The Corporates don’t get it either.
There are times when one is brought to despair at the level of ignorance demonstrated by our national and corporate leaders. An event this week highlights a case in point.
A report was released on Tuesday by a high level and independent group named the ‘Budget Balance Commission’. The commission is chaired by former Howard staffer, Paul McClintock on behalf of the Committee for Economic Development of Australia (CEDA), who launched their report, “Deficit to Balance: budget repair options” at the National Press Club on Tuesday.
The commission has 12 members and includes current Reserve Bank board member Dr John Edwards, and three former secretaries from the Department of Prime Minister and Cabinet, Dr Michael Keating, Dr Ian Watt and Terry Moran. On face value it is an impressive line-up.
The commission’s aim is to balance the federal budget which it believes can be achieved by 2018-19 if certain tax expenditure measures that most of us here at AIMN have been suggesting for the last three years, are addressed.
They recommend a flat 15 per cent discount on super contributions, removing $6.9 billion of concessions, reducing the cap for concessionary contributions to super to $10,000 removing a further $8.5 billion, reducing the capital gains discount from 50% to 25% ($3.6 billion) and abolishing negative gearing on all assets purchased after December last year ($2.6 billion).
All good so far, notwithstanding an absence of originality.
They also want to increase petrol taxes, cut the fuel tax credit scheme, cut industry tax concessions, clamp down on work related tax deductions and extend the “temporary” budget repair levy. Good luck with that.
But, to give them due credit, much of what they suggest makes sense, which is why the Turnbull government will probably ignore it.
So, what is the cause of my despair? Certainly not the recommendations in their report. What staggers me is their understanding, or lack of it, of a currency-issuing government’s capacity to manage an economy.
“No economic problem in Australia is graver than the persistence of large budget deficits,” Mr McClintock writes in the report.
Mr McClintock said it was particularly concerning that Australia had run eight years of continuous deficits during a sustained economic expansion.
Mr McClintock seems to be unaware that 82 of the last 100 Australian federal budgets were deficit budgets. “Prolonged deficit(s) penalise(s) today’s youth and future generations, who will end up paying for current spending despite Australians being wealthier than they have ever been,” he said.
By that logic, surely we must be burdened today by the collective spending weight those 82 deficits created over the past 100 years? Are we still paying for the deficits of our parents and grandparents?
No, of course not.
The report also suggests continuous deficits leave Australia with no buffer to counter future international shocks, while interest paid was money that could otherwise be spent on delivering services and infrastructure.
No, Mr McClintock, we are a currency issuing nation. We don’t need buffers. We handled the last international shock better than any other country. How did we do that? By creating money out of thin air. We can do that to deliver infrastructure too.
Foolishly, Treasury treated that money as debt by issuing bonds and now compounds that “debt” by making interest payments that were not necessary.
In any event, while Treasury records those interest payments as debits against revenue, the fact is they were created out of thin air by the Reserve Bank crediting the accounts of the bond holders. The credits have no impact on our economy. It is entirely an internalised transaction within the RBA.
But what I found more staggering was that, “The commission found that in no period since the Second World War had Australia run budget deficits during a period of economic expansion.”
What utter rubbish!
For the benefit of the Commission and anyone else interested, the Menzies era was one of the most expansionary periods in our history and it was all done by deficit budgeting.
While not wanting to discredit the commission, such blind ignorance is hard to ignore. They deserve credit for their recommendations, but their historical research needs some fine tuning as does their understanding of a fiat currency.
But if they don’t get it, what hope is there for the rest of the country. Ignorance is forgivable. It’s what comes next that matters.
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Return to home pageNeo-Cons strike again!!!
Unfortunately, the man doing the panicking on our joint behalf/ves looks horribly like Dick Smith.
I think he should run for parliament based on his knowledge of monetary issues.
If a man looks like Dick Smith, he has no excuse for not being elected.
I was also impressed with the recommendations of the group but my ears also pricked with that deficit analysis. Another good read John.
“We handled the last international shock better than any other country. How did we do that? By creating money out of thin air.”
That, unfortunately, isn’t true as you concede in the next paragraph John. We did it by issuing bonds. I agree we didn’t need to do that but we did. I also agree that it should not be a problem for a currency issuing nation with unused productive capacity but I get very uncomfortable when you say that we are not funding our expenditure by taxation and bond issuance because that is exactly what we are doing. We could just credit an account at the RBA if we chose to but we don’t.
I guess we see it differently, Kaye. There is a broader issue here, beyond bookkeeping.
The conventional wisdom that issues from various neoclassically trained pundits of the Right or much of what passes for a “Left” nowadays, has, what is supposed to be sound, fiscal advice for monetarily sovereign governments, entirely inverted. If capitalist economies are to grow, governments are literally compelled to spend on deficit to provide enough liquidity for the economy as well as provide the public services that benefit a complex economy and civilization; political and economic predators have exploited the link to bond sales and increasing “debt” repayment obligations to muddy the political and financial waters. This has been a deliberate campaign to capture significant sectors of the political class in Europe and US which means here as well, who can significantly influence the trajectories of national economies and the fates of hundreds of millions of people; they have successfully sold the idea of deficit/public debt hysteria. As long as deficit hysteria reigns in the national government, the chances of sustained recoveries with significant job growth are deemed by neutral observers to be very slim. These economic predators have successfully persuaded people to overlook, that monetarily sovereign governments or currency-issuing institutions can sustain practically any level of public debt if it is denominated in their own currency, i.e. the one they issued and control.
It just goes to show the extent of the “brainwashing” that has been carried out by the relentless campaign of the neo-liberal “think tanks” and their allies. And the coincidence that Costello “delivered surpluses” plays into the hands of the neo-cons very well. Until these myths of neo-liberal macro-economics are demolished, we have no chance that governments will work for the benefit of the vast majority of people.
BTW as everyone knows, issuing bonds is beneficial to the moneyed class, as they get to invest in a completely guaranteed asset and still earn interest. To some extent, this interest is also earned by yours and my super-funds. Recall how the Financial Services Industry implored the govt. to keep issuing bonds when Costello had “paid off all govt debt”, and didn’t need to “borrow” to fund govt. expenditure because he was “delivering surpluses”.
Kaye Lee: As I have pointed out, the difference between creating money out of thin air and creating bonds out of thin air is very small.
Ignoring MMT for a moment, any growing business invests to continue that growth. The debt is considered an acceptable expense which will bring a greater return, just as if the government invests in higher education, universal healthcare, job creation and infrastructure building – all things that will bring a future return. Gina Rinehart borrows money to spend on expansion. Even if we can’t convince our politicians that we do not need to borrow to fund our expenditure, can they not understand the advantages of investing in things that have a positive return?
totaram, I agree that bonds are used as a wealth creation tool which is why we cannot seem to convince the government that they are not necessary.
