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Tag Archives: money

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.

mitch 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.

social 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.”

lennon 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’.

 

Money Is No Object!

Paul Sheahan wrote something rather interesting today…

Well, that’s incorrect. He wrote something that caught my eye. And I’m trying to work out whether the man suffers from memory problems or is simply lying. He wrote:

“In politics, the Rudd Labor government went berserk on deficit spending to remain popular.”

Now, I’m happy for someone to debate whether the Rudd government’s policies were effective, or whether they just postponed the inevitable recession. I’m happy for someone to debate whether the money could have been better spent. I’m even happy for them to debate whether or not the pink batts problems were caused by socialism or unchecked capitalism.

But to suggest that the deficit spending was all about “being popular” just strikes me as a total rewriting of history. Even at the time, much of the spending wasn’t popular. The Liberals were telling us that Labor had gone too hard, too early and there’d be no money left when we were actually in recession – which they assured us was unavoidable.. Many asserted that the $900 would be wasted on alcohol and pokies.

(On a side note, isn’t it interesting that when Labor tried to introduce a voluntary pre-commitment amount for pokies, the Liberals teamed up the Clubs and screamed “nanny state”, but the Ceduna trial of a welfare card which can’t be spent on alcohol or gambling is just fine and dandy.)

Anyway, Paul Sheahan thinks that all the Rudd government’s spending was only to make his government “popular”. And I’d like to point out that he does specifically say the “Rudd Labor government”, so he is talking about the spending that was done at the height of the GFC. This not about things like the NBN or the National Disability Scheme.

Sheahan is one of people who like to remind us of that factoid that there’s a limited amount of money. (Note the use of the word “factoid” which, as I pointed out when Christopher Pyne used the word in parliament, means something that’s repeated often enough for people to take it as fact.)

The problem when we discuss “money” is that many people take it as synonymous with “cash” of which there is a limited amount at any given moment. “Money”, on the other hand, is a measure rather than being a thing in itself. Money tells you how much of the limited resources of the world you can access should you convert your money into something else. Of course, should everyone decide to convert their money into things at the same time, then we’d have inflation. And if they all decided to convert their money into the same thing – such as tulips – we’d have a bubble. (See Dutch Tulip Bubble.) We have people telling us that bubbles are inevitable and just part of the capitalist system.

As banks and governments can create money with the stroke of a computer key. money is infinite. Of course, if they do create an excessive amount of extra money, then the existing values of the “money” will diminish. There are a limited amount of tulips and if there’s suddenly an extra trillion dollars in the tulip market that million dollars for a bulb is going to look like a bargain.

Perhaps a good way to look at it is to use a sporting analogy. Money is the score and while sometimes scoring is hard, that’s only because there’s a team that keeps taking the ball of us and trying to score themselves. In the unusual event that we all decide that we’d rather see a good fast, high-scoring game and we start kicking for the same end, scoring becomes a lot easier. Of course, in real life, this doesn’t happen very often, and many people who are scoring like it’s a basketball game, wonder why the soccer players are finding it so hard to score and conclude that it’s because they’re lazy.

So when people start talking about there being a limited amount of money, what they actually mean is that there are a limited amount of resources. However, if governments can use money to reorganise the economy so that more “resources” are being created then it can actually add to the wealth of the country. If a person is working instead of being unemployed or underemployed, then that adds to the overall pool of “resources”.

The question is not whether such things can be done. Of course they can. The question is what is the most effective and worthwhile way to do it. Will reducing unemployment by two percent create a wages breakout? And a tulip bubble which leads to problems down the track? Will increasing unemployment by one percent mean that we have a tulip glut on our hands? Or is it better to have a regulated tulip market and stop all this speculation.

Creating more money was more or less what the Rudd Labor government did in the early days of the GFC. It was about economic management. Given that we were in danger of recession, there was little prospect of inflation.

So the idea that it was about popularity is another one of those little factoids that certain columnists are so fond of helping to create.

 

It’s not Rocket Science

The shortly to be released Mid-Year Economic and Fiscal Outlook (MYEFO) for 2014/15 is expected to tell us what we already knew. There is a blowout in the current budgeted deficit from $29 billion to $34 billion. By any measure one could have seen that coming as far back as June 2014.

Furthermore, budget deficits projected in the forward estimates through to 2017/18 will be exceeded as well. Again, no surprise there. Reduced revenues, largely in the mining sector, and a host of other miscalculations have led us to this point which means the much sought after surpluses that the present government so desperately yearns for, will not be happening.

Is anyone surprised? If they are, they shouldn’t be.

What it means in very simple terms is that the government is spending more money than it is taking in. Well so what? With the private sector not spending what they were expected to, the government should be spending more. That’s how our economy should work. But don’t tell Joe Hockey or Mathias Cormann that. They think government should spend less and tax less all the time.

In a perfect world they might be right but the economies of the world haven’t been perfect for 100 years. And they are not going to start now. Joe Hockey is a captive of neo-liberal economic philosophy proffered by conservative think tanks and business lobby groups that thrive on surpluses.

hocket corman Why? Because continued surpluses mean continued unemployment at a level sufficiently high enough to control wages growth. Joe Hockey’s austerity budget will only serve to redirect national income away from working families and increase the income of the already wealthy in our society through company profits, higher share prices, imputation dividends and so on.

Surpluses undermine economic growth when they are achieved by austerity measures which is what Hockey et al, are trying to impose. That is the backward, twisted nature of neo liberal economics. All they are going to achieve is a reduction in domestic spending power.

When people don’t spend, business slows and unemployment and underemployment grows. It’s not rocket science. MYEFO will likely show that the combined unemployment and underemployment rate is now at 15% and rising. That is not a signal to try and achieve a surplus.

If our most important trading partner, China, continues to slow down its growth rate, Hockey will continue his austerity policy which will mean even slower growth, or no growth for us, leading to recession, increased unemployment and underemployment. How stupid is that?

econs The Australian public have been deceived. They have continually been led down the garden path by politicians and media economists giving the wrong advice. The metaphors of doom have been allowed to overshadow responsible reporting with crisis headlines like: ‘budget emergency’, ‘alarm bells are ringing’, ‘budget black hole’, ‘burdening our grandchildren’, ‘mushrooming budget deficit’, ‘unsustainable spending’, ‘spending like drunken sailors’ and a dozen others I could mention.

But no one seems willing to give the credit where it is due.

In 2008 the world faced the mother of all economic meltdowns all of which was due to the excessive greed and the most irresponsible actions piloted by sections the wealth sector. What did our government do under Kevin Rudd’s leadership? It ‘spent like drunken sailors’.

And what was the result? We were the only OECD country not to fall into recession. Our GDP increased, employment held steady and we were the envy of a world that is still struggling with the aftermath of that meltdown today.

And who opposed Kevin Rudd’s stimulus measures? The present government. And what is their solution today? Austerity. What fools!

What should we be doing?

In the words of Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia, we should, “Get back to doing what governments are elected to do and that is advance public welfare and stand against the vested interests that seek to unfairly gain income and advantage at the expense of the masses.

brick Contrast these words with what you are going to hear from Joe Hockey, Mathias Cormann other government members over the next week or so when MYEFO is released. Then go and bang your head against a brick wall.

It’s not rocket science.