 10% by paying the unemployed to do useful work, the money supply must also grow by 10%. This is not inflationary nor does it devalue the currency as it is additional to the existing economy. The government can just create this money if it were wise and it does not need to pay it back to any central bank or other lender.

    If the government did pay this money back, guess what, those newly employed would be unemployed again. This is why governments would be wise to run deficits if there are unemployed or unmet growth capacity in the economy.

  78. Harquebus

    Matters Not
    You are not reading my links. The shiny tokens that we spend today do not have the same value as they did yesterday. That is, they purchase less that they did. That is a medium of exchange but, it is not a store of value.

    Andreas Bimba
    More people spending more money does not increase demand and thus prices? Come on mate, I know that you are more intelligent than that. You are correct about the debt. When debts are paid, currency is destroyed. That is why we are urged to borrow and spend. It is a ponzi scheme and all ponzi schemes end the same way.

    Wally
    Please read the last link that I have posted. It is so far the only answer that I have found.

    Cheers

  79. Kaye Lee

    “I think your problem here with the accounting stems from your mistaken belief that Treasury is the issuer of the currency rather the central bank.

    It does explain in a sense why you either ignored or dismissed my response in May when I transcribed what I assumed was the answer to your question from Wray’s book.

    It was an example of the balance sheet of a central bank, not Treasury.”

    The balance sheet of a central bank has nothing to do with the balance sheet from Treasury – they are entirely different things. I am not asking in any way about overnight cash rates or the reason for doing things or anything at all to do with the RBA and its dealings with other banks. I am asking how money creation is recorded on Treasury’s balance sheet which reconciles government income and expenditure, assets and liabilities.

    (The currency debate is irrelevant to what I am asking. The mint makes the coins, an RBA subsidiary prints the notes – the added value is recorded as seignorage. Treasury issues CGS – these are recorded.)

    In my view the problem is coming from you conflating Treasury and the RBA.

  80. Harquebus

    Kaye Lee.
    Please read the link that I have provided for you above. With MMT, there is no need for recording at treasury. The currency is always in the bank. A magic pot that never empties.
    Cheers.

  81. Kaye Lee

    Harquebus I did read it.

    “the relationship between Fed and Treasury is such that the two are not consolidated. The Treasury cannot ask the Fed to credit its account, nor can the Treasury print up a bond and give it to the Fed in exchange for spending power. The only way the Treasury can spend is by moving previously acquired funds that are held in the private banking system into its Federal Reserve account—and the only way it can acquire these funds is through taxes and bond issues.”

    Now whether that is true or not I am not certain. But I do know that Treasury’s financial statements must balance so, if they CAN just create money out of thin air, it would somehow have to be recorded and that’s the sticking point.

  82. Harquebus

    Kaye Lee
    What you say is how the system currently works. With MMT, as the article states, government and the reserve bank “are effectively consolidated into one entity”. No bonds need to be issued. The recording of currency creation will only take place at the bank. The only recording required by government entities, as far I can tell, is the writing of cheques and electronic transfers. The currency will always be in the bank.
    The whole point of MMT is to create money out of thin air without any obligation for governments to pay it back.

  83. Kaye Lee

    Harquebus,

    The article argues the exact opposite of what you just said because Treasury and the central bank are NOT consolidated.

  84. Jonesy

    Kaye Lee,

    If there is no fellow traveller on this blog that can satisfactorily answer your question, have you considered asking Bill Mitchell himself? He has an active blog, and is far from unreachable even if he doesn’t answer every message he receives. I’m sure if you keep trying you’ll get through to him, and then you can judge how one of the authorities on MMT answers the question. You may also wish to get in touch with Steve Hail at https://facebook.com/green.modernmoneytheoryandpractice/ who you may find easier to contact. Cheers

  85. Harquebus

    Kaye Lee.
    The article states government and the reserve bank would be “effectively” consolidated. Considering that treasury is part of the government, effectively, they would be. The “are consolidated” refers to “when” governments can require reserve banks to create currency without the issuance of bonds. It is not stating things as they currently are.

    Treasury need not have a role in currency creation except perhaps determining how much currency the bank is required to create.

    This is only theory and as I consider it a bullshit theory anyway, I think I will move on. Please let us know if you come up with anything.
    Cheers.

  86. Kaye Lee

    Jonesy,

    Thanks very much for the suggestion but, considering the ridicule I get here, I am hesitant to bother the disciples with what MMTers apparently consider an irrelevance. I maintain hope that one day, someone will say something that leads me to my answer.

    Perhaps accounting has nothing to do with MMT. I seem to be able to go along with the theory but I cannot reconcile it with treasury balance sheets and every explanation I am given immediately goes to what the RBA is doing with other banks which, to my mind, is completely irrelevant to the question I am asking.

    Wally seems to understand my dilemma.

    If I could find on Treasury’s financial statements an entry like quantitative easing or capital injection or electronic seignorage or some such thing (not sure what term to use) to account for money creation then I would be ok. I find it very hard to believe that the RBA would just credit a government account with an arbitrary sum and it would not be recorded on Treasury balance sheets somewhere.

    Can someone answer my question about whether this is just something we could do but don’t (yet)?

  87. John Armour

    “I find it very hard to believe that the RBA would just credit a government account with an arbitrary sum and it would not be recorded on Treasury balance sheets somewhere.”

    I totally agree Kaye Lee. What such an entry might be called will be the interesting bit, how the ex nihilo cat is kept in the bag.

    When I get time I’m going to have a really thorough look and see if I can find something that looks like the balancing item. But I guess you’ve already done this?

    Even if I find nothing it will be an interesting exercise.

    I’ve seen seiniorage in there , but it didn’t cover the deficit.

  88. Kaye Lee

    yes John, I have looked and come up with the same conclusion. I would truly appreciate it if you can help. I want to embrace MMT and do to a large degree which is why I have to get things straight in my own head. I know I am being annoying. If we can find an answer to exactly what you just said I will be able to move on to the more important implications of the theory.

  89. Harquebus

    Kaye Lee
    “I find it very hard to believe that the RBA would just credit a government account with an arbitrary sum and it would not be recorded on Treasury balance sheets somewhere.”

    You can believe it. It will be recorded somewhere as “Put n amount in our account.” That is why it is said that currency will be created from thin air, just as it is now and is also why the whole theory is absurd and not worth wasting your time on.

    “is just something we could do but don’t (yet)?”

    Yes but, what are the consequences? Pretty much what it is today. Constant inflation which, allows those whose hands get the newly created currency first, which will be governments instead of the banks and financial institutions, to purchase goods and services or provide loans before the inevitable increase in prices which, those at the bottom end up paying.

    Basically, the banks have shown the way to create currency from nothing and it is just theft. Pure and simple and banksters are just that except, they don’t go to jail.

  90. Wally

    @Kaye Lee “Can someone answer my question about whether this is just something we could do but don’t (yet)?”

    I asked the question if MMT was a steadfast theory or a concept in a previous post but no conclusive answer was forth coming.

    My basic (very basic) knowledge of accounting principles makes me believe that every transaction in associated bank accounts has to appear somewhere on the balance sheet (budget). There seems to be opposing views on the validity of MMT and there is no entry for cash creation entry in the budget so it seems that MMT is not practised by the Australian treasury and that would answer why people cannot answer the question of “How is cash creation recorded in the budget”.

