A Politician’s guide to the question, “How are you going to pay for it?”

January 14, 2018
Written by: John Kelly
47 Replies

If there’s one question a politician fears being asked, it is this one. After announcing a decision to undertake a bold new and expensive development project, the question always arises, “How are you going to pay for it?”

It shouldn’t be a horror moment for politicians, but it is, and the reason is simple. They are afraid to be caught out. Such is the millstone they have tied themselves to, over the years, trying to discredit their opposition, or portray themselves as fiscally responsible. In the process, they have shot themselves in the foot because they don’t understand how sovereign money works.

Therefore, in the interests of common sense and as a means of bringing an end to the foolishness that is endemic within this charade we call our parliamentary system, here is a prepared script for politicians to study which should help them to manage the, “How are you going to pay for it,” all fearing, all threatening, career ending, monster question, when being interviewed by a journalist.

Beginning of interview:

Journalist: And how are you going to pay for it?

Politician: We will pay for it the same way we have always paid for it. By crediting the bank account of the recipient.

Journalist: But how can you do that if there is no money in your account?

Politician: We create the money. There is always money in our account.

Journalist: Until you run out of it, or have to borrow, you mean.

Politician: No, we don’t need to borrow money, we create it. We can’t ever run out of it.

Journalist: But how is that possible?

Politician: We use computers, just like you do. Do you use internet banking?

Journalist: Yes, but I can only do that if I have money in my account.

Politician: That’s right, because you are the currency user. The government is the currency issuer.

Journalist: But you still must have the money.

Politician: No, we don’t. What part of, “we are the currency issuer,” don’t you understand?

Journalist: I’m confused. Are you saying a government doesn’t need to raise revenue to spend?

Politician: I understand your confusion. It sounds a bit fishy, but a sovereign government who issues its own currency doesn’t need to raise revenue to spend.

Journalist: But you need taxation revenue to spend?

Politician: Not for spending we don’t.

Journalist: I don’t get it. You seem to be advocating printing limitless amounts of money. Isn’t that what Mugabe did?

Politician: No, it’s not what I am advocating, and it’s not what Mugabe did. Firstly, we don’t print money anymore. It’s all done via electronic interbank transfers. Secondly, Mugabe wrecked his country’s economy by systematically destroying its resources, not by spending.

Journalist: What about Argentina?

Politician: Argentina foolishly borrowed foreign currency and then wasted it.

Journalist: Venezuela then?

Politician: Sheer incompetence, again, by using another country’s currency.

Journalist: But if we just create money what’s stopping us from doing the same as they did?

Politician: We don’t ‘just create money.’ It’s not about the money, it’s about how we use it. If we use it to engage our workforce and produce meaningful goods and services, the kind of things people here and overseas want to buy, we strengthen our economy, unlike those countries you mention, who failed to use their natural resources, and failed to use their own currency.

Journalist: But surely there is a limit to what we can spend?

Politician: There are always limits, but they are resource related limits, not money limits. We can’t spend if there’s nothing to buy. We must produce before we can buy. So, logically, we must issue the money to get our workforce into jobs and manufacture things we need to live and to prosper.

Journalist: All this seems to contradict any need for the government to produce an annual budget that shows how much they will spend, how much they expect to receive in taxation, how much they need to borrow, to make up the difference, that sort of thing.

Politician: Yes, it does seem that way, but that’s a political choice. We do that to keep the accountants happy and to have you believe that running a government is the same as running a household or a company. It isn’t. Households and companies are different. They can’t create money. They can only use money. Only sovereign governments can create money. But keeping books that show spending versus revenue, makes it easier for us to say we can’t afford it and stuff like that. God help us! We can’t have you think we can work miracles.

Journalist: Then why bother with taxation?

Politician: That’s a great question. We do need to tax, but you are confused enough already. We’ll leave that for another day. There is a limit to what you can absorb in one sitting. Best we schedule another interview where we can cover that issue separately.

End of interview.

Don’t be surprised if, after the interview, the journalist returns to the office and pens tomorrow morning’s headline, “Politician says government is money machine, Taxation unnecessary. Hyperinflation imminent.”

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James GraftonJanuary 14, 2018 at 11:40 am

Well done John. Now if we can only get the pollies to understand. #MMT

Terry2January 14, 2018 at 11:57 am

Probably around 2025 and maybe before a politician will tell us in sombre tones that after all the years of tax cuts – which we know are good right ? – after corporations having weasled their way out of paying any tax, after high wealth individuals having turned themselves into corporations to minimise their taxes, after a Prime Minister has convinced us that salting away money in the Caymand Islands is a good thing because it’s legal, after our education system has all but collapsed because we gave it to private corporations and church businesses to run, after our health system has been privatised because it’s more efficient that way, after our TAFE system has been finally and totally gutted and we have to turn to overseas countries to provide us with tradesmen and women because we failed to train or own, after we finally realize that offshoring jobs was a false economy, after we realize that supporting an automotive industry was necessary to encourage technical innovation and skills training, after we realize that our mineral wealth has been sold off and we don’t even have a steel making industry.

This sombre politician will tell us that we are now a third world country and we are F***ed because we failed to collect taxes to fund our essential services and infrastructure and we fell for the contagious economic flim-flam of people like Donald Trump and Malcolm Turnbull.

Ken ButlerJanuary 14, 2018 at 11:59 am

Yes. Well done.
But this article represents conceptually only a glass half full. The average punter or even oily politician will not move beyond the present conventional perception of national economics until you explain clearly and convincingly what role taxation plays in the economy of a sovereign nation.
Looking forward to Part 2.

Jack RussellJanuary 14, 2018 at 12:00 pm

Short, concise, accurate, and using the small words necessary for those I hand it to, once I’ve printed off a few copies. Some family members NEED to read it. Then, hopefully, talk about it to others – as well as sign up to AIMN.

I hope the follow-up tax explainer is in the pipeline … :))

John, thank you!

townsvilleblogJanuary 14, 2018 at 12:14 pm

In essence it is an easy question to answer, though a fair bit of political courage is required, the answer is “we will tax the multinational corporations a ‘fair share’ of taxation” if that ‘fair share’ were 15% as per trump, on their multibillion dollar incomes replacing the current situation of them paying naught, then we could see new money to upgrade our aging WW2 infrastructure that we have in a large part of Australia.

The trouble then is finding a leader who will not only make that statement but also follow through and make bloody sure that it happens. There is no good reason why low to middle income earners should pay for everything while these parasites and the idle rich go un-taxed.If I am mistaken, I welcome an argument to the contrary.

Allan RichardsonJanuary 14, 2018 at 12:18 pm

Thanks, John. Very well explained. Of course the difficulty would be explaining to the politicians that Fiat is not only a car.

Oh, and what Terry2 said.

