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The Mystery of Money or how I learned to stop worrying about debt and deficits.

When Leigh Sales asked Bill Shorten on Thursday night how he was going to pay for the promises he made in his budget reply speech, Bill dodged the question. Well, why shouldn’t he? Politicians do that. But the answer he should have given was: The same way governments pay for anything. They credit our bank accounts with money the Reserve Bank creates out of thin air.

If the broader Australian community understood the principle of the three sectoral balances, they would be immune to the lamentable language used by politicians, journalists, business commentators and television anchor men and women who demonstrate daily how little they know about money.

People would also be immune to the pathetic lies politicians spew out on a daily basis. They would see through the thinly veiled deceptions economists of all political persuasions practice when they write or speak about the state of the Australian economy.

The language used by the above mentioned people in respect of the health of national economy is so distorted, it renders any attempt by those who try to explain the true position to failure, which, thus far, has resulted in a state of collective national ignorance.

fixConstant references to ‘repairing the budget’, ‘fixing the budget’, ‘the deterioration of the budget’ are meaningless in terms of fiscal balance. But the very worst of the worst of them is the mantra ‘balancing the books’.

For those who don’t get it, the books are ALWAYS balanced.

So how does one start to correct these corruptions? The least complicated way would be to explain, as simply as possible, the principle of the three sectoral balances.

The economy is divided into three sectors: government spending, private spending and external spending (imports/exports). At the end of any given cycle, these three sectors are always balanced, i.e. their combined value always equals zero.

For the private sector to be in surplus, at least one other sector must be in deficit. Our current account (our export/import account) is usually in deficit because we generally import more than we export). If the government sector deficit is greater than the external deficit then the private sector (you and I and the businesses we work for) must, of mathematical necessity, be in surplus. That means we are either saving more money than we are investing, or paying down personal debt. The equation can be expressed thus: (I-S) + (G-T) + (X-M) = 0.

budgetThe current thinking is that governments must be in surplus for an economy to be strong. That is false. For an economy to be strong, the most important element within that economy is employment.

If an economy can boast full employment it doesn’t matter which of those three sectors is in deficit. They will still balance out to zero, but more importantly, welfare payments from the government will be minimised allowing it to concentrate on providing essential services such as schools, universities, hospitals and public transport, the very things it is elected to do.

That leaves the private sector to trade secure in the knowledge that a growing robust economy will ensure they will expand and be more profitable. Full employment also guarantees adequate tax revenues to maintain a balanced economy ensuring delivery of essential services. All of which translates to constant growth and improved living standards.

So where are the sectoral balances at the moment? Our government is in deficit and the external trade account is in deficit, which means the private sector is in surplus. That means you and I and the companies we work for have money to spend. So why aren’t we spending?

The answer lies in our fear and uncertainty. The government is sending us false messages about the state of the economy. It is obsessed with limiting its own spending to produce a surplus, and does not understand the negative impact that a surplus has on the broader community.

If the government returns to surplus and the external account remains in deficit or balanced, the private sector must absorb the difference; you and I and the companies we work for, must go into debt.

During the Howard/Costello years when government surpluses were being brought down almost every year, the external account was either balanced or in deficit and the difference was being absorbed by you and me maxing out on our credit cards, mortgages and personal loans. Private debt skyrocketed during that period.

Today, 7 years later, that debt has not come down. Private debt is higher today than ever before. So what will happen if the government returns to surplus? It is a mathematical certainty there will be more private debt, mortgages will be higher, people will seek out more personal loans and credit card debt will continue to rise.

employThe Australia economy does not have a debt problem. It has an employment problem. The only way to correct this is to increase employment; to make unemployment redundant. For that to happen, government must embark on deficit spending way beyond the puny measures outlined in this year’s budget.

What about the escalating debt I hear you ask? It doesn’t exist. The debt our politicians, journalists and mainstream economists talk about are treasury bonds issued by the government to manage the bank overnight lending rate and to soak up excess reserves in the system.

They are not debt. They are like shares purchased on the stock market. They can be bought and sold on the bond market. Or, the Reserve Bank can simply buy back the bonds.

They attract an interest rate payable by the Reserve Bank twice a year which the bank creates out of thin air. It costs nothing. This is the great deception successive governments practice on an unsuspecting public.

When the bonds mature, usually after 10, 15 or 30 years, the Reserve Bank repays the bond holders by issuing more bonds or by simply crediting the accounts of the bond holders. This is not a new practice; it has been happening for the past 40 years since we dropped the gold standard and adopted a fiat currency.

It is a process completely separate from deficits and surpluses. Government deficits are good most of the time just as debt free savings are good for the individual most of the time.

If politicians and journalists deny the veracity of this practice then one of two things is true. Either they are the ignorant ones, or they are concealing the reality of how money works.

reserveIf you doubt any of this, then listen to the former head of the US Federal Reserve, Ben Bernanke. When asked by US 60 Minutes reporter, Scott Pelley: Is that tax money that the Fed is spending?
Bernanke answered: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

This is how it happens here in Australia as well. When the government pays its bills it simple makes an electronic entry on a computer. Taxes have nothing to do with it.

234 comments

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  1. Johnnydadda

    Thank you, I am glad this concept is finally getting some traction in the media.
    Professor Bill Mitchell of Newcastle Uni provides detailed analysis of Modern Monetary Theory on his blog – http://bilbo.economicoutlook.net/blog/.

  2. mikestasse

    For an economy to be strong, the most important element within that economy is employment.

    Not quite…….. For an economy to be strong, the most important element within that economy is GROWTH! Strong growth = strong employment, and without growth, you can’t create all that money out of thin air you talk of John, because all money is created as debt to foster growth, the classic dog chasing its tail paradox.

    And therein lies the problem of course…….. growth is finished. We are at LIMITS TO GROWTH, just as was predicted over 40 years ago, and nobody has a plan B……

  3. flohri1754

    I want to agree with you, John, but isn’t that going too far down the track plowed by Greece? Or am I missing something here? I do agree that a governmental surplus just means that the government has taken too much money in from somewhere …. it has a surplus because it isn’t (as Howard’s government wasn’t) spending sufficiently on infrastructure …. which includes its people as well as physical items such as roads, bridges, railways, etc. ….

  4. stephentardrew

    Shame on you John for making it so simple. Where are all the charts, graphs and convoluted metaphors of free markets and invisible hand; of trickle down lifters and leaners? how dare you confuse us with truthful rational simplicity and coherent logical thinking. Next minute we will be expected to believe in science.

    Now your’e giving journalism a bad name by not fawning to the lords of deception and double speak so no job for you in the MSM.

    The thing is it is just so damn simple that it demands the public think in very basic logical terms devoid of the rubbish that is daily perpetrated upon us by so called main stream economists and neo-con pundits. How long will it take before people realise these morons are duds. A few more financial crises. A great big collapse in the housing bubble and the mortgage belt. More unemployment and impoverishment of the marginalised.

    Fools that is exactly what this budget is giving you while Shorten and the Greens muddle along with not a skerrick of comprehension. I realise the right strategy is to be persuasive but right now you damn fools can’t even add up two and two so how the hell can we tread softly in the hope of change. You my dear fellows must take responsibility for repeating the same crap over and over again without a semblance of critical analysis.

    Listen you dumb f..ks you are being sold a great big lemon and like idiot sheeple you refuse to think simply and critically. All the dumb fawning journalist think they will get browny points for mindless conformity to the oligarchs of power and greed. After all it was you lot that got us into this shit by not doing your jobs.

    Once again you idiot journalists sleep in your well padded cells of complicity and ignorance pretending you have some grasp upon reality. Well think again dumbo.

    If I could John I would put this excellent piece of journalism up in lights and make everyone capable memorise the facts.

    As you noticed I am more than slightly pissed and mad as hell.

    Boy that little brain fart felt good.

  5. John Kelly

    flohri1754, it is impossible for us to go down the same path as Greece. We are a monopoly issuer of our own currency. Greece surrendered its monopoly when it joined the Eurozone. Greece was also spending beyond its capacity to produce goods and services. Our GDP is approx $1.6 trillion. I can’t ever see us spending that much in any one year. This year’s budget is just $367 billion.

  6. John Kelly

    mikestasse, it is full employment that produces growth. No one working = nothing produced. Growth is not limited if people keep breathing. The rest is political.

  7. Phi

    Great article John Kelly.

  8. Pingback: The Mystery of Money or how I learned to stop worrying about debt and deficits. | THE VIEW FROM MY GARDEN

  9. tripe whatalotoff

    at last. a cut and paste link for when the morons-for-hire start moaning about debt, interest payments, someone has to pay for it or any other related uninformed bleat.

  10. totaram

    Sadly, our politicians just don’t get this. They are all locked into this “how do we pay for it?” syndrome. Wayne Swan still thinks he did a great job by trying to get a surplus budget, and as to MMT he is reported to have said “I don’t agree”. What does he not agree with? That you can divide the economy into 3 sectors and they must add up to Zero?

    Just getting the “budget” idea out of their heads is a problem for most people, because they equate the economy to a household or a business, Bill Mitchell refuses to use the word “budget” and insists on calling it the “fiscal statement” and we should all do the same.

    It is worth pointing out also that the govt. “debt” is in the form of bonds, many of which are owned by you and me through our super funds and other financial institutions. So we are the creditors, rather than being debtors in that case.

  11. Glenn

    So many people don’t get the differences between “budgets” and it is difficult to get through to them.

    I have asked friends who are vehement about deficit/surplus if they borrowed for their own home. When the answer is always “yes” I point out they had a home at the end and hopefully paid off by retirement due to income changes coming up.

    I then ask when does a government (not the elected one but the Nation) retire? Not only does it not retire but the income continues to increase.

    So if income (tax, duties etc.) continue and the income involved can service debt for things like infrastructure spending, stimulus etc. why would we stop that spending? Currently, with our credit rating Australia could negotiate loans at interest rates lower than our inflation. We would in fact be ahead AND get the things we need.

    But try to get THAT in to 3 word slogans 🙁

  12. Blanik

    Thank the gods for independent media, and thank you John Kelly.

  13. Lee

    Love your work, JK. Have a great weekend. 🙂

  14. kerri

    Even if the Government did need more money in taxes they are doing very little to encourage employment other than passing the job to small business owners and of course blaming the unemployed for their own problem.
    Thanks again John Kelly

  15. Lee

    Did anyone watch The Weekly with Charlie Pickering the other night? Tom Gleeson said a surplus is overrated and it means the government is collecting too much tax from us. I’m waiting to see how many of the Lib voters run with this thought. He likened a surplus to sending Joe Hockey out to buy pizza and then said “you should have bought garlic bread, you dick!”.

  16. Lee

    This government has retrenched about 4400 employees from the tax office since coming to power. Last week Four Corners featured a story on working tourists being used throughout the country as slave labour within the food processing chain. They’re employed by labour hire contractors who collect the award wage rates from the food producers using this labour, but they keep a large slab for themselves and pay a pittance to the workers. There were workers being employed under false names. Bank accounts weren’t used and workers were being paid in cash. Yesterday an article in New Matilda quoted someone from the National Union of Workers who said that these labour hire contractors don’t even need an ABN. Why most of the electorate cannot realise from all of this that our income tax is not required when the government can’t even be bothered collecting it, is beyond me.

  17. mikestasse

    We’ll have to agree to disagree John….. but you have this back to front.

  18. Gilly

    show us the money .. Show us the money .. For goodness sakes, just because you don’t flash the family jewels does not mean you don’t have any.

  19. AndrewL

    The current government has done a sterling job of taking large manufacturing businesses (cars, subs, airplanes) and turning them into small ones via outsourcing and foreign trade deals, they figure that there will be a bunch more small businesses to kick in the guts now. Can’t wait until they are kicked out of power.

  20. Jexpat

    It’s unfortunate that we’ve had to have this reactionary redux from John.

  21. John Kelly

    Glenn, I like your analogy even though it includes an unfortunate reference to the family household, but your following comment needs a heads up,
    “So if income (tax, duties etc.) continue and the income involved can service debt for things like infrastructure spending, stimulus etc. why would we stop that spending? Currently, with our credit rating Australia could negotiate loans at interest rates lower than our inflation. We would in fact be ahead AND get the things we need.”

    We as a monopoly issuer, don’t need to negotiate loans with anyone. We sell treasury bonds to the market and set our own interest rates. Also, we don’t need taxes to fund infrastructure. As a monopoly issuer we can fund anything we like. Taxes merely help in controlling inflation.

  22. mars08

    How odd…

    The debt and deficit bed-wetters are furiously averse to spending money the government doesn’t have… yet so keen on the citizens borrowing money to “have a go”

  23. Ciriacus

    Great article John, just one thing, every instance of the word “principal” should really have read “principle”
    A mnemonic to avoid this confusion is “The principal alphabetic principle places A before E”.

  24. Wally

    Great article and easy to understand, I can relate to it on a local scale but I cannot get my head around this on a global scale. What happens if we import more than we export to the extent that the bonds we generate to pay the bills are nothing more than dud cheques? Is that when the arse falls out of our currency?

    I think it was Argentina in the 1990’s where inflation was hundreds of percent per month so the currency devalued quicker than it could be spent. At the time the only solution for Argentina was to sell the entire country to off shore investors who could use other currencies that were much more stable to finance their purchases and activities. I think this is what they refer to going down the gurgler.

  25. Glenn

    Hi John
    I understand your reticence to my reference to households but most don’t “get it” without some sort of bridge.

    And I am still getting… but sort of get your next comment about being a monopoly issuer but need more time to digest it.

  26. Bacchus

    Wally

    Argentina’s problem was their debt was in $US – when they said “stuff that” and only issued debt in their own currency, things started to turn around. That’s similar to Greece with their debt in a currency they don’t issue…

  27. Bacchus

    This has been posted here before, but it is well worth repeating. Steven Hail has a knack of putting MMT in a more easily digestible form – well recommended to those with an interest: https://www.youtube.com/watch?v=qBpm5sVmGYc

  28. Dean Collins

    hmmm an entire article on M1 and no mention on inflation = fail.

  29. John Kelly

    Dean, I don’t follow you.
    Wally, Bacchus has covered it. Our GDP is $1.6 trillion. To be Argentina, we would have to borrow $1.6 trillion per year in US dollars for several years.

  30. trishcorry

    A very good article John. Thanks for posting. I am so glad I have read this. I watched Steven Hail’s video the other week as well. So it is great to read something in the same vein. Hail’s video is definitely 1.5 hours well spent. He explains it all in such simple terms and for once I found economics quite exciting. More and more people need to watch this video, or it needs to be packaged for the people who only have enough patience to watch a short video. It is really important.

  31. mikestasse

    NEVER leave out the effect of PRIVATE DEBT……. I absolutely agree with you that our public debt is not an issue, but Australia’s TOTAL DEBT level IS. This from Steve Keen……

    The main feature distinguishing my approach to economics from mainstream theory (known as “neoclassical” economics) is a focus upon the importance of credit in a dynamic, non-equilibrium framework. From this perspective I identify the ratio of debt to GDP — and the rate of change of that ratio — as the key determinant of the state of the economy, and this is what alerted me to the approaching Global Financial Crisis in late 2005. Debt to GDP levels in both Australia and the USA — the two countries for which I could get reliable data — were clearly on an exponential path that I knew had to break and cause a large economic breakdown.
    Private Debt to GDP ratios since 2006 – GRAPH at link

    This phenomenon was not taken seriously by conventional economists — which is why the crisis took them by surprise — and they continue to misunderstand why it matters, even as the crisis that they did not see coming continues. Some conventional economists have criticized me for focusing on what they call a “crude” private debt to GDP ratio; others allege that I am making a “schoolboy error” by comparing a stock to a flow. In response, I have developed a simple numerical example that hopefully illustrates why the debt to GDP ratio matters.

    Imagine a country with a nominal GDP of $1,000 billion, which is growing at 10% per annum (real output is growing at 5% p.a. and inflation is 5% p.a.);
    It also has an aggregate private debt level of $1,250 billion which is growing at 20% p.a., so that private debt increases by $250 billion that year;
    Ignoring for the moment the contribution from government deficit spending, total spending in that economy for that year — on all markets, including assets as well as commodities — is therefore $1,250 billion. 80% of this is financed by incomes (GDP) and 20% is financed by increased debt;
    One year later, the GDP has grown by 10% to $1,100 billion;
    Now imagine that debt stabilises at $1,500 billion, so that the change in debt that year is zero;
    Then total spending in the economy is $1,100 billion, consisting of $1.1 trillion of income-financed spending and no debt-financed spending;
    This is $150 billion less than the previous year;
    Stabilisation of debt levels thus causes a 12% fall in nominal aggregate demand.

    What about if debt doesn’t actually stabilise in the second year, but instead grows at the same rate as GDP? Then we get the following situation:

    In the first year, total demand is $1,250 billion, consisting of $1,000 billion in income and $250 billion in increased debt;
    In the second year, total demand is also $1,250 billion, consisting of $1,100 billion in income and $150 billion in increased debt;
    Nominal aggregate demand is therefore constant;
    But after inflation, real aggregate demand will have contracted by 5%.

    This is the real danger posed by debt: once debt becomes a significant fraction of GDP, and its growth rate substantially exceeds that of GDP, the economy will suffer a recession even if the debt to GDP ratio merely stabilizes.

    <MORE? @ http://www.incrediblecharts.com/economy/keen_debt_gdp.php

  32. lawrencesroberts

    The most sense I have read in a long while. Why isn’t John Kelly Treasurer.

  33. Ricardo29

    Can you explain this question of interest on our so called debt. E.g. The Libs and their camp followers always saying it costs us x billion dollars a week just to pay off our debt, imagine if we didn’t have to pay that interest, what we could better spend it on?

  34. petermartin2001

    A very good article John. I first came across this way of looking at the economy when I accidentally stumbled on a series of youtube videos made in 2009 by Bill Mitchell and Randall Wray. This is the first one.
    https://www.youtube.com/watch?v=4Ap0ymmVlwA

    I just thought Wow! Of course this is exactly right. Why didn’t I think of that? It was rather like going down the rabbit hole. Economics has just seemed so different but in many ways so much simpler since.

  35. Lawrence Corry

    um FYI Greece and those other euro countries sold off their right to be a currency issuing country..in other words they are a state like QLD or NSW not a country like USA NZ or Aus…this is why they are in the shit,they bought into a ponzi scheme.

  36. petermartin2001

    Ricardo29

    Interest on government ‘loans’ is typically rather low. It’s hardly ever much more than inflation, and often less, and so we shouldn’t, IMO, begrudge those who lend to the government their interest. Lending to government is rather like putting money in the bank. The government doesn’t usually seek out loans. It offers treasury bonds for sale as a part of its monetary policy, and its mainly seen as a way of removing excess reserves from the system.

    See Q8 in the series of videos I mentioned in my post above for more discussion on this. Randall Wray makes the telling point that government can never borrow back its own IOUs.

  37. Lawrence Corry

    hey here is an idea..how about someone start a “modern money theory” facebook page..this just might educate the people of this country..

  38. mars08

    Arguably the 3 biggest battlefields of the last federal election… asylum seekers, carbon pricing and the economy …

    Neither of the major parties contested these topics with facts and education. The lazy, sleazy bastards (and the clueless msm) preferred to take the populist approach. Ignore meaningful debate… and just use the topics as blunt instruments to club the opposing side.

    We get the politicians we deserve.

  39. Harquebus

    Listening to Steven Hail explain MMT and so far, it is just more economic gobbledygook from a know nothing eggspurt. How many civilizations have collapsed because their governments went broke?
    Throughout history, all fiat currencies have failed. See my link above.

    “All paper money eventually returns to its intrinsic value. Zero.” — Voltaire.

    “The majority of the inhabitants of the Roman Empire failed to share in the incredible prosperity of Rome. The flow of gold to the orient to pay for luxury goods led to a shortage of gold to put in Roman coins. Roman currency was devalued to such an extent that a system of bartering returned to one of the greatest civilisations the world had ever known.”
    http://www.tribunesandtriumphs.org/roman-empire/reason-why-the-roman-empire-fell.htm

    Just like the Romans, we have invested in stadiums and pursue ever greater sporting spectaculars.