One very fast budget repair job could be to force all corporations to pay a minimum of 15% tax on their gross incomes, which would eliminate stories such as these http://www.abc.net.au/news/2015-12-17/almost-600-companies-did-not-pay-tax-in-2013-14/7036324 and we could see some ‘fairness’ put back into the taxation system. We pensioners are on our knees now having to begin paying both the Medicare levy and from 1st June I believe paying for blood tests, pap smear tests, X-Rays etc, we will simply not have the tests done because we simply cannot afford to do so. I note the politicians gave themselves yet another pay rise lately but am yet to see their KPIs.
I am no economist but what I do know is if corporate Australia paid as little as 20% tax on their gross income (as working people do) then the budget would receive an extra $30-50 Billion per annum, more than enough to pay any supposed debt that the nation has, and enough to see us in surplus or building all the badly needed infrastructure that the country requires.
townsvilleblog, get real. The gross income of a business provides no guide as to profit generated. For example, a builder may receive $400 000 to build a house for a client but there are legitimate tax deductible expenses involved such as wages and materials. (You know, bricks, timber, nails, concrete, electrical fittings and the like). To suggest this builder pay tax of $80 000 of this $400 000 building is just nonsense, particularly when the profit generated might be as little as (say) $20 000 or maybe even involve a loss of similar proportions.
And I am not a student of the dismal science either. ?
John Kelly
Thank you for your informative and well argued piece.
Why do intelligent and well-informed businessmen cling to the outdated concepts you quote? As it is not rational, the only explanation is that these concepts are hardwired into their brains, as if they are sacred catechisms, learned at the feet of their masters, and repeated as mantras over and again, mindlessly and without question.
Facts and logic are discarded in favour of cherished dogma, dogma which happens to suit their orientation, world view, and ambitions. Nothing can change them. Not the indignation you express and which many of us share. Not facts, figures or logic.
This would not matter were they locked up in an economic monastery, but they have been let loose in the world we live in, are adored by their followers, and their advice is revered as wisdom handed down from on high.
It’s tragic!
I too thought that the speech and solutions were reasonable. I was though worried in the first five minutes. Referencing the Inter-generational report and spending some time parroting the current financial position of the country reminded me of Scott Morrison there just a few weeks earlier. A further difference from Scott was he allowed plenty of time at the end of the speech for questions were he was pressed to become political but did well to stay apolitical. He did not make any shots against either side of politics.
“Kaye Lee: As I have pointed out, the difference between creating money out of thin air and creating bonds out of thin air is very small.”
Ummmm….except for the interest paid? and the repayment of the principle on maturity? Bonds are a redundant construct which cost the taxpayer a lot of money but make money for wealthy investors or foreign governments.
Kaye Lee: ” Even if we can’t convince our politicians that we do not need to borrow to fund our expenditure, can they not understand the advantages of investing in things that have a positive return?”
Indeed, indeed! We need to re-write our federal “budget” in the same way that BHP billiton or the CBA write their Balance Sheets and Profit and Loss accounts. Therein, we need to show “expenditure” on health, education and infrastructure as “investments”. Once that model is accepted, no one can say these “expenditures are unsustainable”.
After all, when did these two stalwart companies last “paydown all debt” and “produce a surplus” ?
Kaye said: ” Ummmm….except for the interest paid? and the repayment of the principle on maturity? ”
Even though bond interest is a budgeted item, it is factored in as a very small component in the release of subsequent bonds. It does not come from taxation. The bonds are rarely if ever purchased back by the government; they are instead rolled over. Thus the “principle on maturity” is never realized. The roll-over takes the form of an auction for them, with first right of acceptance given to the current bond holder.
The important thing in all this is that the federal government (being a monetary sovereign) is the only entity within the broad economy which possesses the ability to create net financial assets and to place those assets into the hands of the private sector, which it does whenever it deficit spends. By contrast, banks do not create net financial assets when they advance loans for example, because any credit money created by a bank as an asset of the borrower is exactly matched by a deposit liability.
So for the past 100 years, budget deficits have performed the very important (and indeed absolutely necessary) role of accommodating the injection – by government – of net financial assets into the real economy.
John Hermann,
You said several things which I don’t understand. The payment of interest does not come from any one designated place as far as I am aware? Certainly it is a budgeted item but I can find nothing saying that it has anything to do with subsequent bonds other than we have to pay for it somehow. I don’t see how you can say it doesn’t come from taxation. It comes from there or further borrowing but I don’t see that proscribed anywhere?
How can bonds be rolled over? They don’t earn any interest after maturity? Do you mean that people reinvest the money in new bonds? And couldn’t they only do that if we are still choosing to fund deficit spending by borrowing?
I understand that deficit spending could “create” money through quantitative easing but if you fund your deficit by borrowing then how is that creating money? It is just taking it from another sector.
Going by Bill Mitchell’s assessment of this “independent” report, I may have been overly generous in my assessment….http://bilbo.economicoutlook.net/blog/?p=33255&utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+economicoutlook%2FFYvo+%28billy+blog%29
John,
Bill seems to agree here that we currently make the choice to fund our deficit spending through bond issuance….”under current institutional arrangements where the government matches its fiscal deficits with debt-issuance.”
but that we could just fund it through crediting an account at the RBA “It can also not issue debt at all any time it chooses and just instruct the central bank to credit bank accounts”
This is what I have been saying forever as MMTers have continually told me that bond issuance has nothing to do with funding expenditure and is purely to control overnight interest rates – something I always thought was an entirely different matter to do with the trading of bonds rather than the reason for their issue.
Hallelujah.
So glad that has finally been settled, Kaye.
Kaye Lee:”if you fund your deficit by borrowing then how is that creating money? It is just taking it from another sector.”
I’ll leave the other explanations to John Hermann. However: “Creating bonds” is no different from “creating money”, as I have said before. But, since you didn’t seem to get it, I will try and explain.
When I borrow money, I need to provide a “security” – maybe the house I own. When the Federal govt. “borrows” money it does it by selling bonds. What are these “bond” objects? They are no different from currency notes, except that they pay interest. Unlike my “home loan” they are not “secured” against any specific (physical) assets. They are guaranteed by the Federal govt. in the same way that the currency is guaranteed. In effect they are “secured” against the “Federal govt” (aka Australia), in the same way that the govt. “secured” the bank deposits of everyone during the GFC. So “printing money” is no different from “printing bonds”. As you noticed, the small difference is that bonds pay interest. However, in a fiat currency regime, interest can be paid by “printing money” or selling more bonds, which, in turn, are simply “printed”. So they are really not different.
