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Our Government’s Misguided Ignorance About Debt

On October 11, 2009, during the post GFC  wash-up, American economist Paul Krugman wrote in the New York Times under the heading, “Misguided Monetary Mentalities”:

“One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas. And some of the bad ideas that helped cause the Depression have, alas, proved all too durable: in modified form, they continue to influence economic debate today. What ideas am I talking about? The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the “gold-standard mentality.” By this he means not just belief in the sacred importance of maintaining the gold value of one’s currency, but a set of associated attitudes: obsessive fear of inflation even in the face of deflation; opposition to easy credit, even when the economy desperately needs it, on the grounds that it would be somehow corrupting; assertions that even if the government can create jobs it shouldn’t, because this would only be an “artificial” recovery. In the early 1930s this mentality led governments to raise interest rates and slash spending, despite mass unemployment, in an attempt to defend their gold reserves. And even when countries went off gold, the prevailing mentality made them reluctant to cut rates and create jobs.”

Today, our Australian government is doing exactly what Krugman argued against, with the exception of raising interest rates. This time, however, it is not to protect our gold reserves. We have none. Peter Costello sold them off years ago at bargain basement prices.

This time, it is to protect us from the myth of public debt. And just what is this debt? The Australian Office of Financial Management displays this debt as a permanent fixture on its website for all to see. As at 31st December 2016, the total issuance of treasury bonds and notes is $464,791,000,000.

This is gross debt. This is the figure upon which interest is paid. These days it is more common to hear government members quote net debt because it enables them to subtract the value of the Future Fund (currently around $125 billion) and so doesn’t sound quite as frightening.

But gross debt is the big ticket item, the one those same government members were all too willing to quote when Labor was in power, the one that supposedly costs us $1 billion in interest per month.

This debt comes about because Treasury runs our economy as if it were a household. If the incoming flow of tax receipts does not cover the outflow of government spending, it directs the AOFM to tender for the sale of government bonds to cover the expected shortfall.

But this is no more than an academic exercise. The government is not a household. It is the currency issuer of Australian dollars and can never run out of money. It never needs to borrow any more than it needs to collect taxes.

The bond issues are purchased by a variety of institutions both here and offshore. But they are only ever issued in Australian currency and are therefore never at risk of default. They can always be repaid independently and regardless of the state of our economy.

Furthermore, they do not fund government spending. All government spending is new money issued by the Reserve Bank of Australia (RBA). If you doubt this, ask anyone who has bought these bonds to show you their certificate. The money they have given the government in exchange for that certificate sits in an account in their name at the RBA.

So, the Treasury documents that are issued as part its accounting responsibilities and which reflect an accounting sheet balance of income and expenditure plus debt issuance, are no more than a mythological construct to give the appearance of good housekeeping.

There is no debt. Furthermore, the interest paid on the bonds is also newly created money. It is shown in the budget papers as an expense but it should, more accurately, be an RBA transaction like any other bank and not a part of the national budget.

If the government were really looking for savings, they need look no further than the $12 billion per year the RBA pays its bondholders.  That money could be removed from the budget expenditure side, immediately. So why don’t they? The answer to that question takes us back to Paul Krugman’s article.

The government, like all western economies, still maintains a ‘gold standard’ mentality. It’s a reflection of its collective macroeconomic ignorance. And in maintaining this ignorance, it is overlooking the real threat to our economic well-being: that of private debt.

In acting this way, they are playing right into the hands of the super-rich who want a permanent pool of unemployed workers, a low paid workforce and less government interference in corporate oversight.

It’s high time we brought an end to this deception and the fantasy of government debt.

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59 comments

  1. Steve Laing - makeourvoiceheard.com

    Hear, hear! Moreover, if the government do wish to use the household analogy, then for most households are happily in debt, paying of mortgages and the interest rates that go with them. What is so wrong with that? When times are tough, or when our costs increase, we might change our repayment schedule a little, or we may take on further debt where we see it as an investment for future growth. But as you say, this is not the point of the Coalition exercise which is to cripple the economy purely to make the wealthy even wealthier at the expense of the poor.

    I ran my own business here in Australia for 10 years. It was successful in every way, bar financially. A significant part of my costs were the non-productive parts of the business – building lease payments, banking interest and ongoing transaction fees, utility charges and business insurance. These costs were as high as the productive parts of the business – the wages of the people who did the work that actually made the money. And yet in all the arguments from the Coalition, there is no mention of how to bring down the non-productive costs, only trying to find ways to bring down the productive ones – the wages and conditions of the people who not only are the workers, but the customers of the next business and the next business. In the end I sold my business, not because of supply issues, but because demand dried up – and that all started two months before Joe and Tony’s first budget, and does not appear to have recovered. And whilst I had to decrease my productive costs, needing less staff to do the dropping work, my non-productive costs hardly budged. So what does that tell you?

    And would cutting my company tax to 25% made any difference? Not one jot.