    The question that I asked last time and still seek an answer for is how does cash creation affect International trade? If my net asset is unchanged but more cash is created logically I would expect the cash to be devalued so the exchange rate would be lower. When the US printed money to solve the GFC cash problem the $AU value increased compared to the US$ and it could also be said that the $US lost value to the $AU. I don’t know if the value of the US$ was reduced compared to other currencies.

  91. Kaye Lee

    After the initial abusive response, I feel this conversation has been worthwhile, though I am sure Edward would disagree – something that upsets me because I respect his contributions but he obviously thinks I am an obstructive moron. When I was a kid studying economics I always said just print more money and don’t tell anyone – I thought I was being flippant.

    “My basic (very basic) knowledge of accounting principles makes me believe that every transaction in associated bank accounts has to appear somewhere on the balance sheet”

    I agree. It’s a shame that no-one will answer about whether MMT is a theory we COULD use or one that is in practice. If it is in practice there should be some entry on treasury balance sheets. If it is an idea that we COULD implement, then we are talking a whole new ball game. I had taken it from the posts about MMT that it is what happens now in which case I need to know how money creation is accounted for on the treasury balance sheet.

    harquebus, in my understanding injection of funds into a system will only be inflationary if demand exceeds supply so I can understand why MMTers say we are only constrained by our productive capacity.

  92. Harquebus

    Kaye Lee.
    Demand only needs to increase in order for a corresponding increase in price to occur.
    Productive capacity is constrained by energy availability.

  93. Kaye Lee

    I disagree. If demand increases and supply keeps up with that increasing demand there is no reason for prices to go up. If you raise your price just because something is wanted, provided supply can keep up, competition will see you lose out. Productive capacity is constrained by ALL available resources, not just energy.

  94. silkworm

    Pardon my ignorance, but doesn’t government create money by issuing bonds, or rather, receives money from the RBA in exchange for the bonds it creates? And does this help to answer Kaye’s question?

    I’m trying to get my head around exactly who or what creates the money and how bonds fit into this.

  95. Harquebus

    Silkworm
    This might help.
    http://hiddensecretsofmoney.com/videos/episode-4

    As best that I can understand, MMT does not require treasuries to issue bonds. Reserve banks create currency and deposits it into government accounts. That’s it.

  96. Kaye Lee

    harquebus,

    The RBA does NOT create currency other than banknotes which are just a miniscule distraction. If you believe they just credit the government’s account then I would love to see the proof of that. And how come everyone’s videos and links are about the American system which, from what I understand, is different to ours in that the Fed is privately owned by shareholder banks whereas the RBA is not.

  97. Andreas Bimba

    Kaye, our governments do not create money out of thin air now but they would be better off if they did as they would then avoid having to pay interest to the middle man – the Reserve Bank.

    Wally, you asked if creating money will have an effect on our exchange rate. If the money supply is increased no more than the amount of economic growth then the value of the dollar won’t change. If too much money is created and is used for consumption (rather than speculative investment) then we will experience inflation and this will devalue the Australian dollar. If our current account is in deficit (more money leaving than entering the country) then the Australian dollar will also devalue.

  98. Wally

    Thanks Andreas your answers make sense.

  99. Harquebus

    Kaye Lee
    I am saying this is likely to happen under a modern monetary system. Sorry for the omissions and not being explicit. I know that is not how things presently are.

    The video says that, all governments create currency in similar ways and only uses the U.S. as an example because it is, or was, the largest economy.
    The video series is worth watching. Really. It is an eye opener and I recommend it.

    As I keep saying. Our current system is theft by the banks and the proposed MMT is theft by the government.

    I my opinion, neither is worth having as the current global economic situation demonstrates. Massive debt and unfunded liabilities that have robbed future generations in order to extend our unsustainable lifestyles and has set us up for the mother of all crashes. A monetary system using precious coins would have avoided our current situation.

    Again, the whole MMT stuff is bullshit and I don’t understand why you are spending so much time on it.

    Cheers

  100. Kaye Lee

    silkworm,

    I am in the same position. Andreas seems to have cleared up the problem by saying we don’t currently create money out of thin air but we could. If we did I would assume that it would show up on treasury balance papers somehow.

    To Edward, I hope you now realise that I am not trying to disprove MMT but to understand it and, as I found when teaching, if there is something that one student doesn’t understand then there is a good chance that others are equally lost.

  101. Harquebus

    Kaye Lee
    Have you considered that the problem is not you. It might just be the theory itself is illogical and nothing more than economic gobbledegook. The basic equations used in modern economics are flawed. That is why our environment is in terminal decline. Economics does not factor it.

    “The economy is a wholly owned subsidiary of the environment, not the reverse.” — Herman E. Daly.

    Fiat currencies of which our is one, are created ex nihilo. Out of nothing.
    Throughout history, all fiat currencies have failed. Every one without exception and for the first time in history, all currencies are fiat.

    “All paper money eventually returns to its intrinsic value. Zero.” — Voltaire.

  102. Kaye Lee

    I know that I have been part of the problem in this discussion but I make no apology for persevering. If you want people to accept ideas then you have to be able to explain them. Faith based economics just won’t cut it. If I thought the concept worthless I would not be wasting time on it.

  103. Harquebus

    Kaye Lee
    I think that you are doing a very good job of highlighting the absurdities of this theory. You just haven’t realized it yet. As I said, the problem is not you, it is the theory itself.

    “To be blunt, MMT is fatally flawed, and someone needs to address those flaws head on.”
    According to MMT, The government does not need to issue bonds to raise money.
    http://www.mercenarytrader.com/2010/12/weekender-the-trouble-with-modern-monetary-theory-mmt/

    Search criteria: modern monetary theory debunk
    (Lots of reading material here. I am going spend some time on it myself.)

    Cheers

  104. Rossleigh

    Money – like the colour “yellow” – is an illusion shared by almost everyone.
    Discuss in three thousand words or less!

  105. Kaye Lee

    Oh poop I will have to edit. Did you know that bees can recognise particular hues of yellow?

  106. Jennifer Meyer-Smith

    Might I suggest that Michael and Carol invite Bill Mitchell into this discussion or into a connecting discussion post?

    Then all the questions that are raised here, that perhaps are not so clear to some of us (I confess I’m one of them!), can be asked systematically to Bill and considered by all of us. In other words, each individual can ask their question/s and Bill can answer.

    Let’s treat it like a straight talking and polite Q&A?!

    I want to get better informed but I also need the language to be user-friendly so that I’m not floundering and unsure and confused.

    We all want an effective alternative to this economic system that fails us and our planet. So, let’s get Bill in to answer our methodically posed questions.

    No sarcasm will be tolerated. Only user-friendly language exchanges will be tolerated.

    And, might I suggest when someone posts a link, could they give less economically endowed people like me the head’s up of their opinion on why their link makes a salient point in our collective understanding?

  107. silkworm

    When someone like Harquebus says they do not believe in MMT, and then posts a link to try to explain it, then I am not going to follow that link. I feel that would just be a waste of time.

  108. Harquebus

    silkworm
    Which link are you referring to? I post heaps.

    In order to argue against something, one must first understand it.

    I read a lot and collect a lot of links that I forward to many politicians including T.A. and B.S. as well as many journalists. 95% of the links I post here I have sent or will send to them. MMT is a subject that crops up regularly.

    “Someone like Harquebus”?

