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Tag Archives: MMT

Do Not Obsess About Debt, Obsess About the Vitals

By Darren Quinn

Professors Edmond, Holden, and Preston are mistaken in that Modern Monetary Theory (MMT) says we should not worry about budget deficits. The effects of budget deficits are significant. As Stephanie Kelton, the most well-known MMT economist in the world, says, we should focus on the deficits that matter. The jobs deficit, the environmental deficit, the deficit of affordable housing for homelessness, and many more. The financial deficit from the budget is the private sector surplus, the money in your pocket and mine.

Keynes used financial praxis to argue for fiscal stimulus in severe recessions, and since financial praxis is always and everywhere an MMT phenomenon, Keynes used MMT.

The professors are also mistaken to say that it is a well-accepted idea that the spending comes first. Many politicians and commentators who talk as if the government spending is like a household budget are economists or have worked in the central bank and Treasury, among other public service jobs. So the television talking heads like financial commentators and public-facing economists such as Stephen Koukoulas and Saul Eslake are not saying these things.

The professors have not been paying attention if they think MMT proponents and economists do not explain when the inflation constraint binds. Every time MMT talks about real resources and their availability, MMT proponents are talking about inflation constraints. The real resource constraint is the inflation constraint.

It is a truth universally acknowledged that central banks do not have a working theory of inflation. Therefore, they must be in want of an excellent post-Keynesian economist like Joan Robinson or an MMT economist like Australia’s Bill Mitchell. After all, those economists have a working theory of inflation that matches reality.

The professors claim that conventional economics has a comprehensive analysis of what causes inflation; however, they would have to elaborate on this to prove that claim. Perhaps the professors are just thinking of the debunked monetary and neoclassical theories of inflation. Daniel Tarullo, a former Federal Reserve Bank board member in the United States, explains [The Financial Times, paywalled] that central banks do not have a working theory of inflation.

MMT has always acknowledged that inflation can occur below full employment, as currently demonstrated through the coronavirus pandemic and the Russia-Ukraine conflict, with Australian unemployment at 3.5% and still 1.3 million people looking for work. As the professors should know, bottlenecks can occur in various sectors from spending before full employment is reached. This congestion can occur in the form of a resource shortage in a greater supply chain of production. It is currently being demonstrated by the lack of oil and natural gas supply in the Australian production chain.

If the Ukraine conflict had not affected oil supplies, then automotive fuel would not have been ever-increasing in price. The price increase was alleviated by the temporary excise cut in fuel. Who would have thought that reducing prices reduces inflation? Inflation is a measure of prices, so of course, lowering prices reduces inflation.

What about price rises for natural gas? These rises have occurred because we have sold our industries off to foreign owners who demand world prices for our gas instead of us owning our energy industry and setting our own prices. Putting aside environmental concerns with these fossil fuels, we are not in control of our energy resources. What we need is an Australian strategic reserve of our energy, owned by Australians and priced in Australian dollars. We briefly saw this achieved when the government activated the Gas Supply Guarantee Mechanism.

As stated earlier, we should focus on the deficits that matter, so yes, if you want to implement policies from the Green New Deal or a larger social safety net with increased social security payments, they should be argued for on their own terms. This conflicts with the professors agreeing that spending comes first (meaning that there is no purely financial constraint) but then saying that implementing any given progressive policy may cause politically unacceptable inflation. MMT explains that keeping an eye on resources and/or expanding capacity in domestic production can minimise inflation risk.

It is worth noting that neither Treasurer Chalmers nor Finance Minister Gallagher has formal training in economics or finance, but they have public service experience in these fields. These Labor ministers have concerns about increased expenditure on Health, NDIS, Aged Care, and Defence. It is an exaggeration to say these are a political concern. As the professors have previously explained, they are reasonable goals that the public can argue for on their own terms.

The professors have not disputed nor disproved Modern Monetary Theory but, in effect, agreed with it. It is clear that Modern Monetary Theory’s time is now. The time to flick the switch is now!

Darren is a leader in educating people in modern macroeconomics. He played a founding role in educating Australians via social media channels and has engaged some prominent Australians on commentary about Modern Monetary Theory. Darren is a member of Modern Money Australia, Australian Real Progressives and has been involved with the Modern Money Network. You can see more of his work at https://www.darren-quinn.net and https://www.realausprogressives.com

You can find him on Twitter @AusMMT @dquinn03

 

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Printing Money

Adair Turner is a British Lord as well as a businessman and academic. He is, according to Wikipedia, a member of the UK’s Financial Policy Committee, a chairman of the now abolished Financial Services Authority, a former chairman of the UK Pensions Commission and a member of the Committee on Climate Change.

