WEALTH AND POWER KEEP ON WINNING

HarryJune 26, 2018 at 10:00 am

Fantastic article again John!

But even here on this “progressive site we get pushback along the lines of :

“The system does not operate this way”. “The RBA is independent”. “The budget shows the government is funded by taxes”. “Politicians will not go near it”. “Its rubbish”. “Hyper-inflation!”

Most people have unquestioningly accepted the mainstream view, partly because they have swallowed the endless, constantly reinforced propaganda.

Mick ByronJune 26, 2018 at 10:11 am

“The system does not operate this way”. “The RBA is independent”. “Its rubbish”.

AND the MMT cult members get defensive if questioned and rarely answer.

Peter FJune 26, 2018 at 10:19 am

Most people agree that the Snowy Mountains scheme was the greatest infrastructure undertaking in this Country. Not as many understand that it was funded by YEARS of deficit spending under Menzies. The ‘burden’ was left for us to carry all these decades later. Few seem to accept that this ‘burden’ was NOT a problem for us because of the benefits from the development.
The same can be said of most proper developments where we all benefit.
This cannot be said of many mining or gas projects where the benefits of our mineral resources are NOT shared.

Alan LuchettiJune 26, 2018 at 10:21 am

Currency issuer, currency user. The two are not merely different, they are opposite. Which makes thinking about the currency issuer as a currency user almost precisely spot off.

Taxation no more returns currency to a currency issuer than control rods return radiation to a nuclear pile. Progressives who enlist “taxpayer dollars” to criticise the parties of the plutocracy need to give themselves an uppercut. What better bogus reason for higher taxpayers to claim a bigger share of political ownership?

Mick ByronJune 26, 2018 at 10:22 am

my understanding is the embryonic MMT or similar was first espoused by Georg Friedrich Knapp in 1905.What countries in the past century + have embraced it or even considered it?

ROY EDWARDSJune 26, 2018 at 10:28 am

I am at a complete loss to understand why the “new” Modern Monetary System (which I admit I only learned about 5-6 years ago through Bill Mitchell’s videos) has not been recognised, explained then implemented years ago……UNLESS it is to ensure the continual almost subjugation of the “masses” who might emulate the rich and rort the system for their own gains.
Can you imagine, John Kelly, if LABOR actually embraced their own political founding policies and supported the poor, the infirm, the sick and the aged and went to this next election telling all and sundry that our beloved dollar (now $0.74 against the Greenback and about to plummet from several sources) is NOT backed by gold; that if we NEED money, we simply PRINT and CIRCULATE more, that those dreaded Bond’s which have had to be issued mean we owe money……..to ourselves and can be burned or shredded in the same industrial shredder used by the CBA to cover their indiscretions. Those old farts among us will explain this is what happened to Germany post 1945…..or of course burn us at the stake as witches…..when people who understand and embrace the simplicity of the MMS SHOULD be seen not as witches…..but wizards.

Miriam EnglishJune 26, 2018 at 10:36 am

In this short video Stephanie Kelton gives one of the best explanations I’ve ever heard of why the deficit is a fake problem:

I’m still trying to think of ways to explain MMT in a simple, compelling way.
We really do need to spread the word. It is important.

Andreas BimbaJune 26, 2018 at 10:56 am

Mick Byron, MMT explains how economies operate better than any other economic theory. Just like Newton’s or Einstein’s laws – they have been valid well before they were discovered.

Who applies the insights provided by MMT most effectively? Japan has taken advantage of national government deficits to keep unemployment very low for most of the postwar period. China has national government deficits of about 15% of GDP according to economist Steve Keen – Australia’s is about 2.4% of GDP. The major powers all used deficit spending to fund the bulk of their wartime mobilisation expenditure – for example the US Government ran a deficit of 24% of GDP in 1942. Many countries used substantial deficit spending to emerge from the Great Depression, examples being Germany, Japan, the US, New Zealand and to a lesser extent Australia.

Most MMT proponents recommend that national government deficits and a Job Guarantee Program be utilised to maintain full employment – this was government policy for most of the developed world during the postwar period up to the mid 1970’s when neoliberalism started to take hold.

The choice is ours, full employment with adequate government services and relative equality or more neoliberalism driving us back to serfdom under the rule of the extremely wealthy capital controlling elites?

Miriam EnglishJune 26, 2018 at 10:56 am

ROY EDWARDS, when people point to the hyperinflation of early 1920s Germany because they printed more money, it’s easy to answer them.

Money used to be tied to how much gold the reserve bank held. Now it isn’t, but little has changed because the amount of money is still is kept more or less stable at a particular level, for no genuine reason. In fact the government can print as much money as it wants, up to the country’s productivity level. Productivity, not gold, is the new limit on money. (There is another limit: taxes and government bonds which take money out of the economy, allowing room for the government to add more money.)

If the government prints money beyond the productive capability of the country then inflation results. This is because too much money trying to buy too few goods pushes prices up. (A seller has 10 apples and 50 people want to buy the apples, so he raises the price until he has just 10 customers, or until only a few customers can buy them all.)

At the moment we have artificial hardship caused by too little money circulating, sending small businesses broke as too few customers have money to buy their goods. This is simply the result of the old economists acting as if we’re still tied to the non-existent gold limit.

Kaye LeeJune 26, 2018 at 11:28 am

“unable to convince even those who should know better.”

In my opinion, and I have spent a great deal of time on this, the problem comes because MMTers are convinced of the potential of MMT, as am I, but they seriously misrepresent the current reality and the changes that would need to occur for us to realise that potential.

For example, the RBA IS an independent body. They do NOT issue money (other than deciding when we need more notes and coins which is insignificant). They will NOT allow the government to go into overdraft except in very temporary emergencies. Because the government chooses to sell bonds on the open market, we CANNOT burn or shred them. If the RBA bought the government bonds then no problemo. But they don’t.

I have no problem with deficit spending which should be explained as an investment which brings a return, which may be social as well as (or rather than) financial.

