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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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WEALTH AND POWER KEEP ON WINNING

As a committed advocate of Modern Monetary Theory and one who thinks it should be renamed, Modern Monetary System, for reasons I will explain, there have been occasions when I have felt a sense of futility, trying to explain something so simple, but finding myself unable to convince even those who should know better.

Firstly, MMT should be referred to as MMS because it is no longer a theory. It is the way our fiat economy was set up to operate and does operate today. Its implementation took place in 1983 and the fact that it has never been used as it was intended, does not mean it is theoretical.

The fact that we still fear deficit spending, strive to balance budgets, lust for surpluses and consider bond issues as debt, is a hangover from a past era, that of the gold standard.

The fact that we fail to fully utilise our available resources, consider 5% unemployment near full employment, shy away from providing the necessary infrastructure for our industries and neglect our national health and education needs, when each of these represents real jobs and growth opportunities, is a travesty of mismanagement and failed leadership.

Last night’s Q&A which highlighted the difficulties experienced by those reliant on the NDIS, gave us a clear indicator that the government is not even spending its own budget allocation on this vital piece of infrastructure. The NBN rollout is just another example of this failed leadership.

And it seems that no matter how clear and concise we are in explaining the economic reality of MMT, successive governments still cling to the gold standard mindset. Why?

Michael Pascoe’s article in ‘The New Daily’ today, sheds some light on the truth of the matter. In discussing the latest on the never-ending tax debate, something the entire country is heartily sick of hearing, he points to what the government is really doing in pursuing this matter.

He writes, “In the short term, it’s a formula in keeping with the Institute of Public Affairs’ prescription for a new Australia – an Australia with less government, richer rich and fewer controls on markets – especially the labour market.”

He goes on to say, “The IPA has emerged as not just the favoured right-wing think tank, but the government’s guiding light. It is too tempting to not again repeat one of John Kenneth Galbraith’s many golden quotes:
“The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.””

We have known from the beginning of the Howard years, and perhaps from some of Paul Keating’s decisions, that it is the rich who run the country. They run it for the rich and they get the best results by supporting conservative leaning parties and their politicians.

Trying to establish a tax system, using confected figures to present fairness and equality, as Scott Morrison has done suggesting average workers are expected to earn six figure sums in a few years’ time, displays a height of arrogance as bold as his government’s self-serving aspirations.

It is a disgrace. But, we know that if you tell a lie, big enough and often enough, people who don’t know any better, will be inclined to believe it. And therein lies the difficulty with people like me who are trying to explain MMT to the average person in the street. How could anything so simple be right. It must be more complicated than that, surely. No, actually it isn’t.

As Michael Pascoe says so eloquently in his article, “In the longer term, flattening our progressive tax system is a tiny part of one of history’s repeating cycles: wealth and power being used to entrench and extend wealth and power until it becomes unsupportable.”

Notwithstanding the difficulties of explaining MMT, there is progress. But it is painfully slow. Much like the NBN. However, one day we will get there, even if it is only a partial implementation. The alternative is the status quo, which, for those who haven’t yet worked it out, is all about keeping the average worker at arm’s length from the rich.

And that really is an unsustainable option.

Day to Day Politics: A New Way Forward to a Better society. (A Labor perspective) Part 2.

Tuesday 3 April 2018

I have had many comments both on Facebook and The AIMN.  As they have come in I have placed them in the category I think applicable. Some categories have had none at all and this is your last opportunity to add your thoughts or correct a wrong.

I haven’t named every individual contributor as I didn’t see the necessity for it. Some categories have been eliminated because I have inadvertently duplicated them.

Once I have finalised all the comments I will get on with the writing of “A new way forward to a better society” (A Labor perspective.)

1 A need to divorce Labor from the negativity of institutionalised politics.

“It must turn its attention to the young and have the courage to ask of them that they should go beyond personal desire and aspiration and accomplish not the trivial, but greatness. That they should not allow the morality they have inherited from good folk to be corrupted by the immorality of right-wing political indoctrination.”

“Look at ways to reduce the military budget.”

“If the Labor party is to convince the lost voters who have left our democracy at the last election to return (and I am assuming that most would be Labor), it has to turn its ideology on its head, re-examine it, and then reintroduce it as an enlightenment, the opposite to the tea party politics that conservatism has descended into.” 

“Labor has taken a small but important first step in allowing a greater say in the election of its leader, however, it still has a reform mountain to climb.” 

“Labor has to raise itself above and overcome its preoccupation with faction power struggles. These struggles preoccupy and erode the ability to be creative.”

“Labor needs to promote the principle of transparency by advocating things like no advertising in the final month of an election campaign, and policies and costing submitted in the same time frame.”

“Reinstate the power of trade unions to protect wages and conditions possibly including a rule that only members can benefit from negotiated conditions.”

“More say to members in electing Labor’s leader.”

“Reinforce real secularism with regard to religion.”

“A rejection of neo-liberalism with an emphasis on new economics.” 

“Economic development through higher education.”

“Modern Monetary Principals, including educating Parliament and voters. Macroeconomic Principals (National Accounts).”

“Create a retail banking arm of the Reserve Bank to create real competition for the banks.”

“Introduce real whistle-blower protections.” 

“One item I feel is missing, and I am not sure how to phrase it, is to restore science to its proper place in reasoned argument and reverse the current denigration and re-labeling of anything that goes against the arguments of the right as ‘fake’.”

“Phil has pretty much explained the sad reality. John, your perspective on what we need to do comes from the vantage point of believing in democratic values whereas most people have been trained to follow the profit principle values.”

There is a link to Phil’s comments later.

“Phil pretty much sums up the sad reality of humanity.”

“You can add reform of the Senate into this mix, and perhaps some form of citizen-initiated, referendum.”

“It has always been the creative people who have led the revolution of society, life experienced persons linked with enthusiastic youngsters who are prepared to challenge the establishment and force a change, Remember, as Dylan said, ‘Times they are a-changin’’.”

“Free market capitalism or neoliberalism isn’t a unifying model of all interaction on this planet, it’s not the economic equivalent of the ‘Grand Unifying Theory’ in physics, capitalism and its new incarnation neoliberalism is just an awkward description of one minor element of human interaction on this planet.”

“And particularly by the narcissistic megalomaniacs (brilliantly exemplified by Trump) who bully their role-playing way to the top of the corporate heap.”

“Capitalism has indeed come to be governance by ‘non-natural but legal persons’ (corporations, institutions, and bureaucracies).”

“Dismantle neoliberalism and managerialism.”

“John this is the most accessible MMT video that could change the game if given enough exposure.”

2  Create new ways of purposeful participation in the body politic.

“Besides internal reform that engages its members, it needs to look at ways of opening our democracy to new ways of doing politics: ways that engage those that are in a political malaise so that they feel part of the decision-making process again.” 

“I am looking forward to the ALP national conference regarding democratisation within the party.”

3  A two-year constitutional review toward a full-time sitting committee of review.

This piece by Phil argues the futility of trying to change the constitution.

“I cannot fathom why we have States.” 

“Religion is regarded by the common people as true, by the wise as false, and by authorities as useful.” 

4 On this subject; A most enlightened read.

“The Constitution is interpreted and operates in two ways: literally – some sections of the Constitution are taken literally and followed to the letter; conventionally – other sections operate through a series of ‘constitutional conventions’ which vest real power in the hands of elected politicians.”

5  The need for a wider range of social experience when pre-selecting candidates.

No comments.

6  An independent speaker heading an Independent Speaker’s Office with clout:

“Penalties for Ministers who miss lead Parliament … maybe, stood down for a significant period.”

“Abolition of the Lord’s Prayer at the beginning of each Parliamentary sitting day.”

“During elections, full disclosure on advertisements from industries or individuals.”

“Drastically reduce the amount of donation allowable which need not be disclosed.”

“Oversee MP’s expenses; political donations revealed in real-time.”

“A fact-checking offshoot.”

“Lobbyists need to be registered and Government Ministers have open diaries in relation to meetings with lobbyists.”

“A review of politician entitlements.”

“Publishing the politician’s diary would show how hard they work where, when, how long, who with, why and what resulted?”

“A review of the purpose and function of Question Time, perhaps by former Speakers; real consequences for lying to Parliament.”

“A serious cap on all party political donations; one for day-to-day general administration and one for electoral purposes, serious fines and penalties for breaches, lies, holding or receiving from offshore accounts (direct or indirectly) and overseas organisations.”  

7  An independent review of Australia’s voting system.

No comments.

8  The teaching of politics in year 12 with the possibility of allowing 16 year-olds to vote if registered at high school and completing the politics course.

“The curriculum would need to be written by, or have input from independent economists.”

9  Fixed 4-year terms with a fixed date.

No comments.

10  A review of free speech in an enlightened society.

No comments.

11  A continuance of current policies.

“Superannuation, negative gearing, capital gains, and other policies taken to the last election including the shares imputation debate currently being debated. Subsidies to mining companies who make enormous profits could be next on the list.”

12  Reconsideration of the Henry Tax Review and Tax generally.

“Increase tax threshold of income tax, especially lower orders and point of commencement, revise the income taxation system to prevent the rorts by the wealthy who seem to be able to reduce their million dollar tax liabilities to less than someone working on the checkout desk at Woolworths. No such thing as trickle-down economics, no such privilege, and preferred status.”

“Religious groups should have their incomes taxed, without ways to reduce them. As part of a root and branch look at the tax reforms already referred to we should look at ending government funding to non-government schools and private health funds.”

13  A policy return to some form of pricing on carbon emissions. 

“Treat Climate Change as urgent.”

“The same fight must also be had for the future of the planet.” 

14  An Australian Bill of Rights

“Bring our offshore and onshore detention programs to a close, an amnesty and stop the wasteful economic and shameful demonising of refugees, especially who seek asylum on humanitarian grounds whatever the mode of entry. By bill of rights ensure future government can no longer capitalise off this in electoral matters, removing partisan and bipartisan interests.”

“Excessively high immigration levels – we should return to the pre- Howard level of 70,000 permanent migrants.”

“Return to a civilised and compassionate refugee policy with creative and positive ways of settling refugees.”

“Public drafting of a Bill of Rights with constitutional clauses to limit the powers of government on civil rights and empower government in matters of criminal, economic, social, environmental and natural resources exploitation.”

“Well done John. Also, I would like to see a Bill of Rights for Australia given we are the only OECD country without one.”

15  That multi-nationals and Australian companies pay their fair share of tax.

No comments.

16  The need for a Department of the Future.

“A future world dependent on innovation it will be ideas that determine government, and not the pursuit of power for power’s sake. Foresight requires preparation and planning for multiple scenarios many of which may neverhappen.. This can require lots of time, effort and resources.”

“Post act fixes require only addressing known situations with just enough attention to barely suffice. It’s about involving commitment versus lazy/disinterested/disengagement.”

17  A guarantee of affordable health care.

“Public investment in dental care, and genuine public health and illness prevention programs, bring back routine primary health care and public health screening programs to improve the health of the nation. Stop this State and national government bickering over our health service and fund it properly, easy if large corporations pay their way, otherwise large corporations made responsible for private health care of all its employees and their immediate families and for a specified period beyond their term of employment.”