    Jennifer
    I try to include quotes with my links in order to make a point and/or give some idea as to their content.

  109. Jennifer Meyer-Smith

    @silkworm,

    Is that all you grasped of my comment?

    Like I said, the terms are that we stay polite and user-friendly to each other and of course Bill himself.

    I want greater understanding of MMT, as a possible economic grounds for economic policy formation and society replenishment.

    I see the Q&A will assist me, and perhaps some others here, on specific points of understanding MMT.

    It is the golden opportunity to address Bill directly, in reasonable file and with user-friendly language.

  110. Jennifer Meyer-Smith

    Harquebus,

    I know you do provide links but if the exchanges leading up to the links have confused less-economic-literate people, they are less likely to want to follow your links. Keep the discussion user friendly for all of us.

  111. John Armour

    Kaye Lee,

    The balancing item we’re looking for does not appear in the budget papers, anywhere.

    I went through Budget Paper No.1 line by line, every statement, every table, every note. Plus the other 3.

    The government’s balance sheet is different from what you’d be familiar with in that it doesn’t “balance”.

    But I think I might’ve found the explanation in this Treasury publication:

    Debt, the Budget and the Balance Sheet

    “The concept of a budget is distinct from how it is financed.

    A government running a budget that is in deficit (that is, where its revenues are less than its expenses and investments in non-financial assets) can choose to finance the deficit by liquidating its financial assets, where available, or by increasing its issuance of debt. Conversely a government running a budget that is in surplus can choose to use the surplus monies to invest in financial assets or to retire its stock of debt.

    These financing transactions will be disclosed as a change in the composition of the government’s balance sheet and are not themselves reflected in the fiscal or underlying cash balances.”

    I now need some time to think about the implications of that.

  112. John Armour

    “As best that I can understand, MMT does not require treasuries to issue bonds. Reserve banks create currency and deposits it into government accounts. That’s it”

    .

    Here’s some history for you Harquebus:

    Direct central bank purchases of government debt

  113. Jennifer Meyer-Smith

    John Armour,

    when you figure it out (sounds like it’s lacking in transparency to me!), please make your explanation user-friendly for mere mortals like me.

  114. Harquebus

    Jennifer

    “Keynesians are not good writers. When it gets down to explaining economic cause-and-effect to the average person, the Keynesians are helpless. The average person cannot follow Keynesian logic. There is a reason for this: there is no logic to it. The General Theory is illogical.”
    http://www.zerohedge.com/news/2015-07-27/bucks-stop-here-why-keynesian-economics-will-get-blamed-crash

    The same can be said of supporters of MMT.

    Don’t sell yourself short. You have common sense in abundance.

    Cheers.

  115. edward eastwood

    @Jennifer Meyer Smith It’s a nice suggestion Jennifer and in fact I had this in mind when I first approached Mitchell. I thought that if a forum or getting him to write an article for AIMN was not possible, then I wanted to ask if he’d allow a re-blog of his more accessible posts so that novices or even those who were only remotely curious about economics would be able to understand.

    I already knew that he was very protective of his work, not because he’s ‘precious’ as the Australian Progressive Party accused him of being when he declined to let them re-blog his posts but because he’s weary – and that’s grossly understating it – of his work being misrepresented or quoted out of context.
    He gave me the same answer that he gave the APP. One paragraph and a link to his blog site.

    He did however offer me some time to have in his own words; “A chat about MMT”. What you’re reading in the article above is the result of two meetings which took place over the month of July.

    As I quickly learned, Mitchell is unbelievably busy not only with his own teaching duties but also on the lecture/talk circuit (he’s currently in Europe at the moment) and on average receives around 40,000 hits a week on his site. He also gets around 200 or more e-mails a day asking him about MMT.

    Btw, he’d never heard of AIMN.

    As I wrote above, he’s also in constant demand from various MSM hacks who want to talk to him for the purposes of either damning him with faint praise or quoting him with out citing him or writing what he’s said and then passing it off as his own work.

    It’s the measure of the man’s generosity that on both occasions he said that he could only give me an hour of his time and on both occasions gave me an hour and a half.

    When I wrote up our first meeting in the form of an article rather than an interview and forwarded the final draft for reasons of accuracy, he wouldn’t let me publish because he felt that it was “too personal” and generously offered me a second meeting.

    Mitchell is a very private man and even though I’m a little disappointed that ‘Mitchell; the man” will never see the light of day, I respect his wishes.

    So in lieu of getting Bill to participate in a forum, I offer the following links to ‘simplified MMT’

    http://www.snowcow.com/society/reframing-money/

    http://neweconomicperspectives.org/2013/02/real-dollars-and-funny-money.html

  116. Jennifer Meyer-Smith

    Thanks Harquebus.

    Would you be good enough to tell me in basic, first principle terms why MMT wouldn’t work?

    Then, I might be able to make up my own mind one way or the other.

  117. Jennifer Meyer-Smith

    Thanks edward eastwood,

    I will attempt to continue to learn about MMT. Do you personally and professionally support it?

  118. John Armour

    “Kaye, our governments do not create money out of thin air now but they would be better off if they did as they would then avoid having to pay interest to the middle man – the Reserve Bank”

    I have to disagree Andreas.

    Fiat currency is creation by executive fiat, which is just a fancier way of saying “out of thin air”, or more pretentiously, ex nihilo.

    The existing arrangements, the institutional smoke screen, the veil of bullshit, just make it look like we’re still on some kind of gold standard but we abandoned the last vestiges of the Bretton Woods agreement in 1983.

    The middle man is not the RBA by the way. It’s the commercial banks, bond traders, and all the other parasites who love the risk-free dividends on the government bonds that sterilise the reserve effects of deficit spending.

    But in the end, it costs “nothing” except the effort to mark up somebody’s account with a few key strokes. No future taxes and no debt burdens for our grand-children like we’re told, endlessly.

    That’s the “miracle” of fiat currencies.

  119. edward eastwood

    @ Jennifer Meyer-Smith. Actually Jennifer, I’m a disinterested seeker of the truth.
    There are many other schools of thought on economics which include Marxist and Feminist theories but you’ll be hard pressed to find them being taught. Like the Church of the Middle Ages, Neo-liberalism demands that there be no other Gods other than the Chicago School
    As I said to Matters Not, which would you rather have; a theory with a proven track record of full employment, fully funded education, health and welfare and a commitment to fulfilling the Social Contract, or the one we have now?

  120. Jennifer Meyer-Smith

    I understand edward,

    the politics has made the MMT hard to reveal to the rest of us. I would prefer full employment, fully funded education/health/welfare and fulfilling the social contract. No hesitation to say that.

    I just need to understand the fundamental elements so I can advocate them more widely. Please help in user-friendly terms.

  121. Harquebus

    Jennifer

    MMT is just another fiat monetary system. A variation on our current system. I do not support either.
    I advocate a verifiable and accountable bullion backed currency or preferably, gold, silver and bronze coins.

    As I stated earlier, all fiat currencies have failed. The reason is, they are intrinsically next to worthless. They are created ex nihilo, out of nothing and declared to be of value fiat, “an arbitrary decree or pronouncement, especially by a person or group of persons having absolute authority to enforce it.”
    Fiat: A Latin word for “it shall be”

    “The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.”
    http://dailyreckoning.com/fiat-currency/

    Search criteria: fiat monetary systems

    I suggest that you do not bother too much beyond the basics of MMT. It is a flawed concept that if implemented, will ultimately fail as our current system is already failing.