AorticJanuary 14, 2018 at 1:11 pm

Well done John spot on. I am always amazed at how in Parliament they generally yell figures, percentages stats et al and unless guys like you and others likeminded take the time to analyse and discuss the rest of us who are either too busy or too lazy or disconnected to try, have to accept them for what they are. More power to your mind and pen.

Don A KellyJanuary 14, 2018 at 1:19 pm

Excellent article John. Very well explained. As for the Government budget, they don’t have one. They have a fiscal position. All politicians talk about budget repair or balancing the budget, just like a household or firm. We must earn, borrow, sell something or run down savings in order to spend. The government doesn’t earn anything yet they can always spend. As Professor of Economics at Adelaide University, Philip Lawn explains it; There is a ‘black hole’ in Canberra, it’s called a bottomless pit of Australian dollars. The Federal Government can buy what ever they want, whenever they want, unlike you or I, or state and local governments who rely on funding from the Feds.

economicreformJanuary 14, 2018 at 1:47 pm

Ultimately the problem does not come from the pollies .. it lies with those orthodox (neoclassical) economists who are in the grip of an ideology known as neoliberalism, and who advise both pollies and government departments. Unfortunately these economists also have ready access to the mass media.

Don A KellyJanuary 14, 2018 at 1:54 pm

Alan Greenspan is an American Economist who served as chairman of the Federal Reserve Bank of the U.S. from 1987 to 2006.
During his time as Chairman he was called as an expert witness during a U.S.Senate enquiry into the sustainability of Social Security Funding by the U.S.Federal Government.
Under oath, Alan Greenspan stated, “It doesn’t matter whether it is a question about Social Security, it could be about Defence spending, it could be about Education spending, it could be about Infrastructure spending, it could be about Student Debt, it could be about anything. What matters – there is nothing to prevent the Federal Government creating as much money as it wants”. The Federal Government has no financial constraints whatsoever. But the Federal Government total spending should only equal the productive capacity of the economy. Any further spending will not lead to any further output because when the productive capacity of the economy is reached, all resources are fully employed, including people who are willing to work. Any further spending will just cause inflation.

diannaartJanuary 14, 2018 at 3:09 pm

John I believe you have described the Labor politician’s response to “where is the money?” perfectly.

However the LNP is slightly different, when asked about a project’s funding we get to hear a diatribe of Labor’s failings of sufficient duration to obscure the original question.

Ricardo29January 14, 2018 at 3:23 pm

I too look forward to part 2, because on my reading, the government doesn’t need taxation and if that’s the case, why am I paying tax ( or in realty not being credited with all of the money I am notionally being paid and, further, why is it so important that these tax avoiding multinationals are so vilified as surely they don’t have to pay tax either?

Matters NotJanuary 14, 2018 at 3:34 pm

Here’s a link to a number of economists that support this theme:

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan

The there’s:

In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.” Peter Zeihan, Vice President of Analysis for STRATFOR

Followed by:

In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.” Erwan Mahe, European asset allocation and options strategies adviser

Supported by:

There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.” Mike Norman, Chief Economist for John Thomas Financial

And:

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.” Federal Reserve Bank of St. Louis

But there are dangers:

Mind you, that doesn’t mean there might not be other economic or political consequences. Inflation and currency depreciation, for example, are possibilities. Also from Dr. Wray:
“
“Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.”

And there are political consequence because most voters simply don’t believe it. Therefore politicians, in general. won’t go near it. The scare campaigns win easily.

https://www.forbes.com/sites/johntharvey/2012/09/10/impossible-to-default/#25c775bb1180

martin connollyJanuary 14, 2018 at 4:15 pm

This is exactly what MMT needs to cut through and begin reframing the entire economic debate.
It will need followup by others should it gain MSM traction, and it is a wonderfully simple start.
Some politicians know of MMT; some even give it credence.
But noone wants to speak the word lest the clothes they have worn through the entire “debt and deficit” farce are suddenly invisible.

guestJanuary 14, 2018 at 4:26 pm

Can someone please explain how, with all this backroom MMT stuff around, how Whitlam was sacked when finances were withheld and money was sought from elsewhere? How did Whitlam run out of money? And the government does not need to raise money.

And we have had a great deal of talk about how many millions of dollars in interest have been paid out each year for debt accrued over time and how the Coalition has doubled the debt in 4 years. All lies? Because according to MMT we can never run out of money.

So there are “resources related limits to spending”. Is that why we need to keep on selling and burning coal even if it means cooking the planet?

PhilJanuary 14, 2018 at 5:12 pm

I’ve lived three score years and nine under the myth system of monetary policy i.e. that government spending comes from taxation and therefore if you want the government to spend more on say, public education, well then government will have to tax you more. There cop that.

I never believed that myth because I never believe what a government tells me – thats been a matter of personal principle all my adult life – but I had no alternative monetary model to consider until recent years the MMT stuff came along. It makes eminent sense. It also makes me angry that the con has been extended for so long.

No government of the pathologically ideological conservative bent that we are saddled with in Australia is going to demythologise the economics myth they use so effectively to con the public, and of course the same household budget/taxation myth is used and abused by the MSM to propagandise in favour of the gods of conservatism that they serve.

HarryJanuary 14, 2018 at 6:06 pm

There are any number of smokescreens that have been put in place to obscure the facts of economic life for sovereign governments that John Kelly has explained so simply. The federal “budget”, the RBA as a supposedly “independent” entity are all part of either a deliberate deception or ideology trumping sound economics.

The complete explanation he is working on could be used as a template to counter the inevitable and relentless attacks on the mainstream version of economic reality. Progressive politicians must have a strong grasp of the fundamentals of federal government capabilities to withstand such attacks and attempts to ridicule. I have encountered this myself and I am not a politician. Zimbabwe, Weimar Republic, Argentina and lately, Venezuela, have all been used to ridicule and dismiss the challenge to orthodox economics that is presented as akin to holy writ.

The implications are not just academic: they are potentially transformative as it implies that sovereign governments can “afford” to utilise available resources that are “for sale” for public purpose. We can properly resource education, health, public transport, housing and the environment. Unemployment can be virtually eliminated and we can ensure that those who cannot work or are too old to work can be decently supported.

I look forward to the next instalment John!

Glenn KJanuary 14, 2018 at 6:15 pm

taxation is a means to reduce the “pool” of money in the economy. It is a lever the government uses to control currency value (and inflation among other things), and importantly distribute currency throughout elements of the economy. reduction and distribution are the important functions of taxation. I believe. I look forward to part 2 to see if my understanding is correct. 🙂

HarryJanuary 14, 2018 at 6:27 pm

Guest: “And we have had a great deal of talk about how many millions of dollars in interest have been paid out each year for debt accrued over time and how the Coalition has doubled the debt in 4 years. All lies? Because according to MMT we can never run out of money”.

