When we hear that a politician has abused his/her expense entitlements, or that federal cabinet has decided to carry out a postal survey costing $120 million, we throw our hands up in despair and cry out, “that’s taxpayers’ money you’re wasting,” and ask why isn’t this money being spent to build a hospital or a road or better still, to give aged pensioners a bit extra?
What will it take to convince people that the emotive outcry, “it’s taxpayers’ money” is a fallacy and a fraud? What does it take to have our ignorant politicians and economists be properly informed?
It’s not taxpayer’s money, it’s government-issued money, being returned to its rightful owners. It’s money created out of thin air by the government central bank and placed into circulation for the benefit of the communities for which it was intended. Then, as reliable as a boomerang and in the passage of time, it finds its way back into government hands, its rightful owners, via taxation.
You would think a process as simple as that, would be easy to explain, easy to understand and not be so deceptively turned on its head so as to make people think it works the other way round. But that’s what politicians and economists are doing. It is utterly dishonest of those who should know better and needs to be exposed for the deception that it is.
The process by which this deception is able to flourish is based on a decades old mindset that sounds simple enough. We are told that we pay our taxes and the government then spends that money to build infrastructure and improve services.
Furthermore we are told that when the government spends more than it collects in taxes, it has to borrow to make up the difference. We call it, the deficit, which then becomes part of the gross national debt that must be repaid over time. We are told that if it is not kept in check, it could threaten our grandchildren’s future.
It all sounds logical. After all, that is how we conduct our personal and business affairs. Our personal deficit spending, mostly on the credit card and the mortgage, must be repaid. So it stands to reason that government debts also must be repaid.
The government, we are told, is the same as a household, only much bigger. But it’s all balderdash! The problem is, the government is not the same as a household; our personal financial management, our household management, is not the same as the government’s financial management. The difference is simple. We can’t issue money. Only the federal government can do that.
But the message isn’t cutting through. The mantra, “it’s taxpayer’s money” keeps bobbing up anywhere and everywhere a politician or economist, a bureaucrat, or a radio or television talk show host has a microphone within reach.
They all keep going on, saying the same thing, over and over again and it’s simply not true.
We might think that our taxes are used to provide government services, infrastructure, pensions, etc., but the reality is, they are used for nothing. They are removed from circulation and once removed, they simply evaporate.
One would have thought, given the exposure of this accounting identity to a broader audience over the past five years that the media would have been all over it, by now. But such is not the case. The media, deliberately or ignorantly, continue to sponsor the ‘taxpayers’ money’ myth.
Our politicians have made such a political football of it that cutting through with the truth, explaining how things actually work, has been rendered near impossible.
These days, as soon as one mentions the word, deficit, whistles start blowing in our heads. Up goes the cry, “They’re spending too much, borrowing too much, paying interest and mortgaging our grandchildren’s future. We’ll go broke!”
It’s so unnecessary. It’s a reflection of our collective mediocrity as well as our ignorance that this absurd situation is allowed to continue. How does it serve the common good to have people believe something that is simply not true?
Yes, we encourage our children to believe in Santa Claus and the Easter Bunny but at least, as the children grow older, they work it out. Why then do we continue to believe the “taxes are for spending” myth? Why, as adults, haven’t we worked it out?
All government spending is new money created out of thin air. Taxation serves to give our currency value, so we will use it, and also to help control inflation by withdrawing it from circulation. It’s just not that hard to understand.
It’s not taxpayer’s money. It’s government money. The taxpayer is paying it back to the government so the government can spend more without causing inflation.
[textblock style=”7″]
Like what we do at The AIMN?
You’ll like it even more knowing that your donation will help us to keep up the good fight.
Chuck in a few bucks and see just how far it goes!
Your contribution to help with the running costs of this site will be greatly appreciated.
You can donate through PayPal or credit card via the button below, or donate via bank transfer: BSB: 062500; A/c no: 10495969
[/textblock]
but as long as governments use the ‘taxpayer money’ and debt strategy to justify cuts to and limits upon spending, using the same terms to criticise their policies is justified. A more correct descriptor of the money the gov generate and spend would be ‘the peoples money’ because ultimately it is a currency over which the people have sovereignty regardless of the economic and taxpaying status of each individual.
Thanks John we simply have to keep on telling it how it is over and over again and hope against hope for the light to come on for some. I get plenty of hits on political conflict, humour and so on however post something on economics in the simplest language and it is like the post has the pox.