  2. Keitha Granville

    If we ordinary folk behaved like the government with regard to debt, no-one would ever buy a house.

    Thanks John, easily explained for this bear of very little brain struggling to follow the logic of NOT spending anything to get people into employment. There is SO much infrastructure needed all around the country, everyone could have a job and it then follows that their spending would give more people a job. All the current policies are doing is cripple the economy and demand further social security ( I refuse to call it welfare) payments to keep people alive. It is a slippery slope to depression.

    I think it would be helpful for all members of a government to play Sim City.

  3. stephengb2014

    Although I follow the logic and fact of a soverign currency issuing state. I still find it extremely difficult for me to accept that people like Turnbull ,Morrison, Bill Shorten and Chris Bowen, do not know how money really works in a sovereign currency issuing state. (Thats not to mention the many highly qualified ex lawyers and qualified economists that are in the oposition cabinet.)

    ‘Extremely difficult’, is the wrong phrase – it ‘beggers belief’, is closer

    Anyone like to explain how these otherwise intelligent people just ignore the reality? It’s what holds me back and indeed probably makes the majority of the population believe that the federal government budget is just like your household budget.

    S

  4. Florence nee Fedup

    Steve, I would expect as workers become more productive through automation and technology, their wages as percentage of cost would fall. You are right all other costs including power and rents rise. I would expect the higher trained/educated the worker, the higher return on wages. The right seem to be talking about a era, a age long gone.

  5. Florence nee Fedup

    It is neoliberal ideology that blind them to truth. They are obsessed with the belief that all will be solved by small government, safety net welfare and low corporate taxes.

    Yes and user pay for all.

    They have convinced themselves, even created churches that backs them up, that all are responsible for their own plight, that welfare weakens people. The hidden hand appears to be replaced by trickle down.

    No longer are we responsible for each other. Wealth is good.

    Empower the corporate world by low taxes, no rules, regulations and compliant workforce, all will be well with the world.

    They are so obsessed that they fail to see from Thatcher on, thirty years, it doesn’t work.

    Hawke and Keating set the groundwork for the last couple decades of prosperity. Was based on unions and employers working together. On opening up the economy, On reforming the tax system.

    The ain’t interested on any economic theories. They are re engineering society to fit in with their obsessions. Social engineering on a scale never seen. Matters not if people fail, not their responsibility. People themselves are to blame.

    You have Pyne and others that believe all are equal in the classroom. The background, environment at home and emotional state of child makes no different. Why they can’t stand Gonski.

    This government really believe they are delivering. Truth is they are. Delivering what they set out to do.

  6. stephentardrew

    So simple yet you would think you are trying to teach calculus explaining it to the general public.

  7. Steve Laing - makeourvoiceheard.com

    The problem Florence is that neoliberals think that everyone thinks and behaves like they do. They expect people cheat welfare because that is what they would do – and we know that because of how they rort their allowances – they believe that their success, and those others who are wealthy, is due to merit rather than luck, good fortune, or inheritance. The poor need sticks to motivate them, but the wealthy need carrots. And these attitudes of superiority are burned into them at school, and reinforced at home, with the Catholic schools seeming to be the worst. A science training based on logic and facts might redeem them, but if they go into a profession, business, or politics, the cycle of congratulatory self-importance will likely continue.

  8. Harquebus

    “The bond issues are purchased by a variety of institutions both here and offshore. But they are only ever issued in Australian currency and are therefore never at risk of default. They can always be repaid independently and regardless of the state of our economy.” – Bullshit! (See below.) Only economics can come up with absurdities like this.

    Fiat currencies work until they don’t and they always fail. I despise economists and their fundamentally flawed theories and ideologies. We will all suffer for their ignorance, stupidity and hubris.

    Hidden Secrets Of Money
    https://www.youtube.com/playlist?list=PLE88E9ICdipidHkTehs1VbFzgwrq1jkUJ

    “An object widely considered as worthless would never become money in a free market.
    However, today, we all use irredeemable paper money. How did essentially worthless objects come to be widely accepted as money?”
    “Rome’s monetary history shows, governments have engaged in theft from the citizenry via monetary debasement from the very dawn of Western civilization.”
    “If the government had to actually raise taxes instead of borrowing the staggering sums of money it uses to keep its welfare/warfare programs running and keeping the vote buying mechanism well oiled, it would have to raise taxes by so much that it would face a rebellion. Instead government resorts to inflation. From the government’s perspective, money supply inflation is nothing but a cleverly disguised hidden tax.”
    “Few people stop to consider that this policy means ruin in the long run. Over time, the middle and lower classes will see their real incomes and living standards shrink ever more, while the true beneficiaries of inflation – those who get first dibs on newly created fiat money – amass more and more wealth in a kind of reverse redistribution from later receivers.”
    “Government mandated fiat currency simply does not work in the long run. We have empirical evidence galore – every fiat currency system in history has failed, except the current one, which has not failed yet.”
    http://www.acting-man.com/?p=35965