18  A national Anti-Corruption Commission modelled on the NSW ICAC. With teeth that can bite.

No comments.

19  A suitability test for prospective MPs. Must complete an aptitude test.

“As events have been proven in recent times: A person doesn’t need to be particularly smart to be a politician.”

“A suitability test for prospective MPs. Must complete an aptitude test.”

20  A 10 point common good caveat for all proposed legislation.

No comment.

21  Look at ways to achieve a fairer more responsible media.

“Re-instate the autonomy, financial, programming and management independence of our public broadcasters with a charter of non-partisan, government, corporate and religious interference.”

“Also how to handle not only bias but lies in all forms of media.”

“Perhaps some truth accountability in both politics and MSM reporting.”

“Companies, individuals and groups with a common interest e.g. charities, churches, unions, professional associations and Industry representative bodies that advertise in blatantly biased media outlets, then those advertising costs are a political donation not a tax deduction.”

22  Look at ways in which to become a republic sooner rather than later.

No comments.

23 Major appointments to government Agencies be considered by a joint parliamentary committee, to discourage stacking of Agencies with partisans.

“One of the things that brought Rudd undone was his magnanimous decision to appoint various ex-Coalition Ministers to prominent public positions (War Memorials, Future Fund, diplomatic posts etc) and also not to flush out the croneys in the upper levels of Public Service embedded there by Howard.”

“It’s the Coalition that has a real history of ‘jobs for the boys’.”

“Such insider appointees are not working in the public interest but in the political interest of the government.”

“If Labor gain power in Canberra they should make it a priority to replace biased LNP/IPA appointees currently planted in government bodies. Fill the rolls with competent, fair-minded citizens who can be trusted to act in our best interests.”

24 Our First Nation Peoples be included in the constitution and in the parliament.

No comments.

25 Address inequality in all its forms. Particularly equality of opportunity in education.

“It must promote and vigorously argue the case for action against growing inequality in all its nefarious guises, casting off its socialist tag and seeing policy, in common good versus elitist terms.”

“It might even advocate lowering the voting age to sixteen. An article I read recently suggested the teaching of politics from year 8, with eligibility to vote being automatic if you were on the school roll. Debates would be part of the curriculum and voting would be supervised on the school grounds. With an aging population, the young would then not feel disenfranchised. Now that’s radical thinking; the sort of thing that commands respect. It might also ensure voters for life.”

“Increase funding to TAFE and restore the system to its former effectiveness.”

“Reform universities to be centres of learning not revenue raising institutions.”

“Rising income and asset inequality.”

“Bring back affordable and not for profit child care, subsidise smaller programs not big business groups and chains.”

“Abolish HECCS for all first undergraduate degrees, diplomas and TAFE courses and pay a basic realistic tax threshold exempt living and study grant for up to three years for successful merit selected student applicants. Bring back non for profit residential and catering facilities in our educational and hospital settings and campuses.”

Stephen C Jones, I mostly agree but though aging rapidly my passion still burns strongly to achieve a fair go for all. I’m putting my efforts behind a rampaging ALP win next election, we have to leave Trump to the yanks, but at least a decent progressive Australian government can begin to redirect our once great country into the direction we should have maintained before the nazi capitalists got total political control! Fix the current school system, outdated and not challenging our children’s minds.”

My thought for the day

”Change sometimes disregards opinion and becomes a phenomenon of its own making, with Its own inevitability”

 

Journo’s cameos

The sacred and inviolate institution of Australian mainstream journalism has been graced with many by-line geniuses for so long, it is difficult to imagine such icons of truth and courage in reporting in any other occupation other than what we have come to know and love them in!

Here, I offer some alternatives for your amusement … or whatever:

#1
When I try to imagine Mr Oakes in another occupation other than the one he is in now (just WHAT is he again?), I see him with one of those dull-blue, full length dust-coats on, the middle button is missing and the coat bulges there. There is some fidgety piece of something in his stumpy, work-stained hands and a vague questioning look on his face … it is obvious from residual crumbs on his cheek that he has just eaten. A self-employed service-mechanic … probably whitegoods, specialising in microwaves (he is recognised as a whiz at getting that ‘finish-bell’ to DING! just loud enough). His workshop is cluttered, the front counter greasy and it always takes three weeks to get anything fixed because “the part has to come from Melbourne”.

When you once again ring the desk bell with the little hand-written note next to it; “Ring Bell” that echos weakly in what must be a vast shed “out the back” to inquire on the progress of repair of an essential white-good, you get fronted with the once again dull surprise of said service-man holding an object in his hands and proclaiming in dull monotone that it is the “ffflllummmthing off the centrifugal drive-pump and it’s broke”. You are inclined in a moment of impish sardonic humour to inquire if it is those damn slithy-toves again … but you know it will be wasted, because he is just as likely to blithy say “no” and once again regret that it will take a while to repair because the part has to come from Melbourne … and you always leave cursing that he is the only service centre in the town and swearing you will get a new machine next time it breaks down, rather than darken his door again!

#2
Ms Grattan, on the other hand, could well fill the role of librarian … not in a state library, nor local council or university, but rather one of those ‘lost around the back-streets’ “Institute Library” of some anacronistic group like “The Ancient Order of Druids” or the “Oddfellows Society” or in her case; “The Steam Engines Assoc Institute”.

In her younger years, when she first started there, she was known as an innovator of style …she is recognised as the instigator of the “clutch ‘n’ carry method” for librarians carrying books … a colour-tinted photograph appeared in the “Woman’s Day” magazine of Feb 1953 demonstrating her unique grip on a large load of books … she has a copy archived at home and a cutting prominent on the wall behind her desk. She also gained a mention in “The Binder”, an inter-institute mag’, on her innovation of using different colour “tags-for-topics” on her Dewey-fileing system … that also is archived and a cutting etc.

She has no time for ‘untidy’, chatty people and denies she ever “encouraged” Mr Glanville Bartlett to propose and never regretted placing Sam “side-valve” Duggin’s donated, almost complete ‘Biggles’ collection on the “For sale – cheap” table by the front doors … citing one particular book; “Biggles Sees it Through” as rather too racy and suggestive a title for her library!

On one occasion and only the once was she asked at the desk by her old nemesis in literary knowledge; Gerry Dooge if she had any copies of “The Hite Report” on female sexuality, she haughtily replied; “What is THAT?”

She is still in situ.

#3
Fran’s tongue protruded slightly onto her lips as she placed the last stitches to tighten the “body-suit” of the doll she had just completed for the “West Wyalong Horticultural and Steam Engines Society extravaganza!” She sat the finished doll against the large, cross-stitched cellophane “trinket-box” she had entered in the 2001 show. The sorry memory of THAT moment brought a bitter twist to her lips … although she had gained the third place ribbon, it was a very distant third behind Lorna Roesler’s “Applique Autumn” tea-cosy and with it’s –just out of line-lid, it looked rather tawdry on the “winners circle” table next to Lorna’s entry. That cruel condescending smile from Lorna said it all.

To cap it off, at the end of the show, when all was being packed away, that crude and vulgar lump of “agro-culture” (as Fran describes him) Herman Saegenschnitter, picked her trinket box up in his big, dirty, clumsy hand, turned it over a couple of times, flipped the lid back and asked in his loud, vulgar voice:

“So what is it … a fart box?” … and he looked around to the others there and laughed and laughed … and then several others joined in. Not a memorable day at all.

Funny, ‘cos Fran used to enter and win many times in the cake section … that is until Annabel, that up-start “blow-in” from Woy Woy, with the Bondi Bouffant, pretentious foreign words and flamboyant dress-ups swept all before her with a new style and range of Italianate cup-cakes that made Fran’s Strawberry Lamingtons and Frog-cakes appear dowdy in comparison.

“Ahh … the world is a changed place”, she sighed.

Fran was talked into entering the “craft-doll section” by her old school chum; Michelle, now a Librarian in the big city. Michelle was entering too, she had made a replica “cabbage-patch” doll of unique expression … it reminded Fran of someone … but she just couldn’t quite put her finger on it.

Again she carefully perused her “Piglet” doll from “Winnie the Pooh” with her crafty eye for any defects of structure and character. All looked well … except … no, not really … but then perhaps … it was the mouth … that fine stitching that created the smile with the dimpled cheek … just there, on the right side … one stitch just a tad too tight had perhaps created a bit of a snarley look. And as she stared at the doll, she could not help but think of a picture she once saw of a Middle-Eastern king:

“Now who? Oh yes … Feisal … old King Feisal with his “curled lip” … oh dear!” she sighed. And she once again, just hoped they wouldn’t notice.

#4
Bazza swilled the ice-cube around the bottom of the tumbler in the dregs of the scotch whisky … he was a bit piqued that his favourite barman; Ron, wasn’t taking him seriously. “No-one takes me seriously anymore,” he thought.

“You see, Ron, I’ve thought about it … It’s the name: Bazza!” Ron was really too busy polishing glasses to be concerned … it was the latest ‘Barryism” in a long line.

“What’s wrong with Bazza?” he sighed. Barry continued:

“Well, it’s a “slogan name” isn’t it? You know, someone enters the room spots you, stops and in an exaggerated way “pistol-fingers” you with both hands and shouts so the whole room hears; “BAZZZAH!” like they’ve just had a eureka moment … how’s that make a bloke feel?” There was a depth of silence … “It’s like you gotta jump off your stool, face them arms and legs spread like a 96 lb weakling full-back trying to block a Jonah Lomu charge single-handed!”

In truth, Barry lamented his fate. He had the perfect situation, he had a captive audience, yet no matter how he pressed his point of view on a topical situation, they just didn’t seem to take any notice of him!

“I can’t understand it, Ron … the other day f’rinstance, I had Barnaby in the “big chair”, and I was asking him about all these Chinese buying our agricultural land and all he could do was to tell me Irish jokes! They just don’t take me seriously any more!”

Finally Ron had enough, he put the cloth down, the glass on the bar and looked Bazza direct in the eyes …

“Bazz … you’re a barber, not Parkinson. People come to you for a haircut, not a grilling on the economy … just do your job, charge your fee and be happy!”

Bazz blinked a couple of times, but Ron could see it was a wasted effort … the lights were on but nobody was home.

“Glad you reminded me, Ron. Quick, give us another shot of that scotch … I got Tony in the chair this afternoon for a short back and sides … I wanna have a steady hand with the cut-threat!”

Watch this space in 2017 – Redux

Normally around this time of the year over at The Political Sword we write an article that discusses some of the themes and issues that we looked at through the year that has nearly finished. In 2017, we’re going to do something different.

You may remember in March this year, we announced with great sorrow of the passing of our fellow conspirator, good friend and (there is no other way to say it) really nice bloke, Ken Wolff, who was a regular writer on this blog. Ken’s last article was entitled ‘Watch this Space in 2017’, first published on 15 January 2017.To demonstrate his acute awareness of the political system in Australia and globally, as well as how well he wrote about it, we’ve decided to revisit the article and see how accurate his predictions were. Ken’s words are in italics throughout this article and it has been edited for length. After a preamble, Ken got straight into the subject.