Yes they are essentially lies, we are being bombarded with economic bullshit to be blunt. You should be aware that a myriad of economic and political smokescreens have been put in place over the years to obscure the essential facts of modern economics. By convention rather than need the federal government issues “debt” (bonds actually) to cover any spending over and above taxation received. It need not do so. there is no genuinely good reason for selling government bonds at all, if you are a monetary sovereign government. Indeed, it would be better to convert them into term deposits at the central bank, and to regard them as a form of money.

It would pay you and others to carefully read the following article. John Kelly will probably explain some of the concepts more simply and I apologise it it preempts John’s coming article.

https://era-blog.com/2016/12/05/paying-for-public-services-in-a-monetary-sovereign-state/

Andrew SmithJanuary 14, 2018 at 6:46 pm

An observation of Australian society and the electorate makes one conclude that politicians and media have been encouraging focus upon financial ‘costs’ without explaining or promoting broad societal benefits. How is this possible? Low levels of financial, numerical and data literacy with focus upon the self and not society. Meanwhile too many know the cost or price of something but not the (broader) ‘value’?

John KellyJanuary 14, 2018 at 6:51 pm

GUEST, The Whitlam era of the early 1970s operated under what we called the Gold Standard. That meant a government could not spend beyond the limits of its gold reserves. For more on this, google the Bretton Woods agreement. However, that is not entirely relevant to what happened with Whitlam. The Whitlam government never ran out of money. It was the opposition (Liberal Party) who blocked supply in 1975 preventing money bills from being passed. It was a blatant grab for power. The government sought foreign money, not to overcome the blocked supply, but to finance some major infrastructure programs. When Whitlam was dismissed, he left zero debt.
In 1983, under the Hawke/Keating Government, we adopted a fiat currency system (12 years after the US), which took us off the gold standard and meant our currency had no intrinsic value. It survives on nothing more than confidence in our ability to produce goods and services. Under a fiat currency system, our government is not constrained in its spending by any commodity. It is only constrained by available resources.
In reality, we have no debt. We issue bonds in $A, similarly to companies issuing shares. The money received for those bonds is not spent. It sits in accounts held by the bond holders at the RBA (currently around $600 billion). Interest is paid twice yearly with money created out of thin air (or the click of a computer). So long as we never seek finance in a foreign currency, we can always create money to pay our bills. Yes, you have been deceived, probably all your life. But don’t feel bad about it. We all have.

MarcusJanuary 14, 2018 at 8:03 pm

Hello John,

I am a passionate advocate for MMT since discovering it around 18 months ago. I have great enjoyed your articles on the subject and would actually like to catch up with you for a discussion around a few subjects. However I thought you would find it interesting that I have been engaging with several political figures about supposed “balanced” budgets, fiat currency, and being issuer of currency as opposed to the “user”. On one occasion while discussion the subject with my local federal member (ALP) I articulated the Government being the currency issuer and therefore literally cannot run out of money…and was nearly knocked over when he said he AGREED, but he went on to say that he would be crucified if he publicly talked about and the party was NOT interested in the subject. Furthermore, I spoke face-to-face with a former treasurer (ALP) and not surprisingly he though it was rubbish…but interestingly did say that Governments should spend in difficult economic times, and take back during boom times, and his exact words were “but balance the “budget” over the business cycle (whatever the hell that means…well I did get what he meant, but personally its a BS answer)”

Anyway be assured there are more of us lobbying for the truth than you may realise but it is a very slow path to enlightenment. Hopefully I will get the chance to meet you face to face, but in the meantime, keep it up, many more are hearing and listening every day.

Regards

Marcus

guestJanuary 14, 2018 at 8:17 pm

So, the media and financial news sources are all either ignorant of MMT principles or are complicit with the deceit which ignores what is really happening?

Alan LuchettiJanuary 14, 2018 at 9:18 pm

“The annual Appropriation Acts detail annual appropriations provided to Commonwealth entities. The Acts take precedence over details in CBMS, Portfolio Budget Statements/Portfolio Additional Estimates Statements and annual reports:”

The Dept of Finance quietly admits the truth. No matter what the numbers are in the accounts it maintains, what can be spent into the economy is what Parliament enacts. If “consolidated revenue” doesn’t measure up, the spending can happen anyway.

https://www.finance.gov.au/…/guide-to-appropriations/

JaquixJanuary 14, 2018 at 9:31 pm

Good format to make this easy reading! Well done. Look forward to next instalment..

Alan LuchettiJanuary 14, 2018 at 9:37 pm

Guest, a lot of academic and professional reputations have been built since 1971 (US) and 1983 (Aus) on gold standard era macroeconomics. How many august worthies and doyens of the financial media would you expect to recant? How many of their students and proteges would have a clue? How many politicians would risk their misconceived derision?

And isn’t “spending depends on revenue” a lovely myth if you want to confer or receive a privatisation or if you just ideologically favour small government?

Matters NotJanuary 14, 2018 at 10:11 pm

Great link Alan Luchetti @ 9:18 pm . But only if you have the faith and know what to look for!

Otherwise. LOL.

Perhaps we might consider that MMT is a theory of how our financial system actually works and (implied) how it might work under certain conditions. (Lots of assumptions involved.) To speak in terms of truth, is a stretch of some proportions, because truth is not a concept normally employed in the social sciences. Indeed it’s not a concept advanced in the hard sciences. Yes mathematics and logic have strong claims to truth but the social science – less so.

Perhaps MMT disbelief is rooted in a long term conspiracy. But maybe not. Perhaps the belief is all down to a religion? A glance at history shows that false prophets are many and varied.

iggy648January 15, 2018 at 6:35 am

China owns about 20% of Australian government debt. Where did they get the money for that? They must tax their workers really heavily.

http://www.abc.net.au/news/2015-10-01/chinese-ownership-of-australian-debt-much-higher-than-thought/6821346

ranterulzeJanuary 15, 2018 at 8:25 am

Clear explanation, looking forward to “taxation” chapter. But – don’t commercial banks produce money? Just read Ann Pettifor’s book -The Production of Money: How to Break the Power of Bankers – and don’t quite get how the two aspects fit together, Govt and private sector. She says Governments only create 3-5% of sovereign money. I do see how capitalism requires prior and continuing creation of credit, that’s basic Marxism a-la David Harvey

MarcusJanuary 15, 2018 at 9:00 am

Matters Not, putting aside the name MMT is less a theory than a description of how the monetary system works…with particular insight in the case of sovereign nations with a fiat currency and Government as monopoly ‘issuer’ of the currency.

Furthermore, rather than ‘assumptions’ it would be more accurate to say that MMT recognises various environmental factors and understands the ramifications of these on the way a monetary system operates. Change those factors, and MMT tells you the implications. MMT accurately describes the monetary system, and in that respect is ideology agnostic…and certainly cannot be described as a ‘religion’.