  40. John Kelly

    Ricardo29, the interest those buffoons are referring to is the interest paid twice yearly on government bonds that have not yet matured. They have simply quantified it and divided by 52 weeks. It is the same as a company paying a twice yearly dividend, e.g. the CBA. They want us to think this is a debt hanging around our necks. It isn’t.

  41. John Kelly

    Thanks Peter and Ross and Lawrence.
    mikestasse, I don’t underestimate the seriousness of private debt and know that someday soon it is going to bite the bejeezuz out of our economy. When that day comes, watch the politicians and journalists run for cover.

  42. townsvilleblog

    John, What he should have said was, We are going to make bloody sure that everyone including overseas corporations pay their responsible and fair share of taxation to we the host country from whence they have derived their massive profits. End of story.

  43. Fred Martin

    Finally, someone talking about MMT. I watched the Steven Hail Utube lecture 3 times. I just could not believe what I was hearing. I now know that all of our politicians are either ignorant or are deliberately trying to fool us. The “magic pudding” does exist.

  44. John Kelly

    Fred, that Steven Hail Youtube clip has converted more people than Billy Graham.

  45. nevk21

    Your great article John has stirred up my quest for knowledge. I have been trying to understand money creation and economic realities for a while now but as I am very busy (children) I have never found an article/book/video that can put the basics in a nutshell for ordinary people. With all the political spin and general BS from politicians that have little credibility it gets confusing. You hear about the Federal Reserve Conspiracy of 1913 in the U.S and Private Central Banks creating money from nothing and lending it to Governments at interest etc and that the Reserve Bank of Australia is a private bank etc and that under the Australian Constitution the Government can issue its own money. I am really confused as to what is the truth and would just like to be able to understand all this clearly. I know there is some links in the comments above that I will look at but I would really appreciate if someone can provide some info/links about the best articles/books/videos to understand the fundamentals and the truth about money creation and basic economics. Thank you.

  46. Matters Not

    that Steven Hail Youtube clip has converted more people than Billy Graham

    Possibly so. But perhaps that’s a big problem at any number of levels.

    Billy Graham’s following was based on ‘faith’ (defined as belief, confidence or trust in a person, object, religion, idea or view despite the absence of proof) which I hope is in sharp contrast to ‘rationality’ or perhaps even ‘science’. The absence of proof being the salient point re the dangers of ‘conversions’ based on faith.

    I note that a reference above was made to a ‘magic pudding’. And whether one likes it or not, the ‘magic pudding’ meaning is what most critics give to Modern Monetary Theory.

    While I am not questioning the basic validity of the ‘reality’ postulated or described by MMT theorists, politically, MMT has some distance to go before it becomes accepted as ‘common sense’. And if it ever is accepted as ‘sense’ I suggest it ought to be on the basis of ‘rationality’ rather that ‘conversions’ and the like.

  47. Annie B

    A fascinating article John, and thank you for helping me understand a subject I have always been rather puzzled by – ( at school it was called “Commercial Principles and Practice – that’s how far back my schooling goes !!! ). … As for ledgers and balance sheets ( very basic and ultra old fashioned stuff ) …. it was 🙁 for me.

    I doubt that I will ever understand the concept of fiat money – making money out of thin air, so to speak, and then using ‘it’ for all manner of means.

    John, you have whet my appetite for learning more, and the debate here has been excellent, and also very helpful.

    Again – thank you …… AB.

  48. Andreas Bimba

    Thanks for another important article John and I’m also a fan of Bill Mitchell and Steven Hail and the other Modern Monetary Theory guys and their compassionate and rational approach to national and international economics. Unemployment and poverty are such appalling scourges and it would be just wonderful if we could rid ourselves of these problems.

    I do however have a lot of questions and would appreciate your thoughts if you can spare the time.

    I’m still a fan however of Reagan’s former Office of Management and Budget (OMB) guru David Stockman who later turned against the US Republicans and the dirty deals and frauds they were involved in. David Stockman is not a proponent of MMT but I think he excels at exposing many of the current crises and frauds that are being pursued by the self serving men of finance throughout the world and articles printed on his website are worth examining and can be very helpful to the MMT cause. David Stockman has an over active website here:
    http://davidstockmanscontracorner.com/

    John I think I need some clarification on a few points in your article. You wrote that the three sectors of the economy, government spending, private spending and external spending (imports/exports) are always balanced. Is this really true? Can’t the money supply contract or expand if the three don’t add up to zero? I thought your reasoning may be that governments tend to control the growth in the money supply to match any growth in the economy, presumably so as to control inflation, and therefore in the case of a fairly constant money supply the sum of the three sectors of the economy is indeed then about zero?

    I think the concept of deficits and surpluses is easy to get round the wrong way, it depends on which side of the fence you are on. A government deficit provides a surplus to the money supply. I personally prefer to visualise from the perspective of the money supply as it is less prone to error.

    A government expenditure deficit (spending > tax), adds to the money supply.
    A current account deficit (imports > exports), reduces the money supply as more money flows out of the economy (your article has an error here I think).

    I don’t like your comment “What about the escalating debt I hear you ask? It doesn’t exist. The debt our …..”

    But surely the government debt does still exist, it is just in the form of Australian Government Bonds or Treasury Bonds which is surely just another form of debt? Investors which currently comprise mostly foreign central banks and sovereign wealth funds as well as local investors provide money to the Australian government (and the states) and those investors in return get a bond that pays a fixed periodic interest payment for the term of the bond and a promise to pay back the bonds face value at the date of maturity. Fortunately the bonds are denominated in Australian dollars. Yes the bonds can be replaced with new bonds but the same applies to bank loans?

    As Australia currently has a AAA credit rating, which we must presumably thank previous governments, including the evil Howard/Costello government for, Treasury Bond interest rates are quite low. In fact they are currently so low that they are little more than the Australian inflation rate and so are near to zero. If however world inflation was to pick up, perhaps due to excessive ‘printing’ of money by the worlds governments, and the interest rate on new Treasury Bonds were to significantly increase and in addition Australia were to greatly increase its debt in the form of additional large purchases of Treasury Bonds, our credit rating could deteriorate and hence the end result is that Treasury Bond interest payments could then consume a large portion of tax revenue so that eventually Treasurer Joe Hockeys war cry of not being able to pay back the debt may indeed be possible? True or not?

    http://davidstockmanscontracorner.com/mind-the-76-trillion-global-bond-bubble-even-the-experts-are-getting-scared/

    As a sovereign currency nation can Australia just electronically print Australian dollars to pay back our currently held overseas owned Treasury Bonds in one lump as I don’t see how this would be inflationary? Indeed a case of money for nothing?? Similarly can the locally owned Treasury Bonds be paid back with ‘printed’ money, at least in a measured way so as to reduce the risk of inflation?

    I would have thought it was also wise not to be saddled with too much government debt (in whatever form) so that a spending reserve (preferably from new AAA rated low interest debt) is then an available option to stimulate the economy in any bad times such as economic recessions, depressions, major national emergencies or war? Or is all of this pointless when a sovereign currency nation can just electronically print and spend more money into existence? Is the quantity of money that can be released into the economy from both of these sources the same and equally constrained by the necessity to not expand the money supply too quickly so as to avoid inflation??

    The MMT economists say you can’t run out of money, as a nation with its own sovereign currency can simply print as much as it wants (up to a point). The constraints I assume are the capacity of the economy to grow and that is constrained for example by limits on available skilled or unskilled labour, limits to finding profitable markets for goods and services produced and limits on the speed new productive capacity can be built? True or not?

    Is a substantial sovereign wealth fund something worth having in an MMT economy?

  49. M-R

    John, would you please explain, additionally, what the devil was that ludicrous business of Hockey ‘giving’ the Reserve 9 billion ?

  50. Kaye Lee

    Hockey gave the Reserve Bank $8.8 billion to amplify the deficit and debt trajectory in his December 2013 MYEFO. His excuse was that Wayne Swan had taken out $500 million in dividends early to help with his budget. To underline the hypocrisy and deliberate manipulation of this measure, Hockey has himself taken out far more in dividends ($1.24 billion for 2013-14). It was also a gamble on the foreign exchange market banking on the Aussie dollar coming down.

    http://www.crikey.com.au/2014/10/03/the-rba-gives-joe-his-first-repayment-and-he-desperately-needs-it/

  51. DanDark

    It was a gamble by a gambler, Joes mother was a gambler too, the apple dosnt drop far from the tree
    He has an addiction to a lot of things smoking Joe, cigars, food, power, lying and gambling with other peoples money.

  52. M-R

    MOST illuminating – thanks to Kaye for the words and to Ms DanDark for the pictures. 🙂

  53. John Kelly

    Andreas, rather than me giving you a very complicated answer, the following link by Bill Mitchell should answer your questions.
    http://bilbo.economicoutlook.net/blog/?p=21389

    In brief, the three sectors must always add up to zero. In answer to your question: Can’t the money supply contract or expand if the three don’t add up to zero? Bill Mitchell answers that this way:
    “This way of expressing the sectoral balances makes it easy to understand that the sum of the balances for each sector must necessarily sum to zero. The sources of income must be exactly equal to the uses. That doesn’t mean that each sector has to be in balance at all times and in the real world that is almost never the case.
    What it means that the surpluses and deficits have to cancel out when we consider the economy as a whole.”

    Fundamentally, the total source of funds must equal the total use of funds. Just like any balance sheet listing total assets and total liabilities the balance, once all items are accounted for (including profit or loss), will equal zero. The most basic macroeconomics rule is that one person’s spending is another person’s income. Any one of the three sectors can contract or expand but at the end of the day, that contraction or expansion must have a corresponding positive or negative impact in one or both of the other sectors.

    It’s not about inflation. The government must first spend the money into existence, then let it find its way into one of the other two sectors. Taxation will then return some of it back to government. Inflation occurs when too much money gets into circulation.

    On debt: What we constantly refer to as debt, are bonds, or if you like, shares or stock held as in a corporation. They will continue to rise as our economy grows and expands. Ideally the issuance of bonds will continue to rise proportionate to our GDP. It’s the percentage of debt to GDP that we are more concerned with.

    We are always able to pay back the bonds and the interest because they are issued in $A dollars and the Reserve Bank is the only place in the world where you can create $A dollars. Joe Hockey either doesn’t get this or he just won’t accept it. This would only be inflationary if too much was repaid too quickly. That is why the bonds have specific time frames. The US, UK and the Eurozone have been creating billions over the past seven years to stimulate their economies. There has been no impact on inflation.
    Hope this helps.

  54. Kaye Lee

    My problem comes with the accounting when you say that bonds and taxation do not fund spending. I understand that we can create money out of thin air and the only constraint on our spending is our productive capacity, but when we “balance the books” (which in no way means spending must equal revenue – it just means account for all incomings and outgoings) this created money must be accounted for and surely that is by bond issuance?

  55. Royce Arriso

    Hi Kaye and John….just an acolyte who has had a recent whizz-bang conversion in part due to your article John, so would also like to see Kaye’s query resolved. Especially because I can’t—as yet—get my head around what ‘govt debt’ represents. (Kenneth Davidson in today’s Age; ‘increase in govt debt in last year of Rudd/Gillard govt was $30bill’) Best wishes to all ye who inform us !(also saw Stephen Hail’s and Phil Lawn’s youtube presentations—real grist to the mill)

  56. John Kelly

    Kaye, it is not accounted for as bond issuance, because the RBA doesn’t regard it as money creation. My understanding is that in their limited thinking, they continue to issue bonds periodically to cover what they see as the shortfall between receipts and expenditure. In effect, they are running the country as if it were a household. However, that is merely an accounting entry. It doesn’t have to be accounted for that way. It could be booked as an outstanding loan that will never be repaid. I will have to see how the US accounted for their quantitative easing program. My memory is that have booked the $3.5 trillion for the purchase of bank bonds (which are effectively worthless) as an outstanding debt owed to them; an investment asset against money “lent” to the banks. Our RBA could create money and count it as a loan but they don’t. I will look into it further though.

  57. supermundane

    Excellent article. I don’t have a twitter account but can someone perhaps tweet this to the likes of Leigh Sales and other political commentators who are out of their depth when discussing the economy? It’s vitally important that we begin to challenge the media and its role in peddling falsehoods.

  58. Harquebus

    Fiat currencies are intrinsically worthless. Anything multiplied by zero is zero regardless of the sector.
    I have been reading about this MMT thingy and so far, the words “energy”, “resources” and “environment” have not occurred once. The best description I have seen stated that, “it appears to be a description of our current fiat monetary system”. The best description that I can give is the same one that I give to economics, it’s rubbish.
    Fiat currencies have never worked in the past and for the first in history, all currencies are fiat.

  59. Kaye Lee

    And that is where I always start frowning with MMT. Every time I have this discussion I am told taxes and bonds are only to control the amount of money in supply – I get that – but in an accounting sense it seems to me that spending IS funded by taxation and bond issuance.

  60. Matters Not

    Anything multiplied by zero is zero

    I think you’re telling a ‘truth’ at this point. Mathematics, given certain assumptions, is about absolutes.

    But what about anything divided by zero?

    Or is that result too big to handle?

    Just askin ..

  61. Matters Not

    sense it seems to me that spending IS funded by taxation and bond issuance

    Your concerns are also entertained by John Quiggin (and others).

    http://johnquiggin.com/2011/10/18/money-for-nothing/

    And there’s any other number of links which could be provided.

    While I think the insights provided by MMT are very useful, I find that the whole concept is too ‘slippery’ for me to grasp with full enthusiasm.

  62. John Armour

    “Fiat currencies are intrinsically worthless”

    Spot on, Harquebus. That’s pretty much the accepted definition.

    “Anything multiplied by zero is zero…”

    Again correct, but not applicable.

    Fiat currency is not a “thing”, it’s an “obligation”, a “social construct”, and as such, not subject to the laws of arithmetic, unlike the goods and services that can be exchanged via the medium of the currency, and which can be quantified.

    You seem to be confused about just what is meant by “fiat currency” given that your earlier Rome example referred to a convertible currency, viz, gold.

    It’s the history of convertible currencies, such as gold and silver, that has been the cause of so much grief.

    Otherwise, it’s the misuse of the fiat currency, not the currency per se. That’s like blaming the messenger.

    Whether we like it or not, we live in a monetary economy where the choice of currency arrangements is either fiat or convertible. Barter is not a serious option.

    And MMT is just a description of the monetary system we actually have. The problems we are currently experiencing, like high unemployment, arise because it suits the interests of some to run the economy as if we were still back in the days of the gold standard, the days of the Bretton Woods agreement.

    I’m surprised you’ve been unable to find references to things like “energy”, “resources”, or “environment” in the MMT literature. They are issues of deep concern to Bill Mitchell.

  63. John Kelly

    To respond to both Kaye and Matters Not, the following was in response to John Quiggan by a reader and seems to clear up some of his concerns, and perhaps yours:

    I don’t think you are getting MMT right. Taxation plays a very important role in MMT, none of the MMTers would argue that taxes are unnecessary. In MMT, governments (that issue their own currency) spend money into existence, then collect taxes to control aggregate demand. The appropriate level of taxation is not determined by the level of government spending, but by whether or not the economy’s resources are fully employed. Unemployment (or low cap util, or some other metric) indicates that taxation, relative to spending, is too high. Demand-pull inflation indicates that taxation, relative to spending, is too low. So in MMT, the government still collects taxes (in fact taxes play a critical role); but they do not need to collect taxes to finance their spending.
    Next, in MMT, governments issue debt to control interest rates. Like taxes, government debt is not operationally required to finance deficit spending (although legally it may be), but that does not mean that debt issuance is unnecessary; the appropriate level of debt issuance is determined by the interest rate target (at all maturities), not by the fiscal budget position.
    I agree with your point about inflation during a period of full employment being a regressive tax, but it does not in any way undercut the MMT position on taxation. In MMT, demand-pull inflation indicates taxation is too low, relative to spending. So if the government increased spending and inflation resulted, the appropriate policy response from an MMT point of view would be to raise taxes, not to finance the increased spending but to reign in AD.
    Finally, you suggest that the idea that taxes dont finance expenditures is dangerous politically. Whether it is politically pernicious or it isn’t, what does that have to do with it being true or not? And, I would argue that it is not a dangerous idea (in fact, it is an idea with incredibly positive implications for macroeconomic stability) because under MMT you still measure policy success in terms of real economy outcomes, namely unemployment and inflation.

  64. DanDark

    John K, I don’t always understand what you say but I have learnt soooo much from your articles and peoples comments to them and really appreciate the time and effort you put into AIMN and your dedication to help people learn and understand in laymans terms how money makes the world go round and how we can make it more equal for everyone not just the rich…. Thanks 🙂

  65. Matters Not

    John Armour @ May 18, 2015 at 10:48 pm

    high unemployment, arise because it suits the interests of some

    A very interesting assertion. While I appreciate that MMT advocates constantly assert that their theory is purely ‘descriptive’ and therefore (supposedly) politically ‘neutral’, it seems to me that such a position is nor sustainable as is indicated by your words above.

    Marx suggested that all ‘ideas’ were interrelated. Is that the path you’re pointing to?

    Is it also about ‘reality’ politics?

  66. John Armour

    Matters Not,

    Your concerns are also entertained by John Quiggin (and others).

    I think Quiggin’s problem, like Krugman, is they have too much intellectual capital at stake to “get it”, despite their “left of centre” positions.

    From memory, I think you’ll find some very good arguments from a number of MMT adherents who responded in comments to that largely “strawman” depiction of MMT by Quiggin.

    While I think the insights provided by MMT are very useful, I find that the whole concept is too ‘slippery’ for me to grasp with full enthusiasm.

    I’d be interested to hear which aspects of MMT you find “useful”, but which somehow combine in the “whole concept” to become too “slippery”.

    With MMT it’s been my experience you either get it or you don’t. Once you start to understand the absurdities in orthodox economics however it’s a journey you can’t stop.

  67. John Armour

    MMT is both descriptive and prescriptive.

    As to my “political” comment, try figuring out the logic of the “non-accelerating-inflation-rate-of-unemployment” and the maintenance of a unemployment buffer stocks, and then asking yourself where the interests lie.

  68. Andreas Bimba

    Thanks John for all your answers and efforts to enlighten us. I’m still looking for answers to some of my questions though but I think I can answer some of them myself after a bit of MMT reading and I will give details below. Professor Bill Mitchell’s site is a bit overwhelming but is definitely a great resource.

    For the benefit of all, Bill Mitchell and Randy Wray are writing a Modern Monetary Theory textbook and the draft of it starts here and goes for miles but what are we to do when the world of finance and government behave like drunken pirates?

    http://bilbo.economicoutlook.net/blog/?p=19782
    http://e1.newcastle.edu.au/mmt/toc_newcastle_s1_2014.cfm
    http://e1.newcastle.edu.au/mmt/chapter.cfm?No=1

    And a brief summary:
    http://thenewinquiry.com/essays/the-world-according-to-modern-monetary-theory/

    Kaye, we ideally need many more good, brief straight to the point answers from the MMT gurus but they’re probably busier than us and they have probably been down this path of teaching the unteachable many times. I will try to give a go at answering your question as a non-conformist, non-economist MMT fellow traveller.

    In regard to government spending arising from taxation I can see nothing wrong with maintaining that simple widely held logic and I think the general community and most economists will never accept the current MMT definition. I don’t really see why the MMT people need to complicate the subject further by describing taxation and money from a different viewpoint (even if there are sound logical reasons) as they are only definitions that in the end get you to the same outcome. After all the quantity of ‘printed money’ likely to be spent into the economy is relatively small and much smaller than tax revenue and would certainly not cover all the governments costs?? And comments such as, governments do not need to collect taxes to finance their spending, what the fu..; I suppose they could just print the stuff like ice crazed madmen but this is not going to happen; tax structures and levels will probably still be much the same in an MMT compliant economy???

