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Modern Monetary Theory and The Great Fraud of Neoliberalism

The time has come to expose the great fraud that has been perpetrated on the West in the last forty years. Once we have even a surface-level understanding of Modern Monetary Theory (MMT), the great lie that is Neoliberalism will come crashing down.

Now, this has been outlined and discussed in detail by far greater minds than my own; this is not original to me. But I thought it might be useful to offer a brief description of MMT, how it works and then use these basics to expose the great Neoliberal fraud.

MMT, Part One: Currency and Its Relationships

In every economy that has its own currency (Australia, the US, the UK etc), every entity in that economy has one of two relationships to that currency. One is either a user or an issuer. Obviously, the federal government is the monopoly issuer of currency (hence counterfeit money laws). So the government issues the currency, and everyone else (including state and local governments and the citizenry) uses the currency.

Currencies such as the Australian Dollar, the US Dollar, the Pound etc are called Sovereign Currencies or Fiat Currencies. This means that when the government goes to do something, it simply goes to the central bank (the Reserve Bank in Australia or The Federal Reserve in the US) and says ‘we need this amount of money to be created’ and the bank, through several keystrokes, brings that currency into existence. Similarly, the relevant bank accounts of the recipients are also augmented using keystrokes. This may seem counterintuitive, but think about it this way. Consider the recent spending of $3.5b on tanks. Are we to believe that the government went to a physical bank vault filled with stacks of $100 notes? In light of the amount of money spent by the government on the regular, this would be impractical. Government spending is essentially EFTPOS on a grand scale.

MMT, Part Two: Tax Does Not Fund the Government

Since the government simply creates (issues) the currency it uses, government spending is not ‘paid for’ in that sense. It does not need tax to fund its spending since it is spending currency it issued itself. Tax revenue, I say again, does not fund the government. This lays to rest the zombie lie that a government has to ‘live within its means’ or ‘has a budget like a household’. Households do not issue their own currency, so this statement is a lie. Government ‘living within its means’ is naught but a lie designed to justify cutting funding for things neoliberals do not like, such as universal healthcare, education, pensions and generally anything that benefits anyone making less than $250k per year.

I should be clear: taxation does not fund federal government spending. It is true that tax does fund state and local government since these entities are still currency users (recall it is the federal government that issues the currency).

MMT, Part Three: The Purpose of Taxation

A natural follow-up might be to ask

If tax does not fund [federal] government spending, why have tax at all?

I think the best answer to this was provided in a New Economic Perspectives article

[Another] reason to have taxes is to reduce aggregate demand. If we look at the United States today, the federal government spending is somewhat over 20% of GDP, while tax revenue is somewhat less—say 17%. The net injection coming from the federal government is thus about 3% of GDP. If we eliminated taxes (and held all else constant) the net injection might rise toward 20% of GDP. That is a huge increase of aggregate demand, and could cause inflation

What this seems to mean is that the act of ‘taxing’ a unit of currency serves to eliminate it from the economy. Taxation seems to have the purpose of being a sort of ‘inflation break’, removing a certain amount of currency from the economy to prevent too much currency from flying around which could lead to inflation.

The Other Great Zombie Lie: How Will You Pay For It?

You have doubtless heard some version of this whenever a policy is proposed that would help the peasants. Any talk of, for instance, raising Newstart is met with loud screams of ‘HOWYIGONPAYFRIIIIIIIIIIT’ (how are you going to pay for it) or ‘we cannot afford it’. It is unclear whether those asking making these asinine statements are not aware of the fiat currency the Australian Federal Government uses, or if they are being deliberately deceptive. I leave that decision up to you all individually.

Not only is ‘how will you pay for it’ a ridiculous statement, but its application is also highly selective. Have you ever heard this question, or some variant of it, asked around, say, the military budget (pick your country, but the Americans are the most egregious)? How about corporate subsidies? How about politicians’ own outrageous perks and entitlements?

It is almost like they know that they have a fiat currency and intentionally lie to the people about ‘debt and deficit’ whenever they do not like something, typically for ideological (or corrupt) reasons. Whether it is funding Medicare (consider Mr Morrison’s recent removal of more than 900 items), investment in renewables or anything else the Liberal National Coalition is (in my opinion) paid to oppose, they become penny-pinchers when their ideology gets in the way. Yet hypocritically when it comes to war, corporate looting of the treasury and their own perks, they are reckless. Enough.

Conclusion: The Great Fraud

Since the advent of Reagan and Thatcher, politics in the west has taken a very selfish, individualistic turn. Pulling yourself up by your bootstraps is a popular Neoliberal mantra. Government has to live within its means is another. MMT shows that the very idea that a government has ‘limited means’ has narrow basis in reality. It is a monopoly currency issuer. It is, in a very real sense, not possible for a government with a fiat currency to ‘run out of money’.

I have said this before, but it is worth repeating: When it comes to helping the people, it is not money these sociopaths lack, it is the will to do it.

Governments with fiat currencies have all the money they could ever need. They could do so many wonderful things to improve society in so many ways. Means is not the issue. Conviction is. MMT, with its focus on fiat currencies, helps to expose the great hypocrisy at the core of the Neoliberal disaster of the last four decades. In an economy with a fiat currency, the use of fear-mongering about ‘debt and deficit’ to suppress policies that could help broad swaths of the population is dishonest beyond measure.