Thank you John, I keep saying the same and it is like pulling teeth for some people to just, read an authoiritive document.
S G B
Now I understand that all government spending is created money, and all government taxes and receipts are destroyed money. I also understand that taxation is what gives a fiat currency its value and is used as one of the levers of inflation control. However…
… the government IS the people. They represent US. They implement programs on our behalf because we empower them to do so. Whatever the government owns belongs to the people. Therefore, when the government wastes money it is our money they are wasting. It matters not whether it is incorrectly labelled as “our tax money” they are spending or it is created money. While debt need not be issued to fund government spending, there are still limits to how much currency can be issued before other factors cause problems. Therefore, waste has opportunity cost, and the public are the ones who bear that lost opportunity.
So while the rhetoric is wrong on the facts, it is still right that waste be called out for what it is. That waste, that stupid SSM survey, those political “entitlements”, are still costing the community.
It is a very important distinction between a currency issuer like the federal government and a currency user such as us, the public. Acknowledging this means you understand they are mistaken when they say ‘We’re out of money’ for school assistance bonus. It means you see the ideology propelling the decisions made. We can only keep explaining it.
I really wish you would have used the example of the general public and the media continually bashing desperate unemployed people and pensioners and accusing them of being bludgers living off the hardworking workers tax money. Then I would have shared your article far and wide. I have no sympathy for politicians rorting the system no matter where the money comes from.
Thank you Tina Clausen and Darren for your comments.
I have been trying to find the words to express my concerns on managing a system where everyone believed money can be manufactured out of thin air.
Imagine the pollies rorting then? Bronwyn will insist on helicopters to wherever whenever, Tones will expect a red carpet laid out for him even just for taking a piss, Barnaby would set up his own kingdom…
I understand we have our own Reserve Bank – how do we regulate the issue of currency?
so would I be right if I say that all this Debt Crisis we here coming from the LNP is more about making people more desperate so that employers can play people off against each other to force down Australia labor cost and working conditions ?
Most economists explain fiat currency as being a form of debt, issued by the Government. It is true that Government debt does not need to be repaid – not because Governments issue currency (debt), but because Governments are immortal. Nonetheless, there are very good reasons why Government debt (in all its various forms) should be kept under control. Like many things, debt is a good servant, but a bad master, and that much is as true for Governments as for individuals.
The important things for the valuation of any “currency” is rarity. What needs to happen is for when a child is born or a migrant is given residency or a person dies or a migrant leaves for good the total of that currency ‘Circulating’ must be adjusted so that each and every individual has access to that whoich is most “valued” by others within the system.
Go back to real basics ‘money’ is a piece of paper with the words I.O.U $X dollars and you can redeem that $X from X,Y,Z anywhere willing to give you back more the colour I.O.Us. the problem we have is that that I.O.U system is no longer controlled by the scarcity of the special paper that it is printed on. The problem is that we have replaced a scarce “paper” (see how the Hong Kong Currency is printed) with rows on a spread sheets.
What is also misunderstood is that a fiat Currency (money) is used to represent in a spread sheet the value we have of our selves and our time and effort and skill sets. Thus when a government wastes ‘Money they are wasting our efforts not their BSaT (blood sweat and tears).
Thanks for telling the truth, bro. I know you have deliberately not used the term MMT or heterodox economists (we don’t all believe the taxpayers’ money myth), but your readers could well educated themselves further by spending a few hours with Bill Mitchell, Steve Keen and others.
Cheers mate
Thank you Tina, Darren and Diannaart. Darren, while I understand your claim that the government is Us, in the macroeconomic sense, we have to seperate the two, much like a family is a single unit but the parents are not the children. Someone must accept the responsibility for distribution. The waste, of which you speak, clearly indicates that the distribution as it is today, is uneven and delinquent. That is a failure of policy, and some sections of the community are disadvantaged because of it. You are right when you say that there are limits to how much a government can spend. But those limits are only constrained by the available resources. Money cannot be spent on what is not available. In brief, the waste does cost us, but not maximising full utilisation of our resources, costs us far more.
Tina, pensioners and the unemployed have always been at the wrong end of both government and the media. It is monumental shortsightedness, because they actually spend their money in their communities rather than save or use it to by shares, etc. The purpose of the article was to highlight community ignorance about taxes, which if properly understood, could lead to less unemployed and better rates for pensioners. However, I’m not holding my breath.