Keitha GranvilleJune 26, 2018 at 11:53 am

I am a bear of very little brain, and yet it seems bleedin’ obvious to me that if government allocated more money to those at the bottom of the pile everyone would be better off, rather than the trickle down theory of giving lots to those at the top. Poorer people spend ALL their available funds to live, thereby creating jobs which then removes people from the unemployment list, so less people are on benefits, and so on ad infinitum. Isn’t it that simple ? Or have I missed something ?
I fear that the Labor party is also stuck in the groove of “returning the budget to surplus”, so we are unlikely to see a radical change to a system that works any time soon.

RoyJune 26, 2018 at 12:05 pm

Miriam….I apologise for leaving out the gold backed part of all of this. I took that all as a ‘given’ whereas I should have continued with a prolonged explanation . However, this forum consists of (one assumes) like minded people who DO understand that most of Australia’s so called ‘gold reserves’ are ensconced beneath the City of London. I do appreciate you pointing out my exclusion- I was trying to keep it all succinct.

Kaye LeeJune 26, 2018 at 12:11 pm

Roy,

Why mention where the gold reserves are kept? Are you suggesting something untoward? The RBA is quite up front about the reasons.

“London is a major global gold trading market and the Bank of England provides a secure and cost-effective storage location for central banks and market participants. The Reserve Bank has processes in place to ensure that the gold reserves are maintained appropriately. It is not considered necessary from management, security or operational perspectives to relocate the gold bars to a facility in Australia.”

And as we all know, we are no longer bound by gold reserves. I don’t see the relevance of where they are physically kept?

Keitha,

I completely agree with you. It seems so obvious doesn’t it.

Don KellyJune 26, 2018 at 12:13 pm

Phil Holden, Head Teacher and Teacher of economics at St. Lawrence College, Athens actually refers to MMT as Modern Monetary Principals. He believes in this system because “it is the fairest system”.

Government Funding
A common thread running through many posts is “government funding”. Sometimes the awkward truth is revealed by a government ‘insider’. Australia is a monetary sovereign, just as the U.S.A. is. We have a Central Currency – Issuing Federal Government, just as the U.S.A. does. The government ‘insider’ is Alan Greenspan, an American economist who served as Chairman of the Federal Reserve Bank of the United States from 1987 to 2006. During his time as Chairman he was called as an expert witness during a U.S. Senate enquiry into the sustainability of Social Security funding by the U.S. Federal Government. Under oath, Alan Greenspan stated – “It doesn’t matter whether the question is about Social Security. It could be about Defence Spending. It could be about Education Spending. It could be about Infrastructure Spending. It could be about Student Debt. It could be about anything. What matters is – there is nothing to prevent the Federal Government creating as much money as it wants. The Federal Government has no financial constraints whatsoever”. The Federal Government total spending should only equal the productive capacity of the economy, any further spending will not lead to further output because when the productive capacity of the economy is reached, all resources are fully employed, including people who are willing to work. Any further spending will just cause inflation. It does not lead to an increase in real goods and services being produced because the economy has reached its productive capacity. If the total spending is less than the productive capacity of the economy then there is no Demand Pull Inflation but we will have unemployment. That has been the situation in Australia for the last 40 years.

Stephen G BJune 26, 2018 at 12:23 pm

Well said John,

I see that some people do not want to understand the simple reality.

It is a fact that the Australian Constitution at sub-section 51xii gives the power over money to the Federal parliament, that the Federal parliament has through Part V of the RBA Act 1959, given the RBA the sole right to issue currency.

So given that the Federal parliament has power over our currency, and that the RBA is the sole issuer of our currency, how the hell do citizens comply with taxation obligation laws by the same Federal parliament, without the same Federal government creating enough currency in circulation BEFORE we citizens can satisfy our tax obligations.

Conversely the common idea is that the market somehow creates money (no ne can tell me how) which the government must tax to spend in that market.

God give me bloody strength – Christ it’s not rocket science.

Kaye LeeJune 26, 2018 at 12:34 pm

Part V of the RBA Act says

8 General powers
The Bank has such powers as are necessary for the purposes of this Act and any other Act conferring functions on the Bank and, in
particular, and in addition to any other powers conferred on it by this Act and such other Acts, has power:
(a) to receive money on deposit;
(b) to borrow money;
(c) to lend money;
(d) to buy, sell, discount and re-discount bills of exchange, promissory notes and treasury bills;
(e) to buy and sell securities issued by the Commonwealth and other securities;
(f) to buy, sell and otherwise deal in foreign currency, specie, gold and other precious metals;
(g) to establish credits and give guarantees;
(h) to issue bills and drafts and effect transfers of money;
(i) to underwrite loans; and
(j) to do anything incidental to any of its powers

There is nothing about “the sole right to issue currency” or do you just mean topping up notes and coins?

RoyJune 26, 2018 at 1:33 pm

Kaye Lee- re. gold in UK….absolutely not at all. I received a comment from elsewhere stating that (quote) “Bloody Keating sold off all our gold to finance his madcap schemes and luckily Howard and Costello got in and balanced the books”. This was from a Liberal surprisingly.I asked why did his two heroes not buy it back if it was so important in securing the dollar. he said their ‘cost effectiveness did the same job.
I actually put that up there in case some were not aware of the situation, hoping to incite debate from a Liberal reader!!. Sadly it was you who picked it.

totaramJune 26, 2018 at 1:37 pm

“There is nothing about “the sole right to issue currency” or do you just mean topping up notes and coins?”

Then how would you prosecute counterfeiters?

Where are you told that the RBA cannot buy Australian bonds? They cannot buy them “directly” from treasury. As far as I know they do buy and sell Australian bonds on the secondary market. If they cannot do that they cannot maintain their “interest rate”. Their setting of the interest rate would become meaningless.

As I have said before, the Bank of Japan now owns almost 90% of Japanese govt. debt.

Kaye LeeJune 26, 2018 at 1:55 pm

totaram,

The issuing of notes is trivial when we are talking about currency issue.