  122. Jennifer Meyer-Smith

    Thanks Harquebus,

    for taking the time to give some extra insight into what MMT might mean and the flaws in fiat currency.

    I suppose fiat currency has a chequered history coz life fluctuates and what might seem reasonable one day to take a punt on, the next day something else has happened to change the playing field.

    i’m interested in any economical system that allows responsible flexibility and equitable accessibility to its benefits.

  123. Matters Not

    edward eastwood said:

    which would you rather have; a theory with a proven track record of full employment, fully funded education, health and welfare

    I agree that you did post that and I will agree I didn’t respond at the time even though I had my (non expressed) reservations. But given the ‘repetition’, can I now ask for clarification re ‘a theory with a proven track record’?

    Where do I find evidence of same? How can a ‘theory’ have a proven track record? I think we can agree that a ‘theory’ is something akin to a ‘way of constructing reality’? But unless those theoretical constructs have been ‘put into practice’ how can one argue that there’s been:

    a proven track record of full employment, fully funded education, health and welfare

    Because there hasn’t been. I suspect you are being aspirational here. It’s perhaps what you think ‘might’ or ‘could’ be under an application of MMT, but to suggest a delivery because of MMT is fanciful.

  124. Wally

    @Matters Not some of my initial issues trying to understand MMT come down to the use of the word “Theory” because it has 2 meanings.

    Theory can refer to something that is a concept, unproven but logically and could be used.

    Theory can also mean the workings behind what is practised in a discipline, proven and factual.

    Many fields of study, in particular trades have practical and theory classes.

    English is a shit language, it is so easy to take something the wrong way or out of context.

  125. Matters Not

    Wally you said:

    because it has 2 meanings.

    Wally, ‘words’ (‘theory’ is but an example) were created by humans and they did so in an attempt to convey what an individual wanted to send to the other, broadly defined.

    While dictionaries define a socially/culturally ‘normative’ definition, such complications are at best an historical ‘record’. Any ‘word’ can be given any ‘meaning’ that an individual chooses to give same.

    Have you had a ‘haircut’ lately? I have. And a Barber wasn’t even in sight.

    Truth is Wally ‘meaning’ emanates from ‘you’. It isn’t transmitted externally.. You are the ‘meaning maker’.

    And you should accept responsibility for that. Don’t blame the ‘other’.

    Not that I am being personal. It’s a general point I am making (perhaps).

  126. Wally

    @Matters Not I agree with what you say, my confusion (along with others I believe) come from the acronym “MMT”, the meaning of theory in this context is up to the reader to attempt to decipher.

    “Have you had a ‘haircut’ lately?” Funny you bring this up, I had my first haircut in 18 months last week and it was a mistake. Should have waited for a few more weeks, had forgotten how sore cold ears get in brisk Victorian winter weather.

    Nowadays when I have a haircut there is no hairdresser or barber in sight, I refuse to pay full price for a haircut when I barely have half a head of hair. I stand in front of the mirror with a set of clippers and shear myself. Not joking! Usually while my wife is at work and then to her disgust I get her to tidy up the bits I miss.

  127. John Armour

    “…when you figure it out”

    I’m still on the case Jennifer.

    The answer we’re looking for is probably buried somewhere in the Office of Financial Management, the Treasury offshoot that manages our so-called debt.

    What I took away from that Treasury publication (Debt, the Budget and the Balance Sheet) I linked to above is that whilst all the numbers are there in the budget to arrive at size of the deficit, also noted is the value of debt issued, interest payments due thereon etc, and it’s up to us to join the dots.

    There’s a whiff of cordite in the air but no body, no gun.

  128. John Armour

    Matters Not,

    On the meaning of words…well put. We are all Humpty Dumptys to some extent.

    I’ve always thought it unfortunate that the word “theory” was used in the name of MMT.

    To me it means something true in the scientific sense, until of course, somebody proves it’s wrong with an even better “theory”.

    But the term has grown a pejorative veneer: “MMT is just a theory

    I’d like a dollar for every time that’s been thrown back at me.

    The reality is that we operate under a monetary system exactly as MMT describes but there are vestigial institutional arrangements left over from the era of the gold standard that prevent it from working in the interests of the citizens.

    I’ve just spent some time trawling through the budget papers looking for the answer to Kaye Lee’s problem and if I didn’t know better I could’ve been back in the pre-1971 era when we still had a convertible currency.

  129. Kaye Lee

    John,

    Whilst the budget papers aren’t presented in double entry format, they do show assets and liabilities which result in a net debt figure.

    See Table 3 here http://budget.gov.au/2015-16/content/bp1/html/bp1_bs6-01.htm

    They also show the balance sheet

    See Table 2 here http://budget.gov.au/2015-16/content/bp1/html/bp1_bs9.htm

    The increase in net debt “is primarily driven by higher levels of Commonwealth Government Securities, owing to changes in the financing requirement and a decrease in average yields compared to those at the 2014‑15 MYEFO.”

    I know you disagree but anyone reading the documents from treasury and finance will be led to believe that government spending is financed by revenue and the issuance of CGS. Until we can find some entry showing ex nihilo creation of funds it is hard to argue against what they are telling us. It certainly appears that the government creates funds by issuing bonds.

  130. Jonesy

    Kaye Lee,
    “Thanks very much for the suggestion but, considering the ridicule I get here, I am hesitant to bother the disciples with what MMTers apparently consider an irrelevance. I maintain hope that one day, someone will say something that leads me to my answer.”

    Maybe I’m naive, but I’ve always thought it good school advice that if there are parts of a subject you don’t understand, don’t ask your fellow students – ask the teacher!
    It’s a shame you feel discouraged from doing so but you’re flat-out talking to the wrong people. I say again: reaching out to Mitchell, Hail or any other professor specialised in MMT is your best (and if you ask me, only) hope of getting a satisfactory answer. Sorry to repeat myself; I’ve just felt some of the more confused/heated exchange here was not just unfortunate but unnecessary.

  131. Kaye Lee

    Jonesy,

    You are right of course. As a maths teacher I always encouraged my students to ask questions and reinforced that there was no such thing as a silly question. I now find myself in the position of being afraid to ask a silly question. I feel like I did when I went to France and tried to use my schoolgirl French to communicate. I am also hesitant to bother busy people with something that may be irrelevant? I am trying to teach myself by reading as much as I can and listening to others. I was very good at maths in high school but I remember having a short period of feeling lost because I didn’t understand that y and f(x) were exactly the same thing. My lack of understanding of that basic fact was irrelevant to the topic we were studying but it held me back. The day that that dawned on me was so wonderful – I am hoping for a similar moment of revelation with MMT.

  132. John Armour

    “I know you disagree but anyone reading the documents from treasury and finance will be led to believe that government spending is financed by revenue and the issuance of CGS”

    To believe that Kaye Lee you have to turn causality on it’s head.

    The government has to first give the investors who buy the bonds the chips to play. There can be no selling of bonds or revenue from taxation until the government first spends.

    That’s because we have a fiat currency and the government is the monopoly issuer.

    http://bilbo.economicoutlook.net/blog/?p=332

  133. Kaye Lee

    How can I accept what Bill Mitchell says when in the first paragraph he says “I will detail the reason why the central bank issues bonds”. The RBA does NOT issue bonds – treasury does.