    As I see it our very able MMT friends could have simply applied all their worthy concepts such as their Job Guarantee Scheme and ‘printing fiat money’ to grow the economy without excessive inflation, avoidance of foreign currency debt and so forth; with the existing general understanding of these ‘economic words’. For example have a look at Bills ‘too complex’ answer to Q1 in the link below:

    http://bilbo.economicoutlook.net/blog/?p=27410

    In regard to my own answers to my own previous questions:

    “As a sovereign currency nation can Australia just electronically print Australian dollars to pay back our currently held overseas owned Treasury Bonds in one lump as I don’t see how this would be inflationary? Indeed a case of money for nothing??”

    No we can’t. It would be an inflation bomb as soon as the AU$ denominated Treasury Bond payment was converted to the chosen international currency of the bond holder and the AU$ lump found its way back to the Australian banking system.

    “Is a substantial sovereign wealth fund something worth having in an MMT economy?”

    Yes a sovereign wealth fund can provide a holding of foreign assets that can earn an income and be sold off when required, but like most investments the value can go up and down. This is good for Australia’s boom-bust resource export economy and can trim the peaks to fill the troughs. By trimming the peaks and filling the troughs the AU$ doesn’t fluctuate so much as well and other industry sectors like manufacturing, tourism and agriculture aren’t kicked in the guts as hard during the resources booms. Stability is also best for economic development. Assets can also be sold off at times of national emergency to buy something that was desperately needed such as potatoes, if we had a potatoe famine, or tanks and planes if we were about to be invaded and the finance and mining lobby hasn’t given the nation its permission to make anything yet.

  69. Lee

    Warren Mosler’s book is a little easier than Bill Mitchell for MMT newbies to understand.

    moslereconomics.com/wp-content/powerpoints/7DIF.pdf

  70. Kaye Lee

    To both Johns,

    We seem to be discussing different things here. I am not questioning the reasons for taxation and bond issuance – I understand about controlling the supply of money, I understand about full employment, overnight cash rates, productive capacity, inflation etc. I understand that bonds are issued to withdraw money from the private sector rather than to fund the public sector.

    I am talking about the balance sheets at the end of the year and how incomings and outgoings are recorded, not about the economic motivation for setting levels of taxation or capital creation.

    For example, in my business, if I inject money from another source (“create” money for this entity), it is recorded as capital introduced. What I have been asking is, when doing the Treasury balance sheets, isn’t this introduction of capital achieved by bond issuance? Those balance sheets must reconcile incomings and outgoings, assets and liabilities etc. When viewed from that perspective, government spending is compared to revenue so, in an accounting sense, the incomings which fund the outgoings are (in the main) taxation and borrowings (bonds).

  71. John Armour

    “In regard to government spending arising from taxation I can see nothing wrong with maintaining that simple widely held logic and I think the general community and most economists will never accept the current MMT definition. ”

    The problem with that simplification Andreas is that it feeds the “lifters and leaners” argument that, combined with the debt and deficit myth, drives the whole neo-liberal agenda. It also contradicts the whole basis of MMT, that is, that governments have no financial constraints, only real ones.

    The following link is to a speech given by a US Fed Chairman in 1945.

    Taxes for Revenue are Obsolete

    “After all the quantity of ‘printed money’ likely to be spent into the economy is relatively small and much smaller than tax revenue and would certainly not cover all the governments costs?? ”

    I think you’re confusing broad money (over which the central bank has almost no control beyond influencing its “price”) and base money, but either way all money is “printed”, to borrow your expression. The whole notion of something “covering the government’s costs” is not applicable.

    In the limit, every cent of government spending is taxed.

    “Is a substantial sovereign wealth fund something worth having in an MMT economy?”

    A sovereign wealth fund only makes sense if you run current account surpluses, like Norway. Our last current account surplus was when Gough was PM. Here’s a useful link:

    Norway and sectoral balances

    That means for a country like Australia it’s a seriously stupid idea. In a time of national emergency it’s equally likely its roots would be global and the assets you would need to sell to buy your potatoes would be worthless.

    Apart from that, saving in your own currency is nonsensical.

    As to Bill’s “too complex” explanation for the purpose of taxation in that question you linked to, you should be aware that the Saturday Quiz is deliberately “tricky”, to really test your understanding.

    If you still think it’s too complex in a reasonable time frame, I’d suggest you go back and revise as it’s a critical insight without which MMT will not makes sense.

    “The difficulty lies not so much in developing new ideas as in escaping from old ones.”

  72. John Armour

    “When viewed from that perspective, government spending is compared to revenue so, in an accounting sense, the incomings which fund the outgoings are (in the main) taxation and borrowings (bonds).”

    I’ve no doubt that’s exactly so Kaye Lee. But therein lies the source of the misunderstanding, rather than some illuminating insight.

    It’s ‘gold standard era’ accounting which doesn’t address the operational realities that flow from deficit spending in a fiat monetary system.

    It’s really just an extension of the deeply flawed household analogy.

  73. Kaye Lee

    “It’s ‘gold standard era’ accounting which doesn’t address the operational realities that flow from deficit spending in a fiat monetary system.”

    That answer makes no sense to me John. It’s just accounting. It has nothing to do with gold standards or households or fiat monetary systems or anything else. It is accounting for incomings and outgoings.

    You say that when the government receives taxation the money is “destroyed” but that is patently not the case. The money is deposited in government accounts. It doesn’t disappear. When you talk of creating money out of thin air, how is it accounted for on the balance sheet? What is the entry that shows this newly created money?

  74. John Armour

    I’m sorry Kaye Lee, I can’t help with the sort of accounting detail you are seeking.

  75. Kaye Lee

    Thanks Lee but not at all. What I am getting at is the notion that taxation and bonds don’t fund government spending. I cannot accept that. I agree that they don’t constrain government spending but I don’t understand why they say that the taxes collected are destroyed. I understand it is money taken out of the private sector but it is deposited in government accounts and appears as revenue. When they say money is created out of thin air and that bonds don’t fund government spending, once again I do not understand. Is that money created out of thin air bonds? I know they say that the issuance of bonds is just to manipulate the amount of money in the private sector but it also gives the government capital for spending.

    For me, MMT talks about the reasons for money creation and transfers, but it falls down in its explanation of the mechanics. Perhaps it is just a language issue, I am not sure. I understand the concepts but I do not understand the accounting in the public sector balance sheet. (I am not referring to overall sectoral balance as Bill was discussing).

  76. Lee

    When the government can create money out of nothing, just the same as it does when a country switches to a new currency, why does it need taxation to assist spending? Collecting tax gives a worthless entity some value.

  77. Kaye Lee

    Lee,

    Is the money created out of nothing bonds?

  78. John Kelly

    Kaye, within the current conventional accounting structure, there is no way to account for created money other than to record it as an interest free, non-indexed outstanding loan. The current structure does not recognise that within its procedures, it is creating money. So, it views it’s procedures as we do running a household. Under MMT conditions it would be accounted for as “ex nihilo”.
    You could see it as two parallel accounting procedures some of which could be interchangeable. However, the conventional system would not recognise the creation of money, while the MMT system would not recognise debt.

  79. John Kelly

    As John A said earlier, “With MMT it’s been my experience you either get it or you don’t. Once you start to understand the absurdities in orthodox economics however it’s a journey you can’t stop.

  80. Michael Taylor

    Great article, John.

    Yes, I’m finally catching up.

  81. Andreas Bimba

    Thanks Lee for the link to Mosler, it’s still 117 small pages of text but I’ll read it when I can.

    Thanks John Armour for your comments.

    The MMT proponents seek to change the existing financial language as it has many serious deficiencies and worst of all is exploited by neo-liberals to pursue their own partisan and destructive agenda. OK, I will read Mosler before chucking more hand grenades at the MMT language. Still don’t fancy your chances though as it reminds me a bit of how the French tried to convert to decimal time after their revolution?

    John Armour, I had a look at ‘Taxes for Revenue are Obsolete’ and the author former FED Chairman Beardsley Ruml in 1946 made many interesting comments and what a pity the US FED went bad and lost site of his much earlier held wisdom. I even read some of Piketty’s logic in the first paragraph in the section ‘To Distribute the Wealth’; long before he was born?

    I also really like Ruml’s sentence in regard to where would the money go if corporation tax was removed. ‘If the industry is neither competitive [monopoly] nor organized [labour unions] nor regulated — of which industries there are very few — a large share would go to the stockholders [instead of lowering prices to consumers or to higher wages].’ In 1946 there may have been very few corporations in that category but in 2015 it appears that whole slabs of the world economy like finance and many of the biggest corporations are effectively untaxed, monopolistic, non union and unregulated. Not only are these corporations unregulated they now use their power to lobby and coerce governments to implement regulations of their choosing.

    On the sovereign wealth fund I take your point that Australia hasn’t had a current account surplus for a long time unlike Norway. If Australia however had competent industrial policy like Japan or Singapore and maintained a healthy manufacturing industry or even processed a larger share of our minerals into metals then we should have been achieving a current account surplus for many years by now. In this case the sovereign wealth fund can then perform the role of reducing ‘Australia’ disease, the much more dangerous variant of ‘Dutch’ disease, where other trade exposed industry sectors are squeezed out by an appreciating currency that comes from a boom of commodity exports.

    I have come to believe that the tariff reductions and free trade agreements were deliberately set up to destroy the trade exposed Australian manufacturing industry (even though millions of jobs were lost over the past few decades), to keep the A$ lower than it otherwise would have been, so as to further increase the profitability of a largely foreign owned mining and resources industry. A case of one excessively powerful industry sector using its lobbying power and influence over a partisan or disinterested media and economic commentariat to directly dictate government economic policy to the detriment of other economic sectors and indeed to the national interest. The finance/banking industry did the same sort of corrupt manipulation with the residential property price boom and the gigantic superannuation junket where huge fees are gouged from consumers without their knowledge.

    John your comment that in a national emergency that international investments will be worthless doesn’t hold water. In time of war, economies usually do quite well and a few weapons, which we can’t make, would probably be much appreciated. Think of all the gold bullion that Russia used to buy weapons in WW2 and they wouldn’t have got much with printed Roubles. Total international economic melt down didn’t even happen in the Great Depression but many share markets did collapse but this just means that investment diversity is important. Besides you can’t make nice chips without potatoes.

    Upon reflection the Sovereign wealth fund was initially set up to give Peter Costello and friends a fat salary and to cover the future liabilities for the payment of superannuation to retired public servants. From Wikipedia: The stated aim of the fund is to hold A$140 billion by 2020; which would fund A$7 billion in superannuation payments each year from the federal budget. I can’t see a problem with building up a nest egg of A$ investments to cover a large future A$ non-productive expense in a MMT compliant economy? The alternative of raising taxes to meet this liability may be economically damaging and unpopular and wouldn’t ‘printing’ of A$7 billion p.a. of ‘extra’ money to meet a new non-productive expense be inflationary?

  82. Lee

    Kaye,

    http://ineteconomics.org/new-economic-thinking/bill-mitchell-demystifying-modern-monetary-theory

    “Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

    Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why economists such as Mitchell see the sale of government bonds as something quite different from borrowing.

    When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

    MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

    You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.”

  83. Kaye Lee

    John,

    “there is no way to account for created money other than to record it as an interest free, non-indexed outstanding loan”

    Can you show me where, in our budget papers, such a thing is recorded? I have never seen any such entry.

    Lee,

    We are talking at cross purposes here. I am specifically asking about the accounting on balance sheets. This injection of funds has to be recorded somehow and it seems no MMT proponents can answer me.

    Perhaps we could start with why you say income from taxation is “destroyed” when it is actually deposited into a government account.

  84. John Armour

    Kaye Lee,

    It’s not MMT that falls down in its explanation of the mechanics. I think I’ve given you that link to Stephanie Kelton’s paper now about 3 times where your questions are dealt with in detail. I can’t recall you ever acknowledging you’d read it.

    Your last comment is full of misperceptions that tell me you are yet to seriously engage with the MMT literature. MMT is not something one can pick up “on the fly”. It does require a bit of study, but getting rid of the old deeply embedded beliefs is the hardest part.

    Most people are happy to accept that the recycling of taxes is a redundant operation in a fiat monetary system, but the purpose behind bond issuance is a more complicated affair. It is however the key to understanding not so much the futility of recycling taxes, but to the necessity of destroying tax receipts.

    I had assumed you understood all this, as you have robustly claimed at various times, but your belief that bond issuance is about manipulating the amount of money in the private sector suggests you have missed something.

    Your belief sounds very familiar to the old (erroneous) text book explanation for central bank “open market operations” where theoretically the central bank could control the money supply.

    Bond issuance is about removing excess reserves, not from the private sector, but from the reserve accounts of commercial banks, held at the central bank, so as to manage the overnight cash rate.

    The assets of the private sector in aggregate remain unchanged.

    If tax receipts and the proceeds of bond sales were not written off (destroyed) but remained in the system the delicate balancing act the central bank has to engage in to maintain the official interest rate would be jeopardised.

    That’s it in a nutshell, but please read the Kelton paper to get a more detailed explanation.

  85. Lee

    Accounting isn’t my thing, but I presume, based on the explanations I have read of MMT, that the creation, or spending, would be a debit and the receipt of tax is a credit. I don’t see how receipt of tax means that it has to be used (John Armour provided an explanation a few weeks ago of federal govt collecting GST but that wasn’t the same money they give to the states – wish I could remember which article it was.)

  86. Kaye Lee

    You don’t consider commercial banks part of the private sector?

    I have skimmed the 28 pages of the report several times and found no explanation for the accounting. Can you perhaps copy and paste the section detailing how these transactions are recorded on a balance sheet?

    I have read MMT papers until they are coming out my ears John and I find you annoyingly dismissive. I have yet to find a satisfactory explanation anywhere about how these money transfers are accounted for. You yourself admitted you do not know – “I can’t help with the sort of accounting detail you are seeking.”

    What do you mean by “destroying tax receipts”? They aren’t destroyed, they are deposited into an account.

  87. Kaye Lee

    John,

    I reread section 5 in Kelton’s paper. I understand that the level of taxation and bond issuance is not determined or motivated by government spending but it seems to me that in an accounting sense, taxation and bond sales are financing operations.

    When you say “your belief that bond issuance is about manipulating the amount of money in the private sector suggests you have missed something” what have I missed? As I have said countless times, I understand about the overnight cash rate, and it isn’t only commercial banks with reserve accounts at the central bank who buy bonds. The use of the term private sector was appropriate and your attack was petty.

    If you want to help people understand you should drop the attitude.

  88. John Armour

    Andreas,

    What a wonderful, and well written, contribution to the discussion!

    I hope you overcome your reservations about MMT and delve a bit deeper. You will be a formidable ally.

    For the moment however, I have a couple of quibbles:

    “The alternative of raising taxes to meet this liability may be economically damaging and unpopular and wouldn’t ‘printing’ of A$7 billion p.a. of ‘extra’ money to meet a new non-productive expense be inflationary?”

    Firstly, in a fiat monetary system the idea of saving in one’s own currency to fund future liabilities is nonsensical.

    Second, nobody has ever had to pay extra taxes to meet these obligations. In a fiat monetary system the purpose of taxation is not “to fund” but to manage demand. Ruml touched on this.

    As to whether the creation of currency to fund government purchases (whether “productive” or not) will be inflationary, that is an issue determined by the path the economy is travelling, vis a vis, demand on real resources.

    All this is pretty much MMT 101.

    Here’s a useful link:

    Intergenerational fairness improved by budget deficits

    I’m not at all familiar with how Russia paid for its war with Germany. I was always under the impression their contribution came mainly from within their own resources, so some interesting reading coming up.

    One thing I do know though is that it was only the US that came out of both world wars economically advantaged, and in demanding their “pound of flesh” from their allies the US created the perfect conditions for the rise of ‘you-know-who’ in Germany.

    Maybe if Peter Costello had bought gold, instead of selling it to buy tobacco shares, his Future Fund would’ve made more sense?

    Another link you might find interesting:

    The Future Fund Scandal

  89. Lee

    My mother is good at accounting but cannot understand MMT. Perhaps it has something to do with having to balance the books, as one certainly has to do in a household or business. There is not a fixed amount of money in the system. When we borrow from banks, we get charged interest. Where does that interest come from? The population is increasing, many of us are wealthier now than we were 20 years ago and there is more money in the system than there was 20 years ago. Money is obviously being created out of nothing. When the government can create money out of nothing, it doesn’t need our income tax.

  90. Kaye Lee

    Balancing the books is something that every entity, even a government, has to do. It has nothing to do with making income equal expenditure. It is accounting for incomings and outgoings and reconciling current balances. If the government “creates” money it MUST be accounted for on the balance sheet. My understanding is that this creation of money is by bond issuance – I am happy to be enlightened if this is not the case. John K. talks of recording it as an “interest free, non-indexed outstanding loan” but I do not think this is what happens. I am not discussing why we tax or why we issue bonds. I want to know how money creation is recorded on the government balance sheet.

  91. Lee

    “Balancing the books is something that every entity, even a government, has to do.”

    No it doesn’t if it issues its own currency. We have been pointing out this lie for months. There is a chapter devoted to it in Mosler’s book, The Seven Deadly Innocent Frauds of Economic Policy (link above).

    The government creates money by spending. If, for example, they pay me a pension, then they create money via a deposit into my bank account. It’s a debit on their side.

  92. Kaye Lee

    Lee,

    Issuing your own currency has absolutely nothing to do with balancing the books and a government most definitely DOES have to produce balance sheets. Have you never looked at the budget papers? ALL incomings and outgoings MUST be accounted for. That does not stop them from creating money, they just have to show that on the balance sheet. As you say, your pension is a debit on their account and shown as such. At the risk of being repetitive, I want to know the mechanism by which the money is created and how that is recorded on the government’s balance sheet. Isn’t it by the issuance of bonds?

  93. Lee

    “Isn’t it by the issuance of bonds?”

    No. That has already been answered here.

    Sorry Kaye, I am not trying to be flippant. I am unsure why you don’t understand and I don’t know how to explain it differently.

  94. Kaye Lee

    It has not been answered by anyone Lee. Both Johns have said they do not know how it is accounted for and neither do you. It should not be a difficult question to answer.

    When looking at the government balance sheets the only applicable entry to account for the creation of money that I can see is the issuance of CGS which is at the discretion of the Treasurer rather than any overnight direction by the RBA which is another thing I don’t understand.

  95. John Kelly

    Kaye, your persistence is admirable and forcing all of us to think this through. Up until your last post I have misunderstood what you have been asking. So, I have concluded that an analogy of some sort is required. Try this:

    Jack and Jill live in a big house with their seven children. The kids all have jobs to do around the house like keeping their rooms clean and tidy, mowing lawns, cooking, sweeping, painting, even preparing sale items for a monthly farmers market. Jack and Jill pay the kids for these jobs with coupons. Jack makes the coupons himself and distributes them to the kids periodically. The kids save their coupons and build up a little nest egg.

    Things, however, don’t always go to plan and sometimes the kids don’t do their jobs properly and they get fined for sloppy work and have to pay Jack with their coupons. Jack takes back some coupons but doesn’t need them because he can make any number of coupons he likes. So, he just destroys them.

    Jack keeps a record of the number of coupons he makes. He does this because he knows that if he makes too many, the kids will build up a cache and not worry about being sloppy because they will have lots of coupons to spare and not care. This, Jack realises will devalue his coupons.

    So, at the end of each month he accounts for all the coupons he has made. He does this by having the children report the total number of coupons they have. If he thinks there are too many, he imposes a special tax to remove some of them from circulation. These he destroys.

    From an accounting perspective, the coupons created (out of thin air….well, paper actually), are the total number he has given the children, i.e. whatever he paid out……his expenditure.

    So, to answer your question, how is created money recorded, it is the total of a country’s spending.

    I have no doubt there are flaws in this analogy, but the fundamentals are rock solid.

  96. John Kelly

    I neglected to add that the kids use their coupons to trade with each other, either swapping jobs (some attract more coupons than others) and so on.