Yes the RBA can trade in bonds but they do not issue them, nor do they buy them direct. If they did buy them direct, then we could either pay no interest on them, or just pay interest to ourselves – it would amount to just an accounting exercise to give us extra funds to spend.

As for maintaining the interest rates, that could be achieved by the RBA offering interest on overnight deposits. The bond market is more so investors have somewhere safe to park their money. It’s unnecessary.

Kaye LeeJune 26, 2018 at 2:00 pm

Roy,

Keating didn’t sell off our gold. It was Costello.

“The RBA revealed in July 1997 that over a six-month period, it had sold 167 tonnes, reducing Australia’s reserves to just 80 tonnes. At this time, the value of its gold assets fell from $3.6bn to about $1.1bn.

The RBA’s sales pushed the world gold price down to an 11-year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender.

The same amount of gold would be worth about $7.4bn today (2011).

The decision to sell the reserves was approved by then RBA governor Ian Macfarlane and then treasurer Peter Costello.”

https://www.theaustralian.com.au/news/nation/reserve-banks-gold-sale-cost-us-5bn/news-story/ffb632d0dee80cfb7ac840a2002c8912?sv=b3bebf55c430616ca0d3205ea5c32c95

ROY EDWARDSJune 26, 2018 at 2:02 pm

Kaye Lee….thank you. I did check somewhere ages ago and thought I had read we (Labor) had decided to sell off some gold as it was just kind of “sitting there, doing nothing” as gold is wont to do. Will go and re-check my source if I can think that far back.

stephengb2014June 26, 2018 at 2:40 pm

RESERVE BANK ACT 1959 – SECT 34Issue, re-issue and cancellation of notes

(1) Subject to this Act, the Bank may:

(a) issue Australian notes;

(b) re-issue Australian notes; and

(c) cancel Australian notes.

(2) Australian notes shall be printed by, or under the authority of, the Bank.

stephengb2014June 26, 2018 at 2:42 pm

RESERVE BANK ACT 1959 – SECT 44Other persons not to issue notes

(1) A person shall not issue a bill or note for the payment of money payable to bearer on demand and intended for circulation.

Penalty: 50 penalty units.

Note: Chapter 2 of the Criminal Code sets out the general principles of criminal responsibility.

(2) A State shall not issue a bill or note for the payment of money payable to bearer on demand and intended for circulation.

totaramJune 26, 2018 at 3:14 pm

“As for maintaining the interest rates, that could be achieved by the RBA offering interest on overnight deposits. The bond market is more so investors have somewhere safe to park their money. It’s unnecessary.”

I agree the bonds are unnecessary. However, under current arrangements, the bonds represent how treasury “borrows” in order to deficit-spend. Just suppose that the RBA is offering overnight interest rates at 1.5% but bond yields are 5%. Will anyone park overnight money with the RBA? As long as bonds are being issued and there is a secondary market the RBA must intervene to “maintain the interest rate setting”. That is my understanding and that is how the Bank of Japan came to own most of the Japanese govt. debt when they tried to drive the bond rates into “negative territory”.

Such questions are often asked on Bill Mitchell’s weekly quiz. You should try them. I must confess I still get many questions wrong.

Kaye LeeJune 26, 2018 at 3:28 pm

stephengb2014,

Yes it is definitely the RBA that decides when we need more banknotes but that is such a miniscule portion of the monteray system as to be ignorable.

It is the department of finance who issues bonds to cover their deficit spending.

totaram,

Just suppose the RBA bought the bonds direct for 0% interest and saved us all the bother.

I have read a lot of Bill Mitchell’s blogs but find him unnecessarily complicated.

jimhazJune 26, 2018 at 3:43 pm

Most people understand that there is no free ride, so rightfully reject MMT.

If MMT was actually a real SOLUTION it would have been in place 2000 years ago.

I can see it is possible to make use of MMT in a partial short term sense, but also see it would lead to economic destruction due to a loss of discipline by politicians.

[Japan has taken advantage of national government deficits to keep unemployment very low for most of the postwar period]

A lack of immigration is perhaps more pertinent.

helvityniJune 26, 2018 at 4:31 pm

“A lack of immigration is perhaps more pertinent.”

So the industrious Japanese do all the available jobs, no matter how lowly or dirty…

Oz has a ‘special’ immigration; we import workers on temporary visas from overseas to get the jobs done ,unwanted by Aussies…Does Dutton think that favouring South African farmers will solve the problem.

Now that Mexicans are not allowed in Trumpland, who will take care of their ‘untouchable’ jobs….

Miriam EnglishJune 26, 2018 at 5:16 pm

“Most people understand that there is no free ride, so rightfully reject MMT.”

jimhaz, all that statement shows is that you don’t understand MMT. Read a little bit about it instead of declaiming it from a position of ignorance.

MMT simply observes that all money comes from the government, then follows the results of an economy not dependent upon gold. Value then shifts to the productivity of society — that means the things we produce: furniture, homes, books, music, crops, wildlife reserves, computers, bread, reading glasses, batteries, string, bridges… and so on. (Traditional calculations of it have admittedly been pretty awful, omitting, for instance meals cooked by mothers, volunteering at community groups, knowledge spread by social groups, and so on.)

The government used to maintain an amount of money in society that was equal in value (roughly) to the amount of gold it stored. Now it should be maintaining the amount of money in society equivalent to the productivity of society. But it doesn’t; it acts confused, as if it’s still based on gold.

If the government creates an under-supply of money then society is starved of funds and under-produces, making people and businesses less productive than they want to be, and many going broke and unemployed or underemployed (this is our current condition). If it makes too much money then we end up with inflation.