In neo-liberal macro-economics, borrowing to spend, “drains” money from the economy so that govt spending does not cause inflation. Hence the need to “borrow” to spend. This is just nonsense. If I spend my money and buy a bond, the money, which is “drained” out of the economy, can be recovered by giving the bond to a bank and borrowing against that bond. So selling bonds does NOT drain money from the economy and prevent inflation. The fact is that ANY spending by ANY entity in the economy can contribute to inflation and we need to take it from there. Just think how “notional spending” (caused by revenue losses on negative gearing and capital gains) has caused inflation in the housing market. All this while total actual inflation is low.
If you combine that with John Hermann’s explanation and possibly anything else he has to say, I think things will become clearer. I suspect you need to stop writing new posts for a day or two and think about these things. Anyone who taught maths and also blogs the way you do cannot fail to get it. And we all soldier on.
Oh I get it totaram…I just wonder if you do. And thanks for the advice about taking a break but I have considered your view for years and don’t agree – another day or two won’t change that.. And you may want to read Bill’s blog before you tell me what you think is “nonsense” because he confirms everything I have been saying. You say “printing money” is no different from “printing bonds”….absolute crap. I am not talking about “printing” anything at all. I am talking about our options for funding deficit spending. As for inflation, that will only occur if our spending exceeds our productive capacity so is fairly irrelevant to our current conversation.
I am sorry if my tone is harsh but yours is patronising and that annoys me.
An impressive line-up ? Well it depends on what they are theorising and recommending about does it not? If they were reporting on ‘climate change’, I (and they) would say not. If they were reporting on ‘domestic violence’ I (and they) would also say not. If they were reporting on ‘education’ (what it is and what it might be) I (and they) would also respond in the negative, even though I am well aware that Terry Moran was the Queensland Director General of Education for a few years.
The ‘impressive’ line-up is only impressive re the exploration and possible implementation of policy possibilities given an assumed ‘common sense’. Their ‘expertise’ lies not with ‘science’, nor with ‘economics’, nor with even the ‘politics’ but how the otherwise predetermined objectives might be best delivered. You know, the best way to deliver. No reference to the ‘ought’. Moran has consistently argues exactly that.
CEDA works within an existing ‘common sense’. Perhaps Bill Mitchell will be invited to present a new way of looking at things? But I suspect not.
CEDA’s ‘common sense’ will not be disturbed in the immediate future.
Matters Not, I was just trying to be nice. I was writing the article before Bill Mitchell wrote his. I knew he would torpedo them.
Kaye Lee: It was not my intention to be patronising. My apologies. It is possible I have not used the english language correctly – it is not my mother-tongue.
However, I suspect you have misunderstood what I have written. I don’t think, it contradicts anything that Bill Mitchell would say. I will check carefully.
Your English is fine totaram. Suggesting that, if I took time off to digest your words, I could not fail to agree, is presumptuous. Assuming that I have misunderstood you is also presumptuous. Can you not accept that I might just disagree with you?
The quotes I gave in my 9:22 comment came from Bill’s blog.
.”under current institutional arrangements where the government matches its fiscal deficits with debt-issuance.”
“It can also not issue debt at all any time it chooses and just instruct the central bank to credit bank accounts”
This is something I have been saying for a long time only to be continually told that I am wrong. It was so good to read those words.
Kaye Lee:
1) I did not intend for you to take a break to “digest my words”. I meant it would help you understand MMT better. I have been struggling with Bill’s weekly quiz for years and still get things wrong because of a missing or extra word somewhere. To me it boils down to not knowing English precisely enough.
2) Nowhere, ever, have I stated that it is not possible for the govt. to simply instruct the Central bank to credit Bank Accounts. Neither have I ever implied that it is necessary for the govt. to issue bonds. Neither have I ever implied that you are wrong to think that there is no need to issue debt in the form of bonds. I don’t know how you got that impression.
Please read carefully what I called “nonsense” – it is the standard neo-liberal reason for issuing bonds to “finance” spending. In my view you have seriously misunderstood whatever I said, perhaps also in the past.
I don’t think I need to say more. I will withdraw and not discuss the matter further. Have a nice day.
Sorry I was grumpy. I appreciate your input totaram. What I am getting at is that currently we DO issue bonds to finance/cover deficit spending but that we do not HAVE to do that – it is the choice they have made.
Kaye said:
“The payment of interest does not come from any one designated place as far as I am aware? Certainly it is a budgeted item but I can find nothing saying that it has anything to do with subsequent bonds other than we have to pay for it somehow. I don’t see how you can say it doesn’t come from taxation. It comes from there or further borrowing but I don’t see that proscribed anywhere?”
This can be established by setting up a mathematical model for spending, taxing and borrowing over an economic cycle. However there is a more fundamental point to be made, that taxes and borrowing do not “fund” spending by a sovereign government. The position held by MMT advocates is that a sovereign government does not store money, nor does it need to. The fact is that when taxes are paid, and credit money received by the government is simply removed from the money supply. And any reserves received are removed from the private banking system, and are not stored anywhere as such. The same holds for borrowed money. Putting it another way, new bank credit money and new reserves are created when the government spends.
“How can bonds be rolled over? They don’t earn any interest after maturity? Do you mean that people reinvest the money in new bonds? And couldn’t they only do that if we are still choosing to fund deficit spending by borrowing?”
People do not invest in new bonds. As I understand it, the same bonds are put up for auction ahead of their maturity date, so there is continuity in interest payments. And if for any reason the government cannot find willing private sector borrowers (unlikely), the borrower of last resort is the central bank.
“I understand that deficit spending could “create” money through quantitative easing but if you fund your deficit by borrowing then how is that creating money? It is just taking it from another sector.”
QE is a process undertaken by a central bank and is not directly related to government deficit spending.
When a government deficit spends, three things happen: (a) new Treasury securities are created out of nothing and sold to the private sector, (b) the government receives money from the private sector in payment for the securities issued, and (c) the government spends the same quantity of money back into the real economy (non-bank private sector). The securities newly acquired by the private sector are financial assets. The result is that net financial assets (meaning assets unmatched by liabilities) have been injected into the private sector.
There are two viewpoints concerning the net assets: (i) one viewpoint is to regard the net asset as the security acquired by the private sector – which has much in common with a term deposit, and may be thought of as near-money, and (ii) the other viewpoint is to regard the net asset as the money spent into the real economy by the government. It matters little which viewpoint on holds to, as both forms of financial asset are inter-convertible.
MMTers make very simple things unbelievably complicated in my opinion.
Using the term QE was wrong on my part – let’s call it creating electronic reserves instead.