  97. Lee

    Kaye, you asked whether or not the government creates money by issuing bonds. My response to that question (quoting Bill Mitchell) was posted at 6.15 am, clearly stating that bonds cannot be issued unless the money has already been created, and you told me we are speaking at cross purposes. The answer is no, the government does not create money by issuing bonds. Bill explained the purpose of bonds, so did John Armour.

    No one pays more in tax than what they earn. We all know that the wealthiest people in the country and big businesses pay considerably less than their fair share. If the government had to balance the books and rely on our income tax for expenditure, it doesn’t take an accountant to realise that it would run out of money very quickly. The government doesn’t care about collecting income tax when it retrenches over 4000 staff in less than 18 months.

  98. stephentardrew

    Great discussion fellow bloggers. I have learned much and am really enjoying the debate. My meager understanding of MMT has been substantially improved by this blog and would love to see a more in the future. This is a great learning process so keep the critiques and replies coming so I can, at least, talk informatively about MMT.

  99. Lee

    Thanks John. I didn’t explain using that analogy because Mosler uses a similar example in the first chapter of his book. I found the book very useful because he paints in pictures and I think in pictures. I couldn’t understand Bill Mitchell until I read Mosler.

  100. Kaye Lee

    Analogies don’t help at all I’m afraid when I am asking for the specific line item in government accounting that shows the creation of money – I am not asking about a concept but the accounting for the actual transaction. What I would call capital introduced in my business. You spoke of some kind of debt before but there is no such item that I can see in the government balance sheets.

    Back to the overnight cash rate if I may. Isn’t that influenced by how much the RBA provides in exchange settlement funds rather than anything to do with CGS?

    The issuing of CGS is at the discretion of the Treasurer.

    Are we talking about entirely different things?

  101. John Armour

    Kaye Lee,

    You don’t consider commercial banks part of the private sector?

    Commercial banks are obviously part of the private sector, but the way reserves are dealt with is a central bank operation and quite dissimilar from your belief that “money is taken out of the private sector” because private sector assets are unaffected.

    As I said, it sounds like the explanation of open market operations still found in textbooks, and that’s why I made that comment.

    You yourself admitted you do not know

    What I said was, as you accurately quote: “I can’t help with the sort of accounting detail you are seeking.”

    What I meant was that I have no intention of accommodating you in a time-wasting exercise, a fruitless search for some balance sheet entry you were clearly hoping would prove that MMT is a crock, for what you are attacking is a core insight of Modern Monetary Theory, and what you are pushing is a core belief of neo-liberal ideology.

    In your search for your accounting “gotcha” you are barking up the wrong tree and ignoring the operational realities that contradict your beliefs.

    If you’ve read, or re-read, as you say, section 5 of the Kelton paper and persist in your belief that taxes and bonds must finance government spending then nothing anybody can say will change your mind; the Kelton paper must be about the clearest, most detailed and most logical explanation I have come across.

    Ever since I badgered Carol into putting up a link to Bill Mitchell’s website some years ago on CW, I have argued the case for MMT, robustly at times, as Michael might attest.

    So when you persist in attacking MMT without the slightest scrap of evidence but your neo-liberal beliefs, you can expect an increasingly robust response from me.

  102. Kaye Lee

    Also, in your analogy, when Jack takes the tickets from the kids, they still exist – in his hand, in his bin, at the tip, in one place or another. They had spending power, even if in paying a fine.

    When the government collects taxes they go into one account or another. The account balance isn’t made zero. It is credited with the money deposited. How is that being destroyed?

  103. Kaye Lee

    How dare you presume to tell me what I am trying to do. I am not attacking anything at all nor am I interested in a gotcha moment or in discrediting anything at all. I am trying to understand something which you cannot answer. Fair enough. But do not dare to attack me for what have been reasonable questions. You may not be at all interested in such things. Once again, fair enough.

    “Attacking MMT”…”neoliberal beliefs”? FFS get over yourself. No-one is attacking your baby. Please do not bother reading or responding to anything I write – your arrogance detracts from any useful discussion.

  104. Lee

    I’d like to know how it is recorded in an accounting sense. It may make it a lot easier for some to understand the concepts and would probably help me to understand a lot faster than it is currently taking me. No one has been able to answer Kaye’s questions 100% yet but I appreciate her asking them. I am learning more as we chip away at it.

  105. Kaye Lee

    Thanks Lee. I appreciate everyone’s attempts to help me understand. I have learned a great deal but have a long way to go. A little knowledge can be a bad thing as they say so perhaps my questions have nothing to do with MMT.

  106. Kaye Lee

    I apologise for my outburst of anger but it was like a teacher telling me I am too stupid to understand while I am thinking it is them not understanding my question. I am interested in MMT but to reconcile it in my own head I need to understand some things.

  107. Jexpat

    Kaye Lee:

    It’s pointless to attempt to reason with hard line MMT proponents, as many a progressive economist has come to realise.

  108. DanDark

    No need to apologise Kaye we all get a bit pissed off sometimes its normal 🙂
    I myself are trying to learn how it all works and it can be a bit confusing all this MMT stuff
    but patience is a virtue and I will get it all eventually…..well maybe 🙂

  109. Kaye Lee

    Every need to apologise. My response was emotional due to my frustration and it will do nothing to help my understanding by saying don’t talk to me. I have so many questions, shutting off possible sources of answers is silly.

    I know I can be annoying when I am trying to understand something. One of my teachers once sent me to the head teacher for “trying to suck her down a dark alley” with my questions. My lecturer at uni once asked me if I wanted a job as a proof reader, because I was forever pointing out mistakes in his notes. Considering his tone, I don’t think the offer was genuine at the time but when I, as a correspondence student, beat all but two of the internal students in the exam he offered me a job doing genetics research which I didn’t explore as I was already working full-time as a maths teacher. When Howard was introducing the GST, meaning I had to do monthly business activity statements, I studied accountancy and once again had a run-in with my lecturer who deducted marks because I hand wrote my answers. I said FFS I need to know if they are correct or not, the tax department isn’t marking me on neatness.

    So once again, I am sorry. I am not trying to be critical, I am trying to learn.

  110. John Kelly

    Kaye, against my best expectations, my analogy bombed out. Too bad, I liked it. So, let’s try again. Your comment, “When you talk of creating money out of thin air, how is it accounted for on the balance sheet? What is the entry that shows this newly created money?”

    The entry you are looking for is in the budget paper No. 5 entitled STATEMENT 5 OVERVIEW (continued)
    Scroll down to Table 2 Reconcilliation of expense estimates, where it says, 2015-16 Budget Expenses. Cross out “Budget Expenses” and write in, “Total Money Created” and there is your answer, in this case, $434,469 billion.

    Here’s the link:

    http://www.budget.gov.au/2015-16/content/bp1/html/bp1_bs5-01.htm

  111. Lee

    Thanks John. I came to the same conclusion based on my readings but wasn’t certain.

  112. Royce Arriso

    Jexpat; those ‘progressive’ economists. Not the ones down at the IPA, by any chance? And they’re ‘progressive’ in the same sense as the IPA calls for ‘reform’, no doubt.

  113. supermundane

    @Kaye Lee

    “Also, in your analogy, when Jack takes the tickets from the kids, they still exist – in his hand, in his bin, at the tip, in one place or another. They had spending power, even if in paying a fine. ”

    Ok then Jack burns them in the fire after which they cease to exist. They are taken out of circulation for good after they’ve been ‘spent’ for the final time on paying the fine as a compulsory obligation. They have spending power right up until the payment of this obligation, which takes them out of circulation for good. Jack controls the flow of tickets in and out of an economy that he has created – that is those who are compelled to use the tickets that he issues. The tickets are given their imprimatur through Jack requiring payment of this obligation solely in the tickets he issues. If any of the children attempt to pay Jack in something other than the tickets he issues, he may fine them for an amount greater than the original obligation and send them to their room.

    The exchange of tickets between the children as users of this currency leads to work done transforming their labour, time and resources into goods and services that add to the net prosperity. One child spends their tickets with another buying their fruits of their labour – one child’s spending is another’s income.

    I think that people get lost with MMT because they find it difficult to comprehend how money can have no intrinsic value. They confuse money and wealth. Money is the oil that greases the machine, keeping it turning as it transforms resources into consumables. You might spend $10 to purchase something if given your earning capacity, you make a judgement that the item is worth spending $10. $10 spent on one item does means that it can’t be spend elsewhere and this plays into making the decision as a user of the currency. The issuer however has no such constraints on spending. You’d never spend $10 to buy $10 unless the physical note had some intrinsic meaning to issue (signed by someone famous etc). Its value therefore rests solely with its latent capacity to be utilised in exchange for a proscribed amount of goods or services.

  114. supermundane

    @John Kelly.
    Thanks John. Explains it beautifully. The trick is not to be fooled by the language of orthodox economics (‘budget expenses’ versus ‘money created’ for example) and being mindful of the conceptual distinction between users of the currency (who must balance the books) and the issuer (who has not need to).

  115. Kaye Lee

    John,

    The table you refer to has absolutely nothing to do with money creation. When Hockey brought out his MYEFO in December 2014 he made estimates of expenses. Since then those estimates have changed. The table to which you refer reconciles the MYEFO estimates with updated budget estimates, detailing the changed expectation for various expenses.

    Asking me to cross out something and call it something else in a table that is completely irrelevant to what we are discussing makes me have a lot more trepidation rather than less.

    If anything we should be looking at statement 6

    http://www.budget.gov.au/2015-16/content/bp1/html/bp1_bs6-01.htm

  116. Kaye Lee

    supermundane,

    Jack doesn’t have to present books for auditing. The whole analogy is silly. John used it to show me how taxation is destroying money but never answered me when I said taxation is deposited into an account that has a credit balance. It isn’t “ripped up” or “destroyed” like Jack’s tickets,

  117. Kaye Lee

    Another thing….when you talk about issuing bonds to affect the overnight interest rate, I don’t see the correlation. As at the December quarter 2014, 65.9 per cent of total CGS on issue were held by non‑residents of Australia. Are exchange settlement funds provided by the RBA somehow linked to bond issuance in some way I’m not seeing?

  118. John Kelly

    Not true, Kaye. You are not viewing it in the spirit that it is given. Yes, they are the estimated expenses for 2015-16. Forget MYEFO and any subsequent changes, this budget estimate is what the government EXPECTS to spend in 2015-16. THEREFORE, this is what the RBA expects to create in computer generated credits to the various bank accounts across the country in 2015-16. It may not be the final figure. We won’t know that until sometime after 30th June 2016. What the RBA expects to credit, to pay the government bills, is what they expect to create in new money. You have persisted in demanding an answer to your question and so you should. You have made all of us search our minds, our manuals and, most importantly, our common sense. This IS the answer you seek. We are not the ones at fault if you refuse to accept it.

  119. John Kelly

    Kaye, you are getting yourself tied up in knots trying to reconcile figures and processes that are irrelevant to your question. Forget the bonds issuance for the moment. That is another matter, unrelated to total government expenses.

  120. Kaye Lee

    John,

    You need to look again at table 2. It is what I described….”Table 2 provides a reconciliation of expense estimates between the 2014‑15 Budget, the 2014‑15 Mid‑Year Economic and Fiscal Outlook (MYEFO) and the 2015‑16 Budget showing the effect of policy decisions, and economic parameter and other variations.”

    “this budget estimate is what the government EXPECTS to spend in 2015-16. THEREFORE, this is what the RBA expects to create in computer generated credits to the various bank accounts across the country in 2015-16.”

    Actually John, the budget reconciles this amount with incomings and outgoings to arrive at projected deficits. Nothing in there at all about computer generated credits or destruction of receipts. They actually account for the numbers.

    “The Government finances its activities either through receipts or by borrowing. When receipts fall short of payments, the Government borrows by issuing Commonwealth Government Securities (CGS) to investors.”

    You still aren’t showing me how this computer generated credit is accounted for….or don’t you guys do balance sheets?

  121. John Kelly

    Kaye, you are arguing at cross purposes. All the numbers are accounted for in either expenditures or revenues. The computer generated credits are government payments that are accounted for AS EXPENDITURE. The only thing I wanted you to look at on Table 2 was the total expenses. Nothing else. An MMT BUDGET, using the same figures would simply express them differently. There would still be estimated revenue receipts and a budget deficit, but the money has to be spent before the revenues can be collected.

  122. Kaye Lee

    Sigh….YES…all the numbers are accounted for as expenditure or revenue, assets and liabilities. Can you tell me which of those figures shows the money that is created out of thin air.

    The mantra of the money must be spent before it can be collected is also wearing thin. Yes…the money is in circulation…ok….now can you show me how the injection of money creation is accounted for on the government balance sheet?

  123. John Kelly

    Yes, it’s the one that says, Total Expenses. The second bit I didn’t understand.

  124. Kaye Lee

    John, I can only assume that you do not understand balance sheets.

    I am also finding the evolving language on this thread interesting. The other John casts me as a disbeliever, a “neoliberal” trying in vain to discredit something I am supposed to accept on trust because the questions I ask are inconvenient.

    “This IS the answer you seek. We are not the ones at fault if you refuse to accept it.”

    Who is “we”? The proponents of MMT? The readers of this site? And I can very much assure you, like many others who tell me they have the answer I seek if only I would accept it, you have not answered the questions I am asking.

  125. supermundane

    @Kaye Lee

    So unless John can point you to a column with the heading ‘Money created out of thin air’ then no answer and no explanation will be good enough for you? He explained which of the columns constitutes the projected government spending. Mantra of not (it may be wearing thin but it is the key to understanding), the key difference between the issuer of the currency and a user (you and your book-keeping) is that the issuer spends the currency into circulation. We as users of the currency must earn it before spending it.

    I don’t believe that you’re debating this in good faith.

    @Jammy March.

    The last thing we need is a return to the gold-standard. Do you know that the first currencies included ‘worthless tallies scratched on to clay tablets?’

    The elites would like nothing better than to make money a scarce commodity under their control. A return to the gold standard would do precisely that. If you want a store of value then in invest in something collectable and that have a reasonable chance of appreciation. Collectables don’t make versatile mediums of exchange

  126. Lee

    Bill Mitchell says the receipt of taxation into the government’s account is for accounting purposes only and doesn’t go anywhere. http://bilbo.economicoutlook.net/blog/?p=332

    Stephanie Kelton states in her paper that the taxation is destroyed. It’s a well-written, easy to understand paper. Warren Mosler says it is destroyed. Any tax paid in cash goes through a shredder.

  127. John Kelly

    Yes, the evolving language is a problem. The more one fails to be understood the harder one tries. That causes frustration to emerge which, in turn, effects the language. Humans! Who else would have time for them?
    I shall retire from this thread disappointed that I failed, but satisfied that I gave it the best I had.

  128. Lee

    Kaye, if the government creates money by spending, how is it that the expenses on the balance sheet cannot be created money?

    If the creation is quite separate from the spending, where does the balance sheet show the injection of more money into the system? It isn’t revenue because that money was already in circulation.

  129. supermundane

    ” The other John casts me as a disbeliever, a “neoliberal” trying in vain to discredit something I am supposed to accept on trust because the questions I ask are inconvenient.”

    No he said that you’re thinking has been framed by neoliberal convention (something that I confess is hard to overcome) and it appears, by experience of bookkeeping (as a currency user so necessarily the federal government is also a currency user).

    I think you’ve been shown remarkable forbearance. You repeatedly accuse others of an intemperate tone towards you, whereas straight off the bat and with each successive post, you have shown rudeness and condescension. The explanations have been given but either wilfully or because you’re failing to making the conceptual leap, you argue at cross purposes.

    I wouldn’t have been nearly so patient with you.

  130. Kaye Lee

    “you have shown rudeness and condescension”

    Can you show me where? (other than the comment for which I apologised)

    ” where does the balance sheet show the injection of more money into the system”

    That, in a nutshell, is my question.

    “Bill Mitchell says the receipt of taxation into the government’s account is for accounting purposes only and doesn’t go anywhere”

    It is accounting I am asking about and what does he mean it doesn’t go anywhere? Money is deposited into that account and then spent from that account.

    “Stephanie Kelton states in her paper that the taxation is destroyed. Warren Mosler says it is destroyed. Any tax paid in cash goes through a shredder.”

    Since it is credited to an account, how is it destroyed. The tax I pay every month doesn’t “go through a shredder” – it is deposited into an account. And we aren’t playing simon says here.

    “this budget estimate is what the government EXPECTS to spend in 2015-16. THEREFORE, this is what the RBA expects to create in computer generated credits to the various bank accounts across the country in 2015-16.”

    Are you suggesting that it is the RBA that funds government expenditure by just creating accounts out of nowhere? Are you suggesting that taxation and bond issuance are entirely irrelevant and that the RBA just makes up an account out of nowhere, recorded as nothing except a deposit into another account? It is an independent body. It holds government income and it pays government bills but it doesn’t set levels of taxation or decide when and how much about bond issuance. It does decide about the cash rate and the available exchange settlement amounts – that to me seems an entirely different issue but my understanding is not sufficient to be sure.

  131. Lee

    “As for the notion of trading or storing wealth in collectables? Fund your retirement with Star Wars figurines or lalique vases? Rusty old cars in sheds, up on blocks, paying a dividend every month? On paper the USA probably has horded trillions of dollars of old cars and other ghosty crap, it ain’t helping them any.”

    Wealthy folks tend to prefer paintings to Star Wars figurines.

  132. Andreas Bimba

    Genuine contributors, please ignore Jammy March. This person is just trolling and is a serial pest with nothing constructive to offer.

    Thanks again John Armour for your comments. Speaking in different languages, in this case financial, can indeed be frustrating and prone to error and it’s a pity that this problem of understanding MMT principles can’t be solved simply and without quite a bit of reading.

    Kaye, I also admire your determination to get some basic questions answered in a manner acceptable to you. I and probably many others learn a lot from these exchanges and share your ‘common sense’ and reasonable concerns. I really think we are just arguing about different ways of describing the same things and need to share a common language which we apparently don’t have. I think the MMT descriptions have strengths and also ‘common sense’ challenging weaknesses hence my analogy of the French revolutionaries failed attempt to introduce metric time where even most of those that wanted to believe couldn’t shake off the old beliefs. My accounting knowledge certainly isn’t as good as yours. I think the frustration on both sides of the argument is understandable but I tend to agree with you that some of John A’s remarks may not have been fair. I also reject much of Supermundane’s criticism of your comments, as I said your frustration and that of those responding is understandable. Anyone that has read your articles and posts would know that you are one of the most inspiring contributors to the AIMN site. Please don’t ever be discouraged.

    John A the article you wanted Kaye to read was authored by Stephanie Bell (you wrote Stephanie Kelton).

    On the tangent of Russian WW2 weapon production, you are indeed correct that most of Russia’s military production was produced and funded locally but I was just referring to their imports of weapons. These imports were very large and were probably decisive given the major difficulties Russia faced with industrial areas being overrun. Russia imported very large quantities of machine tools as well as military hardware from the US and the British and they wouldn’t have been able to do that without their large gold reserves which is a kind of sovereign wealth fund. Russia had very little else of value that the Western Allies needed and no one would accept Roubles or IOU’s. So perhaps Australia should just drop the sovereign wealth fund idea and just build up a substantial gold reserve for rainy days?

  133. Lee

    “It is accounting I am asking about and what does he mean it doesn’t go anywhere? Money is deposited into that account and then spent from that account.”

    Why do all of these transactions have to be in the same account?

    “Are you suggesting that it is the RBA that funds government expenditure by just creating accounts out of nowhere? Are you suggesting that taxation and bond issuance are entirely irrelevant and that the RBA just makes up an account out of nowhere, recorded as nothing except a deposit into another account?”

    When a new currency is introduced, how can anyone pay tax (or pay any form of revenue to the government) in that currency without the government first creating that currency and putting it into circulation? No one said taxation is irrelevant. Taxation does not fund government spending. It does help to regulate supply and demand and to give money its value, therefore it is not irrelevant.

    Can I suggest that rather than continue to argue at cross purposes, you actually read some of the information that has been provided to assist your understanding? Don’t skim, looking to pick out a random sentence.