Will the Australian economy improve or continue to stagnate?

In December [2016] we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

Australia formally didn’t enter a recession in 2017, however the economy is still not strong due to flat wages growth and low inflation.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue, and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

Holden and Toyota have now finished manufacturing vehicles in Australia, (the last Australian Ford rolled down the production line in 2016) and while all three companies did and continue to support their ex-employees with employment assistance, the large number of people involved and the necessity to discover new skills has caused significant dislocation.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016?17 and 2017?18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be, we will have to wait and see.

Well – that’s pretty accurate.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure,

To his credit, Morrison did change track to an extent in the 2017 budget with an increased spend on infrastructure such as the Western Sydney Airport. Shane Oliver from AMP Capital reviewed the budget, delivered in May, here. Although Oliver concludes with

The 2017-18 Budget has a sensible focus on housing affordability and infrastructure. The main risks remain around the revenue assumptions and when we will get back to surplus.

It appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

The US interest rate went up to 1% during March 2017, with further upward movement predicted. However,

The Federal Reserve left the target range for its federal funds rate unchanged at 1 percent to 1.25 percent during its November 2017 meeting as widely expected.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Australia’s interest rate remained steady all year – here’s part of the RBA’s February announcement

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent

and the November announcement

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Did Morrison and Turnbull concede – according to Greg Jericho the answer is a qualified ‘yes’

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party, that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

Queensland went to the polls last weekend. While Bernardi’s Australian Conservatives movement has become a Political Party, it did not run in the Queensland election. One Nation ran in over 60 of the 93 seats in the Queensland Parliament at the election and at the time of writing, they have been successful in one seat while the LNP self-immolates over giving them preferences but accepting One Nation preferencing most sitting members (ALP or LNP) last.

In a major organisational blunder, Hanson’s One Nation ‘forgot’ to register for the March 2018 South Australian state election in time. Xenophon’s SA Best and Bernardi’s Australian Conservatives are expected to have candidates.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to).

Unfortunately Ken didn’t live to see the brouhaha over Section 44 of the Constitution. There are two by-elections already scheduled for December in the seat of New England (‘held’ by Nationals’ Leader Barnaby Joyce who was duly re-elected as he has apparently renounced his New Zealand citizenship and increased his already healthy margin) and Bennelong (‘held’ by the Liberals’ John Alexander on a much slimmer margin, with a high profile ALP candidate and in Sydney, which makes him much less certain to be returned after renouncing his inherited UK citizenship). There are also a number of other MPs and Senators under a citizenship ‘cloud’ although all MPs and Senators have a 1 December cut off to demonstrate their citizenship. This saga still has a long way to go.

With Turnbull’s federal Coalition no longer having a majority of members in the House of Representatives thanks to the ‘dual citizenships’ of Barnaby Joyce and John Alexander in late November, he prolonged the House of Representatives for a week in fear of losing the vote on establishing a banking enquiry on Monday. Turnbull announced a banking industry enquiry on Thursday after a number of National Party members threatened to cross the floor to ensure one was established regardless.

The various claims and counter claims of dual citizenship would have been great fodder for another one of Ken’s specialities, his humorous take on the completely absurd. Ken was the writer behind the backyard bigot, ‘Tiny Napoleon O’penmouth’ and ‘Mal C’od-turn-a-bull who all made appearances (to paraphrase an old commercial) ‘when only comedy would do’

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Abbott is still ‘not being destructive’ by outlining his visions to his conservative rump using every media opportunity he can muster. Despite pitiful polling numbers by Turnbull, there seems to be no real appetite in the Coalition to return to the days of a Prime Minister who was ‘relaxed and comfortable’ in brief red swimming trunks (thankfully; due to the fashion statement if no other reason).

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

The US and North Korean leaders have had an interesting relationship this year. From Trump claiming the threat of North Korea using nuclear weapons ‘won’t happen’ early in the year, through Trump attempting with some success to pressure China to reduce trade with North Korea, to Trump calling Kim Jong-Un ‘rocket man’ with Jong-Un responding with a spray that included the phrase ‘mentally deranged U.S. dotard’. That all happened before the North Korean media sentenced Trump to death in November for the crime of posting a tweet saying ‘Why would Kim Jong-Un insult me by calling me ‘old,’ when I would NEVER call him ‘short and fat’? Who would have though this might have apparently insulted Jong-Un?

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are our two biggest trading partners.

North Korea certainly had an opinion on Australia’s claimed support for the U.S., suggesting the actions were suicidal, however on the surface Australia seems to be able to discuss issues with both the US and China.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

Correct again but Canada not signing as well was a bit of a surprise (especially to the leaders of the other APEC Countries that had turned up to the signing ceremony in Vietnam!)

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?

China announced its ‘One Belt, One Road’ (OBOR) program during 2017, the subject of a briefing note issued by the Parliament of Australia which concludes

Regardless of the credence which one assigns to the various interpretations of the OBOR initiative, progress thus far makes it clear that as Australia becomes increasingly tied economically with China, there is a need to maintain a close watch on the progress of the OBOR initiative globally. It also suggests that Australia needs to adopt a more economically and strategically prudent attitude in determining how the Australia-China economic relationship is to further develop.

Conclusion

The above are just a few of the questions that could arise during 2017. It may prove to be an interesting year both here in Australia and internationally.

All in all, Ken was pretty accurate with his predictions. The related posts for this article are chosen to demonstrate the expanse of knowledge and understanding Ken demonstrated in his writing (and the private emails that help run this site). We said last March we’d miss Ken – and we do.

For Ken’s 90th and last time –

What do you think?

This article by 2353NM was originally published on The Political Sword.

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The storm will come

By Stephen Tardrew

Where is Australia’s Corbyn? Nowhere to be seen.

The neo-liberal right and left in Australia are stagnant, moribund and self-serving though Labor will shift the deck chairs nominally if elected. Nevertheless neo-liberal injustice and inequality will remain entrenched. The economic boom/bust cycle will make sure of that.

My disillusionment and frustration is palpable. Corbyn and the debacle in the US is putting a spotlight on the corporate oligarchic nature of neo-liberalism and its descent into unbridled injustice and inequality. Democracy be damned when they own the media and both parties lose any sense of perspective or critique of a thoroughly discredited paradigm.

Methinks the storm will come before the hopeful calm but unfortunately many will suffer for no reason other than the self-interest of the elites. The clock is ticking, not only for us, but for the whole world as the US war machine and its fawning acolytes, such as Australia, encourage chaos across the planet. The global reach of neo-liberalism is deeply disturbing.

Corbyn, at the moment, seems to be our only real progressive hope. Who in this country will rise to the challenge?

Modern Monetary Theory (MMT) offers a serious non-disruptive alternative however, even though it has strong academic support, the political will to embrace change seems all but non-existent. One thing MMT does is prevent excessive boom/bust cycles and is therefore the architecture around which a party can build stability.

We progressives share this frustration and unfortunately a true leader demands a broad set of skills that require a thoroughly well honed intellect and broad understanding of a whole range of imperatives and most of all parliamentary experience. We can only live in hope. The alternative is deeply disturbing.

What’s up, GetUp?

By Ric Testori

With the Australian Federal Budget coming in a month or so, what can we expect from our government and opposition parties which are both fully committed to the false neo-liberal concepts of fighting budget deficits and accepting unnecessarily high levels of unemployment/underemployment? My answer is “Not much”.

At the same time, I see and admire so much thought and effort being given by a handful of activists and thinkers associated with Modern Money Theory (MMT). And then I receive several new messages and memes from other activist groups such as GetUp who it seems are actively working against these very people that I admire so much. I joined GetUp and donate to them because I wanted to help everyday Australians have their voice over the noise and alt-truths of the mainstream media.

How disappointing it is for me to see GetUp continuing to push the same neoclassical economic bullshit in its own campaigns. They complain that the LNP have increased the “national debt” without considering how much worse things might be if spending on welfare and services were cut to reduce that inconsequential number. They fight hand and nail against tax cuts for the middle class and corporations without considering that taxes do not fund government spending. By giving honour to the stupid “deficit” lies they undermine everything they say they are fighting for. They continuously compare the LNP´s claim of “better management” to their apparent inability to control debt levels, without considering that the increasing debt is a result of the automatic stabilizers (Newstart etc) which are the only things keeping us out of a serious depression.

I can understand that MMT is not yet a platform supported by GetUp, but surely they can gain a little education in the matter of economics and stop fighting against us. They can stop supporting the false, orthodox neoclassical bullshit and speak honestly and truthfully about the necessity for budget deficits in appropriate times (like now).

These are the policies GetUp have launched as part of their Brighter Budget campaign:
1. Reform negative gearing.
2. Reform superannuation tax concessions.
3. Introduce the ‘Buffett Rule’.
4. Scrap the capital gains tax discount.
5. Cut fossil fuel subsidies.
6. Impose a super profits tax on banks.
7. Introduce a ‘Tobin Tax’ on high frequency financial transactions.
8. Place a duty on wealthy estates.

All of these policies seek to increase tax revenues, although (to give credit to their wording) the reasons given are mostly to increase fairness and combat inequality. But by making the campaigns lopsided against wealthier taxpayers and corporations, they almost guarantee the creation of a strong opposition against their implementation and their ultimate defeat.

A far better and more effective campaign would surely be to educate everyone, including activists, journalists and politicians, that taxes do not fund government expenditure. And that the concept of a “national debt” and similarities to household budgets are totally meaningless when applied to our fiat currency issuing federal government. As long as terms like a “balanced budget” are given power, force and meaning within our community there can never be fairness or honesty in any budget from any Australian government.

By ignoring Modern Money Theory (MMT), the GetUp organisation is playing directly into the hands of the neo-liberals who are clearly in charge of both LNP and ALP fiscal policies. Not even the Greens acknowledge the total failure of neoclassical economics to manage, describe or make reasonable predictions for the real world we live in.

Not even the glaringly obvious benefits and desirability of a federal Job Guarantee are mentioned anywhere in GetUp´s literature. The horrors and costs of involuntary unemployment (or underemployment) do not seem to exist as a policy worth consideration or mention.


For anyone looking for more information on MMT:
Prof Bill Mitchell – http://bilbo.economicoutlook.net/blog
Why Minsky Matters – L. Randall Wray
The 7 Deadly Innocent Frauds of Economic Policy – Warren Mosley

Watch this space in 2017

By Ken Wolff

As with most political issues, the following few questions are inter-related: Turnbull’s future may well depend on the economy, on whether or not a new conservative party forms and whether there is a Trump-inspired trade or currency war between China and the US; our economy may well depend on what Trump does in relation to China, let alone whether Morrison displays any understanding of economics; and so on.

Will the Australian economy improve or continue to stagnate?

In December we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

On the other hand, commodity prices are still weak, although better than they were, and if a US/China trade war erupts may weaken again. Every reduction in commodity prices flows through a large segment of our economy, affecting the supporting businesses and often, through reductions in the workforce, local businesses, and the impact then multiplies ultimately affecting government revenue. The Christmas season may help us avoid a ‘technical recession’ (that magical six months) but will we see another quarter or two of contraction during 2017?