Keeping it simple, we have two choices to fund deficit spending. Currently we issue bonds, we could just credit an account instead.
Saying all money collected by the government is destroyed and all money spent is created is a concept I can understand but sooner or later you have to marry up your conceptual ideas with accounting reality and the reality is that, currently, “the government matches its fiscal deficits with debt-issuance”.
As for bonds, I do not understand what you have said there at all. Bonds stop earning interest after they mature. The government then instructs the RBA to transfer the money to pay off bonds to the bond owners
I venture to suggest that I am not the only AIMN reader who, like the redoubtable Kaye Lee, is not totally convinced about some of the details of MMT despite my desire to be an adherent.
First of all, there’s the macroeconomic jargon. My university course eschewed Economics, preferring the easy options of pure mathematics and physics, so when I try to read Bill Mitchell’s stuff I might as well be reading a thesis on post modern feminism.
But that might be age.
I can accept the concept that the main purpose of taxation is not to pay for government services but to soak up liquidity thus keeping inflation to a desired level; that printing money, issuing bonds and bank loans are basically the same. To my simplistic thinking, the government selling bonds involves the same mechanism and obligations as a company raising capital by issuing new shares.
Now, government debt.
We’re all familiar with the “debt & deficit disaster” debt that the LNP have blown out by 50% in their short but colourful tenure.
We are told that, in the last 100 years, there have been 82 years of budget deficits. Does this mean that the sum of all the deficits less the sum of budget surpluses equals the above “debt & defit disaster” or is there more than one govenment debt and if so, how many are there?
In order for the MMT to gain traction, first of all with right wing economists, then the economically aware and finally politicans, the MMTers have to create a dumbed down model similar to the “household” model much loved by the traditional economists.
The following scenario might be adaptable.
Imagine a community of half a dozen families of doomsday preppers living in a remote part of western Queensland. They are self sufficient in all their normal needs except petrol, which they have to buy from the nearby town. Instead of bartering with each other e.g. one hour of labour for half a bag of turnips, the committee of three elders, who rule the comunity, have busted open one of the Monopoly sets, signed each note by the committee President, and are using that money to simplify trade between the families and within each family – children get paid in Monopoly money for doing the washing up, if a family deposits food into the communal storehouse, they get paid.
The garage owner in the town accepts this unique “money” because he knows that he can exchange it for A$ with the local store who then uses it to buy a very popular homemade jam, which the community makes from its excess produce. As there is a trade imbalance in the community’s favour, the community also accepts A$ for its jam.
At some stage, all the Monopoly money is in circulation. Some is in the town (or even further afield – the jam is VERY popular; some has been destroyed, most is under peoples’ beds (so they are all prosperous) but the committee holds nothing. They decide to dam a creek. This will require hiring a bulldozer, buying fuel for same using the A$ reserve but paying for labour in Monopoly money (of which they have none).
Solution?
Bust open another Monopoly game. Result?
Debt & deficit disaster?
I hereby claim 10% of the copyright and royalties on the new computer/board game called “MMT: A game to teach politicans modern economic theory” based on the above scenario: AIMN can have the rest.
Come on Michael, it’d be a cert: Get Kelly and Lee on the job to knock off a few rough edges; consult with Mitchell. I know a couple of top graphic designers and a really talented web designer. …..
[I venture to suggest that I am not the only AIMN reader who, like the redoubtable Kaye Lee, is not totally convinced about some of the details of MMT despite my desire to be an adherent]
Count me in that group. I only see MMT as a short term solution that would cause misery over the long term. It is perhaps something that could be utilised ONLY for capital expenditure where there is a clear cut future income growth return as the new growth soaks up the extra money in the country.
The way John talks about it is as if we can just print or create fiat money with almost no repercussions – the great big free lunch. This is why I always immediately discount it, even though I do not understand the economics involved. No chance of any free lunch at a country wide level, and even though the USA seems to have done just this for over a decade they will pay when the musical chairs stop – maybe they are paying already seeing as there has been no real wage increase for many for a decade or two.
Something of a latecomer to MMT, but my broad understanding is that it describes the day-to-day realities of how sovereign currency economies function. ( Always a bit irritated with the ‘T’ in MMT, as I feel it should be ‘R’, as in ‘reality’).
1.The government always has money.
2. It spends money into existence
3. Govt ‘debt’ comes to be titled thus, simply because no other comparable term exists. But it in no way resembles household or business debt, since it is denominated in the very currency the issuer itself creates.
4. Govt deficits, as John Hermann says above, are an absolutely necessary means of keeping a healthy economy ticking over. It’s not the least of the countless facile deceits embedded in current politics that Neoliberal proponents deliberately link ‘debt’ with ‘deficits’, so as to create in the public mind an image of govts as inherently wasteful and debt-ridden. Whereas private enterprise, by contrast, is a shimmering beacon of…..you know the rest.
The above is the barest outline of my understanding. Meanwhile, have reached the conclusion that Neoliberal economics is a deliberate fraud. (Amazingly, it has no theory of money creation!) It’s ‘heroic assumptions’ as kinder critics have described them, are no more than the big bad lies of propaganda. I see Social Darwinists using Neoliberalism as respectable cover in the same way paedophiles insinuate themselves into churches. In Neoliberal dogma they have at last found doctrines that confirm their least attractive impulses, rather than being sociopathic, are actually praiseworthy and readily harnessed in the service of this rotten ideology.
Keen to learn more, so plugged into Billy blog, if struggling a litle at times. John Kelly’s articles have been decisive in my understanding, while bods like totaram and John Armour keep me choofing along.
Thanks to all!
Royce Arriso: ” In Neoliberal dogma they have at last found doctrines that confirm their least attractive impulses, rather than being sociopathic, are actually praiseworthy and readily harnessed in the service of this rotten ideology.”
Small correction here. They didn’t “find” doctrines … etc. They “created” them with lots of “research” funding and lots of hard work by “think-tanks” etc. and it has been going on for over 50 years.
Read “ECONOMISTS AND THE POWERFUL” Norbert Haering and Niall Douglas
Happy to see that my attempts to explain things have been useful to some, if not to others.
“The way John talks about it is as if we can just print or create fiat money with almost no repercussions – the great big free lunch.”
Hi jimhaz. Misconceptions surrounding MMT are truly bizarre. MMTers are forever being accused of seeing govt as a Great Rock Candy Mountain forever disbursing largesse. This is simply fanciful.
As I see it, all they are doing is describing an existing system. And it’s unused potential, especially the unemployed.