    “An explosion in debt, an unprecedented decline in interest rates and very little economic output growth to show for it. This is a nigh intractable problem and governments definitely lack the competence to deal with it successfully. In fact, their policies have produced this boondoggle in the first place”
    http://www.acting-man.com/?p=47956

    “The level of trust most people still have in the current system is astonishing. Even after decades of incompetence, manipulation, and irresponsibility, the public still grasps to government and the established order like a child learning how to swim.”
    http://theantimedia.org/cash-no-longer-king/

    “President Nicolas Maduro turned to the military to manage the country’s diminished food supply, putting generals in charge of everything from butter to rice.
    But instead of fighting hunger, the military is making money from it”
    http://bigstory.ap.org/article/64794f2594de47328b910dc29dd7c996/venezuela-military-trafficking-food-country-goes-hungry

    “With every passing day, it has not only become clearer that the ban was of no use to eradicate hidden cash, but has also inflicted deep, wide and irreparable damage to the society.”
    “Poor people have traditionally never systematically robbed shops in India. Out of hunger, they are experimenting with this for the first time.”
    “this will go down in the history books as one of the most naïve, least thought through policy decisions ever, a massive man-made disaster.”
    http://www.acting-man.com/?p=47966

    “India will become a police state, likely with the full support of most Indians. Nationalism will be the thread that weaves them together. But it is a fake thread, devoid of any value. Eventually, there will be far too many stresses in the system, whose institutions are already in an advance stage of decay.”
    http://www.acting-man.com/?p=48062

    “If the system shut down tomorrow, what would you do? How would you feed your family? Unless you are a prepper, the answer could make you uneasy.”
    http://www.shtfplan.com/headline-news/economy-shattered-currency-collapsing-venezuelans-wait-in-6-atm-lines-for-enough-to-buy-rice_12022016#

    Cheers.

  9. The AIM Network

    Harquebus, your comment was caught up in the spam folder because of the number of links in it. Spam software generally considers that comments with a certain number of links are spam (as is the nature of spammers). In future it might pay to limit the number of links to 5, and post 2 comments if you have more links you want to share.

  10. Jennifer Meyer-Smith

    Steve Laing,

    your post @ 10.41am re the non-productive costs of small business are the obvious first steps that the dinosaur duopoly should prioritise for economic reforms to incentivise small business activity and viability. Same goes for the birth of micro-businesses.

    When those small businesses flourish, everybody wins. Unemployment would decrease substantially overnight.

  11. Steve Laing - makeourvoiceheard.com

    JMS – if they indeed chose to do so. But Labor (and many of its supporters) are wary of business people (big or small), and Coaltion donors (banks, accountants, financial institutions, big retailers, shopping centres etc) feast of small businesses. Small business is increasingly unviable in the current environment as the fixed costs are increasingly too high, and the margins too low. Just ask any Uber driver.

  12. Harquebus

    The AIM Network

    Thanks for that.
    From my perspective, the comment appeared without delay but, was headed “Awaiting moderation”. That has since disappeared.

    Cheers.

  13. Florence nee Fedup

    I at 75 have come to the conclusion economic theories are just that theories. All work at different times. Some better than others.

    The reason for this, they all have human component. Humans never behave as predicted. No one appears to acknowledge this fact now.

    I noticed that personal loans has dropped in period leading up to Christmas. Could only be one two reasons. First, people have more money. As there is unemployment, rising costs and no wage growth this would be unlikely. Second is people are tightening their belts, not spending. If so, can’t be good for economy.

    Steve you are correct. The way they act and talk, they do believe all agree with them. So deaf, they don’t hear screams of opposition. Don’t understand why they are hated. They know there is no other way.

    Communists might have been as obsessive but they never made mistake of thinking all was with them. They knew they were in a minority.

    Governments should look after small and new businesses. Let the big ones look after themselves but ensure they pay their way. Pay for the infrastructure they need to survive. Both human and physical. Educated workforce and roads etc.

  14. Stephen Griffin

    A great article John.

    Every time I mention these very points in a post I am decried as a fool, ignored or people inevitably bring up Zimbabwe or some other failed state.

    Over Christmas lunch I was told by two people that the currency was still backed up by gold and that only communists could print their own money. The level of ignorance in this area is truly frightening given the consequences.

    But I am am sure the Liberal Party knows this stuff, they just don’t want it getting in the way of the delivery of our wealth to their donors.

  15. Heterodox (@mmt_rod)

    If “The money they have given the government in exchange for that certificate sits in an account in their name at the RBA.”
    Why doesn’t it appear in the RBA’s Statement of Liabilities and Assets?
    http://www.rba.gov.au/statistics/frequency/stmt-liabilities-assets.html

    Total RBA liabilities is only $172.697billion far short of the $464.791Billion of Bonds on issue, therefore there cannot be accounts at the RBA holding the money from Bond sales, the Government must have spent it.