Government has two main levers it can pull to balance this. It can create more money, and it can destroy money through tax or selling government bonds. Tax lets the government pull money away from those places where it uselessly accumulates, so that it can spend more into areas where it will be more productive (e.g. the poor, research, education, health, etc).

ranterulzeJune 26, 2018 at 5:32 pm

The more MMT (or MMS if you you like) is discussed the chance it has of getting “out there.” Not to discuss it would ensure no one get it at all. S thank you John. It’s really a discussion about the nature and purpose of money and this piece by JD Alt “The Five Stages Of Money” gives a nice historical overview – http://neweconomicperspectives.org/2018/06/the-five-stages-of-money-and-why-were-stuck-at-stage-4.html.
Mindless and perjorative comments like “MMT cult members get defensive if questioned and rarely answer” should be ignored, even though one might want to yell back. Ditto the diversions into where the gold has gone.
Thanks Michael and AIMN for publishing discussions like this.

totaramJune 26, 2018 at 8:56 pm

“I have read a lot of Bill Mitchell’s blogs but find him unnecessarily complicated.”

Read his text-book. The blogs are a bit tedious to work through if you want a systematic exposition. Do the quiz every week. You can eat humble-pie in absolute privacy!

Also try other sources. Warren Mosler, Randal Wray, Stephanie Kelton, and our very own Steven Hail. Just Google them.

Of course, if you want to understand Quantum Mechanics, or General Relativity, you might complain that any introductory text-book is unnecessarily complicated.:-)

Stephen G BJune 26, 2018 at 9:36 pm

Kate Lee

Yup MMT is wrong then

Money actually magically appears from the market !

Kaye LeeJune 27, 2018 at 7:15 am

The last two comments are examples of why I get annoyed.

“eat humble pie in private”? I am trying to engage in a sensible conversation, not play one-upmanship. If what I have said is wrong then I want to know why.

“Yup MMT is wrong then” What I am unsuccessfully trying to point out is the mechanics of our current system. No MMTer has been able to explain to me the mechanism that would be used to cover deficit spending.

Geeze you guys are overly defensive.

I understand the concept and appreciate its potential. If you want to convince me, all you need to do is explain to me the mechanics of how it would be achieved.

John KellyJune 27, 2018 at 9:16 am

Kaye, you are quite right in saying the present mechanics, i.e. the relationship between the Depts of Treasury and Finance and their relationship with the RBA, are not consistent with the way things would be managed if MMT was fully implemented. Changes would be necessary. Different accounting procedures would need to be introduced to accommodate the way things would be recorded. Deficit spending, in an MMT world could be managed in a couple of ways. Firstly, the RBA could simply buy all government debt the same as they do it currently in Japan. Or, the deficit could just sit there as an accounting identity, seen but of no real consequence. Bond sales could continue as a means of soaking up excess cash, or a term deposit facility made available. Again, these are administrative matters that would need to be addressed. But let’s not get hung up on the detail. Japan has proven to the world that a properly managed MMT economic system is viable and sustainable.

diannaartJune 27, 2018 at 9:24 am

Australia is a very wealthy country.

It can afford to invest in its people – balancing budgets is bullshit.

How will MMT break the hold on wealth by the top 1%?

How will MMT NOT be exploited?

Mick ByronJune 27, 2018 at 9:25 am

John Kelly
MMT or not MMT, wouldn’t this be best put to a referendum if ever the MMTers get their act together?
Surely the voters of Australia deserve a say in any significant change,similar to as proposed with a Republic .
Do you ever think the MMT brigade will EVER get there act together and explain the ‘theory” in a language that ordinary voters would comprehend?
Seems a lot of intelligent people on this site and others struggle,or have concerning doubts

Kaye LeeJune 27, 2018 at 9:58 am

Thanks John.

I agree with you that I am getting hung up on detail rather than potential but I have so often read that MMT is not about policy (how the money should be spent) but just describes the system as it is….and that is where I come unstuck because, as you agree, it is not how the system currently is. When people make incorrect statements it detracts from the discussion.

This is what I was getting at when I said “they seriously misrepresent the current reality and the changes that would need to occur for us to realise that potential.”

Kaye LeeJune 27, 2018 at 10:24 am

My next stumbling block is when you say taxation destroys money. I can understand that it removes money from circulation so in a conceptual sense I agree, but that money is deposited into a government account and then payments are made from that account (which only has a very limited overdraft facility).

For myself, rather than saying taxation does not fund government spending, I would say that taxation doesn’t constrain government spending – just because it marries up better with what happens at the moment – and then explain how deficit spending is accounted for (as your last comment begins to do).

A lot of the problem stems from confusion about the role of the RBA whenever we discuss this.

I hope you understand that I am on your side – just doing some housekeeping to tidy things up for myself and maybe others.

stephentardrewJune 27, 2018 at 1:01 pm

With you all the way John. Try to keep the home fires burning regardless of knock-backs. Onwards and upwards is the only way as well as a thoroughly thick hide. Keep it coming mate it was you that introduced me to MMT for which I will be eternally grateful.

Kaye LeeJune 27, 2018 at 1:31 pm

“a thoroughly thick hide”????

John is not under any sort of attack. His intention has always been to inform us so surely questions and discussion are healthy?

Discussing the bits we don’t quite understand or agree with is how we learn. It also usually helps the teacher refine their explanation.

StephenGBJune 27, 2018 at 1:40 pm

My Apologies Kaye Lee,

Yes I understand the problem I struggled with the detail for a long time too. The fact is that money does most definately come from the government.

Perhaps John can ellucidate

As far as I can work out (because the mechanics is indeed hard to find on the Treasury or RBA web sites) the Parliament votes to appropriate money, which is paid out by Treasury. But Treasury does not have the aithority to simply award themselves the money that Parliament has appropriated, that 9s d9ne by the RBA who simply increases the Treasury account by the number apropriated.

In regard to taxes being destroyed I understand it this way.

The constitution says government must only spend from consolidated revenue, but a search of the RBA website does not reveal that such an account called consolidated revenue exists!

Search of Treasury web site reveals that consolidated revenue is deemed as any payment to Federal government,
Here I get stumped.

My assumption is that payments simply delete numbers from the Treasury account in the RBA bit I cannot find that assumption as correct.

Meanwhile my reading of various people tells me that the money created by government can be (as you rightly point out) physical cash notes or electronic digits on a spreadsheet called an account, in any bank including the RBA. (We have to realise that in 1901 and then in 1959 electronic digits on a spread sheet did not exist – you might recall the prettier of armed trucks that roamed from bank to bank.) So electron8c digits have replaced the trucks, but just as much created by the RBA as hard currency.