MarcusJanuary 15, 2018 at 9:11 am

For those that have asked the obvious follow-on question: ‘why pay taxes’ then if they are not needed to fund ‘spending’?

I don’t have a lot of time right now but a quick overview. Taxation plays 4 key roles in the financial system and is a fundamental to a fiat currency system.
1. Taxation supports the ‘value’ of money. In simple terms without the requirement to pay your taxes in Australian dollars, why would you need AUD? You don’t.
2. Taxation plays a key role in regulating the money supply. In simple terms Govt ‘spending’ creates money and ‘taxation’ takes money out of circulation and destroys money…which helps manage inflation amongst other things.
3. Taxation redistributes wealth. An excellent example of this is estate tax, but obviously there are many more.
4. Taxation helps guide desired behaviour. For example parking fees, alcohol tax, tobacco tax, etc.

That covers the basics for the moment.

Marcus

Gold DiggerJanuary 15, 2018 at 9:18 am

The difference between money and fiat currency is, money holds its value over long periods of time. Fiat currencies do not and is why they need to keep expanding the currency supply, the formal definition of inflation and is the theft by stealth of our time and effort.
A coconut has more intrinsic value.

diannaartJanuary 15, 2018 at 9:35 am

John

I have a basic question requiring a clear and succinct answer. Before you tell me to read (again) any of Mitchell’s lengthy and wordy works on MMT, I am asking special dispensation for being ill and finding focus elusive. Besides I don’t think I am “the only gay in the village”.

All I want to know is how interest works in MMT. Because I see interest as a rather ‘made-up’ thing – apart from covering minimal costs. Pretend you are speaking to a precocious child with the flu.

Thank you

RossleighJanuary 15, 2018 at 9:55 am

Ok, diannart. This is a simplification and I’m sure that there a few things that people can nitpick but basically:

There’s a lot of misconceptions about money itself, so many discussions about MMT revolve around differing definitions of what money actually is. While most people understand that money isn’t simply the cash in circulation, many people still think of money as a finite thing. Governments can issue as much money as they like. However, the difficulty is that this doesn’t necessarily add to the total goods and services available in a country. (Obviously, it can have some effect. For example, a government subsidy for a factory will potentially increase both demand because workers are now employed and supply of whatever it is the factory is making. But for convenience sake, let’s say that increasing the “money” in the community has no effect on the goods and services created.) If a government increases the money supply significantly this will cause inflation because it adds to the demand because there is more purchasing power without increasing the amount of goods and services.
Now, when inflation is high, you’re better off buying now because your money won’t purchase as much in the future. In order to encourage people to save AND because lots of people will want to be borrowing money during times of inflation, interest rates are high. Think about it logically. If I want to buy a car and it’s twenty thousand this year, but it’ll be twenty five next year, if I’m offered finance at no interest, I’d be silly to say, “No thanks, I’ll save up.” Even at ten percent interest, I’ve saved money by purchasing early.
Of course, the problem with the current housing market is that, while interest rates are low because of a soft economy elsewhere, there are rising prices in the housing market itself. This means that people have a strong incentive to get into the market because they expect the price to be higher in the future, but they don’t have the disincentive of high interest rates.
When it comes to MMT, interest will be a by-product of any inflation caused when the balance between demand and supply is thrown out of whack.

Anyone with a better knowledge of economics is welcome to correct my inaccuracies.

totaramJanuary 15, 2018 at 10:47 am

Matters Not: Disbelief in MMT is rooted in “Gold standard thinking”, which continues even today, because people haven’t got used to the idea that we have a fiat currency. Even now you meet people who think the present currency is backed by gold.

The “conspiracy” is amongst people who deliberately keep using the old thinking even though they know it no longer holds. As you know, there are whole “think tanks” set up to propagate these views.

There are others who are so seriously brainwashed that they cannot accept the fact that all they believed is wrong. This is the characteristic of the religiously deluded as well.

diannaartJanuary 15, 2018 at 12:46 pm

Thank you, Rossleigh

I do understand MMT up to and including what you have taken the time to tell me. The most salient point being:

When it comes to MMT, interest will be a by-product of any inflation caused when the balance between demand and supply is thrown out of whack.

My problem is, if we adopt MMT, I see interest as unnecessary, simply an action which increases complexity and a little bit dodgy – being open to manipulation. I also believe inflation can be manipulated by government intervention – either withholding money or releasing money into the the economy.

I do hope I am making myself clear.

🙂

John KellyJanuary 15, 2018 at 2:47 pm

RANTERULZE, yes, banks create money when they lend. They do that by depositing the money into an account. But, they can only do this with the aid of the central bank who credits their reserve account, after the fact, with the funds.

Gold DiggerJanuary 15, 2018 at 3:06 pm

A loan deposited back into a bank, say via a sale, can be loaned again without additional reserve bank credits.

John KellyJanuary 15, 2018 at 3:07 pm

DIANNAART, interest works in an MMT world no differently from how it works now. The RBA sets a target rate (currently 1.5%). This becomes the wholesale cost of money banks charge each other, sometimes called the overnight rate. From that the banks determine their retail rate they charge for mortgages etc.
On the sale of bonds, the government decides on the rate it issues bonds (called the yield). They pay interest twice yearly from the same source they pay everything else (thin air).
Because we have a fiat currency system, we are already operating in an MMT world. We are just not using it the way it should be used. We should be maximising our available resources, not pandering to companies with tax concessions.
Interest is a made-up thing, but it is the cost of money and will be with us forever.

John KellyJanuary 15, 2018 at 3:14 pm

IGGY648, that article is typical of the misinformation that pervades the media. Chinese interests may indeed own 20% of Australian Bonds on issue, but as those bonds are sold in $AUD, it really doesn’t matter who owns them. They can always be repaid. In fact, they sit in an account in the name of the bondholder at the RBA. They are not spent. ‘Where did they get the money for that,’ you ask. Who knows, who cares. Wherever it came from, it had to be converted into $AUD before they could buy the bonds. The risk is all theirs. It is most likely a combination of rich Chinese looking for a safe place to park their money and some government investment.

totaramJanuary 15, 2018 at 4:57 pm

diannaart: Interest also comes into the picture when private banks lend money. John Kelly hasn’t touched upon that, because it is a totally different game. However, if banks were not paid interest they wouldn’t lend money. You can see already that they charge higher rates than the RBA rate, under the plea that they “have to borrow overseas at higher rates”. How true this is, and why,(when they can borrow from the RBA at a lower rate apparently) will only emerge if we have a proper RC into the banking sector. Or perhaps someone with a deeper knowledge of the banking sector will explain this.

diannaartJanuary 15, 2018 at 6:01 pm

John and Totaram

Thank you.