  16. totaram

    Harquebus’s links have about the same validity, or relevance as this:

    http://www.undeniabledesign.com/

    Just because someone has an opinion on a blog, doesn’t mean it is correct. Fiat currencies have been in use in the past and did NOT “fail” (whatever that is supposed to mean).

    When Britain went fiat and the skies remained above;
    http://bilbo.economicoutlook.net/blog/?p=34881

  17. Matters Not

    Harquebus, a few questions. First, will Mike Maloney (who deals in gold and silver) accept anything other than a ‘fiat currency’ when a customer want to buy his precious metals? Second, when ‘valuing’ gold and silver, why are all valuations expressed in ‘fiat currency’ terms? Third, can you name any airline, department store, car dealership or whatever that will exchange goods and services by using anything other than a ‘fiat currency’? Finally, when you provide a service, do you accept some of this ‘worthless’ fiat currency in exchamge – or do people have to pay in either gold or silver? Just askin …

    An afterthought, what ‘interest’ did your precious metals earn in recent years – you know when their valuation dropped, while my fiat currency earned about 2.7%?

  18. Harquebus

    totarum
    That design link analogy was a foolish and I’ve had enough of that bloody fool Bill Mitchell. Economics is fundamentally flawed. I put current world events up as my evidence.

    Search criteria: global debt bubble

    Matters Not
    Why don’t you ask him? I have contacted him before and he does respond.
    Exchanging fiat currencies for items that will hold their value, including precious metals is a good deal. It’s what I have been doing for quite some time.
    Over time, the “value” of gold has held whilst our fiat currencies have lost value. You are looking at it from the wrong perspective.
    It is not now whether they accept precious metals, it is how long will they accept fiat currency as payment.

    I cited an example of one failing currency when, really, they are all failing. That is what happens when currencies are continually debased. I will also point out that the paper/physical gold ratio has constrained gold’s true value for quite some time. Now could be a good opportunity.

    Search criteria: paper physical gold ratio

    For what it is worth, gold hasn’t done too bad considering past price manipulations and efforts to constrain it.
    http://onlygold.com/m/Prices/Prices200Years.asp

  19. Matters Not

    Harquebus:

    Why don’t you ask him? I have contacted him before and he does respond.

    You really want me to ask a ‘silver and gold’ dealer about the value or otherwise of dealing in ‘silver and gold’? Really? As for him ‘responding’ – that’s his business. I think he will say – Buy now! Tomorrow may be too late! It’s the same advice he’s been peddling for years and no doubt will continue long into the future.

    Here’s some recent figures for your consideration. In 2007 gold was valued at $600 an ounce. By mid 2011 (GFC territory) it had risen above $1 800 an ounce. Wow what an increase in value (300 percent) – as measured in fiat currency terms. But it’s now down more than one-third to less than $1 200 an ounce – as measured in fiat currency terms. Yes I know ‘gold’ only increases in ‘value’ – except when it doesn’t.

    By the way – what about whether or not you accept fiat currency for your services etc. There were a number of other questions as well that might deserve consideration and response, given they relate to how we actually operate in the world.

  20. John Kelly

    Heterodox, there has to be accounts held by the RBA on behalf of the bond holders, otherwise there would be no way for them to credit the interest due twice yearly. They are treated as deposits or Reserve holdings, not as liabilities.

  21. Jexpat

    Matters Not:

    Gemstones (both precious and semi-precious) have a similar, though a bit more capricious quality. They will come into and out of fashion over time. Certain stones that one could purchase in the 1990’s for a very modest price (and which are quite intriniscally beautiful in their own right) are now all but unaffordable except for special purposes or for the very wealthy.

    Other stones have lost value (out of fashion) but in 10 years, who knows?

    The value of some, depending on where they originate, can fluctuate wildly. Opals of superior beauty and quality coming from say, Ethiopia are currently quite affordable especially in comparison to those from Australian sources (that’s marketing for you).

    Using them as a source of ‘value’ in comparison to ‘fiat money’ or in terms of an investment (as they pay no dividends or interest) is probably unwise for most who are not in the business- if for no other reason than if these is a crash, we run into the classical diamond/water paradox.

  22. John Kelly

    Harquebus, fiat currencies never fail, except when they do and when they do it is because idiots mismanage them as has been the case in Zimbabwe and Venezuela.

  23. Harquebus

    Matters Not
    I imagine that a gold and silver dealer would know something about dealing in gold and silver.

    In 1963, a pastie cost me a shilling, the equivalent of 10 cents. Gold was the equivalent of about AU$40/oz or 400 pasties.
    A pastie online now is about $2.00. A loss in the value of our currency of 95%. Gold today is $1600/oz or about 800 pasties.

    How we operate in the world is destroying everything we need to operate in our world.