    He goes on to say “Federal spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the RBA decline by that.” How did those reserves get there? This seems an obvious and very normal thing – you spend and your account is debited. I see no money creation in that.

    He gives a simplistic example of the government spending $120 but only collecting $100 so it prints $20 dollars in notes to cover the difference. If it did this it must be recorded but, as you know, there is no such entry for the billions that we spend beyond what we collect other than the issuance of CGS.

  134. Harquebus

    Ah, the logical debating the illogical.
    Luv it.
    Keep at ’em Kaye Lee. I’m starting to enjoy this.
    Myself, I’ve moved on.
    Cheers.

  135. John Armour

    “How can I accept what Bill Mitchell says when in the first paragraph he says “I will detail the reason why the central bank issues bonds”. The RBA does NOT issue bonds – treasury does.”

    We can agree that the government issues bonds.

    Bill Mitchell says the RBA issues bonds, whereas the RBA says it sells bonds. Functionally, is there a difference?

    Both the RBA and Bill Mitchell (plus Wray, Kelton, Galbraith etc) say that bond issuance (or selling), is for the purpose of interest rate maintenance.

    Treasury says it’s to fund the deficit. Take your pick.

    If you pick Treasury’s explanation you are saying we have returned to the gold standard.

    “He gives a simplistic example of the government spending $120 but only collecting $100 so it prints $20 dollars in notes to cover the difference. If it did this it must be recorded but, as you know, there is no such entry for the billions that we spend beyond what we collect other than the issuance of CGS

    Certainly not in the budget as a discrete entry, as we’ve confirmed. It’s in Treasury’s accounts of the central bank.

    “The AOFM manages the daily cash balances of the Australian Government in the Official Public Account (OPA). The AOFM’s primary objective in managing these balances is to ensure that the Government is able to meet its financial obligations as and when they fall due. Other objectives are to minimise the cost of funding the daily cash balances and to invest excess cash balances efficiently. In minimising cost, the AOFM seeks to avoid any use of the overdraft facility provided by the RBA”.

    “The Official Public Account is the collective term for the Core Bank Accounts maintained at the RBA for Australian Government cash balance management.”

    http://aofm.gov.au/publications/annual-reports/annual-report-2013-2014/part-2-operations-and-performance/#fn-26298-2

    When you understand that the AOFM is Treasury, I really think that trying to discredit what Bill Mitchell says because he says the RBA issues bonds, rather than sells bonds, is splitting hairs.

    When Mitchell says the central bank and Treasury are part of the consolidated government sector, he has a point.

  136. Kaye Lee

    I am in no way trying to discredit Bill. I like the logic of MMT. I am trying to understand it. And I have no problem with the AOFM but when you read their role they say

    “The AOFM develops an issuance program each financial year based on the Australian Government’s expected financing requirements as set out in the Budget and as updated in the Mid‑Year Economic and Fiscal Outlook.

    The AOFM’s cash management role ensures that there are sufficient funds available on a day to day basis to meet the Australian Government’s cash needs. Funds are received from tax and excise collections and debt issuance.”

    So I am back to square one.

    “There can be significant mismatches between these ‘in’ and ‘out’ flows leading to times when the AOFM needs to liquidate short term financial assets or undertake short term borrowing (through Treasury Notes) to meet shortfalls.”

    What I am looking for is the actual method of money creation. I still feel it is through issuing bonds but you say no, so if it isn’t through issuing bonds, how do they do it? They specifically say that they avoid going into overdraft at the RBA which indicates that they need the funds in the account first.

  137. John Armour

    “Square one” is exactly where 99% of the population is and where the neo-liberal ideologues would like you to stay. Don’t give up!

    Superficially, there’s not a lot wrong with what the AOFM says about its role in meeting the cash needs of the government. It’s factually correct. But only at a superficial level.The problem is that it doesn’t go on and explain that the purpose of the issuance or liquidation of securities is solely to manage the reserve effects of government spending and government receipts, leaving instead the impression that borrowing is how the government funds the deficit. And I suspect this is deliberate.

    As Bill Mitchell explains, the government is just borrowing back the money it has just spent. It’s a wash.

    If we didn’t have the RBA (and Bill Mitchell) telling us the rest of the story, maybe we’d be none the wiser.

    It’s clear that most people believe that bond issuance (or tax, or asset sales) is how the government funds its spending because it’s a “logical fit” for the “household budget model” that most people carry around in their heads, and believe to be an accurate description of the way government finances work.

    Functionally, it really wouldn’t matter much if that myth lay undisturbed but it underpins and legitimises pernicious policy that has serious “whole-of-life” consequences for hundreds of thousands who are denied the opportunity to live fulfilling lives through gainful employment.

    Back to the accounting, I’m sure if you could access the Official Public Accounts of the RBA you’d find an entry, or entries, you could identify as ex nihilo injection of funds. I don’t imagine it would be that different from Wray’s textbook example.

    I’m not surprised that it’s not made obvious in the budget papers and statements because that’s essentially a “political” document. I was gobsmacked at the overt political messages threaded into the notes. It could’ve been written by a Murdoch hack.

  138. Kaye Lee

    I did look at the RBA statement of income. They record the $8.8 billion Hockey gift but I can find no ex nihilo creation of funds there either.

    http://www.rba.gov.au/publications/annual-reports/rba/2014/html/fin-statements/sta-com-income.html

    I also looked at their statement of financial position showing assets and liabilities

    http://www.rba.gov.au/publications/annual-reports/rba/2014/html/fin-statements/sta-fin-position.html

    I would not expect to find what I am looking for here because if the government was crediting their own account out of thin air it would appear in THEIR financial statements, not those of the RBA.

    “The aggregate balance of the Official Public Account Group represents the Government’s daily cash position. These banking arrangements include the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility.”

    I get back to asking, is this something you are suggesting we COULD do, but don’t at the moment?

    The movement of bonds and their role in affecting the overnight cash rate is an entirely different thing and totally irrelevant in my mind to what I am asking which is where is this money creation recorded. The only place that makes sense for it to show up is on the government’s records. The bank would show a credit to an account but somewhere the government would have to show these additional funds.

  139. John Armour

    I agree. We won’t find the ex nihilo injection of funds in the RBA’s own operating accounts. But I think we might both be missing something here.

    We can see the “Cash receipts from borrowing activities” of $50b as an aggregated sum in the budget statement but all we’re going to find in the OPA is a record of that as an injection of funds into the government’s account as a credit.

    It will tell us nothing that will answer our question.

    I think the secret to understanding that this has to be creation ex nihilo is not to look for a note or entry describing it as such, but to understand that the debt, the stock of the deficit flows, is never paid off with future taxes. It’s just rolled over with fresh bonds, in perpetuity. That’s why the so-called “national debt” continues to grow.

    If this was “borrowing to finance” in the usual practice we would expect there to be established procedures to pay the debt off but there’s not, apart from issuing more debt. Instead we’re told that we, or our children, will have to pay off the debt in higher taxes, but it hasn’t happened yet and it never will, mainly because that’s not the purpose of taxes.

    For those still holding a “household budget model” of the economy in their heads this is a nightmare but for those who understand that the national debt is the private sector’s asset it’s actually a good and essential thing.