Diannaart, pollies running amuck with limited funds is a serious concern now. Spending won’t be unlimited. It is limited, even now to 100% of our available resources. So at a higher rate of spending to bring us up to 100%, the rorting would be proportionally the same. That’s an issue that should be policed with much greater veracity. However, the issuing of currency sufficient to eliminate unemployment should not be penalised because of rorting.
Chris, our readers could learn infinitely more from Bill and Steve. I am a lowly disciple of both and continue to learn everyday.
Taxes “are removed from circulation and once removed, they simply evaporate.” No they don’t…they are credited to a government account at the RBA. I understand all the stuff about currency issuer etc but why keep saying the money disappears when it doesn’t. It really loses me. Yes, it is taken out of circulation temporarily but MMTers seem to hate any accounting questions and until they can be answered I will always struggle.
“Taxation serves to give our currency value, so we will use it, and also to help control inflation by withdrawing it from circulation.”
We have had this discussion so many times and I am still yet to understand. I know you say taxes have to be paid in Australian dollars so that makes demand for our currency. I truly don’t understand that. I am absolutely certain that, if I lived in the US and had a tax bill to pay to Australia I could just pay it with my US dollar bank account. They press some buttons entering currency exchange and bob’s your uncle – one US dollar account debited and one AU dollar account credited – no need at all for currency of any description other than e-currency.
You also seem to always ignore the very real purpose of a progressive taxation system in redistributing wealth.
I agree government spending is not constrained by taxation receipts – after that I have problems.
Greg Wurn, the debt crisis (so called) is a fallacy, a lie and a political paradox. A currency issuer never needs to borrow. The issue of bonds, which is what we call the debt, is not related to workplace conditions. It has benefits in curbing inflation and controlling interest rates but these could easily be addressed in other ways. The artificial practice of restraining wage claims is achieved by maintaining an unemployment pool. Again, it is a politically motivated exercise to discourage and subdue wage claims.
Kaye Lee, wiser heads than mine have tried to explain this process to you. I have tried several times and failed. All I can say is, that as an accounting exercise, everything is done as if it were a business. I guess that is why you don’t “get it.” The thing is, we already live in a MMT world. The government could spend to the limit of its available resources, eliminate unemployment and not borrow. It doesn’t need taxes to spend. It spends everyday without sourcing taxes collected. But the accounting procedures will always reflect a business approach as if it were a corporation. It will always do that, but that doesn’t change the fact that it’s spending is limited only by its available resources. As for the payment of taxes in $AUD, you answered your own query. If I offered $US to pay my taxes, they would have to be converted to $AUD. It’s possible that the ATO might do it for me, but it would still have to be converted. They are not going to credit my tax account with $US. Hope this helps, but it probably won’t.
Kaye Lee – That taxed dollars return to the government through a RBA account isn’t so much the money physically surviving but more so an accounting identity – the books must balance so your debit (tax) becomes the government’s credit. It serves only to make the entire process a zero sum game (as it must under the rules of double entry book-keeping)
Unfortunately I am not economically literate enough to answer any accounting questions you may have but I’m sure reading Bill Mitchell , Steven Keen or Stephanie Kelton (my favourite) would be enlightening.
And I’m sorry but describing the purpose of a progressive taxation system as a vehicle for wealth redistribution is just ideological bullshit. The wealth does not have to be re-distributed- the rich don’t have to pay for the welfare of the poor … this just furthers the notion that there is a finite supply of money and plays into the hand of those who would foist (unnecessary) austerity upon us.
Taxation needs to be considered as no more than one of several economic levers along with interest rates,unemployment etc – its twin purposes being to give value to the sovereign currency (it has value as people need to earn dollars to pay their taxes) and to remove money from circulation in order to limit the supply of money in the economy and therefore prevent or limit inflation.
John Kelly re:
Spot on. And that ‘everything’ includes the political world. That’s the ‘reality’ of government – as shared by virtually all across the political spectrum.
MMT has a political problem. And I don’t know how to address it but I do know that virtually no politicians across the world are in the business of creating a new MMT reality..
For Kay Lee as much as I enjoy your writing you are incorrect on this, if you understand basic General Journal Ledger accountancy it is logical… please see the attached link: The Operational Reason Why Federal Taxes Are Not Revenue For The Federal Government
Operationally, it is impossible for the federal government to spend the proceeds of tax collections. Since this is a major topic of interest for laypersons, I’m going to explain operationally why your dollars paid in federal taxes are not spent by the federal government on anything.
http://www.realprogressivesusa.com/news/economic-issues/2017-06-29-the-operational-reason-why-federal-taxes-are-not-revenue-for-the-federal-government
I keep asking because I want to be convinced, not because I disagree with the principle as you seem to think.