This year will also see the end of car manufacturing in Australia. That has implications across a number of industries and, as some commentators have noted, it has been car manufacturing that has driven much of the technological innovation in the manufacturing sector. Turnbull’s ‘innovative and agile’ economy may become a little more wobbly as a result.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016‒17 and 2017‒18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be we will have to wait and see.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure, it appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Turnbull’s ‘innovative and agile’ economy and the promise of company tax cuts — which he continues to espouse despite it being unlikely to pass the Senate — are not issues that inspire the average voter. If any benefits are to flow to the economy from such ‘policies’, they will be well beyond the next election, so Turnbull and Morrison can’t look there for short term budget improvements but they seem to have no other plans to help the economy and by implication the average voter.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

The timing of the creation of such a party could be determined by the election timetable. The earliest a federal election can be called, other than another double dissolution, is August 2018 but such a party may like to test its electoral appeal at a state election. WA has an election in March which now seems too soon to establish the party and create an organisation geared for an election. SA goes in March 2018 and the earliest Queensland and Tasmania can go to an election is April 2018 and May 2018 respectively: so to be ready to contest one of those the new party would have to be created no later than the latter half of this year.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to). But if the economy continues to stagnate, or underperform as a result of a US/China trade war, that will reflect on the government, as economic performance always does even if the government has little real control over many aspects of the economy, and he may well foresee that he cannot win the next election — although he could leave an election as late as possible (May 2019) in hope that things will improve. Much will depend on his own vanity and desire to be prime minister or whether he sees a short stint as having achieved his ambition.

Another key factor will be the possible creation of a new conservative party. For Turnbull that could be both a blessing and a curse. A ‘curse’ for the reasons described above but a ‘blessing’ if it freed him to express more of his liberal philosophy rather than the conservative agenda. A Malcolm Turnbull who again expressed liberal views would probably reignite his support in the electorate but then both he and the Liberal party would need to decide what to do about it. While a more liberal Turnbull may attract votes, it may be just as difficult to form government if a new conservative party also attracts votes: in fact, a more liberal Turnbull may draw some votes from Labor and the Greens while some of the Liberal base goes to the new conservative party — that would really redefine the political landscape in Australia. It could also lead to a minority government and I doubt Turnbull would want to be in that situation.

Turnbull will have much to ponder particularly in the latter half of the year unless there is an unlikely improvement in the economy and unless the Liberal party is able to forestall the formation of a new conservative party or even the growth of conservatism in its own ranks. Will Turnbull want to continue to lead unless those things come to pass? Will the conservatives in the party room decide to move against him for a genuinely committed conservative leader rather than one who panders to them only to keep the job? After all, the result of the 2016 election means Turnbull does not lead from a position of strength.

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are two of our biggest trading partners.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?

Conclusion

The above are just a few of the questions that could arise during 2017.

Others include:

  • Will the housing bubble burst and the construction boom come to an end?
  • What will be the effect if we lose our AAA credit rating, not just for government but for our banks?
  • How will Australia deal with Brexit and the need to negotiate separate trade deals with the EU and the UK?
  • How will we address problems meeting our climate change commitments under the Paris agreement?

And of course there are the perennials such as how we handle refugees and Australian Muslims which will be influenced by the rise of the conservative forces.

It may prove to be an interesting year both here in Australia and internationally.

What do you think?

What are your answers to the questions?

What other questions will Australia face in 2017?

This article was originally published on The Political Sword.

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Money is a Scary Subject

The devaluation of peoples’ hard-earned money is what Australians fear most. People fear inflation. Never mind the crime rate, political corruption, nuclear wars, family violence, pestilence and the like, inflation is the king of fear factors.

So, when you tell them that a currency-issuing government is not constrained in its spending capacity, they immediately imagine this nightmare scenario where a government will just spend and spend and spend.

This is just one of the reasons why people struggle to accept Modern Monetary Theory. Fuelled by ignorance and being fed the wrong information by others who don’t know any better, they cling to old standards such as the myth that running a country is the same as running a household.

They foresee inflation going through the roof, causing all manner of pain and suffering to families, their savings and their future well-being. The word hyperinflation often sneaks into the conversation as well.

It’s an entirely false scenario, there is no reason to think that way but, that is the way of people when they are opposed to something or are gripped by the fear of the unknown.

The other great difficulty is that most economists don’t accept it either because it goes against everything they have been taught.

The problem is that few of them have been taught macro-economics as opposed to micro-economics. Most of them, while acknowledging that we live in a fiat currency world, still maintain a gold standard mindset. That is the sum of their training.

gold-standardThat is why it is easier for people who have not studied economics, to accept it. Their minds have not been polluted with gold standard thinking. Common sense takes over.

People in the financial markets, for example, seem to understand it quite easily. Tell them that bond sales drain reserves and they get it, they understand it.

But within the world of the economist, it takes a heterodox-economist to lead the charge, someone trained and qualified in the old ways but who has broken through that glass ceiling. Sadly, there aren’t too many of them.

Very few, if any, policy makers understand it. Senior central bankers do, of course, after all they are the ones who juggle the numbers in their computers. But will they dare explain it to the politicians? The very thought of it makes them shudder.

They too fear that once a politician realises the possibilities associated with a fiat currency, the politician will wreak havoc upon a nation’s economy, spending recklessly. It’s a sad indictment of the perceived maturity of our leaders.

Perhaps the biggest problem in explaining MMT is the language used. Trying to explain to someone that their entire thinking processes need to be turned upside down if they want to grasp it, isn’t easy.

When you hear someone say, “The federal government spends by issuing currency and can never run out,” they don’t respond by saying, “great, let’s have full employment.” They say, “For goodness sake, don’t tell our politicians, they’ll just spend like crazy. We’ll become another Zimbabwe.”

Somehow, the language has to change. We have to develop a new way of explaining MMT such that the irrational behaviour of those who should know better, can be ignored.

banner-languageEngaging in a carefully considered language with simplistic clarity, a language that has factored in all the elements of disbelief and fear is a huge challenge.

It’s hard explaining that when a fiat currency is misused, inflation is a possible outcome, but that full utilisation of a nation’s resources (its people), improving our health, our education, lowering our crime rate, is a far better outcome.

It’s hard explaining that a nation is constrained only by its available resources and not by one or two percentage points of inflation. Under our present management, we can’t even achieve that.

It’s hard explaining that a currency issuing nation can always meet its commitments in its own currency, that it doesn’t need to borrow to fund its spending and can always pay for goods available in its own currency.

Why is it that the prospect of providing full employment, having a world’s best education and health system, a state of the art communications network, a respect for our natural resources and equality of opportunity for all, is restrained by ignorance?

This is the 21st century. Those medieval superstitions that so dogged the efforts of people like Galileo and Copernicus should be behind us now. Modern Monetary Theory, like all theories, needs proper implementation to be accepted as fact.

85After all, who can seriously say that the present theory of classical economics has proved itself worthy?

Money is indeed a scary subject. But it doesn’t have to be.

The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 4 – final)

By Ian Dooley

Responses to comments

If I respond to the comments on Ken’s post, perhaps that means we’ll get some different comments or questions on this article, rather than hearing the same points made again.

So here goes! The comments are in italics and bold, with my responses below each one. I have omitted, abridged or combined some for the sake of brevity and because some of the comments made no sense or were in agreement with Ken’s article:

Diannaart September 21, 2016 at 2:57 pm

Loving this – am beginning to get it. Maybe.

… and the government surpluses are actually reducing the money supply” – it is money no-one is using, therefore, stultifying or even damaging to the economy, right?

A surplus isn’t even “money no-one is using”. Taxation just destroys money. Similarly, we don’t talk about ticks that we have not written down yet on our chore chart as ticks we are not currently using. Those ticks don’t exist yet. We could imagine a world where we use double entry book keeping when we award ticks, so we have a piece of paper with “our” ticks on it, and when we award one we cross it off “our” list and then write it on the kids chart, but from the point of view of the kids, the ticks just don’t exist.

Troy Prideaux

September 21, 2016 at 3:39 pm

… I’m under the impression that it ideally relies on a full scope of levers to control inflation, employment, economic growth etc? ie. still utilising interest rates as a mechanism of controlling inflation and growth but with a greater emphasis on fiscal stimulus that can be funded with fiat money if needed. I’ve heard people like Warren Mosler mention that taxation should be the “thermostat” to control the temperature in the room (an analogy to inflation in an economy) but I would imagine that taxation control alone is not reactive enough (takes time to adjust rates etc) to deal with surges in inflation/deflation or growth? …

We don’t need to use interest rates to control inflation. Inflation is the result of spending exceeding the capacity of the society to produce. The most effective inflation anchor is a job guarantee that pays a socially inclusive minimum wage and sets government deficit spending at precisely the right level to inject demand to offset the savings desires of the private sector. This is the most “reactive” means of demand management (to use your terminology).

… Another point: does MMT accept that money can also be essentially created in the private sector and does it consider that finance and debt is such a significant component of the private sector? Take the GFC for example, billions of dollars which were created by the private sector via property speculation and irresponsible financing suddenly vanished into the ether when the values in such assets crashed? …

As discussed in my article above, private credit creation is more like banks creating “Disney Dollars”. They create deposits that are valid within their own institution and any settlements or transactions external to their institution (including when you pay your taxes) are done with government money.

None of that is questioning the validity of MMT, but my greatest concern about MMT is the power it can provide governments – particularly to (a) potentially recklessly spend for the sake of their own political interests and (b) potentially provide too much fiscal authority for governments to avoid economic crises that might be essential for economies with corrupt political systems – eg. where financial regulation and scrutiny (say) have been compromised considerably to the point of providing major structural faults that need political leaders to be forced into fixing (or at least be given the political mandate to fix) that can often only come with a good ol’ crisis.

Regards,

Troy

Jimhaz September 21, 2016 at 4:09 pm

[What do you think?]

Not that I’d know, but my view is it is an absolute can of worms that would lead to disaster long term due to the non-discipline of pollies in the political cycle.

We don’t actually have an unemployment problem – we have an excessive immigration problem …

The maintenance of full employment is as good a marker as balancing the budget, for governments to adhere to. In fact, this is what happened from 1945 – 1975. Governments did not over spend, and did not cause inflation. People claimed that Whitlam did but the inflation of the 70s was entirely due to oil price shocks and nothing to do with his fiscal expansion.

We don’t have excessive immigration and at any rate all that would mean is more capacity to get things done. Immigration would be excessive if we had to import food in excess of exports in order to sustain the population but that’s not the case. Australia could get much bigger and still ensure full employment for all its citizens.

… If any conservative gov used MMT, all they would do would be to increase immigration levels, if any progressive gov used it they would spend it on non-income producing jobs, and we’d end up with a no win situation. It would also cause wage rises in income producing industries …

Putting the odd obsession with immigration aside, I assume what Jimhaz means by “income producing” is “tax paying”. This is the irrelevant kind of income because the government doesn’t need income in order to spend. All fiscal stimulus in income producing so long as the money is spent; that is spending equals income for you and I. By guaranteeing a job at the lower end of the pay spectrum we can ensure that people will spend the majority of the money they are paid which will achieve the desired fiscal result.