Pretty much what I was thinking, then and, as you say, a very warped version of MMT has been in operation since the dollar was set free from any reality based value. I can understand interest as a tool to recoup expenses – as I stated previously.

Indeed the entire finance sector has been so compromised and is so convoluted that certain types of minds are paid extravagant sums to wade though the mess for their clients/employers. Not a stable or equitable system – it has been sculpted to fit the needs of only a few. The ponzi scheme of all ponzi schemes.

I do not see a way out – apart from some kind of apocalypse, where we manage to keep much of our knowledge – enough to start over and create something useful for everyone.

And let there be the wealthy, I do not have a problem with wealth, I just have a problem striving in a world simply to keep a roof over my head while others possess more wealth than they would need for several lifetimes and, of course those for whom my western lifestyle would appear more than comfortable. While people die of malnutrition… when there is obviously sufficiency for all… I become very despondent..

iggy648January 16, 2018 at 7:48 am

John, what I was hinting at, is that if the Chinese government wants to buy Australian bonds, or anything else, they probably don’t get the money by taxing peasants more, they simply print it, (or whatever the digital equivalent is).

John ArmourJanuary 16, 2018 at 5:44 pm

“Furthermore, I spoke face-to-face with a former treasurer (ALP) and not surprisingly he though it was rubbish…”

Hi Marcus,

I had a similar conversation with a “former (ALP) treasurer” who responded in much the same way.

I think that was about 3 years ago.

I’d be quite disappointed if your conversation was recent; I had formed an opinion that he’d since seen the light, though not necessarily embracing the full insights of MMT.

MarcusJanuary 16, 2018 at 7:26 pm

John, sad to say the discussion was August 2017. Mind you his (and ALP in general) understanding of economics far ahead of the supposedly “better” economic managers of the LNP who have no clue AT ALL. I am actively campaigning in one party for change to their economic platform, but the ALP-LNP Duopoly are just hopeless.

ranterulzeJanuary 16, 2018 at 8:01 pm

Thanks John for the explanation re: bank lending. That highlights the essential position of the Reserve Bank I guess. Great discussion here

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James GraftonJanuary 14, 2018 at 11:40 am

Well done John. Now if we can only get the pollies to understand. #MMT
Terry2January 14, 2018 at 11:57 am

Probably around 2025 and maybe before a politician will tell us in sombre tones that after all the years of tax cuts – which we know are good right ? – after corporations having weasled their way out of paying any tax, after high wealth individuals having turned themselves into corporations to minimise their taxes, after a Prime Minister has convinced us that salting away money in the Caymand Islands is a good thing because it’s legal, after our education system has all but collapsed because we gave it to private corporations and church businesses to run, after our health system has been privatised because it’s more efficient that way, after our TAFE system has been finally and totally gutted and we have to turn to overseas countries to provide us with tradesmen and women because we failed to train or own, after we finally realize that offshoring jobs was a false economy, after we realize that supporting an automotive industry was necessary to encourage technical innovation and skills training, after we realize that our mineral wealth has been sold off and we don’t even have a steel making industry.

This sombre politician will tell us that we are now a third world country and we are F***ed because we failed to collect taxes to fund our essential services and infrastructure and we fell for the contagious economic flim-flam of people like Donald Trump and Malcolm Turnbull.
Ken ButlerJanuary 14, 2018 at 11:59 am

Yes. Well done.
But this article represents conceptually only a glass half full. The average punter or even oily politician will not move beyond the present conventional perception of national economics until you explain clearly and convincingly what role taxation plays in the economy of a sovereign nation.
Looking forward to Part 2.
Jack RussellJanuary 14, 2018 at 12:00 pm

Short, concise, accurate, and using the small words necessary for those I hand it to, once I’ve printed off a few copies. Some family members NEED to read it. Then, hopefully, talk about it to others – as well as sign up to AIMN.

I hope the follow-up tax explainer is in the pipeline … :))

John, thank you!
townsvilleblogJanuary 14, 2018 at 12:14 pm

In essence it is an easy question to answer, though a fair bit of political courage is required, the answer is “we will tax the multinational corporations a ‘fair share’ of taxation” if that ‘fair share’ were 15% as per trump, on their multibillion dollar incomes replacing the current situation of them paying naught, then we could see new money to upgrade our aging WW2 infrastructure that we have in a large part of Australia.

The trouble then is finding a leader who will not only make that statement but also follow through and make bloody sure that it happens. There is no good reason why low to middle income earners should pay for everything while these parasites and the idle rich go un-taxed.If I am mistaken, I welcome an argument to the contrary.
Allan RichardsonJanuary 14, 2018 at 12:18 pm

Thanks, John. Very well explained. Of course the difficulty would be explaining to the politicians that Fiat is not only a car.

Oh, and what Terry2 said.
AorticJanuary 14, 2018 at 1:11 pm

Well done John spot on. I am always amazed at how in Parliament they generally yell figures, percentages stats et al and unless guys like you and others likeminded take the time to analyse and discuss the rest of us who are either too busy or too lazy or disconnected to try, have to accept them for what they are. More power to your mind and pen.
Don A KellyJanuary 14, 2018 at 1:19 pm

Excellent article John. Very well explained. As for the Government budget, they don’t have one. They have a fiscal position. All politicians talk about budget repair or balancing the budget, just like a household or firm. We must earn, borrow, sell something or run down savings in order to spend. The government doesn’t earn anything yet they can always spend. As Professor of Economics at Adelaide University, Philip Lawn explains it; There is a ‘black hole’ in Canberra, it’s called a bottomless pit of Australian dollars. The Federal Government can buy what ever they want, whenever they want, unlike you or I, or state and local governments who rely on funding from the Feds.
economicreformJanuary 14, 2018 at 1:47 pm

Ultimately the problem does not come from the pollies .. it lies with those orthodox (neoclassical) economists who are in the grip of an ideology known as neoliberalism, and who advise both pollies and government departments. Unfortunately these economists also have ready access to the mass media.
Don A KellyJanuary 14, 2018 at 1:54 pm

Alan Greenspan is an American Economist who served as chairman of the Federal Reserve Bank of the U.S. from 1987 to 2006.
During his time as Chairman he was called as an expert witness during a U.S.Senate enquiry into the sustainability of Social Security Funding by the U.S.Federal Government.
Under oath, Alan Greenspan stated, “It doesn’t matter whether it is a question about Social Security, it could be about Defence spending, it could be about Education spending, it could be about Infrastructure spending, it could be about Student Debt, it could be about anything. What matters – there is nothing to prevent the Federal Government creating as much money as it wants”. The Federal Government has no financial constraints whatsoever. But the Federal Government total spending should only equal the productive capacity of the economy. Any further spending will not lead to any further output because when the productive capacity of the economy is reached, all resources are fully employed, including people who are willing to work. Any further spending will just cause inflation.
diannaartJanuary 14, 2018 at 3:09 pm

John I believe you have described the Labor politician’s response to “where is the money?” perfectly.