Then we get to tax dollars being destroyed. It is inconseovable that anyones tax is paid in cold hard cash these days it is paid by electronic digits accross the ether. In fact if you went to a bank to pay actually dollars to pay your tax I would say they would look at you nonplussed. It is therefore unlikely that anyone was able to pay a tax in cash.
So if you accept that point you can accept that digital numbers on a spread sheet represent dollars which when paid are removed from your account, and a totally just added to the Treasury account. Essentially destroying the numbers in your account and creatong numbers in the treasury account at the RBA.

Finaly, apart from a few actually currency notes, the RBA, merely adds and or subtracts digits from an electronic spread sheet.the government does not need our money for anything other than controlling the amount of dollars in circulation th8s ensuring that the dollar electronic or plastic actually reta8ns sufficient value to be used as a medium of exchange by the market. This 5ak8ng m9ney out of circulation is indeed destroying it.

Once again I apologise for my last comment.

S G B

Kaye LeeJune 27, 2018 at 2:06 pm

StephenGB,

I don’t think that is how it works.

The Reserve Bank provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government’s daily cash position. These banking arrangements include the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility.

There is no facility for the RBA to just credit an account out of nowhere.

At the moment, deficit spending is covered by the Department of Finance issuing bonds. The money from the sale of the bonds is added to government accounts.

Miriam EnglishJune 27, 2018 at 2:39 pm

Thanks Kaye. You’re right. I should be more careful in my wording. The tax money behaves differently than I said. It is very useful to have someone like you paying attention to details. All too often the details turn out to be crucial. Thank you.

BobJune 27, 2018 at 3:13 pm

I believe that Venezula has tried this approach to Monetary Issues – it didnt work – and it doesnt work.
Socialism doesnt work – unless you can show me somewhere it has, then that statement is fact.
Sure it would be great if the Govt gave us all a million dollars – but it would not be great for long.

Matters NotJune 27, 2018 at 4:53 pm

Bob with all due respects MMT isn’t about socialism. The principles behind MMT can apply equally to Chinese Yuan, Russian Rubles, even Vietnamese Dong or Sri Lankan Rupees All fiat currencies.

Which raises the issue – the value of last three currencies mentioned have swung wildly over recent years. Usually on the negative side. If Australia, for example, decided to lower its concerns about debt and decided to invest heavily in infrastructure – billions of dollars printed and then distributed in return for goods and services provided (taking care not to cause inflation via demand that can’t be met). The question is – given that then there would be billions of extra dollars in circulation – what would it do to the exchange rate? Presumable – the value of the (A)dollar would decline. Surely that would be a problem? And so on. Given we are in the world of speculation – what are the predictions?

Miriam EnglishJune 27, 2018 at 5:28 pm

Bob, no respect due… socialism works beautifully. The most peaceful, well educated, happiest countries in the world use socialism to achieve that (Sweden, Norway, Finland, Denmark, Netherlands…). I think you’re getting communism and socialism mixed up. They’re very different things.

John KellyJune 27, 2018 at 5:33 pm

In our haste to spread the gospel of MMT, I think we, the disciples of the good news, have erred by ignoring the complexities of current “household” accounting that the government uses and the interaction that takes place between Treasury, Finance and the RBA. Nowhere in any of these departments will we find procedures that uphold the principles advocated by us, explaining how fiat money really works. All you will find is very strict guidelines for managing what is a huge “household” business. We ( the MMT proponents) need to remember this when we talk about the deficit and other relevant matters that contradict accepted accounting practices.

We should, perhaps, begin by acknowledging that what we propose requires accounting changes from the present household method, but that this, in no way, impugns the realities of a fiat currency system.

Matters NotJune 27, 2018 at 6:34 pm

Re:

The most peaceful, well educated, happiest countries in the world use socialism to achieve that (Sweden, Norway, Finland, Denmark, Netherlands

A courageous statement.

https://www.quora.com/Is-Norway-socialist-or-capitalist

The Nordic model is a bit of a mongrel. (In the nicest sense of the term.) Hard to define in any clear cut sense. But the myths of a nirvana prevail. Besides it’s too bloody cold for fighting.

Matters NotJune 27, 2018 at 6:59 pm

John Kelly, I don’t believe for a minute you are being held responsible here. It seems to me that there are academics higher up the totem whose day-to-day job it is to know such things and in great detail.

Surely MMT theorists of the academic variety have dealt with such issues in times past. After all, they seem somewhat basic. Surely KL’s puff of wind hasn’t blown the house down. And if it has (or even shaken the foundations), MMT is in big trouble.

PS, I don’t think it is. But politically …

StephenGBJune 27, 2018 at 7:06 pm

Well so far we have established that the actual mechanics of our money comes into being is difficult to follow, OK I can accept that, but it does not change the fact that the government through the RBA creates our money whether in actual notes or digital numbers called dollars in a spread sheet called some sort of account.

What that accounts name is quite immaterial!

And that means that our money has to come from the government before we can pay our taxes.

Therefore taxes do not fund government spending.

This fact is contrary to the popular notion that the government is just like a house hold and must earn the money before it can spend

This, if you think about it, changes everything, and that is why those who rightly married to the obvious need of the “currency user” needing to earn before it can spend, but this the thing, the Australian Federal government is not a “currency user” it is a “currency issuer”, and that changes averything.

The accounting detail just isn’t important, the accounting detail is based around the fact that the currency was tied to a commodity standard and therefore limited by that commodity . The accounting detail has not changed to meet the new reality created when Australia floated it’s currency in 1983.

Matters NotJune 27, 2018 at 7:32 pm

Re:

The accounting detail just isn’t important

Maybe not to you but in the wider world it certainly is. And that wider world includes the political world. Why, even people go to the slammer if they ignore that reality.

At a more serious level, it’s an issue that needs to be addressed. Kelton who supposedly advises Sanders seems awfully weak in this regard.