… I know it to be a false theory simply as everyone would now be using it were it not. There appears to be nothing actually inventive or clever about the theory. At best it is theory for a rainy day – not even just recessions – but a deep recession …

We are already using it. MMT describes how money works, in any legislative or exchange rate policy scenario. But ignoring the fact that MMT is not “being used” by anyone any more than gravity is “being used” by the planets to stay in orbit, this is where I like to bring things like “flat earth denial” into the equation. Someone knows this theory is false because everyone is not already doing it? Well, in fact we did have a policy of full employment in Australia until 1975, so we have, in recent history, conducted our economy in line with what might be termed functional finance, but does Jimhaz honestly not realise that there are countless times in history when the orthodoxy has been completely wrong? Hand washing is a great example

… That said, I’m not convinced the US Quantative Easing is more or less the same thing, so it might not hurt to get on the same bandwagon …

An understanding of the state theory of money helps us to see that QE is nothing more than a liability swap: the government swaps one liability (a bond) for another liability (reserve balances at the central bank). That’s why QE doesn’t achieve anything: it has no impact on demand in the economy because no-one spends the newly created reserves.

Nexusxyz September 21, 2016 at 5:48 pm

MMT is marginally better but will fail like all other economic models. The thing that determines ‘economic wealth’ is the acquisition, manipulation and management of technology to generate ‘competitive’ outcomes . Only investments in technology that generate value are worthwhile. Printing money without taking into account the ‘constraints’ of the earth is doomed and will generate tens of billions in mal-investment.

Harquebus September 21, 2016 at 6:23 pm

MMT won’t save us any more than any other mumbo jumbo economic theory. It is a cock’n’bull wish made up by those who think that we can extend even further into the unsustainable by replacing energy per capita with increasing amounts of currency and debt per capita. Ha! Good luck with that.

Both of these comments seem to think that MMT is “just another theory” which it is not. If you start by accepting the state theory of money, MMT is the logical extension of it, and all other economic theories are null and void because they reject the state theory of money.

The second point they both make is that we face real resource constraints which is absolutely true, but investing in the “human capital” of our society is just as valuable as investing in other forms of capital.

Kaye Lee September 21, 2016 at 7:47 pm

… That is one of my real problems with MMT – they seem to suggest that the RBA is an arm/tool of the government and hence the government can just create money. That is not the operational reality.

Actually this more or less is the operational reality. When the government right now deficit spends the AOFM issues bonds on the primary market to the same value. This gives the illusion that the government is “borrowing” to “Fund the deficit” but as we have seen above this is a logical impossibility. What it is really doing is first a liability swap (reserves for bonds) then creating more reserves. The bond issues allow the RBA to “soak up” these new reserves to hit its interest rate target, but the bonds themselves are created “out of thin air”, right? And bonds are basically as good as cash. I did a video about this here:

Diannaart September 21, 2016 at 7:57 pm

MMT could work if we changed some rules and elected people with integrity and an ability to prioritise on the basis of expert independent advice, but would you trust the current lot to understand where money should be spent?

This is my misgiving also.

I am beginning to understand how checks and balances could be used to prevent runaway inflation. By ensuring the government has specific uses for the money allocated such as for infrastructure, education, health – anything that can be given a $ value – and this can also include the environment, be it protection and/or restoration work -such as mining – in fact by placing $ value on damage we can seek restitution… yeah, I’m dreaming.

But, we can’t trust government with the current system and MMT is very open to …. creative accounting.

The government is already operating with MMT. All money systems are described by MMT. What you really mean is that we can’t trust the government to use a model of Functional Finance rather than Sound Finance, which I think is ridiculous because there is no difference between the two. In the first case we have the government set up to spend to the point of full employment, in the second we have the government set up to spend only as much as it taxes, or issue bonds when deficit spending and subject itself to “market discipline” which isn’t actually discipline at all. The government already does what it needs to do in order to hit the sound finance target and is perfectly capable of hitting a functional finance target too.

Harquebus September 21, 2016 at 9:42 pm

Not to mention the very real push for a cashless society. Create the virtual currency from nothing, force everyone to become a bank customer, restrict what can be bought and sold and then steal levy what we don’t spend through negative interest rates.

Brilliant! If you own a bank.

There is no difference between a virtual currency and notes/coins. In fact the vast majority of spending already occurs electronically and money has no value outside of the sovereign system which creates it.

Kaye Lee September 22, 2016 at 12:28 pm

I can accept all that Troy but we could be investing in Gonkski, public infrastructure, NDIS, sickness prevention, Childcare support, Training etc now but our government chooses not to. They would rather spend hundreds of billions on war toys and keeping asylum seekers away and paying polluters.

What we have is all parties in this country subscribing to the neoliberal world view of sound finance. This means that if a party wants to spend an appropriate amount on various services and maintain full employment, they are vilified in the media circus that is our election campaign. This is why we need the public to understand functional finance and MMT: the Telegraph can’t run a “black hole bill” cover if everyone knows it’s bullshit.

Diannaart September 22, 2016 at 6:15 pm

I can see how the federal government uses a form of MMT already – no gold standard to see here, we have had a fiat currency for decades.

All we need to do is find a watchdog to ensure the government spends on and for Australia and not just themselves and wealthy vested interests.

Easy peasey.

Aside from the policy choices about how to ensure spending in the public purpose, I just want to clarify that even under a gold standard MMT still describes how money works. Having a floating exchange rate means that we have maximised our domestic fiscal policy space.

Kaye Lee September 22, 2016 at 8:20 pm

“The money received is not used to finance net government spending. It sits in a multitude of accounts at the RBA. ALL GOVERNMENT SPENDING is newly created money.”

See that just isn’t true. Money is deposited in and withdrawn from government accounts at the RBA. You really lose me when you say stuff like that because it is NOT how it currently works.

This is what Scott Fulwiler would call the “weak form” of MMT.

When MMT economists explain MMT they usually present the situation as having a conflated central bank and government because, in the end, regardless of the “veil” presented over the top of the operations the reality of how MMT describes economies operating is still true.

However in Australia we do have an Official Public Account run by the RBA and when the government issues bonds, it does “increase the balance” of the OPA, and then “spend that back in”, as indicated in the video I posted above.

However there are a couple of key points: firstly, at the end of the operation the net financial assets of the private sector have increased by the amount spent by the government. Some of those assets are held in bonds, and some in reserves, but it is all a liability of the government. Bonds themselves are very “cash like” — they are liquid enough to satisfy the capital adequacy requirements of private banks and for all intents and purposes can be considered to be reserves on which we pay interest (sort of like a term deposit).

The other thing is that the OPA is a self executing consolidated fund. That means that the RBA will never “bounce a cheque” from Treasury. So the “balance” of the OPA is just an accounting trick, similar to my comment above about using “double entry book keeping” to issue ticks on our chore chart.

Harquebus September 22, 2016 at 8:21 pm

I am sure that MMT advocates have their data and I would be interested is seeing some.

Has MMT ever been implemented anywhere? If not then, one can not complain when someone else expresses an “opinion” about what is after all, just a “theory”.

MMT describes how all money systems work and has thus existed everywhere as long as money has existed. Functional finance, full employment policies and employment guarantee schemes have been implemented such as in Australia from 1945 – 1975, and the Jefes programme in Argentina, with spectacular results.

Kaye Lee September 23, 2016 at 9:54 am

“you still need $AU to pay your tax.”

I do not understand this at all. Why isn’t it just keystrokes as basically all transactions are? When I pay any bill, even to the government, I just do it on the computer – the money goes out of my account and into the account I designate, even if I am paying to another country – the bank just works out how much to debit my account to cover the other currency bill using the exchange rate. I personally don’t have to have US$ to pay a US bill. Why are taxes different to any other bill? Why couldn’t an American wishing to make a payment to the government just do exactly the same thing? Or are you saying the banks have to have electronic stocks of other currencies and if so, why? I don’t get it.

I explained this a bit in the section on private banking. When you pay taxes, the settlement occurs in exchange settlement funds at the RBA. Only government (or “high powered”) money can be used to pay taxes to the Australian government.

Foreign exchange is a little more complicated but basically central banks all have accounts with each other. So for example, the Fed has an account with the RBA, and that is where the Fed holds their AUD reserves. Likewise for the Bank of China etc. When you buy from China, you transfer AUD to the BoC account at the RBA, and at the other end the RBAs account at the BoC gets debited and the same amount in RMB gets paid to the vendor you purchased from.

All AUD reserves are on account at the RBA, all USD reserves are on account at the Fed and so on.

Resources

From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy, L. Randall Wray

Making Money: Coin, Currency, and the Coming of Capitalism, Christine Desan

Here is a short video by Christine explaining this new creation story of money.

I created a video to illustrate the “chore chart” example here on the Australian Employment Party YouTube channel.

 

The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 3)

By Iain Dooley

Logical conclusions

I hope by now you have been able to come to terms with the fact that currencies are always created by a sovereign and their value is driven by the willingness of the sovereign to accept the currency in payment of taxes.

In fact the “one sovereign, one currency” rule has been almost universal for thousands of years, except for one notable case and that is the Euro. This is basically why the Euro has been such a disaster, and why economists such as Wynne Godley were able to produce such prescient predictions of it’s failure.

So now we can use this simple fact to derive logically some of the obvious statements made by MMT.

1. The government should always spend to maintain full employment

Governments create money to move resources to the public purpose.

When we have people who are willing and able to work and where there is useful work to do in the public purpose it is insane for the government not to hire those people.

Think about the chore cart: would you ever claim that because a certain number of ticks weren’t redeemed this week that you would not issue more ticks to get chores done?

Think about a football game: would they ever stop the game and leave the players idle because they had awarded too many points?

Lunacy. Sheer lunacy.

2. The government cannot borrow its own currency

A unit of currency is nothing more than an acknowledgement of a contribution. It is basically a tax credit. A voucher issued by the government.

If I were to borrow a voucher that I issued, I would have to provide a receipt which would be equivalent to the original voucher.

In other words, since all government money is already a liability of the government, it cannot borrow it back.

This can be tricky to visualise so I created this video demonstrating how this works:

3. The government can never run out of money, but it can run out of resources

This is pretty simple. If we only have 2 kids we can’t just write down a million ticks and get more chores done. The limit of our spending is the capacity of the kids we have to do chores.

As I alluded to earlier this is also why the government needs to deficit spend. In a sophisticated economy, not everyone works for the government, and not everyone spends all their income.

If the government taxes back all the money it spends all it’s doing is destroying all the money it created by spending.

You should be able to see pretty clearly then that the government could sustainably run a deficit forever, so long as total spending doesn’t exceed the capacity of the society to produce goods and services (which would be inflationary).

4. Gold is never money, Bitcoin is never money

They are commodities and they can be used as money. If a government was stupid or ignorant enough then they could use gold or bitcoin to create their currency, but that currency would then suffer all the problems I enumerated above with fixed exchange rates and commodity monies.