However the LNP is slightly different, when asked about a project’s funding we get to hear a diatribe of Labor’s failings of sufficient duration to obscure the original question.
Ricardo29January 14, 2018 at 3:23 pm

I too look forward to part 2, because on my reading, the government doesn’t need taxation and if that’s the case, why am I paying tax ( or in realty not being credited with all of the money I am notionally being paid and, further, why is it so important that these tax avoiding multinationals are so vilified as surely they don’t have to pay tax either?
Matters NotJanuary 14, 2018 at 3:34 pm

Here’s a link to a number of economists that support this theme:

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan

The there’s:

In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.” Peter Zeihan, Vice President of Analysis for STRATFOR

Followed by:

In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.” Erwan Mahe, European asset allocation and options strategies adviser

Supported by:

There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.” Mike Norman, Chief Economist for John Thomas Financial

And:

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.” Federal Reserve Bank of St. Louis

But there are dangers:

Mind you, that doesn’t mean there might not be other economic or political consequences. Inflation and currency depreciation, for example, are possibilities. Also from Dr. Wray:
“
“Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.”

And there are political consequence because most voters simply don’t believe it. Therefore politicians, in general. won’t go near it. The scare campaigns win easily.

https://www.forbes.com/sites/johntharvey/2012/09/10/impossible-to-default/#25c775bb1180
martin connollyJanuary 14, 2018 at 4:15 pm

This is exactly what MMT needs to cut through and begin reframing the entire economic debate.
It will need followup by others should it gain MSM traction, and it is a wonderfully simple start.
Some politicians know of MMT; some even give it credence.
But noone wants to speak the word lest the clothes they have worn through the entire “debt and deficit” farce are suddenly invisible.
guestJanuary 14, 2018 at 4:26 pm

Can someone please explain how, with all this backroom MMT stuff around, how Whitlam was sacked when finances were withheld and money was sought from elsewhere? How did Whitlam run out of money? And the government does not need to raise money.

And we have had a great deal of talk about how many millions of dollars in interest have been paid out each year for debt accrued over time and how the Coalition has doubled the debt in 4 years. All lies? Because according to MMT we can never run out of money.

So there are “resources related limits to spending”. Is that why we need to keep on selling and burning coal even if it means cooking the planet?
PhilJanuary 14, 2018 at 5:12 pm

I’ve lived three score years and nine under the myth system of monetary policy i.e. that government spending comes from taxation and therefore if you want the government to spend more on say, public education, well then government will have to tax you more. There cop that.

I never believed that myth because I never believe what a government tells me – thats been a matter of personal principle all my adult life – but I had no alternative monetary model to consider until recent years the MMT stuff came along. It makes eminent sense. It also makes me angry that the con has been extended for so long.

No government of the pathologically ideological conservative bent that we are saddled with in Australia is going to demythologise the economics myth they use so effectively to con the public, and of course the same household budget/taxation myth is used and abused by the MSM to propagandise in favour of the gods of conservatism that they serve.
HarryJanuary 14, 2018 at 6:06 pm

There are any number of smokescreens that have been put in place to obscure the facts of economic life for sovereign governments that John Kelly has explained so simply. The federal “budget”, the RBA as a supposedly “independent” entity are all part of either a deliberate deception or ideology trumping sound economics.

The complete explanation he is working on could be used as a template to counter the inevitable and relentless attacks on the mainstream version of economic reality. Progressive politicians must have a strong grasp of the fundamentals of federal government capabilities to withstand such attacks and attempts to ridicule. I have encountered this myself and I am not a politician. Zimbabwe, Weimar Republic, Argentina and lately, Venezuela, have all been used to ridicule and dismiss the challenge to orthodox economics that is presented as akin to holy writ.

The implications are not just academic: they are potentially transformative as it implies that sovereign governments can “afford” to utilise available resources that are “for sale” for public purpose. We can properly resource education, health, public transport, housing and the environment. Unemployment can be virtually eliminated and we can ensure that those who cannot work or are too old to work can be decently supported.

I look forward to the next instalment John!
Glenn KJanuary 14, 2018 at 6:15 pm

taxation is a means to reduce the “pool” of money in the economy. It is a lever the government uses to control currency value (and inflation among other things), and importantly distribute currency throughout elements of the economy. reduction and distribution are the important functions of taxation. I believe. I look forward to part 2 to see if my understanding is correct. 🙂
HarryJanuary 14, 2018 at 6:27 pm

Guest: “And we have had a great deal of talk about how many millions of dollars in interest have been paid out each year for debt accrued over time and how the Coalition has doubled the debt in 4 years. All lies? Because according to MMT we can never run out of money”.

Yes they are essentially lies, we are being bombarded with economic bullshit to be blunt. You should be aware that a myriad of economic and political smokescreens have been put in place over the years to obscure the essential facts of modern economics. By convention rather than need the federal government issues “debt” (bonds actually) to cover any spending over and above taxation received. It need not do so. there is no genuinely good reason for selling government bonds at all, if you are a monetary sovereign government. Indeed, it would be better to convert them into term deposits at the central bank, and to regard them as a form of money.

It would pay you and others to carefully read the following article. John Kelly will probably explain some of the concepts more simply and I apologise it it preempts John’s coming article.

https://era-blog.com/2016/12/05/paying-for-public-services-in-a-monetary-sovereign-state/
Andrew SmithJanuary 14, 2018 at 6:46 pm

An observation of Australian society and the electorate makes one conclude that politicians and media have been encouraging focus upon financial ‘costs’ without explaining or promoting broad societal benefits. How is this possible? Low levels of financial, numerical and data literacy with focus upon the self and not society. Meanwhile too many know the cost or price of something but not the (broader) ‘value’?
John KellyJanuary 14, 2018 at 6:51 pm

GUEST, The Whitlam era of the early 1970s operated under what we called the Gold Standard. That meant a government could not spend beyond the limits of its gold reserves. For more on this, google the Bretton Woods agreement. However, that is not entirely relevant to what happened with Whitlam. The Whitlam government never ran out of money. It was the opposition (Liberal Party) who blocked supply in 1975 preventing money bills from being passed. It was a blatant grab for power. The government sought foreign money, not to overcome the blocked supply, but to finance some major infrastructure programs. When Whitlam was dismissed, he left zero debt.
In 1983, under the Hawke/Keating Government, we adopted a fiat currency system (12 years after the US), which took us off the gold standard and meant our currency had no intrinsic value. It survives on nothing more than confidence in our ability to produce goods and services. Under a fiat currency system, our government is not constrained in its spending by any commodity. It is only constrained by available resources.
In reality, we have no debt. We issue bonds in $A, similarly to companies issuing shares. The money received for those bonds is not spent. It sits in accounts held by the bond holders at the RBA (currently around $600 billion). Interest is paid twice yearly with money created out of thin air (or the click of a computer). So long as we never seek finance in a foreign currency, we can always create money to pay our bills. Yes, you have been deceived, probably all your life. But don’t feel bad about it. We all have.
MarcusJanuary 14, 2018 at 8:03 pm