  24. Heterodox (@mmt_rod)

    John Kelly: Reserve holdings ie exchange settlement balances, deposits and notes on issue are liabilities of the RBA
    have a look at the link.
    Maybe the AOFM has bond accounts ?
    If in doubt ask Bill Mitchell

  25. Matters Not

    imagine that a gold and silver dealer would know something about dealing in gold and silver.

    Sure does. And Mike Maloney sure knows how to scare the shit out of people so they will buy more and more – using a fiat currency of course. Predicting the future is always problematic. LOL.

    Have a squiz. https://www.youtube.com/watch?v=BSEoJMNZbl0

  26. Florence nee Fedup

    I am going to make what some would consider a silly comment. When one spends money, it doesn’t go into a big hole never to be seen again.

    Many speak as if this is true. Once spent in eyes of many, wasted for ever more.

    Money spent goes around & around. Not only goes around, creates wealth on the way. If this is true, why are so many concerned about Rudd’s $900. Can’t be wasted even if spent on pokies. That money pays wages, keeps the club or pub going. Keeps the economy going, which was the aim of the exercised.

    That was followed by longer, more target spending, which led to community improvements. School buildings bought into this century. Digitalised/computerised classrooms. Along with language, science laboratories & modernise libraries.

    Ome mustn’t forget the 1 1/4 million insulated roofs leading to lower power bills, summer and winter.

    RC revealed that money was well spent. Yes few hiccups but not many.

    Most important fact that most ignore, is the money was tightly target, with inbuilt end by date. Unlike Howard’s spending, which was built into the structure of the budget, leaving ongoing structural imbalances. New asset test I believe deals with some of it. Not sure why Labor is complaining, unless they went too far, caught the wrong people.

    I am no economics. Do have some basic ideas but have ignored them.

    This is how I see things working.

    Ideology/dogma should be left at the door when running a economy. One has to deal with facts as they present. Both Keating and Rudd were willing to do this.

  27. Florence nee Fedup

    Is the pension rise many of us get tomorrow the normal regular increase, or is it a one off extra rise. Suspect is former. Porter talking ABC 24 as if it is aa rise we are only getting because of other cuts, Dishonest as usual I believe.

  28. Florence nee Fedup

    Seems indexation is March and September. “The current rate of a full Age Pension, including Pension Supplement and the Energy Supplement (formerly known as the Clean Energy Supplement), is $877.10 per fortnight for singles and $661.20 for each eligible member of a couple. This rate is valid until indexation takes place on 20 March 2017” https://www.yourlifechoices.com.au/age-pension/pension-payment-rates

    So any rise would be above this, Googled with little luck.

    “From January your deemed income will remain the same but under the revised assets test you would receive $1322.40 a fortnight. This is more than you would receive under the income test, so you become income tested and your pension will become $1285.90 a fortnight.

    This is because the pension is calculated both on an income and an asset test, and whichever produces the lower amount is what is paid. Many pensioners expecting an increase in the pension on January 1 will discover that the increase has been curbed by the income test or doesn’t exist at all.”

    http://www.smh.com.au/money/ask-an-expert/ask-noel-will-our-age-pension-rise-or-fall-in-2017-20161108-gskist.html

  29. John Kelly

    Heterodox, I took a stab at my response and then asked Dr Steven Hail for a qualified answer. I should have waited for Steven to reply. His answer will take some time to absorb but, in essence, you are right and I am also partly right. Essentially it is all just numbers in a computer. But, the money is not spent. I have asked Steven if I can publish his answer and am waiting for his permission. I will respond further when I hear from him.

  30. Phil

    John’s article makes a lot of sense to me but then I don’t have a practical grasp of economics at national level. I don’t think the government is as ignorant of the facts as set out in John’s article, rather, I think they chose to play this way, not because of rank stupidity, but because of rank corruption – the LNP is the party of and for the wealthy i.e. “the super-rich who want a permanent pool of unemployed workers, a low paid workforce and less government interference in corporate oversight” as John says.

    If the Liberals relied solely on the elite wealthy in order to capture power, then they’d never succeed. It is the ‘aspirational’ conservative voter that gets them over the electoral line i.e. the conservative who lacks the wealth, lacks original thought, suffers a deficit of social conscience and gives short shrift to the environment, but who aspires to one day being admitted to the wealth class – to be the somebody that can look down on the rest of society and claim self-made status. Howard played to this sad class of conservatives even though he despised them.

    The people who subscribe to this aspirational mindset are the most easily manipulated of all voters because their values are not anchored – they float on the breeze of lies and deceits sold them by the elites and so they are the most screwed class of voter – screwed and gutted by the very class they aspire to join. These are the folk who fall for the false economic system that the corrupt Liberals pretend is what is needed.

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  32. Harquebus

    Florence Nee Fedup

    Search criteria: velocity of money

    Cheers.