5. Post money society is a reversion to the stone age

When people get fed up with how our economic and political structures work, particularly with growing inequality, they talk about creating an “alternative to money” (and many people see bitcoin or some other similarly misguided technology as the solution to that).

This is nothing more than the “poker chip” example I gave above. Without an obligation in common to a sovereign there can be no such thing as a successful currency.

So anyone talking about a “post money society” are really just talking about a society without a sovereign. Any such society will not have liquidity and a society without liquidity can’t undertake complex social projects such as building the internet and roads and stuff so it basically limits us to the type of technology available to stone age societies.

I don’t think there’s anything wrong with stone age societies, by the way. I think that they may well be much happier than we are, but I just wanted to make it clear that there is no “alternative to money”. Money is by definition liquidity provided to a community by a common obligation to a sovereign and is synonymous with sovereignty.

Tomorrow: Responses to comments

 

The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 2)

By Iain Dooley

What the Fiat?!

What you have created is a currency with a fixed exchange rate to a commodity.

Imagine if the computer broke one day and you sent it to get repaired. If the kids came to redeem their ticks on that day they might become disillusioned with the tick system because they could not play computer games.

In order to to keep them happy you could offer them extra ticks to be used when the computer is returned.

The rate at which the ticks accrue to children in the absence of the computer would be the “interest rate”.

This is the reason why a government with a fixed exchange rate currency cannot control its own interest rate (and why a government that allows its currency to float such as Australia can).

Now imagine your kids wander into a duplicating machine and all of a sudden there are more of them. Great! You can get more chores done right?

Only to the extent that there is enough computer time for them to redeem their ticks. If you had 1,000 children you would get to the point where the constraint would be computer time and you couldn’t get more work done, even though you had plenty of kids willing and able to work.

Fixed exchange rates have the same basic constraints whether they are a currency peg (where, for example we agree to convert AUD to USD at a fixed rate) or fixed to a commodity (such as a gold standard).

They work fine under certain conditions but ultimately they limit your domestic fiscal policy space to the extent where you might end up with unemployed kids; that is kids who were willing and able to do more work and earn more ticks but whom you could not pay because of the constraint of the underlying commodity.

The same would be true if, instead of ticks you issued pieces of silver stamped with your face. You would be limited in how much you could spend by how much silver you had access to.

As an interesting side note, imagine that the house next door ran the same scheme but they offered to create 2 coins with the same amount of silver you use to create one coin. Your kids might melt your coins for the silver content and have them re-minted by the folks next door, starving your mint of silver and limiting your spending capacity. This is basically what happened all the time in Europe in the middle ages and why commodity money is such a bad idea (further reading in the resources listed at the bottom of this page).

Basically fixing the exchange rate of your currency or making it out of some commodity constrains the currency and you’re going to have a Bad Time™.

So how do we make a currency that has value without tying it to some commodity?

People complain a lot about “fiat” currency and how it has no value because it’s made of paper and it’s based entirely on a confidence scam: as soon as the confidence drops the value of the currency drops and we’re in an inescapable downward spiral.

That’s how mercenaries thought of money when being paid to fight a war in the olden days. They wanted currency they could melt and take to a competing mint of the sovereign who won the war.

But they would always go and get the gold or silver minted into coin so they could spend it.

That is, the coin had a value that exceeded its commodity content because it was accepted in payment of taxes and therefore readily accepted by people under that sovereign rule as a medium of exchange.

In an already monetised economy, the value of the currency is defined by what is available for sale in that currency.

But how does a currency gain value initially?

The way that Christine Desan describes this (see video in resources section below) is that humans have always operated in groups, and that the leaders of those groups accept contributions from the members of the group in the interests of the group. When such a contribution is made ahead of time, a receipt is issued to the contributor as evidence (for example if I worked twice as hard this year than I normally do, I would get a ticket that said I worked an extra year’s worth of contributions).

This receipt can then be traded with other group members and becomes currency.

So outside of our family example it is the willingness of people to contribute to the good of the group and acceptance of sovereign rule (ultimately in the form of taxes) that drives value for the currency.

In other words saying that a currency will lose all value is tantamount to saying that the issuing sovereign will completely collapse and that nothing will be offered for sale in that currency.

This is also called hyper inflation and this is why you will typically see MMT proponents say that “no Australia cannot become Zimbabwe” (at least not in the near future … ) because hyper inflation or near total annihilation of the value of a currency also entails near total annihilation of the sovereign; that is to say for the US dollar to become worthless the US government would have had to collapse.

If that happens, then sure maybe you want to be like a mercenary from the middle ages and hold gold in the hopes that you can trade it for some other currency that has value.

But despite what manic street preachers and conspiracy theorists will have you believe, total collapse of the Australian and US federal governments to the extent that Zimbabwe or Venezuela or the Weimar republic in Germany collapsed is not really something we need to worry about right now.

It is not a collapse in the currency that causes a collapse of the government, but the other way around.

Private banking

Around this point in the article, I’m sure some of those still reading will be yelling at the screen “BUT BANKS CREATE 97% OF THE MONEY I SAW THAT IN ZEITGEIST AND YOU’RE JUST ANOTHER ROTHSCHILD!!1”.

Firstly let me just say that I agree with you that we have far too much private credit creation at the hands of banks and that financial deregulation has been a disaster for our society and our economy.

We need to rein in banks, and make finance boring again.

However banks don’t really create “money” in the same way that government spending creates “money”.

The “money” that banks create is kind of like Disney Dollars.

This topic could be a whole article of its own so I’ll just say that when banks issue loans they are creating deposits that are valid only within that bank.

Whenever a transaction leaves the bank that originally created the deposit, it has to happen in government money (either notes and coins in the case of a cash withdrawal or exchange settlement funds in the case of electronic transactions).

When an electronic transaction takes place, banks don’t have to settle up with each other right away, they only settle up at the end of the day so they only need enough government money to cover the difference in flows between institutions.

We’re getting too far from the point of the article but I just wanted to include this note on private banking here to ensure that no-one comes into the comments and tells me how this whole article is null and void because of private banking and how could I be so stupid.

Tomorrow: Logical conclusions

 

Are governments ready for the coming economic and social changes?

By Ken Wolff

In 1930 John Maynard Keynes predicted widespread technological unemployment ‘due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour’.

In the decades since there has been rapidly increasing technological change but employment has generally been increasing, matching population growth, although not without winners and losers. The creation of new jobs often lags behind the pace of loss of jobs (as Keynes predicted) and those who have lost jobs are not always the ones who take the new jobs — they are often taken by the new generation.

Since the GFC, governments around the world have felt constrained in responding to the changes in the workforce because they lack money — they are in debt — and are being told by mainstream economists that they must return to budget surpluses. People losing their jobs are not being provided the full range of assistance they need to re-enter the workforce nor, in some cases, even the support to sustain themselves and their families whilst unemployed.

That is a direct result of the dominant neoliberal economic approach adopted by so many Western governments. The neoliberal emphasis on debt also has political implications and the following, although written about the US, could readily apply in Australia:

Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers. Workers have become so deeply indebted on their home mortgages, credit card and other bank debt that they fear to strike or even to complain about working conditions.

While the neoliberal approach remains in place, governments will not be well-placed to respond to current and coming changes in the economy and workforce — selling public assets to reduce ‘debt’ will not help people. Modern Monetary Theory (MMT), on the other hand, offers an approach in which sovereign currency-issuing governments are not so constrained. It is possible for a government to both retain public assets and have the money to provide more programs and assistance to people in these times of economic change. Unless governments embrace a new economic approach like MMT, then the technological unemployment predicted by Keynes is likely to be a real outcome.

The spread of robotics and computerisation throughout the workforce is already happening without us being fully prepared. While there is talk of the need for improved education in things like STEM, computer coding and even innovative approaches, and of the need for a flexible, agile and innovative workforce, these are essentially economic issues and we seem to be ignoring some wider social implications.

A basic question in the rise of robotics is that of ethics. One writer raised an interesting ethical question in the scenario of driverless vehicles: if a driverless vehicle ‘perceives’ that it is about to be involved in an accident and the only pathway to avoid the collision may involve hitting a woman with a pram, which decision will it make? A human would likely make a moral judgment to face the accident and minimise the impact by braking, swerving slightly or whatever action is appropriate but will an automated vehicle see saving itself as the primary response? Whether driverless vehicles can ‘learn’ to place humans first in such situations is debatable. While theoretically driverless trucks seem to be one of the next major targets of computerisation, I think there are still issues to be resolved but I doubt they will be prior to their introduction as the economic imperative will over-rule the ethical.

Computerisation generally will displace many people from their current work, as discussed in more detail in ‘An economy without people’. New forms of work will emerge but how long will that take? Much of the new work will require higher level skills: will we have the capacity to retrain people for the new jobs or do they simply move to the ‘scrap heap’ to be replaced by the next, better educated, generation? As unemployment increases, how will governments respond? If our government is already complaining about welfare costs, it will find it difficult to provide for the new unemployed as computerisation pushes further into the workforce. With an ageing population, there should be a need to keep more people in the workforce but that may no longer be possible.

Some unemployed may voluntarily enter ‘the gig economy’ to help tide them over. But the gig economy may also be on the rise as companies decide it is more ‘efficient’ (cheaper) to hire workers only as they are needed for specific tasks or projects rather than maintain a larger full-time workforce, meaning many more people will be forced into the gig economy. While for people it is ‘the gig economy’, for economists and businesses it is the ‘on-demand’ economy: that difference in terminology also shows how people can be removed from consideration in the coming changes. Whatever it is called, it will have many implications.

Nick Wales at the UNSW Business School has raised one basic concern:

“It polarises people”, says Wales. “Is this creating communities of entrepreneurs who have been marginalised from the traditional economy, such as housewives, students, retirees and immigrants, offering them the flexibility of part-time working? Or is it an underhand way for businesses to get around labour laws and pay these contractors low wages?”

If more and more people are working in the gig economy and on short-term contracts, what rights will workers have? They will not have paid sick days or holidays, or protection from unfair dismissal. Even many occupational health and safety rules may not apply. They will also need to provide for their own superannuation but the extent to which they can may well depend on how much they are able to earn. And will unions find new ways to cover them or is this the final death of unions? (If the role of unions diminishes even further what impact will that have on the future structure of the ALP?) Will these gig workers be treated as, or choose to become, small businesses? We have already seen the problems created by the use of ‘contract workers’ and in the new economy that looks set to expand exponentially.

How do banks respond to people who do not have full-time work/regular income if they are working gigs? At the moment, loans to such people would either be out of the question or, at best, be classified at high risk of default. If, however, this form of work becomes normal for a large proportion of the workforce, banks simply cannot ignore such a significant customer base. There will need to be innovative products that cater to the needs of such customers.

Banks may become more important in another way. There is a possibility that people will become more reliant on debt (loans and credit cards) to carry them through between gigs. It may be in the interest of banks to move into areas of lending currently dominated by the so-called ‘payday lenders’ as there is likely to be a growing market for such short-term products. Banks will have much thinking to do about their role in the new economy.