    Consider also that about $50b of the national debt is made up of bonds the government has on issue just to satisfy the needs (or wants) of the bond market, over and above its own needs. The interest payments on these bonds is met by issuing more bonds. Imagine the outcry if taxpayers believed they were footing the interest bill on these bonds so that the bond traders could send their kids to private schools. Yet this is the fiction they are told when it comes to “borrowing to fund the deficit”.

    Without a contribution from the external sector there can be no private sector saving (the source of the funds to buy the bonds) without government deficits: the funds that were used to buy the bonds from the government had to come, in the first instance, from government deficits.

    This might be your “y = f(x)” moment Kaye Lee. I think the evidence that the government creates the money for its own spending out of thin air is indisputable, but it’s in the narrative not the accounting. You have to join the dots.

    Finally, here’s the germ of a thought that might lead you somewhere: every cent of government spending is, in the limit, taxed and destroyed. And all bank created money nets to zero.

  140. Kaye Lee

    I do appreciate your perseverance John but I’m still not happy. (I hear your groan)

    “the debt, the stock of the deficit flows, is never paid off with future taxes. It’s just rolled over with fresh bonds, in perpetuity.”

    This is what I think happens. I have never thought of the government finances like a household’s (and even in my household, whenever I have got out of debt I have gone back into it to increase my assets/income). They never have to retire. They should be continually investing in things that bring a better return even without us considering MMT. I am also quite happy with the notion that they could, instead of issuing bonds, just credit their account but they don’t appear to do so. That is what I am looking for.

  141. Jennifer Meyer-Smith

    Kaye,

    the way I see it you’re looking for the nuts and bolts on how a vastly improved economic system can work that benefits us ALL.

    I would like to see your itemised list of what you like about MMT and what you still find sus. Tell us what you would want improved.

    Then, inform the rest of us mere mortals or it just remains an elitist, intellectual debate that gets us all nowhere.

  142. Kaye Lee

    Jennifer,

    I can’t say I find anything sus about the theory…I just can’t find any proof that we currently employ it.

    The things I like about it are that injecting funds into the community will only be inflationary if “we exceed our productive capacity” which I take to mean too much money, not enough stuff (including labour). We can spend what we need to to give us the society we want up to that point. We certainly have spare capacity with our un/underemployed.

    I like the job guarantee though I would like to see much more detail about what people would be doing.

    I can’t explain well yet because, as you can see, I am having my own difficulties understanding.

    Where I am at the moment suggests we do fund spending by issuing bonds and collecting taxes (according to all financial statements etc) but we can outspend by as much as we need to, no need to ever pay debt off because we can just issue more bonds….and here is the not sure part…. we could do it by just crediting government accounts at the RBA?????? I see no reason why we couldn’t (rather than issuing bonds and paying interest) but no-one can tell me how that would be recorded and I cannot believe they can do that without recording it somewhere.

    Don’t take me as being able to inform you here Jen. I am on a journey but have by no means emerged from the tunnel.

  143. Harquebus

    Kaye Lee
    There ain’t no such thing as a free lunch. MMT would create currency from nothing just like we do now except that, bonds are never issued. It is an illogical concept and the promises of full employment are false.
    x=0 that is y.

  144. Jennifer Meyer-Smith

    Thanks Kaye,

    for your response. I don’t pretend to know much about this but like the rest of us, I’m attempting to find a channel of greatest economical return to the Australian people (and the world) through smart economic policies and procedures.

    MMT gives some promise as an alternative to the current, discriminatory and ineffective economic system that will bring us all down even the myopic 1% eventually.

    I would love for you, Kaye, to advertise, advise and advocate how in your eyes the MMT could be improved by showing those nuts and bolts on the ledger. Let’s face it, the wankers in the current positions of responsibility in Treasury and the RBA have not proven they can do any better and they are getting paid BIG time for their paltry efforts.

    We need you, Bill Mitchell, edward, john armour and other learned people here and elsewhere to expound the theory and advocate the practice.

    We need change for the betterment of every ordinary Australian and world citizen, so we start the process and fine-tune through ongoing quality assurance. The ambition is to revolutionise our global economic systems so that ordinary people get a better deal wherever they are.

  145. Matters Not

    the way I see it you’re looking for the nuts and bolts on how a vastly improved economic system can work that benefits us ALL.

    I think you misunderstand what the proponents of MMT are all about. First and foremost, they argue that the MMT ‘theory’ describes what actually happens re the current ‘monetary’ arrangements. They do not advance a ‘vastly improved economic system’. Their ‘theory’ is much less ‘grand’ than that. ‘Grand theories’ are not the ‘go’ these days. And for very good reasons.

    Putting it another way, they claim to describe what ‘is’ but they refrain from advancing an ‘ought’, even though, if their description is accurate/valid or whatever, you may think an ‘ought’ (or several) is/are implied. I think that’s a reasonable conclusion.

    I think I am a convert (certainly my understanding(s) have been better informed) but the ‘devil is in the detail’ and as Kaye Lee demonstrates (over time) there’s still a devil or two still to be rid of.

  146. Jennifer Meyer-Smith

    Thanks Matters Not,

    I accept that MMT is a descriptor of this current abusive economic system. However, I am by nature an impatient type and when I see or am told that something bad is happening, I want to know that there are good souls around me who are working to make that bad right.

    I’d like to see some other suggestions besides my own observations albeit as unprofessional as they might appear.

    It’s time for building the new model through our collective contributions. No time like the present, so they say!

  147. John Armour

    ” I am also quite happy with the notion that they could, instead of issuing bonds, just credit their account but they don’t appear to do so.”

    There’s actually no functional necessity to issue bonds Kaye Lee but the central bank would have to pay interest equal to the cash rate on excess reserves. Otherwise competitive pressures in the inter-bank market to unload excess reserves would drive the cash rate to zero.

    The bond market would scream like stuck pigs though, like they did back in 2002 when the the flow of fresh issue looked like drying up.

    No “groans”. You’re asking the questions the quiet ones up the back of the class probably don’t know how to. It’s all good.

  148. John Armour

    Putting it another way, they claim to describe what ‘is’ but they refrain from advancing an ‘ought’, even though, if their description is accurate/valid or whatever, you may think an ‘ought’ (or several) is/are implied. I think that’s a reasonable conclusion.

    A fair description MN. MMT is both descriptive, and prescriptive. The Job Guarantee would be prescriptive.

    Of particular relevance right now is understanding that the deficit is not a burden, now, or for future generations. That insight comes from the descriptive side.

    And I’ll quote Kaye Lee!

    “The things I like about it are that injecting funds into the community will only be inflationary if “we exceed our productive capacity” which I take to mean too much money, not enough stuff (including labour). We can spend what we need to to give us the society we want up to that point. We certainly have spare capacity with our un/underemployed”

    If that was more broadly understood we would never see another government like the present one. It would be good if people understood the technical reasons but it’s not necessary.

    The mere mention of “Labor’s budget mess” would be greeted with paroxysms of laughter.

  149. Kaye Lee

    I do understand the machinations of the bond market and its effect on overnight cash rates etc (up to a point) but as I keep pointing out, that is further down the chain than what I am looking at. Plus I still feel that is a mechanism which controls money flow and liquidity in the private sector whereas I am looking at government spending.

    I also have vague notions forming that the bond market is a construct that we could do away with. There are other ways we could achieve the same goals – but I haven’t thought it through because I am more interested in pinning down my first problem first and I doubt we will be wresting power from the banks any time soon.