Seems to me that amateur MMT supporters (I fall into that camp) would do well to seek out those who criticise MMT and why.

Paul Krugman, for example, has argued that MMT gets this all wrong. You still need people to buy government bonds, and if the interest rates on those get too high, then paying for it all might be hard to do without triggering runaway inflation. “Once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation,”

https://www.vox.com/2015/1/10/7521819/sanders-mmt-kelton

Remember most economists are not believers. Just ask why.

Miriam EnglishJune 27, 2018 at 7:36 pm

Matters Not, yes, using socialism to control and get the most out of capitalism is the best way to do things. It works really well. The Nordic countries top the happiness survey every year (http://worldhappiness.report/). They have the most well-educated populations (universal free education) in the world, and the lowest rates of violent crime (poverty virtually eliminated). Japan is there too, though they have a problem with overwork ruining their happiness. And the socialised health systems of those countries ensure they have extremely healthy populations.

Bob, I apologise for my glib and snarky response. I was feeling annoyed for other reasons and took it out on you.

The best way to understand what socialism is, is in the name. Socialism invests in society. It is pro-social.

Our current government, under the influence of the lunatic right-wing IPA don’t want to invest in society at all. They believe only in the individual. They are literally anti-social.

Socialism is a way to get capitalism to work for everybody’s good, not just for the ultra-greedy. Socialism helps capitalism survive by ensuring healthy competition. Capitalism, uncontrolled, degenerates into monopoly. Australia is a socialist country, though less and less so with the tea-bags in office pulling our country apart.

ranterulzeJune 27, 2018 at 7:48 pm

Good discussion here, but I’m not sure things are getting clarified. Kay Lee and Stephen GB -“The fact is that money does most definitely come from the government” – Ann Pettifor in The Production of Money identifies something like 3% of money in circulation as coming from the government (that’s in UK, similar figures quoted for Australia) with the vast bulk of money being credit from the commercial banks (NAB etc). Governments have outsourced money creation to the banks. It’s the taxation angle surely that ensures the validity of the soveriegn currency.

Thanks John for the comment about ways of accounting – our government and bureaucracy keep us in the dark by continuing the “household budget” paradigm. Once more I’d refer folks to this piece by JD Alt “The Five Stages Of Money” – http://neweconomicperspectives.org/2018/06/the-five-stages-of-money-and-why-were-stuck-at-stage-4.html.

Matters NotJune 27, 2018 at 8:04 pm

Miriam English, I am all for self-interest. It’s all about me. As to how I advance my self-interest, I need the other. Some call it enlightened self-interest – defined thus:

Enlightened self-interest is a philosophy in ethics which states that persons who act to further the interests of others (or the interests of the group or groups to which they belong), ultimately serve their own self-interest.

That’s why I think teaching, broadly defined, is so important.

Kaye LeeJune 27, 2018 at 8:38 pm

I don’t think anything I have said undermines MMT.

They just need to stop saying stuff that’s wrong – mainly about the situation as it stands now.

The first thing is to realise the problem with helping people understand, or this audience at least, has nothing to do with gold standards or resemblance to a household.

We know the gold standard is gone and the household thing isn’t realistic with or without MMT – a government is never going to have to save for its retirement so it can always invest in our future. We understand about being a sovereign currency issuer.

We are on board with appropriate deficit spending.

So it IS time for the detail.

What legislation would have to be changed?
How would money creation be accounted for?
Would the government still issue bonds?
If the Reserve Bank bought them, what affect would that have on demand for currency?
What effect might there be on the exchange rate?
What practical limitations are there on the spending? ( I know productive capacity but I think there is more to it than capacity – there must be some consideration of the value of the production and the resource cost – perhaps that is not really an MMT decision)
What restraints would there be on a corrupt, inept or self-serving government?

So many questions….

John KellyJune 28, 2018 at 8:46 am

Kaye, I will take up your questions with Bill Mitchell and see what we can discover. Given the difficulty I have with some antagonists I come across, I recognise there is a need to face head on, some administrative changes. Perhaps this will be my “breakthrough” moment.

Kaye LeeJune 28, 2018 at 9:33 am

John,

Thanks for your perseverance with me. I know it must frustrate you at times but I think I am making headway with your help.

I think Bill’s response to a lot of that will be it isn’t up to MMT which just gives us the facility to spend as we please (kinda). He dismisses the accounting as basically irrelevant and he doesn’t try to make judgements on how money should be spent usually.

So perhaps these questions aren’t exactly his type of stuff?

PS My teachers and lecturers found me very wearing because I would badger them until I understood. I know it’s annoying but it truly is helping me.

diannaartJune 28, 2018 at 2:13 pm

Oooh, ooh, I have another question to add to those which are apparently beyond consideration. Like, Kaye Lee, but less insightfully, I am not criticising MMT I am very keen on alternatives and solutions to the status quo.

😛

Has to do with taxes – which, traditionally were about redistributing wealth and investing in nation-building (not just submarines) – not so much now with the IPA’s anti-human dogma rising to ascendency.

OK, so with MMT what happens to taxes?

Do we still have taxes? I am sure Bill has explained this somewhere, just please humour me for now. If we can do away with taxes, does that not have appeal to our low/no taxing numb-nuts, I mean conservatives?

I’m still for a government to provide essential services – because we still need an independent form of regulation – capitalism does not work without a steady hand on the brake, else it devolves into exploitation rather than healthy competition.

The Nordic countries don’t just write good thrillers but actually try to have a culture which is actually for the greater good. (Right on Miriam).

So, how can we mesh the best of everything together?

I can grasp the basics of MMT, however, as Kaye Lee has tirelessly noted, we need some detail on how to implement and keep things running AND being excellent to another – OK the last bit unlikely to happen while we still reward bullies.

MarcusJune 29, 2018 at 12:49 am

Kaye and everyone,

I do not know enough of the detail to address some of the questions that have been posed…but can at least suggest that expecting to have all the answers to unpicking a system of lies that has been put in place over decades since becoming a fully fiat system is somewhat unfair.