The gig economy has implications for how government views employment and unemployment as the 37-hour week may no longer be the norm. The OECD is already working on new indicators for employment and unemployment. It is likely, however, that any new definition of ‘employment’ will reduce access to unemployment benefits as it is likely to involve shorter periods of work. Even paying unemployment and other welfare benefits in their current form may no longer be appropriate as they are tied to levels of income. The ‘paperwork’ (data entry) involved in making constant adjustments as people move in and out of short-term jobs (some very short-term) will become onerous as the number of gig workers increases. New forms of payment may be required.

Then there are issues of government regulation and taxation. Already the ATO has ruled that Uber drivers must register for and pay GST as they are providing a ‘taxi travel service’. Current taxi drivers believe Uber is not competing on a level playing field because it does not need to meet the same licence and safety regulations. Victorian cab drivers are protesting a Victorian government announcement that it intends to deregulate the industry. While that may create the level playing field the drivers are seeking, they are not happy that the Victorian government is offering to buy back current taxi licences at a price below what many paid.

On the other hand, if more ‘workers’ are operating as contractors and small businesses, what impact will that have on government revenue, particularly if the push continues to lower company tax rates? Governments may need to reconsider that approach as ‘company tax’ could conceivably become the biggest source of revenue as more people in the gig economy register as small businesses to reduce their taxation.

Deregulation and ‘contract work’ or operating as a small business do not provide the full answer — although it will be attractive to the neoliberal economists and, as such, support for those approaches may be the advice that governments receive. It would mean a large workforce not protected by any provisions for safety, holidays, superannuation nor even hours of work. As Wales suggested, it would allow companies to under-cut existing wage structures and make full-time employment even less attractive for other competing businesses, creating a feed-back mechanism encouraging further use of gig workers.

The Aspen Institute in the US, however, does not believe that governments should regulate but allow companies, workers and consumers to experiment with new models:

… that can begin to give shape to a social contract for a changing economy and new century. We need a better system that ensures workers have the stability and security they need, without stifling innovation or undermining the flexibility the on-demand economy offers.

While suggesting that ‘stability and security’ are required for workers it is basically leaving that to ‘the market’ to determine. Given the history of market solutions, I would have no faith in it reaching a suitable arrangement — because, as explained in the first article in this series, ‘the market’ after all is people manipulating trading for their own advantage and it is to their advantage to have an insecure workforce that is less likely to make demands regarding wages and conditions. Government, even if intending to allow such an approach, must hover at the edges and be prepared to regulate minimum conditions.

While a new economic approach like MMT will help governments understand that they do have the money to deal with problems, it is not the answer to all the issues I have raised (it is, after all, a macroeconomic theory). I am concerned whether its Job Guarantee can be used in the new economy or whether it, too, is based on a model of full-time employment.

At Davros earlier this year, a report to World Economic Forum stated:

During previous industrial revolutions, it often took decades to build the training systems and labour market institutions needed to develop major new skill sets on a large scale. Given the upcoming pace and scale of disruption brought about by the Fourth Industrial Revolution, however, this is simply not an option. Without targeted action today to manage the near-term transition and build a workforce with future proof skills, governments will have to cope with ever growing unemployment and inequality, and businesses with a shrinking consumer base.

So the final issue is that it is not just workers who will suffer. Robotics, computerisation and an increasing number of gig workers will each contribute to ‘a shrinking consumer base’ and that has implications for business survival — in essence, their rush to reduce costs could be creating the conditions for their own demise. That in turn will impact government revenue in lower company and individual tax revenue — but only if they continue to cling to the neoliberal economic approach. If there is a silver lining to this ‘cloud’, it may be that the neoliberal economic approach will be shown to provide an inadequate response to the new situation.

With the possibility of declining consumption and problems redefining employment and unemployment, the concept of a ‘universal basic income’ may gain more traction. Although a proposal to introduce such a payment was recently voted down in Switzerland, it is being considered in Finland and the Labour Party in the UK has begun discussing the concept. In simple terms it is an income payment made to every man, woman and child. It has the potential to replace virtually all welfare payments including pensions, unemployment benefits and family support payments for children: in the case of unemployment, it would remove the need to redefine ‘employment’ to meet the circumstances of the new economy. As it would be paid to everyone, it means those who are working would also receive the payment and it becomes necessary to apply tax to the payment so that those who are in work return a much greater proportion of it in the form of tax. Even the MMT approach would require taxation of such a payment to ensure that it did not create demand beyond the productive capacity of the economy. For businesses it would help maintain the consumer base and so be of benefit to them. With fewer workers, the productivity benefits of robotics and computerisation will not be spread throughout society but further concentrated in the hands of the company owners and shareholders, unless something like a universal basic income is adopted. As robotics and computerisation spread and replace major portions of the workforce, such an approach may become the only viable option.

It appears we have a rocky road ahead. Governments will not be able to respond effectively if they cling to neoliberal economic approaches. Avoiding regulation and spending, and leaving resolution to ‘the market’ will be a recipe for disaster and even businesses will suffer. Without new approaches we will continue to have an economy in which people are placed last and well-being is barely a consideration.

It is time this conversation began because if we leave it until the impact is being felt, it may be too late to avoid a major economic downturn, ironically created by the very process businesses thought would boost their profits.

What do you think?

Are businesses blindly pursuing robotics and computerisation without fully understanding the wider implications?

Can ‘the market’ be trusted to reach new solutions or must governments first find new approaches (including MMT) to protect the people?

 

This article was originally published on The Political Sword.

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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 1)

By Iain Dooley

In a recent article on The AIMN, ‘What is Modern Monetary Theory and will it help?‘, Ken Wolff gives an excellent outline of Modern Monetary Theory (MMT).

It’s a great article and covers all the key points about MMT with absolute clarity, and yet in the comments we still had many people who either:

  1. Said they were still trying to understand MMT
  2. Disagreed with elements of what Ken had said, or
  3. Claimed that MMT was somehow flawed (with reasons variously given or not given).

I have been “monsplaining” (a term I coined to describe the act of explaining MMT to people on social media) for about a year now and I have found that the key difference between critics and proponents of MMT is which creation story of money they subscribe to.

This is a debate that predates the development of MMT by about 350 years and one that most people don’t realise even exists.

Basically it comes down to the following 2 options:

  1. Currency arose spontaneously out of barter and markets are created spontaneously, or
  2. Currency is a constitutional project created by a sovereign which thus creates markets.

In the former story (advocated by people like Positive Money UK, Austrian school economists, monetarists and other orthodox economists) people created money because they are enterprising geniuses and then the government came and screwed everything up by wanting a piece of the action.

This is the dominant money creation story.

In the latter story people were living a life devoid of liquidity and therefore lacked the ability to create complex organisational structures in the public purpose. A sovereign creates liquidity in the form of currency that not only allows it to provision resources to the public purpose but also allows private markets to flourish.

I’m sure you can see how the money creation story you believe will determine all your subsequent economic and political views.

What does this have to do with MMT?

If you try to understand MMT without first accepting the state theory of money, you will face an uphill battle.

You will look at equations and find them daunting and confusing. You will be blinded by the operational contrivances of our current economic system. You will find statements made by MMT economists and proponents confusing and unintuitive, and will be prone to believing people when they criticise MMT based on their own flawed understandings of economics.

On the other hand, if you start by accepting the state theory of money, you will find that everything about MMT is a logical extension from it.

You don’t need maths or models and you can easily see through the veil created by our system of “sound financial policy” to the heart of how things operate.

The whole exercise becomes tremendously simple.

This is why MMT economists and proponents call orthodox economists “flat earthers” and why on more than one occasion I’ve stated that “disagreeing” with MMT is like disagreeing with gravity: you might not understand how it works, but this is how things do work.

And it’s not just how things work now that we have a “fiat” currency; in fact this term is misleading because all successful currencies have been “fiat”.

Even when money is made from a commodity, has a fixed exchange rate or is convertible to a commodity, it is still a “fiat” currency, it’s just that the way you set things up can restrict your domestic policy space.

But until you have internalised the state theory of money, you will not believe me.

So in this article I’d like to present the state theory of money, some resources where you can read further if you don’t believe me, and provide direct responses to several of the comments people left on Ken’s original article.

The economy is a chore chart

You are a parent and you have some children. You want your kids to do some chores around the house so you put a chart up on the fridge for each kid. When they do a chore they get a tick, and 10 tickets equals 15 minutes time playing computer games.

Some things should be immediately obvious:

  • The amount of chores you can get done is limited by the number of children you have, not the number of ticks you can write down
  • The children cannot redeem ticks unless you have issued ticks; in other words the “spending” of your currency precede the “taxation” of your currency
  • When you issue ticks, you create them and when the children redeem ticks they are destroyed

But something else has to happen before these “ticks” become “currency”.

Markets

What we have looked at a system where the transactions occur only between the parents or “sovereign”, and the children or “citizens”.

This is basically a communist system where we have 100% employment by the sovereign and no private purpose.

The kids have no mechanism to trade their ticks and do not produce anything for sale.

Now imagine that we created ticks inside a spreadsheet instead of written down on paper, and we created a system whereby kids could allocate ticks to one another.

We might find that the kids start to pay each other for things.

This would mean that kids actually wanted to have more ticks than they needed simply for getting their computer time. In other words, we would have to issue more ticks than were redeemed in order to allow this “horizontal” medium of exchange to exist (issuing more ticks than are redeemed? Should sound familiar to you: this is called “deficit spending”; more on this below).

So we might find that the kids actually do more work than they need to, in order to have some ticks left over after they redeem them for computer time to spend on goods and services created by their siblings.

But if the kids wanted a means of trading between each other, why didn’t they just make up their own system? Why didn’t they just do the bare minimum required to get their computer time, then do no more chores and create a “parallel” currency that allowed them to freely trade between each other?

Here’s a thought experiment:

Imagine they did: the kids decided to use poker chips. So each child did just enough work for the “sovereign” to cover their computer game needs, then they used poker chips to get each other to do stuff.

The chips could be redeemed later with the same or a different child to get them to do work in return.

The first week, child 1 worked really hard for all the other kids and collected all the poker chips.

The second week, child 1 said “okay now I am going to pay you guys to do work for me” and the other children said “nah we aren’t using poker chips any more” or “I only do 5 minutes work for 20 poker chips” or something like that.

There was no anchor for the value of the poker chips; nothing that they represented as an obligation to a sovereign that the children all had in common.

Such a fundamentally flawed system could never survive for very long, and could never be as robust as a sovereign monetary system (this little thought experiment should be enough to demonstrate to you how ludicrous the notion that currencies spontaneously emerge is, but again the resources provided at the end of the article go into this in much more detail).

This “parallel” currency failed and so the kids asked their parents for a way to trade officially issued ticks, and did more chores in order to acquire them.

Sure you might say that the kids could draw up a charter of value for poker chips and enforce that people accept them in payment but this is just another form of sovereign authority, albeit more democratic.

Tomorrow: What the Fiat?!

 

What is Modern Monetary Theory and will it help?