PK1765, I would really prefer links to the Australian system which is not the same as the US system.
As I have tried to explain many times, I fully understand the fact that we do not need to issue bonds and I understand the concept of our only spending constraint being our unused productive capacity. You don’t need to convince me of that. You say money is just spent into existence but the reality is this cannot happen at the moment because the RBA precludes the government from going into overdraft. What they could easily do is just credit an RBA account with a nominal figure like $200 billion and spend away provided it was on productive enterprises rather than stuff like dud fighter jets.
And I still don’t understand the tax in Aussie dollars thing. “If I offered $US to pay my taxes, they would have to be converted to $AUD.”. It’s done by the press of a button – a simple arithmetic conversion. Where is the demand for “currency”? What limits the amount of Australian “currency” available to pay bills? Perhaps if you can answer that last question I will get closer to understanding.
Well said, Kaye. We could pay the welfare bill and a decent dole, pensions, the whole lot, without needing to tax or borrow.
You are right that spending is constrained by physical resources and taxes are needed to limit the money supply (which is almost all done by the big banks lending). Keep posting on this. Even my mates at the pub get it. The media and our politicians (and our public servants) are complicit in the lie that spending can be equated in any sense to taxpayers’ money.
In answer to your question, there is no limit and the sovereign can demand that you pay in its currency, meaning you must get some AUD to pay your taxes. This creates a demand for it, as does an economy that prices its goods and services in the local currency.
As you allude, all the current short and long term bonds and bills owed to bondholders can be repaid without taxation or borrowing ** remember the bondholders lend us AUD and the Government can create infinite amounts of it. Spending without borrowing or (adequate) taxation hits the exchange rate when this happens, but the long term health of the AUD is based on relativities and, for example, how our economy goes. But, when we no longer can spend because our incomes have disappeared or reduced, who is going to buy what the companies are selling?
Start the conversation with your friends. Taxes do not fund anything, they only destroy the dollars already spent by the Government.
As an example of how things can progress. Our politicians may not be doing anything tangible for affordable housing, but they are talking about it.
Those who understand the truth about how the AUD works need to keep shouting. Eventually, the media will be unable to stifle debate, and it will begin.
This isn’t the 20th century anymore
“In answer to your question, there is no limit and the sovereign can demand that you pay in its currency, meaning you must get some AUD to pay your taxes. This creates a demand for it, as does an economy that prices its goods and services in the local currency.”
If there is no limit on the currency then how does that create demand for the currency? I do not need to have the currency to pay the bill.. If I order something on my credit card from the US, the amount even appears in US dollars on my bill. That doesn’t stop me from paying it in AU dollars. Perhaps the banks have to do some sort of reconciling but my question then gets back to what limits them? Where is the demand for currency created when I don’t need it to pay the bill and if it is the bank that needs it, what limits them? They don’t have to go and get Aussie dollars. it is all done by the press of a button.
PK1765, from your link, “When the federal government taxes you, it is placing a tax liability upon you. You settle your tax liability to the federal government by giving the federal government its liability (currency) back. Both your tax liability and the government’s liability are then cancelled.”
As I read that, it tells us that taxes, when paid, are extinguished, no different from paying any other bill. The accounting record reduces the transaction to zero.
Kaye, you cannot extinguish your tax liabilities with a foreign currency. If we assume the ATO does the conversion, they would likely charge you a hefty fee for their trouble, meaning you pay more than you would if you offered $AUD. Credit card transactions involving foreign currencies also attract a fee. The foreign amount appears on your bill along with the converted $AUD amount plus a fee for the service. But the total payment on the card is in $AUD. Credit card transactions online can only be done in $AUD. ATO transactions online can only be done in $AUD. They DEMAND that. I doubt you could shop at Myer with Euros. You might, but in the end, someone has to do the conversion, because Euros are of no use to Myer anymore than they are to the ATO. The government only spends in $AUD. You DO need $AUD to pay your bills.
That’s exactly my point John – I can pay that US dollar liability with AU dollars. They do the conversion based on currency exchange and I pay the bill. I am sure they would allow me to do the same the other way if I had an Australian tax liability. I doubt it would be the ATO doing any conversion, it would just be handled by my bank (no doubt with some fee attached). No-one is passing over cash. It’s all just numbers on a computer. The only way I can see this creating demand for aussie dollars is if, when the banks do their reconciling, there is some limit on the pool of available AU dollars. I have no idea if that is the case.