  33. totaram

    For some people, the simple way to understand that govt. “debt” is not really debt is this: When treasury needs to spend, instead of just printing money (thru the RBA) it prints bonds instead. These are then “sold by auction” to financial institutions. The bonds are freely traded on the bond market, where, if necessary, the RBA will buy them, to maintain its target interest rate. Notice, there is no real limit on how many bonds treasury can issue, just as there is no real limit on how much money the RBA can “print”

  34. Jennifer Meyer-Smith

    Phil,

    you have profiled ‘aspirational conservatives’ perfectly.

    Howard and his family also come from those origins, so if it is true that he despises them, that only should diminish him more for his lack of loyalty, respect, integrity, as such types surely would expect?

  35. Heterodox (@mmt_rod)

    John Kelly you are right saying the Government hasn’t spent it again otherwise it would end up in reserves and RBA would have trouble hitting their cash rate.
    Deficit spending has added to reserves and then they have been drained with Bonds so a debit to the reserve account and a credit on the Bond certificate/account.
    Treasury/AOFM/RBA sure use a lot of smoke and mirrors to disguise what is really going on.

  36. John Kelly

    Heterodox, here is what Steven said in reply to your question, “Bank reserves at the RBA are part of the monetary base, but that is not viewed by orthodox economists as a measure of the money supply at all. Actually, when a non-bank buys newly issued treasury securities, the bank deposit of the non-bank is debited, and in turn its bank’s reserves at the RBA are debited. Both the money supply and the monetary base fall. When a bank buys newly issued treasury securities, the money supply itself does not change at all, but the monetary base falls, as reserves are destroyed. What doesn’t change in either case is the net financial assets of the private sector. Bond sales swap bonds for ESA reserves, so don’t affect the financial wealth of the private sector at all. It is net government spending which does that. Where I think you may have got confused is when people like me say that government bonds are just term deposits at the RBA. That, of course, is exactly what they are, functionally speaking. However, they of course are not on the RBA balance sheet as such, since they are not regarded as term deposits of the RBA. Actually, the balance sheet of the RBA itself is meaningless really, since the RBA is part of the central government. Technically, government bonds are a liability of the central government and not of the RBA. However, in effect they are term deposits of the RBA, since the RBA is part of government, and since they pay interest (as a term deposit would do), and involve the payment of face value on maturity. They are effective term deposits. They are not on any balance sheet as a term deposit, thought. The RBA does not normally take term deposits at all.”

    So, as I read it, there is an off-balance sheet that accounts for the monies received. They are considered a form of term deposit in laymans’ terms although in real terms this is not the case. Complicated and confusing, yes. Technically, the bond money is kept seperate and is not a traditional deposit account but I think the integrity of the claim is sustained. I trust this satisfies you. Thanks for the question. I love learning more about this subject and yes, there is a lot of smoke and mirrors.

  37. Pingback: Our Government’s Misguided Ignorance About Debt | THE VIEW FROM MY GARDEN

  38. sam

    Everyone needs to google and read about Modern Monetary Theory. It is as revolutionary as when Gallilleo realised that the earth orbited the sun. So open your minds to it. But once you understand it and what economics is really about, then you can see that our lollies have absolutely no idea, and have no chance of leading us wisely in that area. We need some economically literate leaders, and that doesn’t mean people who can make money like Turnbull, it means people who understand national and global economies.

    Our government could pay down its debts to holders of government bonds and thus avoid all interest payments tomorrow if they chose, and we could have full employment if they chose. Neither happen because they don’t understand economics.

    It is a fascinating subject to study, but becomes very frustrating when you realise how illiterate our leaders are in this area.

  39. Harquebus

    sam
    MMT has no scientific validity at all and to equate it to the discovery of our sun centered planetary system is an insult to Galileo.
    Those that advocate MMT do not understand it. If they did, they would recognize it as just another variation of a concept that has failed every time.
    There is no science in economics.

    Search criteria: economics not science

  40. Paull Alekna

    I owe $50 to Tom, and I owe $50 to Bill. But when I made my $50 debt with Bill, I didn’t tell him about Tom, so Bill thought I was a good risk, being debt free, and told everyone that.
    Now, I record each debt on a separate piece of paper, so my bank will ask me to show them all my bits of paper, and they will tell me, Yes, you have a debt of $100
    Isn’t it about time our Governments showed us all their bits of paper at the same time? The current strategy is akin to bits of paper that we can read, but not all at the same time, and we are required to forget what we read on each bit of paper before we get to see the next one

  41. totaram

    Sam: “.. then you can see that our lollies have absolutely no idea, and have no chance of leading us wisely in that area.”

    They have no intention of leading us wisely in that area. They carry out the policies of their main donors. Those donors are the people who understand how the system actually works, but it suits them to keep everyone confused. These donors actually support the kind of obfuscation provided by neo-liberal macro-economic mythology, as well as other “schools” like the Austrian gold-bugs, so well represented by the site acting-man.com, which Harquebus thinks is the fount of economic wisdom. One of the authors on that site is also part of the Heartland Institute, and many of them are commodity or metals traders, so it all adds up nicely. These people would love to see a return to the gold-standard for currency, and claim that all the worlds problems are caused by fiat currencies, while the actual problems are caused by treating fiat currencies as if they are backed by gold, and banging on about “govt. debt”. Better still, they bang on about “debt” in general without differentiating govt. debt from private debt, which is the real problem.