By Ken Wolff

Modern Monetary Theory (MMT) is a macroeconomic theory for the current age in which governments have abandoned the gold standard and also floated their currencies. It is ‘macroeconomic’ and ‘monetary’ because many of its conclusions relate to the money supply in an economy. Does it offer scope for a new economic approach recognising people? Can it better assist responses to robotics and computerisation than current economic approaches?

Historically, gold was important because coins were minted from it (and silver). Even when coins were no longer minted in gold, the currency issued by governments was convertible to gold and governments needed to hold sufficient gold reserves to satisfy a potential demand from all holders of their currency — that was the gold standard. In that situation governments could not spend without first taking money from the economy (taxation) because the money supply was limited to match the quantity of gold. Following WW2, fixed exchange rates also meant that governments, through their central banks, had to defend the rate they had fixed by buying or selling their own currency in international money markets: that also affected the money supply in their home economy and also placed limitations on government spending. Floating currencies now allow central banks and governments to target domestic economic policy goals knowing that the floating exchange rate will resolve the currency imbalances arising from trade deficits or surpluses.

MMT points out that much economic thinking since the 1980s operates as though the gold standard is still in place — namely, that governments can only fund their spending by taxation and therefore deficits are bad — but some MMT proponents and supporters argue that this has ideological (neoliberal) rather than genuine economic underpinnings.

Since the abandonment of the gold standard, most countries, including Australia, now have a fiat currency — that is, it is created by government fiat (decree) — and it has no intrinsic value. My $50 note is not matched by $50 worth of gold any longer, nor is my plastic note worth $50 itself (in 2012 Australia’s polymer notes cost 34c each on average to produce irrespective of their face value). My note has value only because the government decrees it has and the government is the monopoly provider of currency: therefore it is the currency I need to participate in the economy and to pay taxes.

MMT places this new reality at the centre of its approach. A sovereign government issuing its own currency can never run out of money, never go bankrupt or default on its ‘debt’. That in a sense was Greece’s problem: as part of the Eurozone it was no longer an issuer of its own currency. In that circumstance, as for the states within a sovereign nation, the oft-used analogy of a household budget still applies but it does not apply to the sovereign issuer of a currency.

The ‘sovereign issuer of currency’ argument leads to probably the most well-known and sometimes controversial aspect of MMT, that a government can always ‘create’ money. The critics argue such printing of money — although these days it actually requires only a few keystrokes on a computer to create deposits in the private banking system — will lead to hyperinflation as in Zimbabwe or the Weimar Republic in post-WW1 Germany. MMT accepts that inflation is one factor that imposes a limit on government spending but that limit is not reached until all the ‘real’ resources of the economy are fully utilised — all human resources (full employment) using all available physical resources. If a government continues to spend after that, then dangerous inflation may result but, prior to that point, MMT argues that government spending to assist utilisation of available resources will not lead to uncontrolled inflation. For MMT, the issue is not just money but the real human and physical resources that are available to the economy and not currently being used:

If there are slack resources available to purchase then a fiscal stimulus has the capacity to ensure they are fully employed.

As a means to help control inflation, current mainstream economic thinking accepts the Non-Accelerating Inflation Rate of Unemployment (more commonly known by its acronym, NAIRU). The Australian Treasury uses NAIRU in its modelling as the basic foundation of longer-term stable inflation — currently the NAIRU in Australia is 5% unemployment. Before NAIRU, full employment was taken to mean there would be about 2% unemployment, allowing for people moving between jobs or unemployed short term for various reasons. In practice, NAIRU provides a ‘buffer stock’ of unemployed which basically means that having those extra unemployed, above the previously accepted 2%, provides downward pressure on wages growth because the unemployed are more willing to accept lower wages simply to have a job. The argument goes that if unemployment falls below the NAIRU level the competition for workers will mean employers accept demands for higher wages thus leading to higher inflation. (Despite the whole capitalist free market system being based on competition, whenever workers appear to have a competitive advantage it is decried as a threat to the economy!)

MMT rejects the NAIRU and instead proposes a Job Guarantee for the ‘unemployed’, sometimes referred to as ‘transitional employment’ which probably describes it better. As opposed to the NAIRU ‘buffer stock of unemployed’, MMT offers a ‘buffer stock of employed’ but this is done at a ‘fixed price’ — in Australia this would be the minimum wage, inclusive of standard employment conditions. It means the government supports employment until such time as a person obtains higher paying mainstream work and it will be in productive work using under-utilised resources:

What matters … is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available — if they are not already being used to produce something else — then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

On broader monetary issues, MMT says that there can only be saving in the private sector, inclusive of banks, businesses and households, if the government spends more than it collects in taxes: that is, only when the government adds money into the economy can there be private sector saving as well as investment.

A good, simplified explanation of this was provided by John Carney at CNBC in 2012:

The MMT people aren’t actually referring to you and I saving. They aren’t even talking about the entire household sector saving financial assets. They are talking about the entire private sector spending less money than it earns.

You can easily see why this would be impossible without the government spending more than it collects. Every dollar someone is paid is a dollar someone else has spent. If we all — every single person and company — spend less than we are paid, very quickly we will find we have to be paid less. The aggregate effect of savings is to reduce the total amount people are being paid for things.

So this is what MMT people are talking about when they refer to a “private sector desire to net save.” They mean that if you add up all the earning, spending and savings of every person and company in the economy outside of the government, sometimes you find that the private sector is trying — nearly impossibly — to earn more than it spends.

The only thing that can make private-sector net savings possible is government spending. If the government spends more than it takes in taxes, the private sector can earn more than it spends. Remember, if everyone pays less than they earn, some outsider must be paying more than he earns.

The MMT equation for this is:

(G – T) = (S – I)

Or in words, government spending (G) minus taxes (T) equals private saving (S) minus gross private investment (I). This is so because in macroeconomic terms the two represent the entire amount of money in the economy. And the other key of this equation is that it shows that money does not come into being in the private sector unless the government has first spent it (over many years now).

MMT points out that when governments run surpluses it leads to an increase in private sector debt because, in that circumstance, if the private sector wishes to save and invest, it has to borrow from the existing pool of money (and the government surpluses are actually reducing the money supply). This is explained by the concept that transactions between banks, businesses and households are ‘horizontal’ transactions and cannot change the amount of money in the economy (liquidity). Only a ‘vertical’ transaction between the government and the private sector can change liquidity (MMT includes both the treasury and central bank when it talks of ‘government’).

In the USA, on all occasions when the government has run surpluses, and reduced debt for a few years, it has been followed by recessions or depressions. Arising from the indebtedness forced on the private sector by the government surpluses, there comes a point when the private sector reduces spending because it cannot afford to take on more debt, thus creating an economic slow-down. In such circumstances, only government spending can relieve the situation. (It is also of interest that since 1776 the US government has been in debt in every year except for the years 1835 to 1837.)

In a globalised world, however, national economies do not operate in isolation so one more aspect needs to be added to the equation: exports (X) and imports (M).

(G – T) = (S – I) ‒ (X – M) or

(G – T) + (X – M) = (S – I)

If a country has a trade surplus that adds to private savings. Many countries, however, as Australia, operate a trade deficit which means that private sector saving is reduced and more reliant on government spending. And at a global level the nett outcome of all countries’ trade must sum to zero, so it is impossible for every country to run a trade surplus — a surplus in one country necessarily requires a deficit in other countries. So a trade deficit or surplus is not bad in itself but does affect private sector saving and creates more need for government to adjust its spending appropriately.

Although even MMT still talks about deficits and surpluses, my reading is that those words are less relevant in MMT. If a government can create money it can never really be in deficit (except perhaps in a point-in-time accounting sense). Even claiming that the deficit represents spending more than collected as taxes is not relevant. MMT says that the government does not need taxes in order to spend — it can always create whatever money it needs. The real purpose of taxes is to take money from the economy or, in economic terms, to reduce liquidity, meaning there is less money to spend and thereby total demand across the economy is also reduced. What taxes can achieve is to create ‘space’ for government spending. If an economy is already running at capacity and the government continues to spend, that is increases liquidity and demand without first making space for that spending, then high levels of inflation may result because there is more money in the economy to buy the same amount of goods and services, meaning people competing for those goods and services are willing and able to pay higher prices to obtain them. So taxes can be important in allowing government spending without dangerous inflation but are not necessary in themselves for that spending.

Similarly MMT argues that the sale of government bonds is not necessary to fund government ‘debt’. So-called ‘debt’ can actually be met at any time because the government can ‘create’ the money to do so. But as always the limiting factor is controlling demand in relation to the capacity of the economy so as not to allow dangerous levels of inflation.

MMT’s explanation is that the sale of government bonds is primarily a means of controlling interest rates: this relates to the overnight commercial bank reserves placed with the central bank but I won’t attempt to explain how that works. (This interview with Bill Mitchell for the Harvard International Review provides an explanation and also a good summary of MMT.) A secondary reason is that banks, financial markets and the private sector generally, desire government bonds as a safe haven to park money. Here in Australia, that became obvious during the Howard/Costello years when the government paid down its debt and saw little need to make new bond issues but the private sector complained and the government had to issue more ‘debt’ even though it had no debt: that fact alone gives credence to the MMT argument.

Although the approach is called Modern Monetary Theory, it places more emphasis on fiscal policy. Bill Mitchell writing on the current economic problems said, ‘until we stop relying on monetary policy and restore fiscal policy to the top of the macroeconomic policy hierarchy, nothing much is going to change’. Mitchell argues that governments have been using the wrong approach to overcome the current economic stagnation affecting many countries:

It is not that they have run out of ammunition. They have been using the wrong ‘ammunition’. For example, trying to drive growth with low or negative interest rates failed to work because the lack of bank lending had nothing to do with the ‘cost’ of loans.

It had all to do with the dearth of borrowers. Households, carrying record levels of debt and facing the daily prospect of losing their jobs, were not going to [start] suddenly bingeing on credit again.

Business firms, facing slack sales and a very uncertain future, could satisfy all the current (low) levels of aggregate spending in their economies with the existing capital stock they had in place and therefore had no reason to risk adding to that capital stock.

In the MMT model, the remedy to many economic problems is fiscal stimulus not austerity which only exacerbates the problems. And as a sovereign issuer of currency the government always has the capacity to provide such a stimulus when there are under-utilised resources in the economy.

Using fiscal policy, and the knowledge that governments can spend as much as they wish, limited only by available real economic resources and inflationary impacts, MMT suggests that the real issues are social policy issues. The debate should not be about ‘debt and deficit’ but what we as a society wish to achieve, wish to become, and, within the limits mentioned, governments do have the capacity to meet those goals. For me that is an important outcome from MMT, not just that it offers a new economic approach but that it offers scope for a new policy and political approach. To that extent, it does allow space for people by creating an economic approach that recognises social policy goals are of critical importance and the ability to achieve them is not so limited or proscribed as it is by existing neoliberal economic theory. For that reason alone MMT deserves more attention.

Next week, in the last of this four-part series, I will consider whether governments are ready for the coming economic and social changes.

What do you think?

Can MMT really change government thinking and overcome current neo-liberal approaches, not just in government but in Treasury?

Will it take a new generation of economists before MMT is accepted? Will that be too late to help the people?

 

This article was originally published on The Political Sword.

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