Epilogue: Still Learning

I am very much still learning about MMT, and doubtless, I have gotten some things wrong here. I encourage you to check out this podcast for detailed discussion of the theory and its applications. I hope this piece has provided a basic discussion of MMT and given some insight into the rot that is Neoliberalism.

 

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8 comments

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  1. Kaye Lee

    “it simply goes to the central bank (the Reserve Bank in Australia or The Federal Reserve in the US) and says ‘we need this amount of money to be created’ and the bank, through several keystrokes, brings that currency into existence.”

    That is not what happens.

    “Sound financial policy requires that the Government fully fund any budget deficit by issues of securities to the private sector at market interest rates, and not borrow from the central bank.

    This arrangement means that there is separation between monetary policy and the Government’s debt management, with the Treasury directly responsible for the latter and the Reserve Bank responsible for the former.

    It is not possible to ensure that the Australian Government’s need for funds are exactly matched day-by-day by issues of securities to the market. To overcome this mismatch between daily spending and financing, the Treasury keeps cash balances with the Reserve Bank that act as a buffer. The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances.”

    https://www.rba.gov.au/monetary-policy/about.html

    Now if the Reserve Bank buy the bonds, as happened recently, we effectively owe the money to ourselves. The RBA is forbidden from buying bonds direct from the government so they buy them on the market which injects money into the private sector but they don’t want to keep doing that.

    As for taxation, it also has other uses like changing behaviour or investment direction and it puts a brake on wealth inequality. (MMTers also say taxation creates demand for a currency though I have never quite felt comfortable with that one.)

    I do agree that government spending is not constrained by taxation revenue which is, I guess, the important point.

  2. Clinton

    Kaya Lee, those are institutional arrangements that exist to obfuscate what is really happening. When the government wants to spend, it instructs the RBA to make the payment. The RBA makes the payment. No child care payments or centrelink payments or any other Government expenditure was ever stopped or delayed because the Government “account” had no money.

    Parallel to this, treasury issues securities that tend to approximately match its expenditure, and doesn’t allow the RBA to buy directly. But the bond dealers are all keen to get their hands on these bonds, and they know that they can always offload them to the RBA at any time. The RBA will purchase as many bonds in the secondary market as it needs to in order to meet its interest rate targets.

  3. Kaye Lee

    Clinton,

    I agree no Australian government payment will bounce – they account for expenditure above account balances with an overdraft which must be extinguished as soon as possible, either by revenue deposit or bond issuance. It may just be accounting but it is the system they have chosen.

    As you say, it is Treasury that issues bonds – not the RBA as many think – to match any deficit spending.

    RBA trading in bonds has little to do with government expenditure. It is a liquidity tool that injects or withdraws cash from the private sector with a policy interest rate corridor (rate for deposits to rate for lending) around their target cash rate.

    The intention of the quantitative easing (buying of bonds by the RBA) that has gone on over the last year or two was to lower government bond yields, putting “downward pressure on funding costs throughout the economy and helping to lower the exchange rate, contributing to easier financial conditions and thereby supporting economic activity and inflation.”

  4. Mike

    So how does tax payer funds transfer from government accounts into IPA/MURDOCH accounts to fulfill the trickledown investment econony.

  5. Clinton

    Kaye Lee, I am well aware of all of that. Your original comment was to reject the statement that the Government spends by directing the RBA to mark up the values of bank accounts, and your reason for that was to parrot RBA propaganda about institutional arrangements. The Government faces no real constraints to spending any money it wishes to spend.

    Saying the Government has to fund it spending by bond issuance is like saying you can’t afford to go out for dinner because you have to put $1000 into your savings account this month. It is a fake, self imposed constraint.

  6. Kaye Lee

    “The Government faces no real constraints to spending any money it wishes to spend.”

    I would suggest the productive capacity of the economy is a very real constraint.

    I’m sorry, I don’t understand your analogy about dinner. I’m not saying the government has to fund spending by bond issuance. I am saying that is the mechanism they have chosen to use to account for deficit spending. I’m not sure why you consider it propaganda because it is what happens….a deficit will be accompanied by an equal bond issuance. When the government wants to pay someone, the RBA will credit the recipient’s account but it also debits the government’s account.

  7. wam

    Come on on Kaye,
    What happened to allow the copperman’s $440m to the 4 member reef company? A nice little earner in interest?
    As you well know, there are no constraints, to LNP cash, because christine went from doubling the debt limit to no limit. There are no references to the debt because albo is too principled or stupid or gutless?

  8. david

    everyone in the world except 2 groups of people are happy to earn their living through their labor. these 2 other groups earn their living parasitically through the labor of others & are…

    landlords, who extract unlimited rent on stolen land (all land being stolen)
    moneylenders, who charge interest on money created from nothing (this having numerous problems, the least of which is impoverishment of us all)

    usury really includes both of these but it’s usually the more narrow definition of usury as the debasement / inflation / etc of the money supply that brings down civilizations. Richard Hoskins “War Cycles, Peace Cycles” is THE book to read on this (it’s available online for free as a pdf but you might have to look).

    usury IS the one ring. the ring of power. knowing about money (the vampire money system we have & kind of money system we should have) & the moneylenders (those who use money to take us all down) is basic knowledge for all who wish to prevent our civilization crashing & burning like all the rest

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