    If someone would say to me that the government creates money for it to spend by issuing bonds I would be happy. How and why the bonds are then traded is another issue.

    If they create money by just crediting their account out of nowhere and I could see that recorded on a balance sheet I would likewise be happy.

  150. John Armour

    “I also have vague notions forming that the bond market is a construct that we could do away with.”

    I think these proceedings are closed.

    : )

  151. Harquebus

    Kaye Lee and John Amour.
    You both obviously have no idea as to the intrinsic value of fiat currencies and refuse to recognize the fact that, not only do they all fail but, also bring down the economies that facilitate them.
    Both of your endeavors and arguments will amount to zero which, is what fiat currencies are basically worth.
    I recommend this website for your regular reading which, has been consistently accurate over the years in economic and financial matters and also which, is more than I can say for other talking heads and politicians who, every year have to explain why what they said last year didn’t happen.
    zerohedge.com

    Cheers

  152. John Armour

    “You both obviously have no idea as to the intrinsic value of fiat currencies and refuse to recognize the fact that, not only do they all fail but, also bring down the economies that facilitate them.”

    All currencies are somewhat “fiat” Harbequs. What’s the intrinsic value of an ounce of gold when you’re starving and there’s no food?

    You see stability in commodity currencies but you seem unaware of the history of cyclical depressions that followed gold and silver. Mistakenly, you then blame ‘paper’ currencies for other collapses that had nothing to do with the nature of the currency but everything to do with historical events and the destruction of productive capacity of which Zimbabwe and the Weimar Republic are the classic examples.

    I don’t doubt there are examples where your hypothesis holds up but generally it doesn’t. There are very good reasons why the world’s economies gave convertible currencies away.

    I don’t buy your argument Harbequs because I’ve made the effort to read the literature.

    I looked at your zerohedge.com but I couldn’t find anything relevant to this discussion. It seems to be an investor’s newsletter. If there’s something you think I should look at in particular let me know.

  153. Harquebus

    John Armour
    Fiat currencies are a medium of exchange but, unlike precious metals, are not a store of value.
    Precious metals are more easily traded for food than are fiat currencies as my mother, as a survivor of the Dutch famine of WW2, can attest.
    Stick with zerohedge and compare.

  154. John Armour

    “Precious metals are more easily traded for food than are fiat currencies as my mother, as a survivor of the Dutch famine of WW2, can attest”

    Cigarettes were even better.

    In extremis, any asset can have exchange value, but it’s hardly an argument for a gold standard for the rest of the time.

    Before the famine, gold was scarce and bread plentiful. When bread was scarce, how much could you buy with a wedding ring?

  155. John Armour

    Matters Not,

    I just noticed your question still hanging.

    “Where do I find evidence of same? How can a ‘theory’ have a proven track record? I think we can agree that a ‘theory’ is something akin to a ‘way of constructing reality’? But unless those theoretical constructs have been ‘put into practice’ how can one argue that there’s been”

    I imagine that Edward, being familiar with the literature, could’ve answered it but seems to have missed it.

    What he was no doubt referring to was the so-called Keynesian golden age, those decades post WW2 up to perhaps 1970.

    MMT has its roots in Keynes, but especially Abba Lerner’s “Functional Finance”, which was an important element in the policies that came out of what’s called “The Neoclassical-Keynesian Synthesis”, when deficit financing gave us an era of great prosperity and full employment.

    The Neoclassical-Kenesian Synthesis

  156. Matters Not

    Thanks John. I read and reread your link and I also checked on Abraham (Abba) Ptachya Lerner although the link to him (within your link) is in Japanese I believe. I searched elsewhere.

    Interesting that he studied under Hayek, given there’s some distance between their ‘world views’, and was friends with Friedman. Presumably they ‘agreed to disagree’ and left it at that, or just talked about the weather.

    It would seem to me (after a quick read in English) that Lerner believed in ‘government intervention’ because economies at the national level (at least) are not self-regulating and an important role of the State was to ensure a prosperous economy. A ‘prosperous’ economy must be the goal rather than a balanced budget. While a ‘balanced’ budget might be necessary for individuals, households, businesses, local governments and the like (in fact for any unit that doesn’t issue currency), it doesn’t apply to entities like national governments which have the power to issue money (what we now call ‘fiat currency’).

    He also argued that the level of government expenditure should be determined by the ‘desired level of activity’ and taxes should be collected in terms of ‘their economic impact’ rather than to raise revenue.

    Therefore I can appreciate his significant influence on MMT.

    Thanks again for the link.

  157. John Armour

    Kaye Lee,

    “I also have vague notions forming that the bond market is a construct that we could do away with”

    This article by Bill Mitchell last night might hurry you along that path.

    PQE is sound economics but is not in the QE family

    It covers a lot of the stuff we have been discussing.

    We’re living in interesting times: Bernie Sanders is getting advice from Stephanie Kelton and Bill Mitchell is having conversations with Jeremy Corbyn’s economic advisors in the UK.

  158. Harquebus

    “The shock to the global economy that will be caused by the end of the fossil fuel era will be compounded by the scarcity of other non-renewable resources, such as metals.”
    “the money supply is controlled by the private banks rather than by the government, and also that profits made from any expansion of the money supply go to private corporations instead of being used to provide social services.”
    “real wealth is subject to the second law of thermodynamics.”
    “Soddy’s commonsense economic analysis is increasingly valued for the light that it throws on the problems of our fractional reserve banking system, which becomes more and more vulnerable to failure as economic growth falters.”
    “gradual decrease in population to a level that could be maintained only by organic agriculture”
    “unlimited economic growth on a finite planet is a logical impossibility.”
    http://www.cadmusjournal.org/article/issue-4/entropy-and-economics

  159. John Armour

    “Soddy was extremely critical of the system of “fractional reserve banking” whereby private banks keep only a small fraction of the money that is entrusted to them by their depositors and lend out the remaining amount”

    I stopped reading at this point.

    I think I’d prefer to read Soddy first-hand, because that is totally incorrect.

  160. Harquebus

    John Armour
    Keep reading. The article provides a variety of views and critiques.
    Do you have another definition of fractional reserve banking? Your quote is my understanding of it.

  161. John Armour

    “Do you have another definition of fractional reserve banking? Your quote is my understanding of it.”

    Fractional reserve banking exists only in text-books (and fairy tales). Banks do not lend deposits. Most countries don’t even have have required reserves.

    The money multiplier and other myths

    I did keep reading as I’m not afraid of listening to the other point if view. As it turns out, I agree with every word, except for where the author displays his ignorance of our monetary system.

    Soddy’s confusion over actual banking practices turns out to be irrelevant in the scheme of things (bank lending is even less constrained than he imagined) but it seems to contradict your claim to understand MMT: if you had read just the introductory MMT material you would’ve spotted this howler immediately.

    More importantly, as you progressed through the article yourself, you would’ve seen the relevance of MMT in providing solutions to the problems being raised.

    “In his recent popular book The Rise of the Creative Class, the economist Richard Florida points out that in a number of prosperous cities – Stockholm, for example – a large fraction of the population is already engaged in what might be called creative work..a type of work that uses few resources, and produces few waste products – work which develops knowledge and culture rather than producing material goods..”

    Sweden of course runs a large current account surplus which helps sidestep the usual nonsense about deficit financing, but it’s the sort of employment that Bill Mitchell often writes about.