  134. Michael Taylor

    Yes Andreas. He is clearly trolling.

  135. Lee

    Andreas, Bell is Stephanie Kelton’s maiden name.

  136. DanDark

    When I first joined AIMN it was Kaye Lees articles that attracted me, they were what I wanted and needed to read in this mixed up world
    Since then I enjoy all the authors articles and often comment, because this site keeps me sane literally.
    Not long after I started commenting on AIMN Kaye put a song up on an article and it was I am woman by Helen Ready
    Now when I have had enough and lose faith in myself for a brief moment maybe, I play that song, it gives me the strength to keep going in this mad mad world…… so for you tonight Kaye here is that song and keep smiling……… 🙂

    https://www.youtube.com/watch?v=NUvmPfgVTGQ

  137. Andreas Bimba

    Kaye, Michael, Lee and DanDark 🙂

  138. Annie B

    Even just 2 years ago ( or less ) no-one could have told me I would be enthralled by a debate on monetary matters. …. But hell, I have been here … it has taught me a lot, some of it also goes clean over my head, and perhaps I should not even begin to make comment. But I will because – – –

    – – – – something rankles. And continues to do so.

    Kaye Lee asked one simple question – and I too, would like a definitive answer to it.

    Where .. in .. the .. HELL .. is .. it… noted …. in the Budget, any reference to the fiat money – the money created out of thin air – the money produced by the Government because they can, Where is that accounted for. …. or more succinctly in Kayes’ words “” where does the balance sheet show the injection of more money into the system” …… “That, in a nutshell, is my question.”

    One of Kayes’ other questions was similar, a couple of days back ( 9.40 am 19th ) ” The money is deposited in government accounts. … It doesn’t disappear. When you talk of creating money out of thin air, how is it accounted for on the balance sheet? What is the entry that shows this newly created money?”

    There are almost dozens of links here to prove / disprove arguments. I have looked at just one. The Governments’ Budget ( as put forward by John K – May 20, 2015 at 5:38 pm ). And while it gives a great run down of how money is spent, divided, allocated, received et al – – nowhere does it show the injection of funds that amounts to printed money – on paper – that goes SOMEWHERE for gosh sakes, as any sort of entry…. it is not income, it is not expenditure, ( which ideally balance one another out, after adjustments ) … perhaps it comes in on the pie chart there – labelled ” Other Economic Affairs”. ?

    This is a very very basic and simple question.

    Where does this ( or any ) Government account for this injection of paper or computerised ‘money’ ?. It cannot be in Budget Expenses ( expenditure ) as John K suggested surely ? It is not an expenditure as such – it is a creation of more money, more stimulus if you wish, more something out of nothing, AND IF it has an impact on the economy, on the budget, on any bloody thing to do with the running of this country – fiscally, it MUST be accounted for, somehow. Somewhere in the Governments’ complicated spiel.

    Putting aside for the moment the MMT and other guru’s who boggle us ( me ) with monetary maths and calculus, the question is indeed simple. We cannot use something that we create out of nothing. Nothing equals, actually, nothing. It is in fact, non-existent. I cannot hold up my hand with an imaginary 1700’s priceless vase, whack a huge price on it, and then show ‘it’ to buyers when it in fact does not exist, and cannot be shown or physically seen ? Can I ? …. Don’t think so.

    Does fiat money actually exist … and if it does, why can’t the government ( any government ) show exactly WHERE it exists – and for what purpose. …. Fiat money, by definition, is “inconvertible ( not able to be changed in form, function or character ) paper money made legal tender by government decree” …. well, you all knew that.

    I seriously don’t expect any answers.

  139. Jexpat

    I’ll give you a straight up answer Annie B.

    People who peddle nonsense about creating money and therefore not having to make decisions about taxation and allocation of resources are charlatans. Plain and simple.

    Not only that, but their misguided polemics are detrimental to the very causes that they might otherwise support.

  140. supermundane

    @Annie B
    ‘Putting aside for the moment the MMT and other guru’s who boggle us ( me ) with monetary maths and calculus, the question is indeed simple. We cannot use something that we create out of nothing. Nothing equals, actually, nothing. It is in fact, non-existent. I cannot hold up my hand with an imaginary 1700’s priceless vase, whack a huge price on it, and then show ‘it’ to buyers when it in fact does not exist, and cannot be shown or physically seen ? Can I ? …. Don’t think so. ‘

    You’re confusing two very different things. John Armour answered this earlier when he wrote:

    ‘Fiat currency is not a “thing”, it’s an “obligation”, a “social construct”, and as such, not subject to the laws of arithmetic, unlike the goods and services that can be exchanged via the medium of the currency, and which can be quantified.’

    Money is an abstract – a government-backed IOU and as you know, it doesn’t even have to be physical or tangible. Just like the scoreboard at the MCG where points on the scoreboard are ‘created out of nothing’ (ex nihilo) and deleted at the end of the match, the government can no more run out of the money it issues than the scoreboard at the MCG scoreboard run out of points to issue. A 17th century vase is a specific and finite thing and its value on the modern market derives from the fact we won’t be making any more 17th century vases.

    @Andreas Bimba
    I’m sorry but I have found Kaye’s replies to John Kelly snippy and generally rude. Perhaps it’s her style however John’s responses have been absolutely measured and courteous by comparison. I do however believe you’re right when you say that the misunderstanding perhaps arises from people ‘speaking different *financial* languages’. I think it stems from differing and incompatible conceptions of money (the question ‘what is money’ is indeed one of those hard questions), some confusion about what money is (as evidenced by Annie B’s comment above) and the challenge of comprehending the distinction between a currency user and currency issuer.

    I believe Stephanie Kelton’s article cited earlier, if read carefully, answers the questions posed. At a more fundamental level my path to understanding MMT (still a long way yet) began with challenging preconceptions about what money is. David Graeber’s ‘Debt – the First 5000 years) was instrumental in helping me disabuse myself of the notion that the balance of my bank account had intrinsic value (a legacy of once being bound to the gold standard and how our monetary discourse frames it as it it remains pegged). I began to recognise it as latent IOU’s promised against future purchases of goods and services. After being exchanged for goods and services, they again serve as latent IOU’s for that individual’s future purchases of goods and services and so it goes.

    The money that is received in taxation is certainly accounted for (in records) but it no longer functions as money. Money only functions when it is used to conduct a transaction in exchange for goods and services. When withdrawn from the economy it no doubt exists as a record (Tax receipts, which is a legacy from when taxation did fund spending) just like there exists a historic record of the scores of past games at the MCG. The points issued in those past games are accounted for but no longer serve to score the number of goals once the game is concluded. They are effectively withdrawn from circulation and new points are issued in the next game. This isn’t an ideal analogy but it demonstrates the conceptual gymnastics required to recognise conceptually what money is and isn’t.

  141. DanDark

    supermundane said at 2.40am, May 21, 2015 “I’m sorry but I have found Kaye’s replies to John Kelly snippy and generally rude. Perhaps it’s her style however John’s responses have been absolutely measured and courteous by comparison.”

    Supermundane……. Kaye apologized yesterday as shown below why keep attacking her, fairs fair give it up, Kaye is a much respected and liked person on this site by many and I find your comments towards Kaye now offending and uncalled for…..
    Kaye Lee
    May 20, 2015 at 12:20 pm
    “I apologise for my outburst of anger but it was like a teacher telling me I am too stupid to understand while I am thinking it is them not understanding my question. I am interested in MMT but to reconcile it in my own head I need to understand some things.”

    She apologized what else do you want blood Supermundane……

  142. Andreas Bimba

    Jexpat I don’t think your comments add to the discussion? Sorry if you are genuine and not a troll.

    Annie B, I can’t help much with the accounting theory but I think I can answer a few of your questions:

    1. Fiat money is just money that does not have its value fixed to a commodity like gold and we have had fiat or free floating money for a long time now. Just call it money as it is not an MMT creation.

    2. Governments that have sovereign control over their currencies can print as many notes as they like or more realistically ‘electronically create’ as much as they like. They no doubt keep good records of how much money they create and how much they destroy or remove from the economy.

    3. My understanding is the amount of money circulating around in the nations economy is called the ‘money supply’ and that this remains relatively stable but grows as the economy grows. If too much money is put into the money supply, too much money chases the same quantity of goods and services and we get inflation, so governments carefully regulate the money supply.

    4. As our MMT friends and also the earlier Keynesian economists say, it is indeed possible and indeed very beneficial to create additional money (out of thin air) to add this to the money supply and to enable unused capacity (idle and new factories, unmet business opportunities and most importantly unemployed and under-employed people) to become productive. This is not inflationary as the economy does indeed grow in proportion to the quantity of ‘extra’ money spent into the economy. Neo-liberals are stupid and criminal to not put the idle to work and for perpetuating the lies that stop governments from doing this more effectively.

    5. The metaphor I like for item 4 is that of growing a plant inside a clear plastic bubble where the transpired water condenses and is reused by the plant. The plant is equivalent to the economy in this metaphor. As the plant grows we need to add a little bit more water as a portion is held within the structure of the plant. Water is equivalent to ‘money in the economy’ in this metaphor. The sun is what provides the energy and is what actually drives the growth of the plant. Sunshine is equivalent to ‘human energy and creativity in the economy’ in this metaphor. We would be stupid not to provide more water to the plant to let it harness the suns energy and grow. Without additional water the plant will become deformed, stunted and will eventually die prematurely. Neo-liberals are afraid to water the plant as they are afraid the plant might drown and this is one of the main reasons why we are in our current mess.

    6. With fiat money when the government receives taxation revenue it is just extinguished and when the government needs to spend money into the economy money it is just created. All money transactions are carefully recorded.

    Please be patient with the MMT economists that have been kind enough to participate as they are indeed human as well as being humanist centric economists and are genuinely trying to create a better world for all people, not just the rich and powerful and their message is very beneficial and powerful. Many MMT economic concepts are counter intuitive and are difficult for layman like me to grasp but I still remain confident that the core logic of Modern Monetary Theory – MMT economics is sound.

  143. supermundane

    @DanDark

    Respected or not, while she apologised then she proceeded to make a number of curt remarks to what were very reasonable responses that did provide an explanation. For example:

    ‘John, I can only assume that you do not understand balance sheets.’
    ‘You still aren’t showing me how this computer generated credit is accounted for….or don’t you guys do balance sheets?’

    Hardly a respectful approach to inquiry. Still I’ll say no more of the matter as I believe many have endeavoured to patiently ‘lead the proverbial horse to water’. Answers have been provided and I suspect that the difficulty in understanding them arises from conceptual differences over the nature of money and the distinction between currency user and issuer.

    While government spending an taxation are related there are not the same. In a commodity monetary system, the precious metal did need to be obtained (through taxation for example) before minted and issued as currency. That is no longer the case but the balance sheet of the government and the language employed is a vestigial remnant (a legacy) of those times that clouds rather than illuminates reality under a fiat currency system. Bond issuance is similarly a vestigial legacy that serves as corporate welfare and gives the appearance of funding government spending.

    Anyway, I’m still fairly new to MMT and be the first to say that I don’t have all the answers. For anyone seeking answers I recommend delving into the literature that has been cited in this comments section and I do recommend Graeber’s Debt – the First 5000 years as a fascinating exploration into the history and nature of money. It certainly helps to dispel first-principle preconceptions, critical for understanding MMT.

  144. Lee

    The question has been answered multiple times. The federal government creates money by spending. No explanation of MMT states that this only happens sometimes. Therefore the creation of money on the balance sheet must be the total expenses. It cannot be anything else. Most of the money in circulation is not in the form of cash. Ours is a predominantly cashless society. Most people receive their pay into their bank account. Many people use cards in supermarkets and pay their bills online. The government uses either cheque or bank transfer for its own transactions. All public servants are paid directly into their bank accounts.

    Bill Mitchell points out that government expenditure in the form of job creation (thus aiming for full employment) is preferable to paying people welfare. It makes good sense. Most unemployed people actually do want to work. The government’s spending is only constrained by the consequences of its spending. If there is too much money in the system, then hyperinflation will result when demand exceeds supply. All people, employed or not, are consumers of goods and services. Therefore it is better for the economy if as many people as possible derive their income from providing goods or services, rather than being paid in the form of welfare. If the government were to simply give those on welfare more money, demand for goods and services would undoubtedly increase but the supply may not be able to keep up.

  145. Lee

    The entire article is relevant but there is the answer to Kaye’s question. http://bilbo.economicoutlook.net/blog/?p=352
    “It is actually rather obvious but all government spending involves money creation. “

  146. Lee

    http://bilbo.economicoutlook.net/blog/?p=381

    “The diagram above shows how the cumulative stock is held in what we term the Non-government Tin Shed which stores fiat currency stocks, bank reserves and government bonds. I invented this Tin Shed analogy to disabuse the public of the notion that somewhere down in Canberra was a storage area where the national government was putting all those surpluses away for later use – which was the main claim of the previous federal regime. There is actually no storage because when a surplus is run, the purchasing power is destroyed forever. However, the non-government sector certainly does have a Tin Shed within the banking system and elsewhere.

    Any payment flows from the Government sector to the Non-government sector that do not finance the taxation liabilities remain in the Non-government sector as cash, reserves or bonds. So we can understand any storage of financial assets in the Tin Shed as being the reflection of the cumulative budget deficits.

    Taxes are at the bottom of the exogenous vertical chain and go to rubbish, which emphasises that they do not finance anything. While taxes reduce balances in private sector bank accounts, the Government doesn’t actually get anything – the reductions are accounted for but go nowhere. Thus the concept of a fiat-issuing Government saving in its own currency is of no relevance. Governments may use its net spending to purchase stored assets (spending the surpluses for instance on gold or as in Australia on private sector financial assets stored as the Future Fund) but that is not the same as saying when governments run surpluses (taxes in excess of spending) the funds are stored and can be spent in the future. This concept is erroneous. Finally, payments for bond sales are also accounted for as a drain on liquidity but then also scrapped.”

  147. stephentardrew

    Great post Andreas.

    The core moral foundation of MMT is a vital component in finding a more rational and sustainable way to distribute and create returns as the whole concept of wealth is a false metaphor fabricated to discriminate against those who are winners and those who are, by en large, excluded, for many reasons, from the accumulation of capital and property. Those who are excluded are called leaners and those who accumulate capital and property lifters so the whole process is supported upon false metaphors to justify unwarranted accumulation of capital and property while others live in poverty. Neo-conservatism is simply an unsustainable subjective strategy for blaming the victims while feeding those in power and control more and more resources and capital. Marx demonstrated clearly that workers are the means of production and therefore the creators of value however the elites, in response to socialism and communitarian moral obligations, fabricated financial markets with products like futures, derivatives and so on to avoid employment and equitable distribution of capital and property. The wealth of a nation is a fallacious oxymoron because most products purchased by the masses incorporate planned obsolescence and the continuation of debt servitude. The moral obligations in terms of social justice and reduced inequality is the starting place for MMT and, though sometimes difficult and convoluted, the foundational objectives are a rational and ethical response to greed, inequity and injustice.

    It may take time and effort to understand but the objectives and goals are laudable and should represent core values of justice, equity and utility. I admire the enormous effort theoreticians are putting in to reforming supply side economics so as to more effectively represent ordinary peoples needs. There will be some confusion and some complexity however if we keep the goal in focus those matters can be dealt with over time. It is ingenuous to expect too much too soon while MMT is going through its formative stages. That it is absolutely necessary is unquestionable.

    Changing a paradigm is difficult struggling against the purveyors of fear who systematically vilify those who want to modify and improve the economy to more equitably represent the fundamental primary needs of citizens. Our brains are geared to grasp onto the know and fear the new and unknown so it will take substantial effort, and quite possibly another economic crisis, before things begin to move substantially. Meanwhile MMT offers a viable alternative when neo-con trickle down is shown for what it is.

    One giant con by the wealthy and powerful.

  148. Kaye Lee

    Everyone is talking about potential and concepts and motivation for doing things but no-one has answered me as to how money creation is accounted for on a balance sheet.

    Andreas said “They no doubt keep good records of how much money they create and how much they destroy or remove from the economy”. That is what I am looking for. Where are the records of money creation? What is the mechanism by which money is created? I know it is created by being spent into existence but how is this recorded? I understand that you consider everything the government spends to be money creation and hence just say look at what they intend to spend – that is the money creation. But surely they must keep records of how much extra they have injected into the economy?

    I have read countless articles by Bill Mitchell which have helped my understanding of MMT but he himself says the accounting is irrelevant. That is why I ask don’t you guys do balance sheets. I am not trying to be nasty. The accounting is important for me to understand the mechanism.

  149. Lee

    “One giant con by the wealthy and powerful.”

    Yes, and a very easy lie to sell because we’re all familiar with the way a household budget works and most of us are not economists. I have encountered several economics students and graduates, both on social media and in person, who say that what we are being told by the Liberal government is contrary to what they have been taught at university.

    The Australian Progressives first caught my eye when they discussed MMT in the social media. I went to one of their meetings about 6 weeks ago. When speaking to the man who organised the event, I said this is the only political party I have known to mention MMT. He said he learned about it from a lecturer in economics at Adelaide University. The same man told him about the Australian Progressives. To date, their policies have been evidence based and in line with the writings of Bill Mitchell. I will be watching them with great interest.

  150. Lee

    “Everyone is talking about potential and concepts and motivation for doing things but no-one has answered me as to how money creation is accounted for on a balance sheet.”

    You have received the answer, Kaye. You just refuse to accept it. Discussing this with you is as pointless as telling an anti-vaxxer that vaccines don’t cause autism.

  151. stephentardrew

    Kaye not being an economist I do see your point however I have run welfare programs and have a sound understanding of P&L and balance sheets yet for some reason I do not see it as a problem with MMT. Maybe it is something in the way my brain functions but personally I see no contradiction. I think it has something to do with cognitive processing which forms a variety of mental pathways that conceive of reality in different ways. The problem is money creation and removal follows complex and convoluted pathways which are difficult to reduce to a simple flow chart that traces capital flows and the complex web of graft and corruption that bleeds money, be it digital, from place to place through off shoring, tax avoidance, futures, derivatives and a whole raft of complexity that, to my mind, no single person or theoretical model can demonstrate empirically. The problem is economics, as we know it, is not a science. It is by enlarge value implicit and prone to personal bias and in this respect formulating a cohesive understanding of capital flows is not possible. Computerised high frequency trading is another damnable complexity. We are being blinded by claims to robustness and empirical reliability when there is no such thing therefore any attempt to logically and rationally unwrap the system is fraught with irrationality and pure self-interest. Starting from a logical premise, while the foundations of economics is not logical and rational, can only lead to confusion and frustration.

    In essence complexity is the escape clause making it almost impossible to follow the flow of money and formulate a coherent and logically consistence, demonstrably robust, balance sheet. Often what seem rational when applied to business becomes a convoluted didactic foil when applied to the economy at large. Neo-cons try to convince us that black is white and in many cases have succeeded. Damnably dirty business in which governments are complicit.

    May be wrong but that is my personal opinion.

  152. Kaye Lee

    Lee,

    I don’t think you understand what I am asking. It has nothing to do with any form of economic theory. It’s not economics at all. It’s accounting. The closest I can find to an answer is

    (1) Raising taxes; (2) Selling interest-bearing government debt to the private sector (bonds); and (3) Issuing non-interest bearing high powered money (money creation).

    Taxes and CGS on issue are recorded in the balance sheet. It is the recording of number three I am having trouble understanding.

    This has nothing to do with how much governments can spend. That is not what I am asking about. The discussion has been useful in crystalising for me, what it is I am seeking. I will continue reading.

  153. Lee

    Kaye, are we agreed that the various references which have been posted here all state that the government creates money by spending? Where do any of them state that only partial government spending involves the creation of money? They don’t. That is an assumption that you have made and it has created a roadblock for you.

  154. Lee

    On the surface, what the politicians tell us seems plausible. But when you start digging and asking questions it just doesn’t add up. All Australian government “borrowing” is in Australian dollars. From whom is it being borrowed? It cannot come from another country because only the Australian government creates Australian dollars. It is being likened to a personal loan but it isn’t one at all. The major parties rely on most of us not caring enough to strain our brains thinking about it.