I do not care where the money comes from or what it looks like. It could be made by the fairies at the bottom of the garden and stored in honey jars for all I care.
What I do know and care about is the fact that much “money” is wasted and there are people, who do not deserve it, but get their hands on large amounts of it – and apparently get away with it as if it had never existed.
guest, totally agree with your comment.
I don’t care if it falls from the sky, but I do care where the money is spent; I don’t want anything spent on Chiobo’s world travels, on war gear,or Bishop’s sporting events. Lets have some better roads, faster trains, spend some on education, healthcare…don’t build more jails, start rehabilitating wayward youths…
How much GDP growth are we seeing as a result of all this ‘currency’ creation? If they can create it from nothing, I see no reason why the government should complain about giving ‘currency’ to the unemployed.
Fiat currency creation has always ended badly and will this time also. Note also that, ‘currency’ is a proxy for energy and we are progressively creating more of the former and receiving less of the later.
Our current debt reliant ponzinomic system increasing relies on confidence.
Kaye Lee: Sorry for being late to the discussion.
If there was an unlimited pool of AUD then the price of the AUD on the Forex exchanges would be zero. Correct? Hence the available pool is finite. When demand for the AUD increases, compared to what is available, the price goes up as we might expect.
Only the RBA can issue the AUD. When you pay your taxes in AUD, this does not cause the RBA to issue more AUD. Therefore the total pool of AUD remains the same until (by some means) the taxes paid are “extinguished”.
If you decide to pay your taxes in US$, then you will need someone to use your US$ to buy AUD on the exchange. This could be your (USA) credit card provider or any other intermediary.
If lots of people start buying AUD in US$ for whatever reason, the AUD price (w.r.t. that currency) goes up, as happened a few years ago when the the AUD was higher than the US$. None of this causes the RBA to issue more AUD, unless it intervenes in the currency markets to bring down the price of the AUD by (producing and) selling more of them (which it can do).
Under current arrangements, the only other time the RBA issues more AUD is when it intervenes in the bond markets to maintain the RBA-set exchange rate. In this case, if the bond prices fall too low, their yield goes up and therefore it becomes necessary for the RBA to buy bonds (using AUD) so that the price goes up to the right level.
This is my best understanding of the situation and I am of course prepared to be corrected on any point. Does this answer your doubts?
Just go to Bill Mitchell’s site and search for “bond markets” to understand that. You can also search for “currency and taxes” and get lots of wisdom on that issue.
BTW just as an aside, the neoliberals who always bleat about “spending other people’s money” by govt.s that tax highly but spend on social welfare etc. have nothing to say about the money that govt. gets as royalties for the extraction of “minerals” from the ground. Surely that belongs to everyone and not to “hard working taxpayers”? And if only the govt. would not give away our mineral wealth so cheaply, we might all be better off, but we know how that works don’t we?
Kaye – In your example, you could use $USD to pay a tax Liability in $AUD, however you would first have to convert the money into $AUD via a bank, currency exchange or via whatever method, as the RBA will not accept foreign currency for payment of federal government taxes. When you convert those $USD into $AUD you are effectively ‘buying’ the australian currency from that trader, so it is real liquid currency that already exists in our economy which then in turn is removed from circulation when it is transferred to the government as a tax payment.
I think part of the confusion is that the federal government currently issues bonds to cover all federal deficit spending. There is no actual reason for them to do this any longer, it is a historical legacy practice going back to the days before the Bretton-Woods agreement when most world currencies were backed by gold or some other form of intrinsic value. In the modern era the only thing that gives a fiat currency value is the fact that the government will not accept taxes (and also royalties, excises etc) to be paid in any other currency – that’s it! These days the government continues to needlessly issue bonds and it’s really just a form of corporate welfare for the wealthy and the financial sector who can afford to purchase those bonds, as they are a form of guaranteed investment (it is literally impossible for the feds to default on a bond since they alone issue the currency that bond is denominated in) – so calling bonds a government ‘debt’ is a deliberate form of sleight of hand as those bonds are always denominated in aussie dollars so will always be repaid no matter what the ratings agencies say! The fact that even during the Howard fiscal surplus years (note I say fiscal, not budget) that the RBA continued to issue billions of dollars worth of bonds, so clearly government bonds are not required to fund federal spending. they could choose to do away with the bonds entirely and just pay for goods and services directly out of fiat issued currency! The fact that howard continued to issue bonds despite the surplus was actually an utterly way for him to expand the currency supply (required to allow for GDP population growth which naturally require more money in circulation) without actually spending that currency on useful things
A really important point on taxes though, is not that they provide value to the currency, but also they give the government the fiscal room to spend on socially beneficial things. without taxes, the government could continue to spend however your average punter and especially business and large corporations would spend all of their own money on things that aren’t generally beneficial to society. Eventually all the real goods and services (real resources) would be gobbled up by the private sector, and government spending would be hugely inflationary in that scenario.