Lets keep in mind, contrary to reality successive Governments have arbitrarily made rules to keep up appearances of the Government as a household and it will take some time to unravel the bureaucratic nonsense. However, there are likely experts who could at least point the way. Furthermore, when the need arises the Gov has been able to “release the spending floodgates” when necessary with little fanfare, after all how was WW2 funded? or the GFC bailouts etc.

Here is previous reserve bank chairman admitting the Gov does not operate like a household: https://www.youtube.com/watch?v=6FbUvA5mLlA
So confident this one can be answered. But will leave those with more knowledge of the specifics to address that one.

I can however start to address three questions you have posed:

What practical limitations are there on the spending? ( I know productive capacity but I think there is more to it than capacity – there must be some consideration of the value of the production and the resource cost – perhaps that is not really an MMT decision)

As you yourself appreciate spending in a fiat system is not constrained by a ‘budget’, but by the economic capacity…so what does this mean? In simple terms, you cannot “spend” to buy 15 cars if the economy can only build 10. No amount of spending will create more nurses…they have to be trained from available labour. Dollars cannot magically create more trees than are available, or provide more cement than we have gravel to make, or mystically create more water to drink.

MMT intrinsically understands the balance between real resource constraints, Government-non-Government sector spending, and the key being to carefully regulate the money supply to meet desired policy objectives. Again you have asked a question that has no “one answer” and that’s the point about how the system works…it depends. Certain measures such as inflation, unemployment, etc will provide indicators that capacity is being reached…but then you can pull levers such as taxation, macro prudential controls etc to regulate the economy, and “make way” for more spending as required. Plus spending can be directed to create more capacity so provide the opportunity for more spending…for example, planting more trees, cleaning water, digging up gravel, and building more cars.

What MMT does is moves the debate from simplistic “what money do we have” to what is the economic capacity of the country, what are the limits of our environment, what resources do we have, what are the needs of the people…and find the optimum balance between these competing forces, and the desired policy objectives. There is no answer because you actually haven’t asked the right question.

What restraints would there be on a corrupt, inept or self-serving government?

What are the restraints on a corrupt Government now? Please don’t pretend the “budget’ approach contains anyone…it does not. So, the answer for an MMT approach is the SAME as with ANY other system…make the system less susceptible to corruption by reducing the benefits to those who manipulate it. Expecting MMT to solve this is grossly unfair and places an impossible demand.

If the Reserve Bank bought them, what affect would that have on demand for currency?

What effect will MMT approach have on the exchange rate is a common refrain I hear when talking about MMT, and actually only shows how misunderstood the entire monetary system is. Firstly, predicting exchange rates in trading circles is called the “widow-maker” trade…as they are notoriously hard to predict and anyone who says otherwise is either a liar, a fool, or trying to sell you something. Secondly, what do we know about exchange rates…fundamentally they are driven by demand for the currency, that is driven by economic activity. MMT fundamentally understands the connection between economic capacity/activity and spending…so an MMT approach is more likely to generate greater demand for the currency so would likely be stronger.

Thirdly, so what if exchange rate changes?…that’s actually the point of a fiat currency system. We have a floating exchange rate…it is a self correcting mechanism that makes little difference to our daily lives…so what if it goes up or down? Lastly, by what mechanism would the exchange rate be affected by the Gov spending its own currency? interested to know….no one yet has given me an answer that makes sense. btw, US has injected (some describe it as “printing”) TRILLIONS of dollars…how is their exchange rate going? or what about Japan that have done around 10 TRILLION…their economy falling over? currency tanked? No.

That’s probably enough for now….and will leave others to take up some of the other questions. I will make one last VERY important point…MMT merely describes how the monetary system works. As pointed out by John, it describes the monetary system, it is a lens, nothing more. It does not have an ideology, it provides no moral judgement…what Governments do with that knowledge it up to them. Can make inequality worse, or better…depends on the policies that are progressed.

What MMT does do is move us beyond the puerile debate of “how much money is in the wallet” and into the adult debate of what do we want to achieve.

Marcus

Kaye LeeJune 29, 2018 at 6:58 am

I don’t expect anyone to have all the answers but surely it is reasonable to consider what changes would have to be made and what the consequences may be.

And can we PLEASE stop with the household analogy. It seems, regardless of what question is asked, that MMTers have a list of talking points that are more unshakeable than the Coalition script du jour. As I already said, of course a government is nothing like a household. That is not something we need to beat to death every time.

My problems have been because MMTers don’t seem to understand how the system works now and perpetually make incorrect statements. I do understand that we can change the rules but it is not helpful when people misrepresent the rules as they stand.

I understand what productive capacity means. What I was saying is that it isn’t just capacity that is important. If we waste the money on non-productive things then we could strike problems. As I also said, this may not be a question for MMT but that does not make it an irrelevant consideration. You don’t just stop with the mechanism. Telling me I have asked the wrong question is presumptuous.

I take your point on the government corruption issue.

” by what mechanism would the exchange rate be affected by the Gov spending its own currency”

As you have said, one factor affecting the exchange rate is demand for currency. If overseas investors don’t need our dollars to buy our bonds then won’t this make a difference? If there are a lot more of our dollars in circulation, won’t that make a difference?

And I would suggest that the exchange rate has a significant affect on our daily lives. If our dollar weakens then the price of imports goes up. The price of overseas travel goes up. The return for our exports goes down.

MarcusJune 29, 2018 at 7:10 am

One point for further consideration.

I have been seeking out and talking to a number of sitting MPs, ministers and senators. There are two things I can report from that experience to date:

1.The lack of understanding of economics in general is not just poor, but to a level I would call disturbing.

2.A few are actually not just fully aware of MMT but have spoken to me in private they know as issuer of the currency the government cannot run out of money, and that the key is managing spending in alignment with economic capacity…BUT they will never say that in public.

Therefore, many of our own representatives KNOW how the monetary system works but are too gutless to act on that knowledge. So when some of us get very frustrated by questioning the reality of how the system works, keep that in mind.

