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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. 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.

  2. Wally

    Thanks Andreas your answers make sense.

  3. 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

  4. 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.

  5. 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.

  6. 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.

  7. 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

  8. Rossleigh

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

  9. Kaye Lee

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

  10. 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?

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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

  17. 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.

  18. 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.

  19. 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

  20. 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.

  21. Jennifer Meyer-Smith

    Thanks edward eastwood,

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

  22. 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.

  23. 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?

  24. 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.

  25. 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.

  26. 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.

  27. 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.

  28. 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.

  29. 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).

  30. 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.

  31. 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.

  32. 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.

  33. 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.

  34. 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.

  35. 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.

  36. 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

  37. 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.

  38. 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.

  39. 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.

  40. 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.

  41. 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.

  42. 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.

  43. 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.

  44. 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.

  45. 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.

  46. 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.

  47. 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.

  48. 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.

  49. 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.

  50. 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!

  51. 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.

  52. 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.

  53. 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.

  54. 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.

    : )

  55. 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

  56. 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.

  57. 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.

  58. 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?

  59. 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

  60. 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.

  61. 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.

  62. 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

  63. 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.

  64. 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.

  65. 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”

  66. 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

  67. 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.

  68. 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.

  69. edward eastwood

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

  70. 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.

  71. Roswell

    Abbott, that is.

  72. edward eastwood

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

  73. 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).”

  74. 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.

  75. 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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