companies and the wealthy tend not to spend on socially beneficial things, so that’s why it’s really important that the government levees taxes in a progressive way, to ensure it can spend on socially beneficial things like health, education, infrastructure etc without causing inflation
the neo liberalist debt strategy in action in Brazil. https://www.ft.com/content/4edee690-aeff-11e7-aab9-abaa44b1e130
kaye lee. what makes aust currency of any value is that by law gov make it the monopoly legal tender curency and guaratees its value. in aust purchases and transactions between individual citizens can take place in any form of exchange eg barter. also i dont think it is entirely true that all aust taxes must be paid in aust currency. i think the tax office does also accept gold and silver in payment of a tax debt. i think u are right about the reserve bank. its not the gov that issues currency…its the reserve bank as an independent agency of gov and the gov borrows amounts it wishes to spend above its tax take from the reserve bank. that is the source of debt plus the interest on bonds etc. mmt needs to overcome some very significant political and legal hurdles for it to be a pragmatic workable system.
Sooooo….if there is a finite pool of Australian dollars that creates demand for our currency, what would happen if, as MMTers advocate, that pool of money increased significantly? Wouldn’t our currency go into freefall?
And, as I asked before, what limits this available pool of Australian currency?
I also am very confused about the RBA. It might make decisions to issue more notes and coins but it definitely does NOT make the decisions about issuing bonds. I don’t see how it plays any role in the amount of AU dollars that are available other than actual cash.
I am continually told that the RBA and the government are the same thing. They are not.
MMT is a MT GG. Its beating a dead horse.
All government spending is new money created out of thin air. Taxation serves to give our currency value, so we will use it, and also to help control inflation by withdrawing it from circulation. It’s just not that hard to understand.
It’s not taxpayer’s money. It’s government money. The taxpayer is paying it back to the government so the government can spend more without causing inflation.
Following on from John Kelly’s closing paras… how will MMT effect the shenanigans and general bullying tactics of Australia’s top accounting firms, CPA Australia, Chartered Accountants Australia and New Zealand and the Institute of Public Accountants?
Reform of conflicting commissions continues to be renounced and generally ignored by the above mentioned firms.
http://www.abc.net.au/news/2017-10-12/accountants-fight-financial-planning-reforms-to-ban-commissions/9045080
Will appointing the measures recommended by Bill Mitchell et al, have any influence on current finance industry unfair practices?
Having read much about MMT am still not seeing how appropriate regulation can be placed on the MMT.
the pool of money available is not finite in theory at least. But gov policy certainly treats it as such. Gov spending needs to be backed up by hard currency that can be drawn upon by creditors of the gov in the settlement process. That is, those who the gov issues money to or pays. The gov creditors have a right to cash. So when the parliamentary or executive gov wants to spend it does not have authority to simply register more digits in its bank account at the Reserve Bank as MMTers say. They overlook the role of an independent central bank in the system that has a monopoly on minting cash and coins and they assume the parliamentary or executive gov has absolute control over money production and distribution. That is not the case. There would need to be changed to legal arrangements for MMT to be implemented and until then it is largely a possibility conditional upon the changes to legal arrangements or policy. Budgetary deficit or debt is the difference between estimated forward expenditure and reserves in the gov account. Hence the gov interest in the cashless welfare card, the cashless economy and digital currency as no cash is exchanged or called upon. It shifts the risk of the financial system onto traders who accept the card for transactions.
the Reserve Bank is responsible for ensuring liquidity in the national economy. That is, that there is enough cash available to ensure settlement of transactions can take place. To do that it needs to have cash on hand for the payment system to work in the event there is a call on funds during settlement proceedures. The Reserve Bank decides the degree of liquidity required not the parliamentary or executive gov. The parliamentary gov has no control over that decision. Under current arrangements if the gov wants to spend more money it needs to back up its expected expenditure with liquid reserves and can’t just insert a few more digits in its account at the Reserve Bank without the Reserve Bank’s concurrence. These are all legal arrangements that need to be dealt with if MMT is to have any practical implementation. It is not simply an economic matter as MMTers seem to think it is. There are very significant legal arrangements in play that have evolved over hundreds of years.