For example, debt denominated in AUD can always be paid.(As Warren Mosler says, “the RBA will never bounce a govt cheque”). Why is that simple process so controversial? It happens all the time. Yet critics like NielofSydney, labouring under the bizarre notion that govt ‘debt’–there’s no better word–is comparable to that of a household, positively soil themselves over the amount of outstanding Treasury Bonds, as if we were all going to hell in a handcart. Nothing to do with the TB process–just Neil’s decision to see the economy as a household, because as he himself admitted, “I prefer the household analogy”.( A clearer illustration of the conservative propensity to create your own, ‘preferred’, reality is hard to imagine.)
Likewise, government programs such as Medicare can always be funded–if govts choose to. Claims that it’s somehow ‘unsustainable’ are outright lies, more attempts to demonise it and justify privatisation. No negative results arise from funding Medicare. Does Medicare get rorted? No doubt. But attempts to link rorting with its status as a fully-funded govt entity are just restroom-rodent deceit. The answer lies in sorting out the rorts, not cutting its funding. Where is the ‘free lunch’ in that?
Geoff Andrews and Jimhaz:
I will not attempt to “explain” anything or even offer any “defence” of MMT. You have not raised any “doubts” that can be articulated as a question. Please do that first. Then go to Bill Mitchell’s blog and search using your question. Thou shalt find. Good luck.
totaram,
I’m not attacking MMT; I want to understand it. I’m just searching for a metaphor to use on LNP protagonists who are as economically deficient as I am.and who use the “there’s no such thing as a free lunch” response. I tried to set up a scenario that duplicates, on a small scale, an economy like Australia’s and let the MMTers loose on it.
If no simple explanation of the theory is possible then it is doomed to be a another intellectual plaything inside the ideologically fractured study of economics.
Re Bill Mitchell. Thanks for the tip and I’m sure he’s brilliant but I don’t have to read Einstein’s original paper to understand relativity: any competent lecturer could get the basic concepts over to an eager student.
Geoff Andrews, and to some extent, Kaye Lee, the fundamental point both of you miss is that we already live in the world of MMT. We have been doing so ever since we adopted a fiat currency in 1983. The fact that the government of the day chooses to continue its accounting trapped within a gold standard mindset doesn’t change anything. All government spending is new money created by the Reserve Bank. Taxation withdraws a portion of that money from circulation over a given cycle. Over time, all new money created is eventually withdrawn through taxation as new money is fed into the economy. All the money spent by the government eventually finds its way back to the government. This is what happens NOW!
Kaye has finally had her queries answered and it seems the problem centred on what the government is doing, or more correctly, thinks it is doing. It is keeping records that show it issues bonds to finance deficit spending. It seems Kaye needed to hear somebody say that. All well and good, if that’s all it was. But that doesn’t change the fact that a fiat currency does not constrain a government in that way. They CHOOSE to do it that way. They don’t have to. They obviously feel more comfortable employing the household method. It’s childish, it’s pathetic really, but if that is what makes them happy, then so be it. But it is AMATEURISH. Saying that we can’t do this, or we can’t do that, because we can’t afford it, is JUVENILE ! Saying we will go broke, or default on our bond commitments is LAUGHABLE. Yet, this is what our politicians and neo liberal economists are saying. It is any wonder MMT advocates have lost respect for them?
Geoff Andrews suggests we should come up with some form of MMT for dummies, but I can’t think of anything simpler than saying what I have just said. If we are unable to explain to people that a fiat currency system is not the same as a household system, then all I can ask is, how stupid are we, or, how stupid are they?
John,
For years I have been saying the government issues bonds to fund deficit spending and every time I have been told that is utter rubbish – that the only reason for issuing bonds is to influence the overnight cash rate. I have argued that, whilst trading in bonds certainly does that, it is NOT the reason they were issued in the first place, so you can understand my joy when Bill himself confirmed that.
For years I have been saying that is the choice our government makes – that it could just credit an account instead – and I have once again been told that is rubbish, that it is unnecessary, that they just spend the money into existence, no need for any crediting of an account because the RBA will just honour all their payments anyway. But when you actually look at reality, the RBA has VERY strict rules about overdrafts on government accounts. They can never just spend money without accounting for it in some way. As I have said before, somewhere on the books there would have to be an entry showing the introduction of new capital. There is no such entry (other than the seignorage from minting cash).
Every time we have this discussion, MMTers start talking about gold standards and household budgets. That is unnecessary. I understand the potential of a fiat currency system but I also look at what actually is happening now.
It is also very difficult to accept that taxation “destroys” money. I understand that it removes money from circulation but for any form of wealth redistribution to occur, that money must be spent. How can it be “destroyed” when it is credited to a government account?
MMT is like a religion where those who question are looked at as heretics rather than people who want to understand instead of just accepting on faith. The concept is simple and worthwhile – the explanations are incredibly complicated and interspersed with a lot of “if you can’t see this then you are an idiot”.
Kaye said”
” Saying all money collected by the government is destroyed and all money spent is created is a concept I can understand … ”
It is more than a concept, it is a simple fact. The central bank does not or account – as part of the money supply – any money received by the central government or held by a government agency.
” As for bonds, I do not understand what you have said there at all. Bonds stop earning interest after they mature. The government then instructs the RBA to transfer the money to pay off bonds to the bond owners. ”
This is certainly a possible trajectory, However in practice Treasury bonds are rolled over, in the manner I have described. These bonds are similar in some ways to bank term deposits — the bond holder is given the option of reinvesting in the same bond for another term, and this option is usually taken up by the large institutional investors like mutual funds, pension funds, superannuation funds and insurance companies (who have the lions share of bond ownership). Where it is not, the bond is listed for auction ahead of the maturity date. And the central bank is always there as a borrower of last resort. What this means is that this so-called public debt is not really debt at all. The reason being that it is debt which never needs to be repaid, and debt for which the state has an unlimited capacity to service the interest payments.
“The central bank does not or account – as part of the money supply – any money received by the central government or held by a government agency.”
What does that mean? Are you saying that when I pay tax to the government that it is not credited to an account? That just isn’t true. The Department of Finance operates Official Public Accounts with the RBA. The Constitution requires all revenue raised or received by the Commonwealth to form one Consolidated Revenue Fund. The Constitution only permits the Government to spend money from the CRF with an appropriation made by Parliament.
As for the bonds, investors may be given an option to reinvest in a new bond issuance but they are not investing in the “same” bond because it has reached maturity. The terms may be similar but it is an entirely new bond. The investor also has the option of being repaid the principle plus any outstanding interest so to say it never has to be repaid makes no sense. If our sovereign currency issuing government chose not to issue bonds to cover their deficit spending then there would be nothing to reinvest in. They would just pay out the principle. I don’t understand having an auction for something that is about to reach maturity. Who would invest in a bond that no longer pays any interest?
