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Japan: a shining example

Professor Bill Mitchell’s blog, dated 22 November 2018, “Japan still to slip in the sea under its central bank debt burden” gives MMT advocates all the ammunition they need to present a case for greater fiscal participation in the economy.

It signals quite clearly that government spending, not monetary policy (RBA interest rate management), is the more effective tool to bring about full employment and maximise the use of Australia’s available resources.

For nearly 30 years now, the Bank of Japan, the nation’s central bank, has been buying government debt (deficit spending), to the point where its current holdings are now greater than the country’s GDP.

However, despite massive injections of ‘created money’ into its monetary base, Professor Mitchell says, “inflation (in Japan) remains low and despite low interest rates, economic activity is hardly booming.”

Mainstream economists seem unable to connect this reality with their more dire predictions that Japan’s fiscal policy over this period, must lead to hyperinflation. It has done nothing of the sort.

For the past 30 years, mainstream macroeconomists the world over, have been predicting the demise of the Japanese economy, claiming it will slip into the sea, that its debt burden is unsustainable, that there are limits to the amount of assets the Bank of Japan can buy.

What has happened is that, “the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).”

Each time their predictions have been proved wrong they have been forced to invent excuses, such as closed markets and cultural peculiarities. It’s all hogwash!

What these Economists are really concerned about, is that by buying government debt and keeping interest rates low, the Bank of Japan is effectively preventing the commercial banks using the bond market to make profits.

By not issuing bonds to offset government debt, it is depriving the commercial banks off a risk-free asset from which they can make money. The BOJ has “effectively killed regular trading in the once lucrative bond market.”

It has defied claims that currency-issuing governments like Australia, are captive to the yields in play on secondary bond markets.

How terrible is that?

Australia currently has 5% of the workforce, or 700,000 people looking for work with a further 800,000 working less hours than most would prefer. This represents a huge underutilisation of available resources, yet our government and the media, via their economic “experts” claim our economy is humming along nicely. More hogwash! Our economy is underperforming.

By way of comparison, Japan’s unemployment rate as at September 2018 was just 2.3%

To the further detriment of our underperforming economy, it is just what our government wants. It might appear that they are concerned at the slow rate of growth and the low wages growth, but deep down, captive as they are to the demands of the big end of town, they do not want full employment, or any significant wages growth.

Such economically beneficial activity would impact on the profits of commerce and industry, the source of their political funding. It is corporate welfare by stealth. The state of the Japanese economy, proves that decades of deficit spending and huge injections of money into what was a stagnant economy, does not risk inflation when the injection is correctly targeted.

There is no reason why we, in Australia, cannot do this and achieve full employment, a higher GDP, which itself will attract further private investment and in the process, improve living standards for all Australians.

We can do this, if we can change the mentality that dominates current mainstream economic thinking. But, at the moment, our prime minister is so intent on fuelling an outbreak of anti-Islamic sentiment, for no other reason than to attract votes, that our economy is destined to continue underperforming.

As Bill Mitchell says, “All those commentators who claim that accelerating inflation would result if governments abandoned debt-issuance but continued to run deficits, have been repeatedly shown to be wrong.”

What will it take to get this simply message across to those in treasury who have the power to change government thinking?

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  1. ajogrady

    Thank you John for shining a light on the absurdity of the arguments from mainstream economists. Where would Australia be if we had economists that understood that we now have a Fiat economy and the benefits that can arise with that. Japan and America are glaring examples that a large deficit does not hamper a countries economy.

  2. Ian Hughes

    Cheers John for an excellent article. I have learnt so much about MMT from Prof Mitchell – he is a wonderful teacher. It changes the way you view the monetary system and shows what is possible with the right mindset. I sense there is growing awareness and momentum about MMT. I wish Labor would invest in fully understanding MMT and working with Prof Mitchell to educate the public. It could be a real game changer with enormous benefits for our country.

  3. totaram

    Excellent piece as usual John Kelly. I was pleased to see on ABC TV, in the programme about the USA, an interview with Stephanie Kelton, who is advising Bernie Sanders. She is also an MMT economist. It seems that MMT is getting more attention and winning over converts, but the neoliberals will fight hard to try and keep their mythology from being exposed. After all, it is the “balanced budgets” myth that allows them to continually cut funding for education, health, infrastructure and welfare, along with the privatisation of public assets to”repair the budget”.

    Japan is a very good example, because the fact that nothing happens to the USA in spite of its massive debt, is passed off as a special case. The US$ is a “world reserve currency” it is claimed. No such claim can be made for the Japanese Yen. The other (false) claim made about Japan is that most of the debt is held by the Japanese people themselves who are very patriotic and therefore do not allow the price of the bonds to fall. Well, now you know. It is the very patriotic Bank of Japan that has bought all the bonds keeping the price high and the bond yields very low.

    Our treasury is beholden to its imported banker secretaries, who are chosen for their neoliberal ideological stance. And any employees with heterodox macroeconomic views would have been purged since the Howard years. So not much luck there.

    Labor, I was told by someone, is “not interested in even hearing about MMT”. I also know anecdotally, that Wayne Swan rejects the 3 sector financial identity (on unknown grounds, since it is just arithmetic/algebra). He recently wrote an article in the Guardian perpetuating the myth that without tax revenue we cannot fund our requirements. One can only hope that with the USA Democrats talking MMT, suddenly our politicians in Labor will begin to take note (thanks cultural cringe!). I have just seen the Greens proposing a Job Guarantee, although whether it is in conjunction with other MMT principles I haven’t checked. I may yet live to see something positive emerge.