The pool of money is definitely not limited by the notes and coins that are printed. If it is unlimited then I get back to where is the demand? If it is limited, then by what?
In my view a great deal of Australia’s current economic under performance is because the Reserve Bank has abandoned its duties. On its website it says this:
“What are the Objectives of Monetary Policy?
The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959
1. the stability of the currency of Australia;
2. the maintenance of full employment in Australia; and
3. the economic prosperity and welfare of the people of Australia.
Since the early 1990s, these objectives have found practical expression in a target for consumer price inflation, of 2–3 per cent per annum. Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.”
Inflation is currently 1.9% – well below the target of 2% to 3%. The over emphasis upon adherence to the inflationary target has lead to the Reserve Bank’s failure to achieve the second and third objectives. It has more or less achieved objective 1 but we are, and have been, a long way from full employment for many years and the welfare and prosperity of the vast majority of the Australian people is in reverse. In my view, the Reserve Bank is actually failing and needs reform and its policies are a significant cause of the lingering malaise in the Australian economy.
‘If it is unlimited then I get back to where is the demand?’ Sorry ‘demand’ for what? Currency?
Only a certain amount of notes and coins equivalent to a proportion of the value of total transactions are kept on hand. That doesn’t mean the amount of notes and coins on hand needs to be exactly equal to the total value of all transactions taking place in the economy.
“Sorry ‘demand’ for what?”
Australian dollars to pay tax liabilities.
Everybody’s talking about Bitcoin lately. Does anybody here know much about it?
I’m tempted to buy some.
well most people who owe tax would be paid in Australia in Australian dollars PAYE so when they pay their tax it would be in $au and deducted automatically from their pay in $au. If they earn foreign currency then it would be exchanged by the bank when transfering the money to the ATO. Still not quite sure what the question is though.Banks are required to hold $au over night – that is called the cash rate -which the Reserve Bank sets and requires under a banking licence. When the reserve bank announces the interest rate it is only setting the cash rate – the amount banks must hold over night to give effect to settlements. Then they hope that affects other interest rates which it only seems to do partly . If a transaction takes place in Australia in a currency that is not $au and tax is owed on that transaction then the tax would still be owed in $au and the person owing the tax would have to pay it in $au so would have to acquire $au to pay the tax. That is one of the ways the Gov can maintain the value of Australian currency by maintaining a demand for it by those who owe tax.
“Everybody’s talking about Bitcoin lately. Does anybody here know much about it?
I’m tempted to buy some’
I could have bought some when it was about $200 a few years back but thought it had risks, Kicked myself when it went past $4000. Bit too high a price for my liking now. Higher the price the increase in risk. It’s a complicated process if you really want to make money out of it. Has advantages like taking them across borders and avoiding exchange rate fees from banks. Buy in Aust in $au sell in USA in $us. but you would need a bank account in the receiving country to accept the sale proceeds. Try the horses. WINX is almost a certainty.
I think the fundamental point here is that the RBA, although notionally independent, is not some sacred cow that is beyond reform. There is no reference to it in our constitution and it was established by an act of federal parliament. It was established in the pre bretton woods era before we had a proper fiat currency with a floating exchange rate, when currency was actually backed by something tangible. In that era it was quite reasonable for governments to have to borrow any deficit, it’s not now!
Even under their current guiding legislation, their third goal is to support fiscal policy to the benefit of the commonwealth. You could easily take that to mean that the RBA, whilst remaining independent, could just ‘give’ the Feds the money to cover any fiscal deficit via overt monetary financing rather than the current ridiculous arrangement which is nothing but a source of free money to the financial sector. It’s unquestionable that with our current rate of population growth and our backlog of infrastructure spending, to even contemplate a fiscal surplus would be a disaster and would instantly cause a recession. Simply because a surplus is taking currency out of circulation
Look, I really find the whole “taxation creates demand for currency” a distraction and I don’t understand why MMTers keep saying it.
Perhaps a more important question is what effect does a large injection of government spending have on the exchange rate?
‘…what effect does a large injection of government spending have on the exchange rate?’