Recently, this celebrated Baron Turner of Ecchinswell issued a paper that he delivered to the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015.

Turner’s article is heavy reading but it is summarised and commented on more simply, by John Cassidy of The New Yorker under the title, ‘Printing Money’.

As most of us know, the term ‘printing money’ is a misnomer. Apart from a small percentage of notes and coin, today all money is processed via electronic transfers from the Central Banks to the private banks who in turn credit their respective account holders. Money today is, essentially, just numbers in a computer moved around in millions of transactions every day.

Turner’s article is essentially about Overt Monetary Financing (OMF) which is the creation of debt free money to fund government deficits.

At present most Western fiat currency issuing governments finance deficits by issuing interest bearing bonds to the private bond market.

Such a process is a hangover from the fixed exchange rate mechanism of the gold standard era.

OMF, as described by economist Bill Mitchell “brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.”

Modern Monetary Theorists (MMT) support OMF. It is money creation without debt.

The difficulty supporters of MMT have faced in the neo-classical world is that whenever we attempt to explain it, the words, ‘printing money’, ‘Weimar republic’, ‘Zimbabwe’ and more recently, ‘Greece’ are thrust in our faces as if to suggest that such a proposal would send us bankrupt, that hyperinflation or at least some kind of inflation would destroy our economy.

The reality is that none of these outcomes would result with OMF. Inflation occurs when excessive spending outstrips the ability to supply. However where a nation has underutilised resources, i.e. unemployment, and OMF draws on those resources to increase supply and meet that demand, inflation will not happen.

In reality, it is the pathway to full employment which brings about an increase in the tax base, a debt free fiscal position, as well as growth and higher living standards.

There are those that argue that continued growth based on the exploitation of finite resources is unsustainable and they are right. However, people are our most important resource and within us we have one resource that is not finite: the mind.

Ground-breaking discoveries in technology and social cohesion continue to reduce our dependence on natural resources. They will continue to do so as our minds continue to search for better ways to do things. And money, a product of the mind, which has evolved over time to be what it is today, is now another of our most powerful resources.

It is as infinite a resource as is organisation, initiative and discipline. But money has, almost from its inception, been corrupted by individuals and governments to service greed.

Money needs to be restructured to serve its most wholesome purpose: equality. Modern Monetary Theory seeks out that wholesomeness, that equality.

As a direct consequence of the corruption of money as a resource, evidenced by the GFC, we now have the gurus of macroeconomics throwing their hands in the air, bereft of ideas on how to restore economic growth. Little wonder they are now slowly but surely turning their heads towards the simple principle of Overt Monetary Finance.

Turner writes, “My proposals will horrify many economists and policymakers, and in particular central bankers. Printing money to finance public deficits is a taboo policy. It has indeed almost the status of a mortal sin.”

While Cassidy writes, “Given the problems of debt overhang and slow growth, and the high toll that an extended period of economic stagnation could take on Western democracies, we face a choice of dangers. We could revert to the standard model, hoping that another round of debt issuance in the public and private sectors will juice the economy. Or we could resort to something different and radical: the electronic printing press.”

Bill Mitchell’s blog on the subject of Adair’s article and Cassidy’s response to it, reflects his own take on the changing attitudes to the way economies are managed.

He writes, “It is interesting that more people are now talking about things that the MMT crowd have been writing and thinking about for a fair while now.

It is clear that ideas that were considered ‘crazy’ some years ago and now being entertained as being plausible by the mainstream media.

Given the vilification that our small group endured when we set out on this MMT journey, I find all of this rather amusing. Apparently it takes a British lord to give an idea credibility. So be it.

It is better that these ideas penetrate the mainstream debate through which ever means than be sequestered by the mainstream media and wheeled out as a way of humiliating commentators who dare to challenge the mainstream paradigm.”

Let us hope that as the world continues to struggle with flat demand and little improvement in employment, some national leaders with a sense of vision and a passion for equality, will catch on to the idea and implement a strategy to mobilise our underutilised resources. Such a vision would go a long way toward that mythical image John Lennon created when he penned, ‘Imagine’.

 

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