Hello John,

I am a passionate advocate for MMT since discovering it around 18 months ago. I have great enjoyed your articles on the subject and would actually like to catch up with you for a discussion around a few subjects. However I thought you would find it interesting that I have been engaging with several political figures about supposed “balanced” budgets, fiat currency, and being issuer of currency as opposed to the “user”. On one occasion while discussion the subject with my local federal member (ALP) I articulated the Government being the currency issuer and therefore literally cannot run out of money…and was nearly knocked over when he said he AGREED, but he went on to say that he would be crucified if he publicly talked about and the party was NOT interested in the subject. Furthermore, I spoke face-to-face with a former treasurer (ALP) and not surprisingly he though it was rubbish…but interestingly did say that Governments should spend in difficult economic times, and take back during boom times, and his exact words were “but balance the “budget” over the business cycle (whatever the hell that means…well I did get what he meant, but personally its a BS answer)”

Anyway be assured there are more of us lobbying for the truth than you may realise but it is a very slow path to enlightenment. Hopefully I will get the chance to meet you face to face, but in the meantime, keep it up, many more are hearing and listening every day.

Regards

Marcus
guestJanuary 14, 2018 at 8:17 pm

So, the media and financial news sources are all either ignorant of MMT principles or are complicit with the deceit which ignores what is really happening?
Alan LuchettiJanuary 14, 2018 at 9:18 pm

“The annual Appropriation Acts detail annual appropriations provided to Commonwealth entities. The Acts take precedence over details in CBMS, Portfolio Budget Statements/Portfolio Additional Estimates Statements and annual reports:”

The Dept of Finance quietly admits the truth. No matter what the numbers are in the accounts it maintains, what can be spent into the economy is what Parliament enacts. If “consolidated revenue” doesn’t measure up, the spending can happen anyway.

https://www.finance.gov.au/…/guide-to-appropriations/
JaquixJanuary 14, 2018 at 9:31 pm

Good format to make this easy reading! Well done. Look forward to next instalment..
Alan LuchettiJanuary 14, 2018 at 9:37 pm

Guest, a lot of academic and professional reputations have been built since 1971 (US) and 1983 (Aus) on gold standard era macroeconomics. How many august worthies and doyens of the financial media would you expect to recant? How many of their students and proteges would have a clue? How many politicians would risk their misconceived derision?

And isn’t “spending depends on revenue” a lovely myth if you want to confer or receive a privatisation or if you just ideologically favour small government?
Matters NotJanuary 14, 2018 at 10:11 pm

Great link Alan Luchetti @ 9:18 pm . But only if you have the faith and know what to look for!

Otherwise. LOL.

Perhaps we might consider that MMT is a theory of how our financial system actually works and (implied) how it might work under certain conditions. (Lots of assumptions involved.) To speak in terms of truth, is a stretch of some proportions, because truth is not a concept normally employed in the social sciences. Indeed it’s not a concept advanced in the hard sciences. Yes mathematics and logic have strong claims to truth but the social science – less so.

Perhaps MMT disbelief is rooted in a long term conspiracy. But maybe not. Perhaps the belief is all down to a religion? A glance at history shows that false prophets are many and varied.
iggy648January 15, 2018 at 6:35 am

China owns about 20% of Australian government debt. Where did they get the money for that? They must tax their workers really heavily.

http://www.abc.net.au/news/2015-10-01/chinese-ownership-of-australian-debt-much-higher-than-thought/6821346
ranterulzeJanuary 15, 2018 at 8:25 am

Clear explanation, looking forward to “taxation” chapter. But – don’t commercial banks produce money? Just read Ann Pettifor’s book -The Production of Money: How to Break the Power of Bankers – and don’t quite get how the two aspects fit together, Govt and private sector. She says Governments only create 3-5% of sovereign money. I do see how capitalism requires prior and continuing creation of credit, that’s basic Marxism a-la David Harvey
MarcusJanuary 15, 2018 at 9:00 am

Matters Not, putting aside the name MMT is less a theory than a description of how the monetary system works…with particular insight in the case of sovereign nations with a fiat currency and Government as monopoly ‘issuer’ of the currency.

Furthermore, rather than ‘assumptions’ it would be more accurate to say that MMT recognises various environmental factors and understands the ramifications of these on the way a monetary system operates. Change those factors, and MMT tells you the implications. MMT accurately describes the monetary system, and in that respect is ideology agnostic…and certainly cannot be described as a ‘religion’.
MarcusJanuary 15, 2018 at 9:11 am

For those that have asked the obvious follow-on question: ‘why pay taxes’ then if they are not needed to fund ‘spending’?

I don’t have a lot of time right now but a quick overview. Taxation plays 4 key roles in the financial system and is a fundamental to a fiat currency system.
1. Taxation supports the ‘value’ of money. In simple terms without the requirement to pay your taxes in Australian dollars, why would you need AUD? You don’t.
2. Taxation plays a key role in regulating the money supply. In simple terms Govt ‘spending’ creates money and ‘taxation’ takes money out of circulation and destroys money…which helps manage inflation amongst other things.
3. Taxation redistributes wealth. An excellent example of this is estate tax, but obviously there are many more.
4. Taxation helps guide desired behaviour. For example parking fees, alcohol tax, tobacco tax, etc.

That covers the basics for the moment.

Marcus
Gold DiggerJanuary 15, 2018 at 9:18 am

The difference between money and fiat currency is, money holds its value over long periods of time. Fiat currencies do not and is why they need to keep expanding the currency supply, the formal definition of inflation and is the theft by stealth of our time and effort.
A coconut has more intrinsic value.
diannaartJanuary 15, 2018 at 9:35 am

John

I have a basic question requiring a clear and succinct answer. Before you tell me to read (again) any of Mitchell’s lengthy and wordy works on MMT, I am asking special dispensation for being ill and finding focus elusive. Besides I don’t think I am “the only gay in the village”.

All I want to know is how interest works in MMT. Because I see interest as a rather ‘made-up’ thing – apart from covering minimal costs. Pretend you are speaking to a precocious child with the flu.