  155. Kaye Lee

    Lee,

    This has nothing to do with government spending. It is about how money creation is recorded on the balance sheet. I make no assumptions about anything at all. I am not talking about concepts – it’s straight out maths.

  156. stephentardrew

    Kaye maybe fractional lending is a fly in the ointment when banks can re-lend the same capital ten times over thus creating money through interest on loans using the fractional multiplier. Where is the cumulative interest recorded and how can one dollar be lent ten times over? That is straight out money creation for the banks which would appear on their balance sheets but not the governments. Just a thought.

  157. Lee

    Kaye, how can it have nothing to do with government spending? I’m a dunce when it comes to accounting but even I know that a balance sheet is a record of income and expenditure.

  158. Kaye Lee

    Exactly Lee. You start with an opening balance, you account for income and expenditure, and come up with a closing balance. When I say it has nothing to do with government spending I mean the government can spend what it likes – it is not constrained by taxes or borrowings etc but by the productive capacity of the economy as a whole. That is not what I am discussing. On that balance sheet, how is money creation accounted for? Seigniorage is one example of money creation that I understand and that does appear on the balance sheet but it is minor. Is there another entry that shows how money is created or is it just the bonds on issue?

  159. Lee

    Forget the bonds. It has nothing to do with it. The government creates money by spending. Government spending = creation of money. Expenditure on the government’s balance sheet = money created.

  160. Lee

    John Armour is correct. You cannot learn about MMT by skimming through an article and picking out a random sentence. You have to read the whole lot to understand how it all connects together.

  161. Kaye Lee

    I have been reading in depth for quite a while Lee. You ask me to forget the bonds. That is impossible to do when looking at the balance sheet. If you want to ignore an entry you will have to contra it against another or things don’t add up. I don’t know how to make it clear that it is the adding up I need to understand. That has nothing to do with MMT.

  162. Harquebus

    I have been reading up on this MMT, also known as neocharlatism. It is rubbish. The same old economic dream world of forever trying to conjure up wealth from nothing.
    Do not believe government statistics nor accounting. They are all fudged and is why no one can work them out.

  163. DanDark

    Supermundane said “Hardly a respectful approach to inquiry. Still I’ll say no more of the matter as I believe many have endeavoured to patiently ‘lead the proverbial horse to water’. Answers have been provided and I suspect that the difficulty in understanding them arises from conceptual differences over the nature of money and the distinction between currency user and issuer. ”

    You cant help yourself mate, “lead the proverbial horse to water”
    Another insult by someone who said “Still I’ll say no more of the matter” in the same sentence
    Yeah time to give AIMN another break,,,to many so called experts like Superman just out to be pricks….
    Take care Kaye and everyone on AIMN…….. 🙂

  164. Wally

    I have read all of the replies to Kaye Lees questions and I cannot believe no one has an answer.

    Is MMT factual as Ohms law is in Electrical Theory or a concept?

    If you collect tax only to destroy it why bother collecting and why put it on the budget balance sheet?

    If bonds do not fund the shortfall between income and expenditure why bother creating bonds and committing to pay interest?
    You could simply tax more to remove excess funds from circulation or cut spending so less money is put into circulation.

    Why pay interest on government debt when you can just print more money?

    If we don’t need to borrow money to create money why worry about having a AAA credit rating?

    I find it hard to make MMT fit within what I see occurring in the real world and how the role of the International Monetary Fund fits in.

  165. Lee

    Sorry Kaye, I’m done here. You’re all over the place. You’re adamant that those who have tried to help you are wrong. You cannot tell us the correct answer. You have totally ignored every question I have asked you. I was hoping those questions would prompt you to think about it from perhaps a different perspective.

  166. supermundane

    @DanDark

    ‘You cant help yourself mate, “lead the proverbial horse to water”’

    A figure of expression mate. Are you familiar with it? I’m not calling anyone a horse and no insult was intended. Perhaps you’re failing to see that people have patiently and methodically explained it to Kaye Lee and demonstrated a level of forbearance with her that I must admit I do not have. Hence the expression.

    “Yeah time to give AIMN another break,,,to many so called experts like Superman just out to be pricks….”

    Stop being so precious and get over yourself.

  167. supermundane

    “If we don’t need to borrow money to create money why worry about having a AAA credit rating?”

    Why indeed? And why do we need credit ratings at all. The point is, we shouldn’t worry about the credit rating in state that sovereign control of its currency issuance. The states of the federation as users of the currency are of course a different matter.

    People need to understand how much of this is legacy from when the currency was tied to a commodity and how much is obsfuscation in the service of an ideology that services the financial sector and the elites. Those who wish for government to serve their ends and who wish to hobble the capacity for government to serve the interests and well-being of all, stand to benefit from the continued mythologising and obscuring of the fiscal latitude that the government really has. MMT isn’t a political manifesto but broader public knowledge of how it serves as a description for a economies working with a sovereign currency and a floating exchange-rate would undermine the austerians and those who are served by hobbling government and fostering private-sector indebtedness. We would cease to by frightened by shadows and chimeras.

    Read this for starters:
    http://bilbo.economicoutlook.net/blog/?p=22809
    http://bilbo.economicoutlook.net/blog/?p=6857

    Really to answer your questions you need to take the time to read all the material cited.

    “If you collect tax only to destroy it why bother collecting and why put it on the budget balance sheet? ”

    This question has been answered a number of times. In short,Taxes function to regulate aggregate demand, not to raise revenue per se. It’s about regulating the supply of the money (which is done by either increasing or decreasing government spending or increasing or decreasing taxation). Both spending and taxation can be targeted for social outcomes but they are not linked, in that taxation requires government spending (injecting currency into the economy) first rather than the other way around. It also gives the currency its imprimatur. Taxation ensures that it is used (as you require it to meet tax and fee obligations to the government) over some other currency.

    “If bonds do not fund the shortfall between income and expenditure why bother creating bonds and committing to pay interest?”

    Perhaps one of the more complicated thing to understand and one which understandably trips people up. Again its a vestigial remnant of when the currency was commodity-backed. There is no prima facie imperative for bonds to be created to fund deficits nor for public debt (government debt) to be “repaid” by taxation ie. by surpluses. It may be repaid. In some circumstances (overheating of the economy) it may be advisable to repay it in part or in full but it is not imperative that it be repaid. Read here:

    http://bilbo.economicoutlook.net/blog/?p=26596

    “Is MMT factual as Ohms law is in Electrical Theory or a concept?”

    Putting aside the attempt to conflate two unrelated things for the purposes of ridicule you’ll find an answer here. It is the best explanation for how a sovereign currency (and by extension non-sovereign currrency arrangements such as the Euro) work at a granular level. It is certainly superior to the fact-free ideology of neoliberalism that is propagated on a daily basis in the media (fears about government debt et al):

    http://bilbo.economicoutlook.net/blog/?p=25161
    http://bilbo.economicoutlook.net/blog/?p=29761

    To quote Jesse Myerson from this link in reference to the US Federal Reserve:

    ‘… it does not matter who owns the public debt, because its repayment places absolutely no budgetary burden on anyone. It might take a minute or two out of the day of some operations person at the Fed, but that’s all. That person might bring up the spreadsheet of a Chinese bank’s savings account at the Fed (its “Treasury securities” account) and deduct a certain amount, by a keystroke, thereupon to bring up that same bank’s checking (“reserve”) account spreadsheet and add that same amount, by a second keystroke. The debt is thereby paid. Ta-da! ‘

    Remember the bonds are purchased with the currency that the government issues and can issue at will (at a key-stroke). They are a risk-free salve to special interests Functionally, if they can be said to have any purpose its that government bond issuance is a form of government price level intervention in interest rate markets.

  168. supermundane

    The previous post was a response to Wally’s comment if that wasn’t clear

  169. Annie B

    I would first like to say thank you to those who gave answers to my own queries, which were along similar lines to Kayes queries, with a few of my own variations thrown in.

    I sincerely appreciate your efforts, Jexpat, Andreas, Supermundane and if I have missed anyone, my apologies …. I am beginning to get a glimpse of what is being told here. There are several things I will NEVER understand tho, e.g. how taxes can be ‘destroyed’ ( or does that mean written off ? ) …. I am not looking for an answer to that, just making another observation.

    I must say that stephentardrew put a different spin on it all – in terms of individuals’ understanding of concepts and procedures etc. ( well that’s how I read it stephen ). … and I rather think Wally also had some very interesting points to make & questions to ask.

    Kaye mentioned the word ” Seigniorage” …. and said she understood that. …. I had never heard the expression, so searched its’ meaning. ….. Explains ( in a way ) why a Government Budget and ‘balance sheet’ would perhaps NOT show the line that she wants to see …. and its meaning surprised me.

    ” Seigniorage – “profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs — and ( historical ) — “a thing claimed by a sovereign or feudal superior as a prerogative.”

    Which kind of boils down for me, that despite the many theories, concepts, procedures, arguments, accounting practices and anything else to do with monetary / fiscal considerations – a Government, any Government – can do what they bloody well like to fill out or pull in the figures as they see fit – or – ‘as a prerogative’ ( right, privilege, entitlement). Which makes what Harquebus said ( today 11.15 am) ….. particularly his last two sentences, all the more worthy of thought. “Do not believe government statistics nor accounting. They are all fudged and is why no one can work them out.”

    After all, who here on AIMN – really trusts this Government – – – – to do anything honest, worthy, worthwhile or to ever tell the truth. Doesn’t happen, and isn’t about to. Leopards don’t change their spots.

    Yes – I have strayed off topic somewhat, but it is also perhaps relevant ???

    Just sayin ……… !

  170. supermundane

    @Harqebus.

    I strongly suggest reading Graeber’s Debt – the First 5000 years’ as you appear to be struggling with the fundamental conception of money (a social contract). A simple parable for you – Neoliberals act as if money is finite and the world’s resources are infinite when in fact the opposite is true.

    Money issuance is of course tried to work done and the planetary limits pose real limits and caps. Money is merely a government-backed social contract (in Ancient Mesopotamia it was backed by the Temples who kept clay tallies. Every transaction had to be recorded and lodged at the temple and your purchase of someone’s goat was registered as a series of stokes carved into a tablet. Money today isn’t all that different conceptually). MMT is not an advocacy for exploiting the planet even more. It merely serves as a description of how money actually works. The best way to combat the destruction of our planet is to shed light on how money works and what it actually is for it is presently obscured by an ideology in the service of the elites and of mindless destruction and resource appropriation in their interests.

  171. supermundane

    @Annie B

    No problem. And apologies for any frustration on my part. When you say:

    “here are several things I will NEVER understand tho, e.g. how taxes can be ‘destroyed’ ( or does that mean written off ? ) …. I am not looking for an answer to that, just making another observation.”

    I think it is critical to understanding the fiscal latitude that the government as the sovereign issuer that you do come to grips with this. I think the mental block is a conceptual one. Why go through the effort of collecting taxes only to destroy the money accumulated through taxation (bear in mind that this only serves at the federal level and not the state)? Taxation still serves a vital purpose as has been explained here. I think the conceptual stumbling block people are struggling with is the nature of money. Why would the government destroy something that has value? It’s a vestigial hang-over in our conceptual framework from when money issuance was constrained by a finite commodity and directly convertible with it. Money is a government-backed IOU and has no intrinsic value. What has intrinsic value are the goods and services produced and traded with money as it flows through the economy. We could say that money is only something when it is activated in an exchange.

    Now you accept that the government can issue the Australian dollar at will (it can’t issue the American Dollar or the Japanese Yen). If you accept this, then you can accept that it can never theoretically run out of Australian dollars any more than the MCG can run out of points or runs on the scoreboard. Money is a representation of a social contract (an exchange of goods, which are theoretically finite) just as the runs on the scoreboard are a representation of a physical act and not the thing itself. The government can meet every debt denominated in the currency it issues. This means it doesn’t need taxation to fund spending. The money called in by spending simply goes from being a 1 to a 0. Now I and others addressed why taxation remains important regardless elsewhere so I’m not going to cover than ground again.

    Seignorage – Let’s remember that precious little of the money in circulation is physical. It exists as 1 and 0 in an account somewhere and with physical money the link between the face-value and the value of the materials used has long ceased to have any relation. Regarding the value of the nickel, copper, tin and polymers used to mint money, assuming that they were purchased in Australia, the are purchased with Australian dollars which again, the government issues and can always meet just as it can meet the wages of those working at the mint.

    The question of why the neoliberal/monetarist conception prevailed in academic and public consciousness is a long, fascinating and vitally important study. It has a lot to do with the age-old battle between capital and labour, between power and demands form popular enfranchisement, about control of resources and people by a few, about fear at the elite levels about popular and democratic decision-making (thus withdrawing control of the economic sphere out of the hands of the population and providing a simple parable (governments are like households) to justify it et al. It’s the key to why the world and relations of power are as they are – it’s why capital likes a degree of unemployment (even though the government could eliminate unemployment by purchasing idle labour). It keeps up powerless, fearful and needing them. If people knew that governments could fund education, infrastructure, the health system etc then they would see that the emperor is naked (the likes of the IPA exist to sow confusion in the interests of those they serve).

  172. DanDark

    Superman who is precious you have taken over this thread, it’s all about and you and has been on this thread for awhile buddy
    I think you are doing a bit of projecting hey

    “Stop being so precious and get over yourself.” You said
    I have got some advice for you, ” Stop being sooooooo precious and get over your self” prick…… 🙂
    Now I will return to something more constructive than your insults and then you explain them off with more insults….

  173. supermundane

    @Annie B

    One other thing, the questions that you, Kaye and Wally have asked are not novel or alien to those here who have been endeavouring to explain MMT and pointing you in the direction of further reading.

    Trust me, we have posed the same or similar questions to ourselves as we grappled with it. That is why we can confidently say that the problem that you’re facing it one of preconceptions – a mental framing of the world that prevails and that asserts itself as the definitive account of reality in the public discourse. We’ve been there.

    If you persist in trying to understand; read the material carefully; weigh it up against what the orthodoxy is telling you; look for the real motivations (the agents and players) behind the orthodox views, then at some point there’ll be a light-bulb moment. The mental leap is huge, there’s no denying that especially as such of what we’re endeavouring to explain seems counter-intuitive.

  174. supermundane

    @DanDark

    Looking forward to finally contributing something here then Dan. Haven’t seen anything so far.

    Surprise me.

  175. Andreas Bimba

    @ Lee
    re. the video ‘Economics for Dummiez’.
    Thanks, I quite liked it and it helps in a few areas. The video probably does need a bit of improving to really hit the big time, for example the synthesized voices were a bit of a pain and some comments were a bit unclear or quick for genuine dummiez, like most of us, but on the whole it was a good effort.

    @supermundane
    Interesting answers and comments, thanks. Be careful though with answering Harqebus as I personally think his/her? comments are just all doom and gloom and he/she just wants us all to live in a land of overwhelming futility with him/herself forever, but I’m not an arbiter just another person with an opinion.

    @Wally
    “Why pay interest on government debt when you can just print more money?”

    Supermundane may have missed this one or answered it indirectly so I will give my interpretation.

    Indeed the federal government shouldn’t be issuing bonds or entering into other similar ‘loans’ to pay for government debt. Funding shortfalls should have indeed been met by ‘electronically printing money’ but within the limits of the economy to absorb that money ‘spent into it’ without undue inflation.

    Repeating one of my earlier questions which no one (apart from myself) answered. What should we do with most of the Australian Government Treasury Bonds, which are fortunately denominated in A$, but are predominately owned by foreign financial institutions and we pay interest on, given that it is also possible to have a worldwide bond market meltdown and our credit rating could deteriorate from the current AAA, in which case interest rates for new bonds could very well be much higher than existing ones? Have the neo-liberals created a potential Treasury Bond debt ‘bomb’ for us, that is difficult now to escape from?

    My understanding is that A$ interest payments on Treasury Bonds (both foreign and locally owned) will re-enter the Australian banking system when the recipients receive these funds and if this interest were to be paid by the government with ‘extra’ electronically printed money then there would be a net increase in the money supply which is inflationary. Given this predicament I would think that either additional bonds would be needed to be issued, taxes would need to be increased or government expenditure reduced to pay these interest payments if they were to become painfully large?

    I expect our MMT economist friends will say credit ratings and bonds are not really relevant and a fiat currency controlling government can create as much currency as it wants in an MMT based economy but, HOW DO WE BEST GET OUT OF OUR CURRENT TREASURY BOND PREDICAMENT?

  176. supermundane

    @DanDark
    ‘Superman who is precious you have taken over this thread, it’s all about and you and has been on this thread for awhile buddy
    I think you are doing a bit of projecting hey’

    I see you’re the thread-monitor are you? You might want to start to with writing a cogent sentence before you assume that responsibility.

    ‘I have got some advice for you, ” Stop being sooooooo precious and get over your self” prick…… :)’

    It’s like having an argument with an Infant and what do they say about the sanity of that?

    I won’t be engaging with you Danny boy from here on. So run along.

  177. John Armour

    I’ll just throw this in. It might switch on a light…

    We all accept (I hope!) that commercial banks create money out of thin air when we borrow.

    Even if we handed over hard currency (notes) to settle the debt, that logic still applies as that money had to be sourced from within the aggregated banking system somewhere and will show up as a reduction in overall reserves. Bank money is destroyed in the process of paying back debt.

    It’s no different with government money. Like original sin, it seems we are born with a tax liability.

    This time, when the government deficit spends, using money created ex nihilo, the assets of the private sector are increased and the money so created is recorded as a liability on the central bank’s balance sheet.

    Currency is a government IOU, an acknowledgement that the government will redeem its own IOUs in settlement of our tax liabilities.

    It used to be a promise to redeem in precious metal but that of course no longer applies. The thinking however persists and can be confusing.

    When we pay our taxes with the State’s unit of account, our personal bank account is debited, and the liabilities of the central bank are reduced by an equal amount, that is, money is destroyed following the same logic that applies with a loan from a commercial bank.

    All I’ve done here really is paraphrase and expand a little on the relevant points in the Kelton paper.

    If one can accept that money created ex nihilo enters the economy as a liability on the central bank’s balance sheet, all subsequent transactions follow the rules of double entry book-keeping and it all makes sense.

    Kaye, Randall Wray’s book “Modern Money Theory” has quite a few examples of such transactions with the aid of T accounts but I don’t have it with me at the moment, and trying to reproduce the T accounts in narrative form would be quite tedious. I’m sure it would settle this issue for you.

    I doubt you will ever find a balance sheet entry indicating ex nihilo creation of currency or reserves however. It’s not part of the secretive banking culture.

  178. Wally

    supermundane

    Thanks for your reply I start a 2000km round trip to Sydney in a couple of hours but I will investigate the links you provided as soon as I return home.

    “Putting aside the attempt to conflate two unrelated things for the purposes of ridicule”
    Maybe I should have worded that question differently but there was definitely no intent to ridicule anything or anyone.
    English is a shit language words often mean different things and a theory can be conceptual or factual.

    Ohms Law (I = V/R) is set in concrete. you can manipulate or inverse the equation but the relationship between V (voltage). R (resistance) and I (current or amperage) always remain proportionally the same so it is the perfect comparator to gauge how strict the rules of other so called theories are.

  179. supermundane

    No problem Wally and have a safe journey. Hope you enjoy your time in Sydney.

    I understand your comparison better following your explanation. I think we can agree that economics isn’t a science with the same level of testability however I do believe MMT at least tries to provide an account of the relationship between the sovereign currency issuing government and the private sector that is no longer commodity-backed or operating with a fixed exchange rate.

    John Amour’s post above gives an excellent (far better than I could do) precis of MMT in my opinion. The article that he cites by Stephanie Kelton is well worth reading. The link is buried somewhere in the earlier posts.

    Take care.

  180. Andreas Bimba

    @ Christopher Brooks
    An amusing link and yes indeed:
    “What a silly stupid bunch of ignorant peasants. Isn’t it lucky we are too smart to fall for such an obvious scam”.