  42. Harquebus

    totaram
    I do want see real money (gold and silver) used as currency.
    Fiat currencies always fail. It is madness to repeat past mistakes over and over.

  43. Steve Laing

    Belief in gold as a “standard” of value is nonsensical. Gold has very little value other than in jewellery. It’s “value” may have made sense before money was largely digitised because it was consistent globally and didn’t degrade (as it is highly inert), but the main reason it has value now is because people choose to believe it has value.

    The other reason that economics have changed so remarkably is that there is significantly more activity related to things that may (or may not) happen in the future. Derivative trading again only works because people believe in it – that they can have a reasonably certain view of what will occur in the future. Gold alone is not effective in that additional dimension. It is a relic of simpler times and simpler thinking.

  44. Harquebus

    Steve Laing
    I do not want to see a return of the “gold standard”. It will solve nothing. I want to see real gold and silver used as money. Governments can’t create gold and silver and they can’t destroy them.
    Looking at the current global economy, there can not be much said for fiat currencies. This has always been the case and I would have thought that someone like you would not be advocating repeating past mistakes.
    Gold that was traded thousands of years ago is still with us and still has value. See my post above for “Hidden Secrets of Money”. I think that you will enjoy it.
    Cheers.

  45. totaram

    John Kelly: Thanks for illuminating that bit about the RBA’s balance sheets. I have copied that response and saved it for chewing on later. I believe it might answer some doubts that Kaye Lee had about the operations of treasury and the RBA. Truly, the accounting smoke and mirrors are wondrous to behold.

  46. townsvilleblog

    Steve LaingJanuary 1, 2017 at 12:05 pm, Steve, as usual you are spot on, I enjoy reading your comments.

  47. John Kelly

    Harquebus, if you want to see gold and silver used as real money and you believe Mike Maloney’s thinly disguised “Hidden Secrets” advertisement for metals trading, it strikes me that you are less interested in the future of the planet than you are about speculating in the rare metals market. So, which is it? Your antipathy towards fiat currencies doesn’t make sense unless one of the above is true.

  48. Harquebus

    John Kelly

    My precious metals make up only part of what I think will retain or increase in value during the coming resource shortages. Fiat currencies do not retain value which, I have demonstrated in an earlier comment.
    Our currency, the economy and our civilization in this current political environment can not survive. Current world events provide ample evidence.
    What can you trade after your bank accounts are stolen and no one is willing to accept our fiat crap?

    An economic collapse might be the only thing that could save our environment and I do not and have no interest in speculating on the rigged precious metals market. The time will come when the true value of precious metals is revealed and those that have instead invested in the stock market and other financials will lose a lot.

    What is happening in Greece, Venezuela and other places should be a wake up call but, of course, economic collapse can never happen here, can it?

    Mike Maloney’s “Hidden Secrets of Money” is not about metals trading and he disguises nothing. It is about currency and why fiat currencies fail. Have you not seen it?

    You still haven’t provided a single example of a successful fiat currency. Those currently in use excepted because, they haven’t failed yet but, they will. They all do.

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

    Cheers.

  49. totaram

    John Kelly: If you use gold as actual money, can you imagine going off in your armoured van filled with gold to buy a house? Some of Harquebus’ ideas are very strange indeed!

  50. totaram

    If someone can quote Voltaire about “paper money” (which incidentally was probably NOT a free-floating fiat currency), then I can quote Archimedes about the “laws of motion” – thereby proving that Einstein’s Special and General relativity is all bullshit. Seriously?
    I think most readers of this blog are smart enough to see through this kind of sophistry.

  51. rossleighbrisbane

    “You still haven’t provided a single example of a successful fiat currency. Those currently in use excepted because, they haven’t failed yet but, they will. They all do.”

    So, Harquebus any currency that hasn’t failed is exempted and can’t be used as evidence! Talk about circular logic!

  52. Jennifer Meyer-Smith

    Why H,

    are you so anti-MMT beside your mantras of anti-growth and resource depletion?

    MMT if allowed, can address your concerns of over-consumerism and population growth.

  53. Harquebus

    Jennifer Meyer-Smith
    Correct me if I am wrong but, it is my understanding that MMT requires “steady” inflation. A fundamental flaw and an oxymoron so, no it can not.

    “most people still don’t have any idea what peak oil means, much less that its consequences are unfolding around us right now.”
    “maybe no politician can get elected by promising that the economy will continue to contract and energy supplies become ever scarcer.”
    “The fact is that because oil production cannot be increased, economic growth is now over.”
    “From now on, geology and physics call the shots.”
    http://cassandralegacy.blogspot.com.au/2016/12/the-peak-oil-election.html

    No growth means large scale debt default.
    Get ready.