  4. Stephengb

    Well done John – we have got to keep MMT front and centre.

    I also like the stuff from Ellis Winningham, he uses a layman’s language approach to teaching modern money.

    Meanwhile I believe that the ALP does get it, but is frightened to be seen as radical for fear of redicule by the nonsensical mutturings from the establishment and the orthodox mainstream so called economists, who cannot see they have been brainwashed by the neoliberal agenda since most of them came from the universities infultrated by neoloberal group think.

    See Lewis Powell Jnr, Memo to the American Chamber of Comerce 1971.


  5. Ian Hughes

    I just posted this on Twitter:

    @billy_blog @GetUp @thejuicemedia @StevenHailAus @OzMyHomeMAC Love to see you all combine your collective talents to educate the Aussie public about #MMT. We can’t afford to wait for the pollies to wake up. They’ll jump on the bandwagon when there is momentum with the public.

  6. Ian Hughes

    Hi Kaye, I had the privilege of attending GetUp’s ‘Rethinking Our Economy’ event in Melbourne. Stephanie Kelton was one of the main speakers (how I wished Bill Mitchell was also there!). The Collingwood Town Hall was packed and it was a wonderful event. Sessions were also run in Syd & Bris.

    I wish there was someone or group who could take the lead on this to unite all the MMT voices. Otherwise, the risk is fragmented messaging which makes it easier for our opponents (the entrenched vested interests) to pick off.

  7. Kaye Lee

    I think sometimes the different messaging does get confusing for people Ian. What John was saying about the Central Bank holding the debt and forgetting about trading bonds on the open market has cleared up many problems for me.

    Personally, I would prefer it to be phrased as how we fund deficit spending rather than the talk about taxes destroying money and spending creating it (I think that causes unnecessary problems) but I can run with the concept. The result is the same.

  8. Mark Needham

    I really can not follow, this article, ie, understand.

    I have tried so bloody hard, to understand this money stuff. Soon as I think I have a handle on it, something jumps up and …whoa.

    Are there any sources, oral or written that are ‘laymans language’. I do not play on twitter or facebook. Any other sources, gratefully accepted.

    Mark Needham

  9. Ian Hughes

    Hi Mark, here’s a few link to sites that I use regularly, in no particular order: – Aussie Prof Bill Mitchell – a leading authority on MMT globally. Can get very detailed. – relatively new but has some very good content. Check out their Fact Sheets. – US based and one of my favourites. Ellis has a graphic of ‘Monetary System Reality’ on his main page which I use often to intro MMT.

    Hope this helps. Cheers

  10. totaram

    Mark Needham: First note that the A$ is no longer backed by gold. i.e. it has no real “value” as it did in the old days. So you need to change how you think about it. Go from there.
    Purely on a side note: Anthony Green has already called the Vic election in favour of Labor. Hurrah! We are not interested on “tough on crime”!

  11. Peter F

    When friends go on and on about the deficit I ask them whether they think the Snowy River Scheme was a good idea. I then tell them that I believe Menzies ran deficits for most of the years during it’s construction.

  12. Marcus Champ

    Thanks John for another great post bringing MMT into the public eye. I don’t have a lot of time to respond right now, but I have a few resources on you-tube which may be helpful to get started. Ian has already posted a few but there are some that beginners tend to find helpful, including some great videos from a local in Tasmania.

    Deficit Owls

    Stephanie Kelton presentation on MMT

    (first of a series – sound on first video not great, gets better)

    Furthering earlier comments there are individuals within both ALP and Greens actively campaigning to change the economic narrative, but there is a very strong resistance from vested interests.

    Kay, given some of the comments you have made I am glad to see progress is being made. I appreciate MMT completely changes the economic narrative we have been fed for years…but once learned you cannot “unlearn” MMT thinking.

    Your summary of Wayne Swan’s rejection of MMT is accurate…I have spoken to him personally on this matter and he made his opinion quite clear. His grounds are quite simple, he does not believe it, but then he also believes house prices are based on supply and demand with no role for the availability of credit, so make of that what you will. He was key part of ALP response to GFC and he should be recognised for that. The most he is able to concede at the moment is that a “Government can be in deficit over the business cycle but then must get back to surplus”…and no he couldn’t define what “the business cycle” means classic economists never can.

    In regard to the Job Guarantee currently being discussed within the Greens, yes it is being discussed but no it is not in conjunction with MMT understanding and policy…YET.



  13. David Bruce

    Thanks John!

    Next thing we know, Australia has a universal basic income and solves the problem of homelessness, unemployment and apartheid of our first nation?

  14. Keitha Granville

    This bear of little brain usually struggles to understand monetary policy, debt, deficit, etc – but this article is abundantly clear. How do we get our government to throw away their capitalist ideology, dump their big business mates and do the right thing ?

  15. Matters Not

    Kelton who was on Planet America this week is the ideal person to lead the MMT charge in Australia (a foreign prophet.) For example, a Q&A program with Professor Kelton (would appear), Dame Groan (Judith Sloan) (would appear), Josh Freudenberg (won’t appear), Chis Bowen (won’t appear), Sally McManus (would appear) and … whoever

    Keep Bill Mitchell well away … A decent percentage of the audience should be economics students, including some from Newcastle. Might make a good program.

  16. David Bruce

    The article below appeared in the AIMN last year and was originally published in the Political Sword on 21/09/2016 by Ken Wolff :

    What is Modern Monetary Theory and will it help?

    Those people who criticize MMT are usually the people who make money out of buying Government Bonds. Wall Street have gamed the Money System for long enough!

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