    Looks like we are already feudal. thanks my fellow peasant and hand me that musket.

    @supermundane
    Supermundane and DanDark please stop this little storm in a tea cup, judging by your many comments here and elsewhere I suspect you could be good friends if you met in person, and restrained the pen a little.

  181. John Armour

    “HOW DO WE BEST GET OUT OF OUR CURRENT TREASURY BOND PREDICAMENT?”

    We don’t actually have one.

    Who is in charge?

    The government (via the central bank) can simply enforce a yield structure onto bond markets. Like it or lump it. If the bond markets don’t like it then the central bank can buy the debt. Bill Mitchell.

  182. John Armour

    Wally,

    In the economics analogy one has to deal with inductance and reactance with unstable frequency.

    : )

  183. Andreas Bimba

    @John Armour
    Thanks, if the Australian central bank had to buy the debt, for example if the bond holding nation threatens to send an ICBM or two because they thought we were screwing them, how would the nation pay for it? I haven’t read the article yet but your answer please for the benefit of all.

  184. John Armour

    Andreas,

    It doesn’t matter who holds the debt, foreigners or residents, so long as it’s denominated in the domestic currency.

    Barnaby Joyce thinks that when foreigners buy our bonds, we are building up foreign debt, but nothing could be further from the truth. The RBA carries very little foreign debt and what there is, is safely hedged (we hope).

    When we redeem bonds, we just roll the debt over with fresh bonds, and we could do that until hell freezes over or as long the private sector enjoys a return on a risk free investment.

    If a serious attempt was ever made to “pay off” the so-called debt, the economy would collapse overnight. Surpluses can only ever really suppress the issuance of fresh bonds.

    Bond issuance is really a favour to the bond market, not the other way around.

    We pay the dividends by marking up the bondholder’s Treasury account using costless keystrokes.

    The US, according to Frank Newman, former Deputy Secretary of the US Treasury, has been doing that since (I think) 1791. He also says that the “debt” should not even be called a debt, as it is really a private sector asset.

    Finally, consider this: in 2002 after a couple of Costello’s surpluses, fresh bond issues looked in doubt. After an “inquiry” was set up to come to the previously determined conclusions, the government continued issuing fresh bonds even when there was no need to.

    More interestingly, the RBA recognises a need for bond issuance of around 15% of GDP (to satisfy the liquidity needs of the market) which is about the level of “debt” the last Labor government left for the Coalition, the debt that was a “crisis”.

    Enjoy the article!

  185. John Armour

    “A parable to explain our money reality.”

    Judging from the comments on the FB page, Christopher, Fair Money needs to get a few things sorted out itself before embarking on a campaign.

  186. supermundane

    @Andreas Bimba
    “Supermundane and DanDark please stop this little storm in a tea cup, judging by your many comments here and elsewhere I suspect you could be good friends if you met in person, and restrained the pen a little.”

    Agreed. Apologies to all including Dan for my intemperance.

  187. Annie B

    I decided to do some of my own research, as my head was spinning at the myriad of ideas put forth here – all good I am sure, and with much to impart to an economic klutz like myself – but comments seemed to often come from opposite sides / teams, aiming at the same goal ??? …. No offense intended by that comment, to anyone here, who have taken the time and effort to explain much to those ( including myself ) who have asked, queried and requested. …..

    ,,,,,,,,,,,,,,,

    http://www.economonitor.com/dolanecon/2012/11/28/what-does-it-mean-for-fiscal-policy-to-be-sustainable-mmt-and-other-perspectives/

    written by Edwin G. Dolan who is an economist and educator with a Ph.D. from Yale University.

    I found this article helpful, and it furthered my curiosity. As both the U.S. and Australia are similar ( they both issue their own sovereign currencies and maintain floating exchange rates ) what he has to say is fairly relevant to our own fiscal situations.

    Dolan also has a sub-heading ” What can MMT and the rest of us agree on? “ …. >>>>

    I am not in a position to even attempt to summarise Dolans’ article …. but one ( of many ) comments stood out and I hope it piques your curiosity.

    “Can we go so far as to say, then, that because a country with a sovereign currency and a floating exchange rate can never become equitably insolvent, its fiscal policy can never become unsustainable? …..

    In my view we cannot. ….. Solvency is only the starting point for a discussion of sustainability, not the whole story.”

    ………..

    John K – I have just now re-read your entire article … and can truthfully say I understand it more now than I did before. Not 100% but more. It is an excellent article, written succinctly, and with facts always to the fore.

    ____________

  188. Annie B

    While this Government makes political hay, by continually moaning about the deficit ( all Labors’ fault ) … it turns out that in fact their spending, which has been seen by many of us here on AIMN as fruitless, futile, wasteful, self-aggrandising, and theft from the pockets of the poor – – – – is in accordance with the MMT theories ? … Would that be correct ?

    That ‘creating money’ is based on expected or projected expenditure – so ” wow, let’s have at it boys” – we will spend like there’s no tomorrow in order to keep the economy running smoothly into tomorrow. ??? But while we add to Labor’s deficit – it’s ok, because WE are doing it, not them. … All Governments ( apparently ) will keep a country in deficit, because a very sizeable surplus is not advantageous ( a little one is kind of ok ) ….

    “In reality, there is no affordability issue and nothing inherently responsible in balancing the budget. To the contrary, such a move would be burdensome in the extreme, as well as unsustainable. Particularly at a time of high joblessness and underemployment, efforts to reduce rather than increase the deficit are the height of irresponsibility.” http://heteconomist.com/what-everyone-should-know-about-budget-deficits-and-public-debt/

    That puts Abbott’s grizzling into perspective. !! ” reducing the deficit is the height of irresponsibility”, so he is being ultra responsible in raising it way above what he inherited. ? Is that his game ? … Maybe, maybe not. … Depends on how good his financial advisors really are. !! 😉

    This only points up what we all know. The double-speaking crud that spews from Abbott, and particularly Hockey ( who needs help !! ) – ” we must fix the Budget ” … ” we will have a surplus in 3 years ” ( said early in their reign of terror ) … ” these measures are necessary to fix the Budget crisis” blah, blah, blah – and austerity has been more than hinted at, more than once.

    There’s much secrecy within the LNP rank and file. …. with no doubt many duplicitous whisperings around the table, to decide how to keep the public confused, dumbed down and off balance ( they think !! )….. That’s precisely what manipulators do – i.e. – manipulate anything, the truth, lives, behaviour, hopes and fears.

    Of course, there ARE matters of Government, Law Enforcement, Banking, & Industry that must be kept under wraps, so I have not suddenly become paranoid in stating the above.

    It would however, be so refreshing – just once, to hear a truth come forth from any of the LNP front benchers, including the prime monster – and they could start by explaining why they spend billions on what they do, and how it affects us all in the long run – fiscally. …. But they wouldn’t lower themselves to speak plainly to the ‘plebs’, even if they could actually intellectually and intelligently get their heads around it, in the first place.

    Too much to expect. ….

    Night all – – – 🙂

  189. Christopher Brooks

    @John Armour who wrote,

    “Judging from the comments on the FB page, Christopher, Fair Money needs to get a few things sorted out itself before embarking on a campaign.”

    Hi John, “Fair Money” is a new association seeking to learn and progress honest understanding of the essence of “wealth” that our lives could achieve, in all it’s dimensions, if our economic life was conducted with an honest and just currency.

    Because a “financial currency” has multiple dimensions, power, accounting, policy, philosophy, legal and political, there is a great deal to contemplate, particularly for those only just beginning to engage in the subject.

    The general truth that our “money” is a trick has been understood and stated in books and by various associations over the previous centuries but efforts to challenge and correct the situation have only achieved brief episodes of respite from the monopoly dominance by
    a few with the Black Magic ability to control the population.

    If Australia is to achieve and sustain an honest financial currency it must have a society that is well educated on all the subjects that the historical record reveal are relevant.

    One of the critical lessons is how easily well intentioned associations and individuals can be subverted in their outcomes if the correct principles and methodology of association, policy and purpose are not adhered too with strict discipline.

    The pattern of well intentioned altruism playing out in the raging economic injustice and constant waring conflict is part hope and part tragedy.

    On the other hand, humanity has demonstrated incredible capacity for amazing positive achievement.

    The contrast in living experience and justice about the globe is incredible.

    Is there even a practical possibility that the forces that have chained us to “debt money orthodoxy” can be challenged?

    Who are those forces of power that benefit from the present economic matrix.

    The first task of “money reform” is to get to know who exactly is the enemy of honest money.

    Much more could be said…………

    In my mind a Think Tank approach based on expanding the discussion with open debates and a self education towards
    building the intellectual and moral force against the monopoly is the correct strategy.

    I don’t represent “Fair Money” in these comments.

    Associations are only a means to an end, not an end in themselves. This is an important principle.

    Words make people slaves if they are not wary of the sorcery wrapped and conditioned in our language by elements that
    have mastered the dominating mischief of control without guns.

  190. Andres Bimba

    THE RULE OF THE BRAIN IN THE LAND OF NEO-LIBERALISM

    Imagine that the brain thought of itself as the ruling organ and in fact the only really important organ of the body and began to demand a greater and greater share of the total blood supply that was commensurate with brains self perceived higher status. For a while all went well but later the unimportant toes began to atrophy and later the hands and feet, eventually the legs and arms were gone but the brain was content as it never had it so good. By the time the vital organs started to fail, the brain noticed the blood supply was failing and in a rare moment of humility or perhaps fear decided to ask the remaining organs what to do. The organs almost instinctively said as one, don’t be afraid, you are the brain and we only respect strength and clarity and we don’t know what to do, please lead us to a better world and besides, the legs and the arms probably weren’t worthy and that’s why they died and everyone knew they were really lazy and were no good for anyone. The brain agreed and said the arms and legs were just leaner’s and it was time for us lifters to continue on faster than ever. The brain was feeling much more confident and even demanded a bigger share of the remaining blood supply as it was sure that only it had the necessary strength and wisdom to escape the current minor predicament and succeed.

  191. John Armour

    “THE RULE OF THE BRAIN IN THE LAND OF NEO-LIBERALISM”

    As allegories go, that’s pretty bloody good Andreas,

    I tried to Google the source, but nothing popped up.

    Were you the author?

  192. Andres Bimba

    Yes John, just felt like writing a different kind of post and that train of thought sprung to mind.
    Thanks for all the links to worthy economics material, time is a bit of a limiting factor for me though and I may need to skip to other things.
    Cheers

  193. Annie B

    Agree with John Armour ….

    That was clever writing indeed Andreas.

  194. John Kelly

    Might I add something to your, ““THE RULE OF THE BRAIN IN THE LAND OF NEO-LIBERALISM”, Andres?

    ….and it came to pass that the brain became so absorbed in itself, that the rectum was drained of its needs and began to close. When this happened, the brain became a little fuzzy such that it did not realise what was happening. Similarly, the eyes, the ears and the nose, those parts the brain always left to function normally, were also suffering a disabling condition. Pretty soon all manner of dysfunction so pervaded all remaining parts of the body that they turned to the rectum and pleaded it reopen. The rectum smiled a satisfactory smile and announced that the brain had failed the test of fair play and humility in the service of the body whole. Everyone agreed and so from that point on, the arse was duly recognised as the ruling organ. It duly reopened for business and everything returned to normal.

  195. Royce Arriso

    John Kelly, Andreas, supermundane, John Armour etc–(apologies to anyone left out) Four hearty cheers to all of you for your beautiful explanatory posts. And to Andreas especially for that well-nigh perfect ‘brain’ analogy. All swiftly cut-and-pasted to my brand new MMT file. Keep spreading these simple truths, people. We cannot continue in this state of suspended animation tempered by half-truths, obfuscation and outright lies. More power to you all!

  196. John Armour

    Annie B, @ May 22, 2015 at 12:11 am

    I read those links you provided.

    The first article, by the Yale economist, after producing three different measures of “sustainability”, at no point tells us what the consequences of breaching the limits of those sustainability measures will be, beyond this:

    “The concern here is that a debt that grew without limit would eventually become unmanageable, leading to some unpleasant consequence like default, excessive inflation, or forced austerity.”

    What does “unmanageable” mean?

    The author has already admitted default is not possible.

    And inflation, whether “excessive” or not, is always a risk with any kind of spending, if it draws on scarce real resources. All spending carries an inflation risk. That’s hardly unique to a MMT interpretation and simply addressed using fiscal policy.

    The “forced austerity” argument just closes the loop in what is just a circular argument: that debt could become unmanageable. It also tells us that the author doesn’t understand that a sovereign currency issuing government does not have financial constraints.

    The term “unmanageable debt” is meaningless for a currency issuing government.

    Most of the article, where the various definitions of sustainability are trotted out, is a journey to the centre of Flat Earth economics.

    Anybody with a reasonable grasp of MMT could tear it to bits on just the facts.

    Oddly, most of the author’s criticisms of MMT seem to evaporate in the summarising paragraphs where he looks for some common ground.

    The second article you linked to however is a very realistic depiction of our monetary system, a benchmark you could use to make a judgement about the soundness of the first article yourself.

    You also made this comment:

    “While this Government makes political hay, by continually moaning about the deficit ( all Labors’ fault ) … it turns out that in fact their spending, which has been seen by many of us here on AIMN as fruitless, futile, wasteful, self-aggrandising, and theft from the pockets of the poor – – – – is in accordance with the MMT theories ? … Would that be correct ? ”

    Roughly speaking, that is correct Annie, as I have said many times here when others have sought to score cheap points by pointing out how Hockey “has doubled the deficit”.

    No matter who’s “fault”, we should be glad the deficit continues to grow as otherwise unemployment would be much worse.

    We are entitled to point out the hypocrisy of this government’s rhetoric on Labor’s deficit, but it’s very unwise to bang on about the growth of the deficit itself as that’s just showing we’re as ignorant as they are.

  197. Annie B

    @ John Armour ….

    Thank you very much for your reply.

    I did say here, I am an economic klutz, definitely a newbie, but love learning…. There has been soooo much discussion on this thread ( a good thing ) that the logic part of my brain could not quite accept. …. As someone ( maybe you ) pointed out, that might be a conceptual problem. …

    I was rummaging around on the Net when I came across that first linked article, and I guess it was because I could understand the language ( to a degree ) that it resonated. …. It also had comments available, ( there were 32 replies and admittedly, I didn’t read all of them ) – so perhaps that writer, Edward G Dolan, threw that article out there for comment – as so many writers do here. … Therefore, he did not answer his own questioning….. Left it to the readers to add their comments and solutions.

    Still and all, I take your point.

    What does ‘unmanageable’ mean ? …. I think the word can be applied to almost anything we occasionally encounter in life, initially. With guts and determination, unmanageable can become manageable. … however, the word also means unwieldy, uncontrollable ( e.g. a person who is seriously hooked on ice – could be called unmanageable ) and a variety of other meanings. … Basically – – – – out of control.

    Your comment ” And inflation, whether “excessive” or not, is always a risk with any kind of spending, if it draws on scarce real resources. All spending carries an inflation risk. That’s hardly unique to a MMT interpretation and simply addressed using fiscal policy.” ….. Is this Government ‘gambling’ with our future, with our resources, with our reputation, and our welfare. ? … It does seem at times, as though it is gambling on a great deal, while trying to instil fear into the populace, to attempt to keep it quiet and subservient. … So much for their understanding of human nature, of Australians in particular, and of the most basic of instincts – survival. ….

    Perhaps I did not explain properly – because my main focus was on having yet another crack at the overall ineptitude of the current Government, which is and always will be my beef, unless they produce some miracle of sense and sensibility – somewhere, sometime. ? ( not likely with the line-up we currently have ! )

    One of the few things I do understand is .. ‘that a deficit in budget is infinitely more preferable, to a surplus, especially a large surplus ‘. Have taken that on board for years, having heard it and read it so many many times over. …. and so I have to agree, even though I don’t quite understand the machinations of that premise. ….. so, we are in agreement.

    But now ! … there is the pro-MMT and the anti-MMT sides of argument. …. A new monetary theory vs. the older status quo ???

    Which will win – in the long run ? …. I hope I live long enough to see … and to accept – whichever it is.

  198. John Armour

    Annie B,


    “that a deficit in budget is infinitely more preferable, to a surplus, especially a large surplus ”

    That would certainly be true for our economy, most of the time, but it’s not a universal truth for all occasions.

    If for example, our income from exports suddenly boomed and injected huge amounts of income into the domestic economy, a fiscal surplus would be totally justified.

    Or if the private sector decided to embark on an investment boom instead of saving, that might justify a fiscal surplus.

    It all depends on how the 3 sectors of the economy play against each other.

    Each sector can at different times inject money into the economy, or drain it. Each sector can drive the balances of the other two, or be itself driven by them. The sectoral balances say nothing about causality.

    Here are some links you might find useful.

    http://bilbo.economicoutlook.net/blog/?p=2418 Norway and sectoral balances

    http://bilbo.economicoutlook.net/blog/?p=22871 Balancing the budget over the cycle is not a sound fiscal rule

    http://bilbo.economicoutlook.net/blog/?p=24732 Balanced budgets are rarely appropriate

    http://bilbo.economicoutlook.net/blog/?p=21287 Sectoral Balances Part 1

    http://bilbo.economicoutlook.net/blog/?p=21389 Sectoral Balances Part 2

    http://bilbo.economicoutlook.net/blog/?p=21467 Sectoral Balance Part 3

  199. Harquebus

    I agree with Jammy about returning to the gold standard. It won’t happen though. It would mean that governments via reserve banks can not inflate their way out of debt through currency creation.

    Anyone who claims to understand economics is either deluded, benefiting from the greatest ponzi scheme in history or both.

    “Economics is not science because much of economic knowledge is not based on facts derived from the scientific method where facts make or break theories.”
    http://www.asepp.com/facts-and-economic-science/

    Money for Nothing Inside the Federal Reserve 2013
    h ttps://www.youtube.com/watch?v=qDMkgmL-G24

    Again, I recomend.
    http://hiddensecretsofmoney.com/

  200. Andreas Bimba

    Thanks all for the comments on ‘THE RULE OF THE BRAIN …’. John and others please feel free to write your own versions and spread the word far and wide. Every little bit helps.

  201. John Armour

    “Anyone who claims to understand economics is either deluded, benefiting from the greatest ponzi scheme in history or both.”

    And you wrote this?

    “It would mean that governments via reserve banks can not inflate their way out of debt through currency creation.”

    Self parody?

  202. Lee

    I wrote to the RBA and asked where the creation of money is shown on the Federal government’s balance sheet. Here is the reply.

    Australian banknotes on issue are shown on the Reserve Bank’s balance sheet. See Table A1 – Reserve Bank Of Australia – Liabilities and Assets (banknotes are listed in column C. http://www.rba.gov.au/statistics/tables/xls/a01whist.xls The Reserve Bank is responsible for issuing Australia’s banknotes, whereas coins are produced and issued by the Royal Australian Mint. http://www.ramint.gov.au/)

    Although the Reserve Bank is wholly owned by the Commonwealth government, it is an independent central bank. For any questions about government finances, I would suggest contacting the Treasury http://www.treasury.gov.au/ or the Australian Office of Financial Management http://aofm.gov.au/.

  203. John Kelly

    They have not answered your question, Lee. They have only commented on the minting of notes and coin. That isn’t what you asked them. I think, if you press them further, they will not acknowledge that they do “create” money. Nor will treasury or the AOFM. It is their mindset to act as if they were running a household.

  204. Lee

    I agree John, they have only mentioned notes. I was hoping someone else might be able to make more sense of the spreadsheet.

  205. Kaye Lee

    @ John Armour
    May 21, 2015 at 7:06 pm

    “If one can accept that money created ex nihilo enters the economy as a liability on the central bank’s balance sheet, all subsequent transactions follow the rules of double entry book-keeping and it all makes sense.

    Kaye, Randall Wray’s book “Modern Money Theory” has quite a few examples of such transactions with the aid of T accounts but I don’t have it with me at the moment, and trying to reproduce the T accounts in narrative form would be quite tedious. I’m sure it would settle this issue for you.