Thank you

D
RossleighJanuary 15, 2018 at 9:55 am

Ok, diannart. This is a simplification and I’m sure that there a few things that people can nitpick but basically:

There’s a lot of misconceptions about money itself, so many discussions about MMT revolve around differing definitions of what money actually is. While most people understand that money isn’t simply the cash in circulation, many people still think of money as a finite thing. Governments can issue as much money as they like. However, the difficulty is that this doesn’t necessarily add to the total goods and services available in a country. (Obviously, it can have some effect. For example, a government subsidy for a factory will potentially increase both demand because workers are now employed and supply of whatever it is the factory is making. But for convenience sake, let’s say that increasing the “money” in the community has no effect on the goods and services created.) If a government increases the money supply significantly this will cause inflation because it adds to the demand because there is more purchasing power without increasing the amount of goods and services.
Now, when inflation is high, you’re better off buying now because your money won’t purchase as much in the future. In order to encourage people to save AND because lots of people will want to be borrowing money during times of inflation, interest rates are high. Think about it logically. If I want to buy a car and it’s twenty thousand this year, but it’ll be twenty five next year, if I’m offered finance at no interest, I’d be silly to say, “No thanks, I’ll save up.” Even at ten percent interest, I’ve saved money by purchasing early.
Of course, the problem with the current housing market is that, while interest rates are low because of a soft economy elsewhere, there are rising prices in the housing market itself. This means that people have a strong incentive to get into the market because they expect the price to be higher in the future, but they don’t have the disincentive of high interest rates.
When it comes to MMT, interest will be a by-product of any inflation caused when the balance between demand and supply is thrown out of whack.

Anyone with a better knowledge of economics is welcome to correct my inaccuracies.
totaramJanuary 15, 2018 at 10:47 am

Matters Not: Disbelief in MMT is rooted in “Gold standard thinking”, which continues even today, because people haven’t got used to the idea that we have a fiat currency. Even now you meet people who think the present currency is backed by gold.

The “conspiracy” is amongst people who deliberately keep using the old thinking even though they know it no longer holds. As you know, there are whole “think tanks” set up to propagate these views.

There are others who are so seriously brainwashed that they cannot accept the fact that all they believed is wrong. This is the characteristic of the religiously deluded as well.
diannaartJanuary 15, 2018 at 12:46 pm

Thank you, Rossleigh

I do understand MMT up to and including what you have taken the time to tell me. The most salient point being:

When it comes to MMT, interest will be a by-product of any inflation caused when the balance between demand and supply is thrown out of whack.

My problem is, if we adopt MMT, I see interest as unnecessary, simply an action which increases complexity and a little bit dodgy – being open to manipulation. I also believe inflation can be manipulated by government intervention – either withholding money or releasing money into the the economy.

I do hope I am making myself clear.

🙂
John KellyJanuary 15, 2018 at 2:47 pm

RANTERULZE, yes, banks create money when they lend. They do that by depositing the money into an account. But, they can only do this with the aid of the central bank who credits their reserve account, after the fact, with the funds.
Gold DiggerJanuary 15, 2018 at 3:06 pm

A loan deposited back into a bank, say via a sale, can be loaned again without additional reserve bank credits.
John KellyJanuary 15, 2018 at 3:07 pm

DIANNAART, interest works in an MMT world no differently from how it works now. The RBA sets a target rate (currently 1.5%). This becomes the wholesale cost of money banks charge each other, sometimes called the overnight rate. From that the banks determine their retail rate they charge for mortgages etc.
On the sale of bonds, the government decides on the rate it issues bonds (called the yield). They pay interest twice yearly from the same source they pay everything else (thin air).
Because we have a fiat currency system, we are already operating in an MMT world. We are just not using it the way it should be used. We should be maximising our available resources, not pandering to companies with tax concessions.
Interest is a made-up thing, but it is the cost of money and will be with us forever.
John KellyJanuary 15, 2018 at 3:14 pm

IGGY648, that article is typical of the misinformation that pervades the media. Chinese interests may indeed own 20% of Australian Bonds on issue, but as those bonds are sold in $AUD, it really doesn’t matter who owns them. They can always be repaid. In fact, they sit in an account in the name of the bondholder at the RBA. They are not spent. ‘Where did they get the money for that,’ you ask. Who knows, who cares. Wherever it came from, it had to be converted into $AUD before they could buy the bonds. The risk is all theirs. It is most likely a combination of rich Chinese looking for a safe place to park their money and some government investment.
totaramJanuary 15, 2018 at 4:57 pm

diannaart: Interest also comes into the picture when private banks lend money. John Kelly hasn’t touched upon that, because it is a totally different game. However, if banks were not paid interest they wouldn’t lend money. You can see already that they charge higher rates than the RBA rate, under the plea that they “have to borrow overseas at higher rates”. How true this is, and why,(when they can borrow from the RBA at a lower rate apparently) will only emerge if we have a proper RC into the banking sector. Or perhaps someone with a deeper knowledge of the banking sector will explain this.
diannaartJanuary 15, 2018 at 6:01 pm

John and Totaram

Thank you.

Pretty much what I was thinking, then and, as you say, a very warped version of MMT has been in operation since the dollar was set free from any reality based value. I can understand interest as a tool to recoup expenses – as I stated previously.

Indeed the entire finance sector has been so compromised and is so convoluted that certain types of minds are paid extravagant sums to wade though the mess for their clients/employers. Not a stable or equitable system – it has been sculpted to fit the needs of only a few. The ponzi scheme of all ponzi schemes.

I do not see a way out – apart from some kind of apocalypse, where we manage to keep much of our knowledge – enough to start over and create something useful for everyone.

And let there be the wealthy, I do not have a problem with wealth, I just have a problem striving in a world simply to keep a roof over my head while others possess more wealth than they would need for several lifetimes and, of course those for whom my western lifestyle would appear more than comfortable. While people die of malnutrition… when there is obviously sufficiency for all… I become very despondent..
iggy648January 16, 2018 at 7:48 am

John, what I was hinting at, is that if the Chinese government wants to buy Australian bonds, or anything else, they probably don’t get the money by taxing peasants more, they simply print it, (or whatever the digital equivalent is).
John ArmourJanuary 16, 2018 at 5:44 pm

“Furthermore, I spoke face-to-face with a former treasurer (ALP) and not surprisingly he though it was rubbish…”

Hi Marcus,

I had a similar conversation with a “former (ALP) treasurer” who responded in much the same way.

I think that was about 3 years ago.

I’d be quite disappointed if your conversation was recent; I had formed an opinion that he’d since seen the light, though not necessarily embracing the full insights of MMT.
MarcusJanuary 16, 2018 at 7:26 pm

John, sad to say the discussion was August 2017. Mind you his (and ALP in general) understanding of economics far ahead of the supposedly “better” economic managers of the LNP who have no clue AT ALL. I am actively campaigning in one party for change to their economic platform, but the ALP-LNP Duopoly are just hopeless.
ranterulzeJanuary 16, 2018 at 8:01 pm

Thanks John for the explanation re: bank lending. That highlights the essential position of the Reserve Bank I guess. Great discussion here
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