Geoff Andrews: Your scenario is not copyright-able. Read (the bottom half of)
http://bilbo.economicoutlook.net/blog/?p=7864
for a simple “household model” of how fiat currencies work. It is much simpler and pre-dates yours by many years.
See what I mean by “thou shalt find”?
BTW there is nothing intellectually complex about MMT. It is just that a sovereign govt. that issues its own freely floating fiat currency is so different from the “household” we are constantly told about, that a lot of confusion ensues. Clearing that confusion requires time and effort.
Ooops! Here is the original from 2009.
http://bilbo.economicoutlook.net/blog/?p=1075
totaram,
I don’t think any of us are struggling with the idea of a sovereign currency. I don’t think any of us are thinking of household budgets. That is not the issue.
[BTW there is nothing intellectually complex about MMT. It is just that a sovereign govt. that issues its own freely floating fiat currency is so different from the “household” we are constantly told about, that a lot of confusion ensues.]
Absolute crap, the real economic principles must remain the same. That is someone must pay for any purchase and this means a budget is required. MMT is still like a consumer using credit to fund consumption.
MMT would involve inflation (more UNEARNED money in the market, but same capital) and higher interest rates (greater risk, less likelihood of high net returns on international funds investment).
Actually I think the real question is who hurts the most from inflation. Does low inflation (or even just the fiscal controls that keep inflation low) help the rich get richer. I don’t think so, I think it is more about taxation as it is is massive taxation lowerings since the 70’s that have made the rich dominant in government policy. They can spend more on “political donations”, which are nothing more than graft and corruption.
Totarum, thanks for the link to Bill’s tutorial for Barnaby. I had read it before and searched for it but couldn’t remember the key words.
Kaye, Bill might yet disappoint you where he makes a quite definitive statement in the Barnaby tutorial…..
“Apart from getting the accounting clear and allowing us to avoid making fools of ourselves by saying things like – “the taxpayers will be paying off the debt for years”; or “debt is financing government spending” and related nonsenses; this framework helps us understand that it is the use of state money that introduces the possibility of unemployment.”
He also makes it clear that taxes are destroyed in the following….just above the first diagram in Month 1
“This spreadsheet records all the transactions. Business cards are created (for spending) and destroyed (as taxes are collected) with the stroke of a key in a spreadsheet cell.”
So, yes, taxes are destroyed. They are not re-spent.
totaram & John,
difficult to respond to the disappointing news that, not only is my brilliant, tongue-in-cheek idea not copyrightable, but it also won’t get a mention in John’s next best seller: “MMT for Dummies”. Great idea, John.
What a market! Three quarters (maybe more?) of all the economists, every economic student in Australia, Corporation CEO’s, politicians, financial reporters, Kaye Lee and myself.
It’s a shame that all the leading economists didn’t rush to Labor’s defence during the “DD&D” debacle in 2013.
Well, I’m orf. Gotta cancel the order for the BMW I made in anticipation of all those lurvly royalties.
Don’t feel too disappointed, Geoff. I once penned a fantastic song that would have sold millions. Turned out it bore a striking resemblance to a hit of the 70s. I was saved from serious embarrassment and a nasty copyright suite.
jimhaz:
Accelerating inflation has to be out there somewhere … in the dark or somewhere –
http://bilbo.economicoutlook.net/blog/?p=16270
John Kelly:
I have not been able to get definite information on this matter, but it appears that the federal treasury operates on completely neo-liberal principles. In short:
1) treasury has an account with the RBA which is used for all govt. expenditure
2) All revenue receipts from the ATO for the current period are “credited” to this account.
3) treasury then estimates the expenditure requirements for the next time-period (maybe a month) and to the extent these exceed what is in the account, treasury sells bonds in “open market transactions”. The proceeds of the sale are credited to treasury’s account at the RBA.
4) Go back to (2).
Please note that all this is completely unnecessary and just maintains the various fictions. The fact that it is a fiat currency is hidden by the issue of bonds, which is what a country like Greece would also do, as would the Australian states. The difference is that Greece issues bonds denominated in Euros which are controlled by the ECB, so a default on borrowings is possible. In the case of Australia, no such default can occur. Even the MSM gurus agree on this:
http://www.smh.com.au/business/markets/what-is-a-aaa-credit-rating-and-why-does-australia-need-one-20150430-1mwkrh.html
Because no default is possible, the treasury in Oz can issue as many bonds as it likes, with no chance of yields going up and causing problems as happened with Greece. So the fiat nature of the currency is “hidden” by the fiat nature of the bonds. Instead of “printing money” we “print bonds” (where “printing” is a metaphor only for creating out of thin air)
Thus,the various fictions are maintained, causing endless confusion, argument, obfuscation, etc. all to the detriment of a sane and sensible discussion about the “budget” a.ka.” the fiscal statement of the federal govt.”
Geoff Andrews, and to some extent, Kaye Lee, the fundamental point both of you miss is that we already live in the world of MMT. We have been doing so ever since we adopted a fiat currency in 1983. The fact that the government of the day chooses to continue its accounting trapped within a gold standard mindset doesn’t change anything. All government spending is new money created by the Reserve Bank. Taxation withdraws a portion of that money from circulation over a given cycle. Over time, all new money created is eventually withdrawn through taxation as new money is fed into the economy. All the money spent by the government eventually finds its way back to the government. This is what happens NOW!
Kaye has finally had her queries answered and it seems the problem centred on what the government is doing, or more correctly, thinks it is doing. It is keeping records that show it issues bonds to finance deficit spending. It seems Kaye needed to hear somebody say that. All well and good, if that’s all it was. But that doesn’t change the fact that a fiat currency does not constrain a government in that way. They CHOOSE to do it that way. They don’t have to. They obviously feel more comfortable employing the household method. It’s childish, it’s pathetic really, but if that is what makes them happy, then so be it. But it is AMATEURISH. Saying that we can’t do this, or we can’t do that, because we can’t afford it, is JUVENILE ! Saying we will go broke, or default on our bond commitments is LAUGHABLE. Yet, this is what our politicians and neo liberal economists are saying. It is any wonder MMT advocates have lost respect for them?
Geoff Andrews suggests we should come up with some form of MMT for dummies, but I can’t think of anything simpler than saying what I have just said. If we are unable to explain to people that a fiat currency system is not the same as a household system, then all I can say is, how stupid are we.
Thank you totaram. You have better explained what I have been trying to say about what actually is happening now. I have also said that issuing bonds is our way of money creation and been told I am wrong.
John, I’m sorry, I do not understand the relevance of your unemployment quote. I know you think the accounting is irrelevant but for me it never will be. And I refuse to accept that taxes are destroyed because I know that I pay them into a government account.