    Regardless of the current account, MMT gives the insights to explain why a currency issuing government can “afford” to provide such employment for its people. One thing’s for sure, it’s not going to be provided by the private sector.

    You often ridicule MMT as “a free lunch”, a common description from those who’ve either read nothing about MMT,or not understood what they’ve read.

    You might find this amusing:

    “Why, sometimes I’ve believed as many as six impossible things before breakfast”

  162. Harquebus

    I have found one site that supports your statement. It still does not change the definition of fractional reserve banking.

    “I hope this also explains why, in every country in the world where Reserve Requirements exist (and that’s not every country – Australia, for one, doesn’t have them), they are backward-looking: they depend on the level of deposits existing in the previous reporting period”
    http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier

    It appears to me that it is just a zero reserve requirement as the reserve is already accounted for.

    I also found these.

    A response from the RBA to an open letter.
    “To use an example, if you invest $100 of newly minted cash in a bank deposit, your new deposit balance counts as money. If the bank then lends the $100 to, say, a business, most of these funds will return to the banking system as deposits. Consequently, the increase in broad money in dollar terms can be considerably larger than the increase in currency. The bank, the person and the business have interacted to create the additional money..”
    https://www.taxpayersparty.com.au/open-letter/rba-full-reserve-banking/

    “This is called Fractional Reserve Banking and it is the current form of banking worldwide. Fractional Reserve Banking assumes only a small percentage of depositors will demand their money back at exactly the same time. So, the rest is put to work as loans to other customers (borrowers).”
    “In Australia, a deposit is an unsecured loan agreement between a saver and deposit taker. Banks, building societies and credit unions (collectively called Approved Deposit-taking Institutions – ADIs) are regulated by APRA. APRA regulated deposits are protected under law by a concept called depositor preference.”
    https://www.gatewaycu.com.au/blogs-comments.aspx?id=4098&blogid=58

    “This situation gets even worse in some countries, for instance Canada and Australia have a 0% reserve requirement, thus banks in these countries among others have the ability to create virtually an unlimited amount of money.”
    “However, even though central banks around the world are printing money out of thin air (FED,BOE,ECB,BOJ,PBOC) and increasing the level of debt in their respective countries, most of the credit money creation is done at the bank level.”
    http://www.economicreason.com/canadahousingbubble/the-fractional-reserve-banking-system-and-what-this-means-to-you/

    It is still my opinion that MMT is unproven and as a variation on our current fiat monetary system, would fail just as all fiat currencies have always failed or as is currently the case, failing.
    TANSTAAFL. There ain’t no such thing as a free lunch holds true.

    Whilst searching, I came across a few sites that said that the ARB is privately owned and one even stated by the Rothschilds. No, I am confusing with the Federal Reserve. As this seems to be your area of expertise and it’s getting late, would you care to comment?

    Search criteria: australia fractional reserve banking

  163. John Armour

    It’s not the “definition” of fractional reserve banking that is the problem. It’s the widely held belief that that is how banks operate that is the problem.

    Starting out with a mistake is not the best way to build a model of reality.

    Recently however some mainstream sources, “The Bank of England” and “The Bank of International Settlements”, have come out and told us what MMT has known for nearly 20 years, drawing on sources that have “known” for far longer.

    “Banks are not intermediaries of loanable funds — and why this matters”

    “Since the Great Recession, banks have increasingly been incorporated into macroeconomic models.
    However, this literature confronts many unresolved issues. This paper shows that many of them are attributable to the use of the intermediation of loanable funds (ILF) model of banking. In the ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. But in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that
    involves no intermediation whatsoever. Third parties are only involved in that the borrower/depositor needs to be sure that others will accept his new deposit in payment for goods, services or assets. This is never in question, because bank deposits are any modern economy’s dominant medium of exchange”

    “Money creation in the modern economy”

    “The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.”

    “The bank lending channel revisited”

    “This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand
    for loans if it wishes to”.

    “It is still my opinion that MMT is unproven…”

    In what respects? Are you saying the government shouldn’t finance public sector employment for, say, environmental repair and other projects that serve the public good, through deficit spending?

    Do you have a belief that the so-called “national debt” has to be “paid back”, to “someone”?

    Just chanting “there-is-no-such-thing-as-a-free-lunch” doesn’t cut it with me as any kind of argument.

    Until you overcome your irrational antipathy to MMT and engage with the literature, in good faith, you will continue to make nonsensical statements.

    Harquebus, the internet is a rich source of information, and dis-information. The trick is to spot the difference, to know when you’re being fed bullshit.

  164. Harquebus

    John Armour
    Whether or not the banks use fractional reserve banking the definition, in my opinion, still remains. What is your definition?

    Has MMT ever been implemented? If not then there is no proof.

    Have you ever considered that it is you that is feeding on excrement? If my previous concerning the RBA response is genuine then, I have to take their description of money creation in Australia over yours.

    The global economy, orchestrated or not, is going down. All fiat currencies fail. Let us wait and see.
    I at least am prepared for it. I will read your links later.

    Cheers.

  165. edward eastwood

    @ Harquebus; I’ll look forward to your next article in Popular Mechanics… ’10 Bright ideas to refurbish your Bunker!’

  166. Roswell

    Don’t talk too soon, Edward. After Abbott’s next scare campaign I wouldn’t be surprised if he recommends we all build one.

  167. Roswell

    Abbott, that is.

  168. edward eastwood

    @ Roswell; Can’t talk now…have to decide whether chintz or lace is more suitable for the coming season…

  169. John Armour

    “What is your definition?”

    Why would I bother defining something I know doesn’t even exist and is not practiced? The argument is not about the definition, but the implementation.

    “Has MMT ever been implemented? If not then there is no proof.”

    See my reply to Matters Not above, August 19, 2015 at 10:52 am.

    Also, Frank Newman in his “Six Myths that Hold Back America” believes that China has been employing MMT-style thinking to drive their economy. And spare me the lecture on what they’ve done to their environment. MMT is just a tool, to be used for good and bad.

    Anyway, what’s “proof” Harquebus? Friedman’s Monetarism was “implemented” and to a large extent still drives neo-liberal ideology despite being built on a flawed understanding of the monetary system.

    Monetarists claim that the dominance of neo-liberalism vindicates Friedman, but one wit said “unfortunately for Friedman, his theories were implemented”.

    “Have you ever considered that it is you that is feeding on excrement?”

    Past tense, often, but I’ve learned.

    “If my previous concerning the RBA response is genuine then, I have to take their description of money creation in Australia over yours.”

    If you prefer to take that response from the RBA’s “Manager, Media and Public Relations Office” over the papers from the BoE and BIS I’ve quoted from then that’s your choice.

    What’s amusing is that your RBA story starts with a quote from one of those papers I referred to , as you will learn when you find the time to read it. The BoE paper totally contradicts this statement from the RBA’s PR man:

    “It is common for broad money to grow faster, in dollar terms, than currency. The difference is mainly driven by a process called ‘money multiplication’, described in most macroeconomic textbooks (1).”

  170. Harquebus

    John Armour
    MMT has never been implemented so, there is no proof. As for failing fiat currencies, there is ample.
    Economists are frauds and your gobbledegook makes you your own worst enemy.

  171. John Armour

    “…have to decide whether chintz or lace is more suitable for the coming season…”

    To wear?

    Are you coming out?

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