Theoretically it would create a disequilibrium between supply and demand. Supply of aussie dollars would be greater than demand for aussie dollars and hence the value of each aussie dollar would fall and prices of goods and services relative to the aussie dollar would increase as you would need more aussie dollars to buy the same goods….i.e. inflation….simple supply and demand economics.
Jordan “I think the fundamental point here is that the RBA, although notionally independent, is not some sacred cow that is beyond reform. There is no reference to it in our constitution and it was established by an act of federal parliament.” Yes it is set up by an Act of Parliament that can be reformed, amended or repealed. And there are good reasons why it should be….it is not achieving its objectives and has not done so for sometime now. Reform is needed. “It was established in the pre bretton woods era before we had a proper fiat currency with a floating exchange rate, when currency was actually backed by something tangible.” No. It was formed after Bretton Woods. Previously the Commonwealth Bank was the gov owned central bank. The USA renigged on the Bretton Woods agreement in the early 70s after the Reserve Bank had been formed based upon the Bretton Woods Agreement. Maybe that’s another reason why it needs reforming.
It is all about corruption and greed. The greedy INTENTIONALLY have duped the public for decades. This keeps the public from demanding more, but also provided a SMOKESCREEN for the ways that our corrupt politicians sucked the country’s money to themselves and their owners/donors.
Every ‘privatization’, every ‘public-private’ partnership (generally speaking – we have that here in the US, not sure what your cheaters call it), allows the FEW to bill the government ANY AMOUNT, providing massive exec salaries and billions in profits, at least here in the US. Here, those systems mainly are: defense, federal prisons, and healthcare insurance. They are arranging education and infrastructure, and have a long list after that.
The corrupt know that the federal dollars are ENDLESS, so if they can invest in each other’s ‘systems’, they do so whenever they can, knowing that profits are GUARANTEED.
Another scam here is to demand drug testing of welfare recipients – since welfare is a federal program, the politician wanting this will OWN or be invested in a drug testing facility, and the owner can bill the govt ANY AMOUNT, again providing massive exec salaries and phenomenal profits.
There is ‘waste’, all right, but that waste is typically SITTING IN THE BANK ACCOUNTS OF THE CORRUPT, instead of actually being USED to employ people who want jobs, to fix infrastructure, to provide good education and healthcare and so on (which would provide MORE jobs for providers and in construction and so on).
Regular people need to REALLY UNDERSTAND what has been done for decades, since 1971 in particular – these same greedy types are who took out Prime Minister Whitlam; I guess he was not interested in their corruption. Those who say ‘No’ are removed. Assad said ‘no’ to a US pipeline through his country, and suddenly became a ‘bad man’.
Same story for many MANY decades.
Kaye, when you pay your taxes with USD, the currency exchange takes place automatically, so I know it seems trivial. But behind the scenes, the bank knows that only AUS dollars will be accepted by the govt. So the bank says “I’ve got USD here and I need AUS. Who wants to trade?”, right? The answer to how taxes create demand is in what the bank just said. It NEEDS AUS. Need is demand. Need creates demand. The bank has promised to accept your USD and settle your tax debt with it, so it must find someone to trade with. Just because it is easy to find someone to trade with doesn’t mean that there is no underlying need to do it.
My daughter asked me about what taxes are for…
Like you John I have getting blue in the face telling my friends and colleagues that SOVEREIGN GOVERMENTS OF A FIAT ECONOMY do not NEED revenue to issue cash/ credit into the economy over which it has legal tender and rule of law.
I have been doing some basic lectures on this (the series is called “Ask Dad….about economics ” ) It is aimed at my kids’ age group ie 17-20.
I will only put a link to my vimeo videos if you want me to.
But, I came up with a mnemonic to answer the purpose of government taxation. DCFFS (“Don’t Cheat For Flips Sake”!!)
D=Drainage …to drain excess money supply to control inflation
C=Coersion…. citizens are forced to transact in the sovereign currency. Penalty is jail via A TO
F=Fodder….politicians NEED something to argue about even if it is a huge merrygoround of straw men
F=Favour….equally pollies need a means of showing favour and disfavour to key voting blocks. This is through tax signals
S=Surveillance…. this is the really sinister function of the A TO. It has enormous powers of surveillance amongst citizens and companies( all in the guise of “safeguarding taxpayers money ” haha ha!!!)
NOTE the absence of revenue as a valid raison d’etre for a tax system run by a sovereign government
Cheers