Kaye said: ” Are you saying that when I pay tax to the government that it is not credited to an account? That just isn’t true. The Department of Finance operates Official Public Accounts with the RBA. The Constitution requires all revenue raised or received by the Commonwealth to form one Consolidated Revenue Fund. The Constitution only permits the Government to spend money from the CRF with an appropriation made by Parliament. ”
Bank credit money paid to the government is never credited to any account, it simply goes out of existence. So do the associated banking reserves. Treasury’s account with the central bank (RBA) consists of operating credits, however these credits are certainly not bank credit money and neither are they bank reserves (i.e. the two recognized forms of credit money).
There are differing points of view on the status of Treasury’s account, i.e. is it a depository account or is it an operating account – meaning a record of monies received and monies spent? Some economists regard these credits as a form of state fiat money. However there is a respectable argument which says that it is not a form of money in any sense, because it is not used as a medium of exchange. Those who think these credits are a form of state fiat money presumably would also hold that a definition of money does not require it to be a medium of exchange. I disagree with that viewpoint. The accounting conventions you referred to have no bearing on these considerations.
“Bank credit money paid to the government is never credited to any account, it simply goes out of existence.”
How can that be? It makes no sense. Every month I forward to the government the PAYE taxes I have withheld from my employees’ wages and the GST I have collected through sales. Every quarter I forward them my PAYG payment. These amounts are paid into a government bank account.
“The accounting conventions you referred to have no bearing on these considerations.”
Until MMT can match up what they say with what actually happens then I will remain unconvinced. Accounting DOES matter.
For me, it boils down to a very simple choice on how we fund deficit spending. We can either issue bonds to cover it as we do now or we could just credit an account at the RBA and forget about bonds. If we chose to just credit an account (create money out of thin air), some are concerned that this would be inflationary. I accept the proposition that, with unused productive capacity in the economy, this does not necessarily follow provided we invest the money in productivity enhancing spending rather than on wasteful spending like defence and political advertising.
Kaye said: ” How can that be? It makes no sense. Every month I forward to the government the PAYE taxes I have withheld from my employees’ wages and the GST I have collected through sales. Every quarter I forward them my PAYG payment. These amounts are paid into a government bank account. ”
Something that is counter-intuitive never makes sense to the average person in the street . However scientists are accustomed to handling counter-intuitive concepts, and they do it all the time. I’m afraid you have been brainwashed by orthodox, and dare-I-say neoliberal, ways of thinking about the economy. The “government bank account” you refer to is one of Treasury’s accounts with the RBA. The federal government does all its banking with the central bank. This includes the tax office. And I have already discussed the status of Treasury’s RBA accounts previously. None of the entries in these accounts are accounted as being part of the money supply or of the stock of reserves, and arguably they are not a form of money at all because they are not a medium of exchange (providing you accept that the role of medium of exchange is a necessary part of the definition of money, which some economists seem to reject).
In a very few countries (like the U.S.) the central government maintains holding deposits in commercial bank accounts (in addition to its federal reserve accounts), for the stated purpose of minimizing the fluctuations in banking reserves which are associated with the government’s various fiscal operations (you can easily obtain Fed papers discussing this point). The fact that fluctuations in banking reserves occurs at all is evidence in itself that the credit entries in Treasury’s central bank accounts are not in themselves reserves, and that reserves are created when government spends and are destroyed when government taxes and borrows.
And in the case of the U.S., it is highly significant that the bank credit money held in the government’s commercial bank holding accounts is never accounted by the Fed as being part of the money supply (i.e. part of the monetary aggregate M1). None of these government bank credits are directly spent on anything — they are merely entries in holding accounts, pending their ultimate destruction. Australia does not have a system like this, and the money received from taxes is destroyed immediately it is received.
One of the central principles of MMT is that a sovereign government is never revenue constrained. Meaning that in reality taxes fund nothing, and exist primarily for the purpose of withdrawing purchasing power from the real economy in order to negate the inflationary effects of government spending. If we had no taxation there would be hyperinflation.
The belief held by most people that taxes “fund” federal government spending is a carefully cultivated illusion. In an economy where net financial assets are created and injected into the economy by the central government, and in circumstances where those net assets are interchangeable with reserves created out of nothing by fiat – care of the central bank, the idea that government spending needs to be “funded” is erroneous. The only real constraint on spending by a monetarily sovereign government relates to the extent to which idle economic capacity (including unemployed workers) exists. Putting it differently, inflation is only of concern where the stock of goods and services available for purchase by the government has become exhausted.
“Something that is counter-intuitive never makes sense to the average person in the street …..I’m afraid you have been brainwashed by orthodox, and dare-I-say neoliberal, ways of thinking about the economy.”
I am brainwashed by no-one, including MMTers. There is nothing counterintuitive about the potential of a sovereign currency. And if you read what I wrote I spoke about inflation, but you felt the need to pedantically explain it to me, as if I am incapable of understanding about unused productive capacity.
You and I will have to agree to disagree John because what you say does not match reality. I would be interested to hear your response to totaram’s last comment.
Kaye, you seem to have misinterpreted what I said. I used the word counter-intuitive in regard to the concept of funding by taxation, not in regard to the potential of a sovereign currency. And you have not addressed any of my other points, so it seems that we have nothing more to say to each other.
Bill Mitchell says…..
“I do not apologise for using the terms ‘deficit’ or ‘receipts’ or ‘revenue’ or ‘spending’ when dealing with currency-issuing government matters. I have assessed that at present these terms have meaning within the the ‘new’ Modern Monetary Theory (MMT) framework that I have been pushing into the public debate and do not undermine the message. You can disagree with me if you like.
…under current institutional arrangements the government matches its fiscal deficits with debt-issuance. So by definition, on-going deficits will lead to rising levels of public debt. The fact that the government matches its fiscal deficits with debt-issuance to the non-government sector is a voluntarily choice it makes. It can stop that arrangement any time it chooses.
It can also not issue debt at all any time it chooses and just instruct the central bank to credit bank accounts in patterns that reflect it spending choices. Only ideology that seeks to limit the size of government and make ‘debt’ a political weapon to achieve this aim prevents the government from doing that.”
I see no point in responding to what happens in the US. Do you also disagree with what Bill has said in his article from March 30?
I must say, I may only be a middle-aged woman in jammies, but I am also a student and I think I may be asking questions that other kids in the class are also struggling with.
I often find the responses dismissive. I am in bible study classes very much wanting to believe but I am not yet praying at the altar. I can’t do leaps of faith. I ask what I think are simple questions and am confronted with the great mystery. I think it is important so I persist. Hopefully I can become a believer…I am well on the way…but I have to match it up to reality. Bill’s latest article gave me hope…I am trying to translate his words into something less than a two million word thesis full of terms that many of us don’t understand.