    I doubt you will ever find a balance sheet entry indicating ex nihilo creation of currency or reserves however. It’s not part of the secretive banking culture.”

    Thanks John. You have come closest to understanding what I am asking with that comment. It is not the monetary theory I am asking about. It is how it is recorded on the balance sheets. I was hoping for an answer that related to the government’s balance sheets rather than the central bank’s (I have never looked into the RBA’s balance sheets but am very familiar with government accounting). The reason I brought up seigniorage is that the government’s balance sheet DOES show an entry for the coins – I am trying to understand how it accounts similarly for electronic seigniorage which I assume is what you mean by ex-nihilo creation of reserves.

    I truly am not trying to be disruptive or critical. The extensive answers by most others have not addressed what I am trying to understand much as they may think they have.

  206. Lee

    Here’s a segment from a NZ news/current affairs show about how banks create money. At 3.16 there’s an economist saying it’s taught in first year economics and commencing at 3.58 there is a banker who says that the banks are creating most of the money in the system with loans and this unregulated process was the primary cause of the financial crisis. He goes on to say that the government can supply the money to build infrastructure interest free, which is preferable to private companies doing it with borrowed money, quite unnecessarily. E.g. the government can directly issue one billion dollars into circulation for an infrastructure project and there is no interest charge on that money.

    If this is first year economics then the economists who are consultants to the government and tell us differently obviously are aware that they are lying to us to protect vested interests.

    https://youtu.be/fOj_xp2jHl0

  207. John Armour

    Kaye Lee,

    I’ve got my Wray’s “Modern Money Theory” back. As soon as I get a chance I’ll see if I can transcribe the T-accounts in a way that makes sense.

    As for seigniorage, no I didn’t have that in mind. My understanding of seigniorage has always been that it is a gold standard kind of thinking, whereby the difference between the cost of production of the physical currency (mainly coins) and its face value accrued to the issuer, like the king.

    In these days of fiat currencies there is still that difference and I think the central bank gives the profits to Treasury.

    I guess if you extended the definition to the creation of electronic balances, the “profit” accruing from currency creation could be considered seigniorage but I don’t think it conveys any particularly useful insights.

    I’m aware (vaguely) that Paul Krugman and John Quiggin have use the term in articles discussing MMT in the past but I never did understand the point they were making. As they are both fairly dismissive of MMT, without seeming to have spent any time reading the MMT literature, I didn’t waste any time looking into it.

    The subject of seigniorage however did hit the big time when the Republicans were threatening to shut down government by refusing to raise the idiotic “debt ceiling” a few years back.

    An MMT blogger called Beowulf proposed that Treasury authorise the mint to strike a 1 Trillion dollar platinum coin and lodge it with the Fed to fund government spending.

    The Republicans backed down eventually so it was never seriously contemplated, but the publicity it got made a lot of people realise that the government had the power to create currency, in contradiction to the common belief that the government had to borrow from the private sector, or collect taxes.

  208. Kaye Lee

    John,

    I think electronic seigniorage is more a concept – value adding if you like. This is what I had been reading.

    “The greatest amount of seigniorage results from the electronic creation of money, since virtually any amount of money can be created electronically at virtually no cost.

    In most countries, central banks have control over the creation and destruction of money. For instance, because of the credit crisis of 2008 and 2009, central banks all over the world were creating vast amounts of money — often called quantitative easing — by buying government securities with their newly created money, thereby trading debt securities, which cannot be used as a means of payment, into money, which can be. Buying government securities injects the new money into the economy by giving it to the traders who sold their debt securities. For instance, when the Federal Reserve, which is the central bank of the United States, purchases Treasuries from its primary dealers—mostly commercial or investment banks—it simply increases their reserves by the amount of the purchase price, allowing the banks to lend or invest the money in the general economy.

    After the economies get going, then the central banks will lower the supply of money by reversing the effects of quantitative easing, by selling government securities to their primary dealers, which decreases the dealers’ reserves at the central bank, thereby reducing the supply of money to the economy. The money supply can also be decreased by increasing reserve requirements for the banks, or by raising the discount rate, which is the interest rate that banks must pay for interbank loans.

    However, there is a limit to how much money governments can create before they hurt their economies through inflation. If money doesn’t have a relatively stable value, then people lose faith in it as a medium of exchange, and especially as a store of value, with dire consequences for the economy. This is why governments are mostly financed with taxes, even though taxes are unpopular.”

    http://thismatter.com/money/banking/seigniorage.htm

    But I still can’t get my head around how the “newly created money” is recorded on the government’s balance sheet. They do record seigniorage for the coins. Surely they do the same for the injection of funds created by electronic deposits somehow? I know this is unimportant to the process but the feral accountant in me needs to know.

  209. John Armour

    That article is wrong on so many points Kaye, especially this:

    “For instance, when the Federal Reserve, which is the central bank of the United States, purchases Treasuries from its primary dealers—mostly commercial or investment banks—it simply increases their reserves by the amount of the purchase price, allowing the banks to lend or invest the money in the general economy..”

    Banks do not need reserves to lend. The purpose of reserves is to ensure the smooth functioning of the payments system, the clearing of cheques and so forth.

    If banks wants to lend they just credit the borrower’s account. Apart from a few prudential regulations, they are only constrained by their capital, which, at its simplest, is just the value of shareholder’s equity.

    This is also incorrect:

    “The money supply can also be decreased by increasing reserve requirements for the banks, or by raising the discount rate, which is the interest rate that banks must pay for interbank loans.”

    The money supply is determined by activity within the private sector. It is, as they say, “endogenously” determined within the commercial banking system. All the central bank can do is influence the price, not the quantity, contrary to the beliefs of monetarists.

    Bill Mitchell has a good explanation of QE here:

    Quantitative Easing 101

  210. Kaye Lee

    The article wasn’t the point. I give up. It seems no-one has any idea about how the government records money creation.

  211. stephentardrew

    Kaye:

    The point is maybe the balance sheet has been so distorted for so long that no one wants to ask the hard questions which seem to lead to many of the issues challenged by MMT. My feeling is that complexity is a shield against hard facts so that even the experts claim they don’t fully understand derivatives. Even this may be another deflection. There are so many contortions and distortions which have no empirical or logically consistent and coherent foundations that the system can seems to have pseudo order when in fact it does not. Being conditioned to believe a paradigm does not make it a fact.

    Often I think silence, complexity and obfuscation is their only defense. All of those Nobel Prizes in economics and the things is still a blood mess of unreasonable inequity while the one percent run away with the bulliion as people starve. The whole ponzy scheme is there to be seen for what it is – a fabrication of lies and deceptions hidden behind unnecessary subjective complexity and pseudo reasoning.

  212. John Armour

    “The article wasn’t the point. I give up. It seems no-one has any idea about how the government records money creation.”

    I understand that Kaye. It was a digression into the meaning of seigniorage in the context of fiat currencies.

    Meanwhile, I know exactly how the government records money creation: as a liability on the central bank’s balance sheet.

    And when I get time I’ll transcribe those T-account examples from Wray’s book for you.

    There’s a lot in what Stephen says. Some years ago I had a conversation with an officer from APRA, the banking regulator, who found it hilarious that I believed that depositor’s funds were not loaned, that commercial banks were not simple intermediaries in the lending process.

    “Where do you think banks get the money to lend?” he kept asking.

    This has nothing to do with your quest but it taught me that there is utter confusion even at the highest levels.

    These days, if it doesn’t have the MMT trade mark, I try to get a second opinion.

    Slowly everything the MMT academics have been saying for 20 years is being acknowledged as the facts. Recently the Bank of England published an article stating that a keystone of orthodox economics, the “Money Multiplier” was a myth. MMT had been saying this for years.

    Some famous person once said if the public knew the process by which money was created there would be revolution.

    That’s probably a bit over the top, but that’s where the apostasy would start. Next thing you’d have people questioning the wisdom of surpluses and the walls of the whole neo-liberal shithouse would fall down.

    There’s a lot at stake.

  213. Lee

    “Recently the Bank of England published an article stating that a keystone of orthodox economics, the “Money Multiplier” was a myth. MMT had been saying this for years.”

    John, are you able to provide a link to this please?

    “Some famous person once said if the public knew the process by which money was created there would be revolution.”

    There are many videos on Youtube explaining how banks create money. Perhaps most people don’t ever question it because the information they receive from politicians seems plausible for the most part?

    In that video I posted yesterday, the banker said it makes more sense for the government to invest in infrastructure rather than private companies pay interest on loans. But big business likes privatisation because they have the opportunity to make a lot of money from it. So I can understand why big business doesn’t make waves when such news stories are aired.

  214. John Armour

    Here’s the link Lee…

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1.pdf

    Our interest is in the first 2 articles.

    “Money in the modern economy: an introduction”

    “Money creation in the modern economy”

    I had a look at your video. No surprises there, but what an opportunity missed to explain there’s a similar process taking place with the creation of government money, with the exception it never has to be paid back.

    In the end, the people decide what they want government to do and what they want the private sector to do.

    I saw the plug for Positive Money at the end. I read some of their literature once…

  215. Kaye Lee

    John,

    I don’t want you to go to trouble setting up T accounts for me unless they show me where on the government balance sheet they account for the creation of electronic deposits. What happens subsequently is not what I am asking. It isn’t the bank’s balance sheets that interest me. It’s the government’s.

  216. Kaye Lee

    When you say “Meanwhile, I know exactly how the government records money creation: as a liability on the central bank’s balance sheet.”…how is it recorded on the government’s balance sheet.

  217. Annie B

    Kaye …

    Not sure if this will help at all, ( and I DO know what you asking, having asked the same myself ) …. where is it shown ??? ….. As a recorded, identifiable entry ? …. on the governments’ balance sheet which is accessible to the public.

    Amazing as it was – ( to me – the supreme dill when it comes to accounting and monetary matters ), I had occasion to speak to my ex-husband this evening, and raised the question about the MMT. He is a chartered accountant, tax agent, and … an accountant for 50 years, with a law degree. A clever bod.

    After some discussion, he came up with this :

    “All sovereign Governments now can create fiat money – and they have absolutely NO requirement by legislation, law or any other means to HAVE to account for it, or show it – except as a liability.”

    This ‘ liability ‘ is couched apparently in many terms – the trick is figuring out which ‘term’ on the government balance sheet it applies to. … Projected funding has to be a liability ( makes sense ). … What else could it be ? It is money owed – somewhere down the track ( look at our own mortgages – 25 years with XX triple the amount of interest paid on it ) … projected financial owings.

    Frankly, I think that stinks – as far as governments go. ….. It is sneaky … but what else would one expect in this day and age. ? Anywhere.

    They ( apparently ) run their books partly the way a household might run an income and expenditure balance sheet situation. But there are many items that have to be factored in, and from what I gathered, they move ( for want of a better description ) items around, in order to balance the books. Ultimately it comes out to one side balancing the other – or it should.

    This is where I get a bit lost – that a balance sheet can show ( example only ) $259,230,495 on both sides, which effectively is a nil. i.e. it shows neither profit nor loss, because it is not a profit and loss statement.

    Projected profit ( or loss ) however, comes into it . … and so the government(s) create an electronically or however, ‘cultivation’ ( ? ) of money, based on projections.… which becomes money owed – a liability from the moment it is created. Seems that collateral ( bullion / resources reserves ) don’t mean anything any more. … Which ( as a supreme dill ) to me does not make any sense ! … [ Yes, I know – the gold reserve was ousted back in the last century – yet gold is yielding more and more in price ? …. The Chinese are gathering it up like there’s no tomorrow ……… do they know something that we don’t ? ]

    ,,,,,,,,,,,,,

    If this is a liability, ( I gather ) then it is because it is something that will and must ultimately be owed or paid back against some form of profit or reserve – somewhere – in the long run. …. the thing is, how long can something like that continue, without imploding, or turning back on itself. ( someone said here, something similar, but I cannot now find the post ! ).

    As my ex-husband – ( who is not a fancier of the MMT theories ) advised … go increase your ability to play a better game of chess … don’t worry yourself about how any government does things these days … this government is making mistakes – ( he went on to explain that – too long to go into here ).

    And he a dead set Liberal !

    His advice, I just might heed. ………

    🙂

  218. Annie B

    @ John A

    You said ” Some famous person once said if the public knew the process by which money was created there would be revolution.” …. I don’t think that was an over-the-top statement, John – the general population does not concern itself with these machinations, but if they did – there would indeed be a major riot.

    Also …. depositors funds are indeed loaned. ….. Loaned out on overnight and short term money markets for quick return – it’s a gamblers game, and those who play it do so because they can, and have the knowledge how to go about it – precisely. Just depends on who is the cleverest on the day. Eons ago, I worked at J B Were, in the short term money market …. it was like working in a daily emergency and crisis situation !!

    A few years back, it took 5 days to clear a cheque. While that money was in limbo – it was used by the banks – on overnight / short term trading. A wise person did not play against that issued cheque. It was gone from the account – and indeed it was, because the cheque presentation went immediately into the funds of the receiving bank. …. Someone woke up to this, and the banks were forced to reduced their clearance rate to 3 days. ,,,, which is still all a furphy – because the instant a cheque is issued and presented ( or a transaction of any kind for that matter is made – cheques are somewhat redundant these days ) it goes out of the senders account, never again to be seen, and allegedly into the receivers account 3 days later. …. Thing is, electronically, those funds are transferred IMMEDIATELY – nano-second stuff, and the receiving bank knows if those funds are legit. or not. … And can, by electronic means, make that money available to be invested – by the receiving Bank. … Seems they all work in tandem.

    It would be rare if funds were not ready, as a sending bank would not allow the transaction to take place, unless there were an overdraft applied to the senders account. … So whats’ with the 3 days clearance ?

    Funny thing is, if a B-Pay is ordered on-line from bank funds to a business e.g. Vodaphone … Vodaphone receives it the very next day. … Same with say Bendigo Bank ( me ) to Bendigo Bank ( other private person ) … it goes into the recipients account almost immediately …. It’s the between banks transactions that is rife with manipulation.

    Funds clearance is a load of b-s …

    All this is just ONE of the ways banks make their money – at our expense. As a recipient of (say) cheque funds into my account, I have to wait 3 days for it to happen. …. Unless I pay a ‘quick clearance’ fee – more means of banks making money.

    Bah bloody humbug to the whole procedure …. gives me the horrors … but hey – business is business !!!

    ,,,,,

    Apologies – I do rant on when I get my teeth into something. …. there is no need of reply, if you don’t wish.

  219. John Armour

    Kaye Lee,

    Ok. We’ll skip the T-accounts.

    I’ll just copy this from Wray’s book in case others might be interested:

    “The balance sheet of any central bank looks more or less like this:

    Assets (LHS)

    Credit market instruments (securities)
    Loans to domestic banks (advances of reserves)
    Gold, foreign exchange, SDR certificates
    Treasury currency (coins held by the central bank)
    Other assets (buildings, furniture etc)

    Liabilities (RHS)

    Vault cash and cash in circulation (banknotes held by banks and the public)
    Reserve balances (a check account due to banks)
    Checking account due to Treasury and banknotes held by Treasury
    Checking account due to foreigners and others and banknotes held by foreigners and others
    Other liabilities (including Net Worth)

    Banknotes and Checking accounts at the central bank are liabilities of the central bank, but an asset for everybody else. Note that there are no domestic monetary instruments on the asset side of the central bank, except for a few coins if the treasury is in charge of minting them as in the US>

    Vault cash, cash in circulation plus reserve balances (the first 2 items on the liabilities side) are approximately equal to what is called the monetary base.

    Let’s see what happens to the monetary base with a simple transaction: the central bank buys T-bills worth $100 from banks:

    Change in Assets

    +$100 T-bills

    Change in Liabilities

    +$100 Reserves

    You have just witnessed the creation of some monetary base: the central bank credited the account of banks (it could also have printed central bank notes instead, +$100 on the liabilities side).

    Where did the Fed get the funds it provided? From nowhere; the reserves are the liabilities of the central bank so it can create an unlimited amount of them. The central bank does not need gold, does not need tax revenue or anything else to create IOUs.

    What would be the impact of people paying their taxes?

    Say Mr X needs to pay his taxes due of $1000. The impact is to debit his bank account at Bank A by $1000.
    At the same time, the reserves of Bank A would be reduced by $1000, and the Treasury account at the the central bank would rise by $1000.

    You have just witnessed the destruction of some monetary base (because the Treasury’s deposit at the central bank is not counted as part of the monetary base).

    Tax payments destroy monetary base, that is the amount of money things held by the public and banks.”

    **********************************************************************************

    That’s a truncated version of that section of Wray’s book, but consistent with the intent.

    Despite the so-called “independence” (policy-wise) of the central bank, MMT regards Treasury and the central bank as part of “consolidated government”.

    It seems logical to me that if you want to get the big picture, the central bank’s balance sheet is the best place to look. It is after all, the bank for the banks, and the bank for the government.

  220. John Armour

    “Also …. depositors funds are indeed loaned. ….. Loaned out on overnight and short term money markets for quick return – it’s a gamblers game, and those who play it do so because they can, and have the knowledge how to go about it – precisely. Just depends on who is the cleverest on the day. Eons ago, I worked at J B Were, in the short term money market …. it was like working in a daily emergency and crisis situation !! “

    Insomuch as depositor’s funds form part of a bank’s reserves, they are indeed loaned, in the overnight interbank market where banks scurry about trying to meet their reserve needs, if they are short, or unload their excesses at something a bit better than the central bank’s rate.

    You are quite correct.

    I was referring however to the more widely held belief that those funds are loaned out for things like house purchases.

    You are also correct about the games the back room boys (and girls) get up to with our money.

    Apart from seeking deposits to meet their reserve needs, banks also need those funds to trade with. I suspect they’re also happy to wear the cost of a bit of interest to keep those funds out of the corporate bond market, on ice, while waiting for “opportunities”.

    The “3 days clearance” on cheques is quite a rort in these days of electronic transfers. It’s also quite arbitrary. It seems it can depend on one’s “relationship” with one’s bank whether they’re tempted to try it on.

    J.B. Were, eh? Methinks you know a lot more than you let on Annie!

    : )

  221. Annie B

    John Armour….

    Had a good giggle at that … but no, I don’t know much at all about fiscal fisticuffs, and even less about proper accounting methods. …

    Thanks for the reply, and your reply to Kaye was fantastic – I actually understood it, for the most part.

    I manage to run the household ok – that’s about it, but have learned a bit here and there – especially to do with Banks and shares …. What my ex-husband has done all his adult accountancy life however, leaves me in the bewilderment basement. ….

    I can now go back and read the bilbo links you provided, some many posts back.

    I know what bulls and bears are, which is something I don’t think we will see for a very long time into the future – i.e. we will not see upward bull trends continuing over a longish protracted time, or downward bear trends doing same . … as it once was.

    The markets ain’t what they used to be. …. All over the place and a lot of profit taking, reinvestment going on, on a daily or bi-daily basis – especially as one can sit at their computer and happily buy and sell to their hearts’ content, these days ! ..

    I have a few shares ( very few ! ) … and I sit on them, and pray a lot 😉 No computer trading for me !

  222. John Hermann

    Hi John, I realise that this comment is more than 6 months down the track from when your article was written, however I have only just come across the article. Most of the article is correct, however you are technically wrong on two points. The bonds you are talking about are issued by Treasury, not the central bank. Moreover the interest paid out to the private sector on those bonds is primarily the responsibility of Treasury, not the central bank. The interest payments are an annual budgeted item. Of course, this does not imply that the interest payments are funded by taxpayers (that claim is certainly a dangerous fallacy, of the type you have been discussing).

    What happens is that Treasury instructs the central bank to pay interest to the various bond holders when the interest payments fall due according to the agreed timeline. With each payment the credits in Treasury’s account with the central bank are appropriately adjusted downward. This does not imply that there is ever any danger of Treasury running out of credits in its general account. The reason is simple: Treasury’s account does not operate like household accounts. The reality is that it is closer to being an operating account, rather than a savings account or a transaction account.

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