    “For Smithian economists, the notion that there are, or should be, limits to economic growth is just beyond the pale of thinkable thought. For to admit that growth is a problem, let alone the problem, is to concede a fatal flaw in the whole system and opens the door to challenge from the left. So across the entire spectrum of mainstream economics, Smithian economists, for all their important differences, still all belong to the same church of “Can’t Stop Shopping” and worship the same idols of growth and consumption.”
    “There you have it: insatiable growth and consumption are destroying the planet and will doom humanity in the long run — but without ceaselessly growing production and insatiably rising consumption, we would have economic collapse in the short run.”
    http://www.truth-out.org/news/item/36916-how-individualist-economics-are-causing-planetary-eco-collapse

    Cheers.

  54. Rossleigh

    H, no civilization that has used gold or silver as a currency is still around therefore it doesn’t work

  55. John Kelly

    Harquebus, MMT does not “require” steady inflation. It manages inflation by providing full employment.

  56. Harquebus

    Rossleigh
    Their gold and silver is still here and still has value. I don’t know of any gold currencies collapsing without debasement. That is diluting coins with a non precious metal.
    See my link to “Hidden Secrets of Money” above.

    John Kelly
    Full employment is not going to happen. That requires cheap and abundant energy and fiat currencies can not substitute. High unemployment is required to conserve resources.
    Inflation is exponential and equates to theft.
    Also, I use the traditional definition of inflation as an expansion of the currency supply.

    “We had a problem in 2008 because of too much debt, domestically and worldwide. Now the debt levels are staggering compared to 2008. Some countries have up to five times as much debt as they had eight years ago. And the dangers now are even larger than 2008.”
    http://www.businessinsider.com/brexit-was-nothing-compared-to-whats-coming-2016-8

    “the world has experienced massive asset inflation ever since President Nixon dropped the Gold-Dollar peg in 1971.”
    “The reason for the massive increase in U.S. debt shown in the chart above was due to the falling EROI – Energy Returned On Investment of U.S. Oil & Gas.”
    http://www.zerohedge.com/news/2016-11-19/peak-decline-international-reserves-warns-massive-asset-deflation-ahead

    “When money or credit is expanded, the first receivers of it get to spend it on existing products before anyone else. Therefore, they benefit from the extra money before prices have risen to reflect its addition into general circulation. The second receivers have a similar advantage, but incrementally less so. Therefore, after this new money has progressed through many hands with a tendency to drive up prices every time, the last receivers of the additional money find that prices for nearly all goods have already risen and the purchasing power of their wages and savings has effectively fallen.”
    “The result is government, banks and their close supporters enjoy a wealth benefit at the expense of ordinary people.”
    https://wealth.goldmoney.com/research/goldmoney-insights/saving-the-system

    Unless a search criteria is included, the links that I post I have read. These are just examples of what I read every day and John, sorry to say but, you just don’t cut it. You do not understand the role of energy in the economy, its effects on growth, the effects of growth and nor are you aware of the disruptions to supply chains that are going to happen.

    Economics is not science and I have no respect economists at all including that fool Bill Mitchell who MMT advocates idolize.

    Cheers.

  57. Florence nee Fedup

    Could be true that boom and bust is built into capitalism? There are bust or what is called depression every few decades with many lesser recessions in between,

    Since the www we have been lucky in managing capitalism better but the truth is there has to be a big bust, where out of the ashes a new boom will arise.

    That is the nature of the beast. People serve capitalism. it is an economy that doesn’t serve people.

    There must be a better way.

  58. Claudio Pompili

    John Kelly is being too polite by calling the deception as “misguided” or “ignorance”. In fact, it’s anything but, and a critical plank of neo-liberal oppression of workers, as Kelly points out,
    “The government, like all western economies, still maintains a ‘gold standard’ mentality. It’s a reflection of its collective macroeconomic ignorance. And in maintaining this ignorance, it is overlooking the real threat to our economic well-being: that of private debt.

    In acting this way, they are playing right into the hands of the super-rich who want a permanent pool of unemployed workers, a low paid workforce and less government interference in corporate oversight.”

    Understandable for the conservatives/fascists but deplorable from the ALP of old school the ‘workers’ party’. Modern Labor since Hawke and Keating is more obsessed with wooing the middle-class and monied-elite so doesn’t want to be seen as pushing up wages against the interests of employers or singing to the unions’ songsheet. Although to be fair, recently Wayne Swan talked up Keynesian economics and Shorten pledged ‘full employment’ as party policy.

  59. Jennifer Meyer-Smith

    Well said Claudio.

    If Swan and Shorten have made some changes to their modus operandi, they must make them BIGGER and more sustained before I’ll give them credit again …
    … for innovative advocacy of alternative socio-economic remedies that help the 99% and not their puppet masters of the 1%.

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