John Hermann: I can see you are using terms such as “credit money” etc. in a very technical sense. Those of us not privy to those technical definitions simply find them confusing. Please refer us to a suitable source/text where we can brush up on these definitions so that what you have written will make more sense. Thanks.
Hi totaram,
Thanks for your query. There is no mystery in regard to the term “bank credit money” — all bank demand deposits are constructed of this form of money. It may be regarded as a proxy for state fiat money (reserves and/or currency), since any depositor may make a withdrawal from his/her depository accountwith the demand to be paid in currency — in exchange for the bank credit money. Even though it exists only as computer entries, it has come to be accepted by the general public as a form of money, moreover it satisfies all of the definition requirements for an entity to be regarded as money. More to the point, the central bank regards it as part of the money supply (the form of money which is accepted by and used by the general public). It is by far the major component of the monetary aggregate M1.
Hi Kaye,
Thanks for the extract from Bill Mitchell. I agree with Bill, that there is nothing wrong with using the terms “revenue”, “receipts”, or “deficit” when discussing the government’s fiscal operations. Be aware however, that the significance, meaning and import of these terms is quite different for heterodox economists than they are for neoclassical economists. I see no contradiction between what he has been quoted as saying and what I have been saying.
Ok. So do you agree with what I said previously?
“For me, it boils down to a very simple choice on how we fund deficit spending. We can either issue bonds to cover it as we do now or we could just credit an account at the RBA and forget about bonds. If we chose to just credit an account (create money out of thin air), some are concerned that this would be inflationary. I accept the proposition that, with unused productive capacity in the economy, this does not necessarily follow provided we invest the money in productivity enhancing spending rather than on wasteful spending like defence and political advertising.”
Note that Bill said that we can choose the option of issuing bonds to “cover” the deficit, i.e. to accommodate it. All he is saying here is that the withdrawal of purchasing power from the real economy by selling bonds to the private sector is conventionally (and voluntarily) matched to government spending — which according to conventional practice injects the same amount of purchasing power into the private sector. What he did not specifically mention in this quote is that deficit spending as a whole injects net financial assets into the private sector (he is of course well aware of this). In principle the government can alternatively sell bonds to (borrow from) its own central bank. And a government in debt to its own central bank is not in any sense in debt at all.
Is that a yes?
John,
You seem to think that I and to a certain extent Kaye, reject the concept of MMT. For my part, nothing is further from reality. When I shout abuse at someone on TV or radio thundering on about how we have to increase taxes to pay for burgeoning health costs, I believe that I can hear an echo coming from your direction. So I must be on the right track – I’m not a sceptic or a denier.
However, sites like:
(combined with my inability to counter such objections as “so we will have a healthy economy just as long as the “debt” continues to grow with budget deficits?”), tend to make me a reluctant doubting Thomas; so I’m just going to have to convince myself or let my club membership lapse.
The worst thing that can happen is the LNP spin doctors suddenly discover MMT and realise that “deficit” can really mean “public savings” and “debt accumulated since 2013” is “investment in innovation and infrastructure”. Labor’s accumulated debt will, of course, be written off as a bad debt.
And I will still look forward to all of your musings.
Kaye,
if I can put it my 10c worth – bond issuance in the simplest form.
All below from a currency issuing government/treasury point of view:
All ‘legal tender’/currency circulating in ‘the economy’ is already government debt – i.e. the govt is obliged (agrees?) to deliver to the currency holder the ‘value’ of exchange designated on the token (In gold standard days the currency was ‘convertible’ to ‘x’ amount of gold).
On issuance of bonds, the govt receives from the buyer/investor $x amount of legal tender; in exchange the govt issues a promissory note to repay that $x of legal tender on redemption, plus an agreed interest payment over the term of the promissory note.
The govt. delivers to the buyer an (interest bearing) investment ‘bill’ (debt) in exchange for recall of an equal amount of circulating govt debt.
A pre-existing (circulating) monetary debt has been replaced with a non circulating ‘investment’ debt.
Given the govt.’s overall amount of debt is unchanged by the transaction, how can the issuance of bonds/securities be said to finance new govt. spending?
One form of govt. debt has merely been exchanged for another form of govt. debt, (albeit interest bearing).
Sorry John. I don’t see how my money is government debt. They do not have to repay me anything? My income comes from consumers paying me for goods and services that I provide. Treasury clearly states that they cover deficit spending by bond issuance. (See totaram’s comment April 1, 2016 at 6:25 pm)
Bill Mitchell agrees “under current institutional arrangements the government matches its fiscal deficits with debt-issuance”
Kay, @April 3, 2016 at 10:14 am
you are restricting your observations to the ‘currency user’ side of the treasury issuance ‘counter’.
Try looking at bond issuance from treasury’s side of said counter.
All money in circulation is by definition govt. debt. – the currency’s redemption value is guaranteed by the issuing govt. The govt. ‘guarantees’ – therefore it is ‘in debt’ to whoever possesses that currency.
The fact that treasury adopt such accounting procedures described by totaram does not change the reality that in issuing bonds, the govt. is indeed swapping one form of debt for another.
Note that totaram also added “..Please note that all this is completely unnecessary and just maintains the various fictions…. “
From Bill Mitchell:
“…the only reason a government should issue debt is if it wanted to alter the “proportions in which the public holds securities or money”.
It is clearly recognised that the government does not need to raise revenue.
In his 1943 article Lerner says (page 355) that the government would only issue debt “if otherwise the rate of interest would be too low”. So you start to understand that the “borrowing” is a monetary operation not a funding necessity…”
Your citing of Bill Mitchell’s statement:
” Is true under current institutional arrangements where the government matches its fiscal deficits with debt-issuance….”
suggests you consider Bill Mitchell accepts that fiscal deficits must/should be matched by debt issuance.
Such acceptance is not in accordance with macroeconomic reality; from his many prior postings on the subject Mitchell clearly does not accept that proposition. See “There is no need to issue public debt”
The statement was immediately followed in the next sentence by “So what?”; and a little further on he writes “…The fact that the government matches its fiscal deficits with debt-issuance to the non-government sector is a voluntarily choice it makes. It can stop arrangement any time it chooses…”
In my view he wrote that statement in deference to the ‘current institutional arrangements’ that conventional neoliberal economists have adopted.
Mitchell vigorously contests the need for that arrangement in many of his writings, but his point in that posted article “The CEDA Report – one of the worst ever” is that even under the arrangements that neoliberals have chosen to adopt, rising levels of deficit (public debt), and higher interest payments are inconsequential to an efficient productive sovereign currency issuing nation.
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