Marcus

Kaye LeeJune 29, 2018 at 8:14 am

Marcus,

I had the dubious pleasure of doing 1st year economics with Tony Abbott at Sydney University. His lack of understanding is not confined to economics. At age 18, Tony thought he had all the answers and his opinions have not been any further informed by education, experience or expert advice.

‘second-grade footballer, third-rate academic and fourth-class politician.’

nexusxyzJune 29, 2018 at 10:55 am

Creating money without constraint whatever the source has some significant issues. Assuming that a form of MMT was adopted you would still have issues to deal with. These are specifically to do with the purpose of the money in terms of the ‘value’ it generates – either in a commercial context or the delivery of a ‘superior’ outcome for the community e.g. curing a disease. If the investment does not deliver either ‘value’ or a ‘superior’ outcome why would you invest? You would only generate ‘mal-investment’. It’s only after ensuring these outcomes that you would invest and then utilise the funds to deliver the outcome. Technology driven planning would ensure these outcomes and ensures that only investments that create positive outcomes take place. This would drive effective policy making and end the current ‘garbage can’ policy making. Even with MMT underpinned by technology driven certainty other issues have to be addressed. That is the wishes of the wider community are ignored in terms of policy making as narrow interests have a ‘back door’ into government to influence policies and resource allocation – the low life IPA is an obvious example as are other lobby groups.

Peter FJune 29, 2018 at 11:10 am

Kaye, as usual, good comments. With regards to wasting our resources, it would seem that we could not afford to develop our existing car industry into one which produces the vehicles of the future, but we can afford to develop our shipbuilding industry into the production of weapons of mass destruction.

diannaartJune 29, 2018 at 12:03 pm

@ Marcus

I’m one of the “others” who likes to ask questions.

Just quickly, because I have to get out of here, I asked about corruption BECAUSE of the endemic corruption that exists across our political, media and corporate interests … just to make that clear. Else I might think you were being condescending.

As for my other questions such as about tax – I thought they were sooooo basic that the good MMT proponents would have, at the very least, thought about such issues.

John KellyJune 29, 2018 at 3:01 pm

Wow! Where do we start? Where else but at the beginning. Answers will be brief, more like an overview.
1. Dianaart: Yes we still have taxes. Taxes are necessary to drain the economy of excess cash, thus permitting the government to spend without overheating the economy and causing inflation. What happens to them? Well, after all, they are just a number in a computer, so nothing really. They don’t get used again.

On the question of corruption (a good one) legislating to ensure all spending cannot exceed the previous year’s GDP and also placing caps on those areas where spending could get out of control, such as: politicians’ salaries, public service spending, ensuring cost/benefit analyses of certain projects meet independent minimum levels etc. And, I suspect a whole lot more regulatory controls.

Marcus: Production levels must meet demand. Not the other way around. the only constraints are available resources. As you say, we can’t build ten cars if we only have the materials for five. Industry deals with these issues everyday, so I don’t see a big problem here. Our GDP is measured every year and we cannot spend beyond that. Nor should we, if we have full employment. So, full employment underpinned by a job guarantee would be the nominal spending limit. Spending beyond that point would require an additional workforce, which, if available or imported, would be value-adding and lead to a higher GDP.

The value of our currency is determined by our GDP (not the bond markets) and also what goods and services we have that other countries need and want to buy from us. We sell commodities (ion ore, coal, wheat, beef, etc). These are the things that create demand for our currency. This would not change.

Kaye Lee: Our exchange rate will be determined by what we have, that the rest of the world wants. The more items we produce that are in demand, our exchange rate will strengthen. if we waste money on things that no one wants, our exchange rate will fall. Helicopter drops in an economy fully employed, is waste and will cause inflation. Safeguards would be required here to make sure our politicians don’t get greedy fingers. But we have that today…..don’t we?
Also, there is no real need to sell bonds. We don’t need to borrow. But if we were to sell bonds the same situation would apply as it does now. Overseas investors hand over their currency to their central bank who then credit our account with them in that currency, then calculate its value in $A and issue bonds to that value. Our central bank then holds that foreign currency as its reserves.
If there are more dollars in circulation than demand requires, the economy will overheat and inflate. This is something that the RBA constantly monitors. If our spending increases dramatically, it must have a corresponding increase in production. And yes, our exchange rate determines the cost of imports.

I hope this helps. It’s only a brief explanation of some of your queries.

economicreformJune 29, 2018 at 4:14 pm

Kaye said:

” the RBA IS an independent body. They do NOT issue money (other than deciding when we need more notes and coins which is insignificant). They will NOT allow the government to go into overdraft except in very temporary emergencies. Because the government chooses to sell bonds on the open market, we CANNOT burn or shred them. If the RBA bought the government bonds then no problemo. But they don’t. ”

The RBA is a state entity, not a private entity. And it is obliged to operate cooperatively with Federal Treasury.
The RBA creates and issues state fiat money – currency plus exchange settlement funds (also known as banking reserves). Notwithstanding that these forms of money are far smaller in volume than money created by commercial banks, they are far from being insignificant in the overall scheme of things.
The RBA does not have the ultimate power to disallow Treasury from going into overdraft for any reason. The will of the government is the final arbiter in such matters. The reason it does not happen is an ongoing commitment of successive governments (since 1982) to “sound financial policy” under advice from Federal Treasury – which (in alignment with neoliberal ideology) views such practices with disfavour.
The RBA DOES buy government bonds – on the open market. It does this as part of its open market operations, in order to achieve its interest rate targets. The bonds purchased by the RBA from the private sector are effectively the same as bonds which could have been purchased from Treasury directly (i.e. theoretically, and as actually occurred prior to 1982).

economicreformJune 29, 2018 at 4:31 pm

Kaye said:

” My next stumbling block is when you say taxation destroys money. I can understand that it removes money from circulation so in a conceptual sense I agree, but that money is deposited into a government account and then payments are made from that account (which only has a very limited overdraft facility). ”

Taxation removes both bank credit money and reserves (exchange settlement funds) from circulation when taxes are paid to a government agency operating under the umbrella of Federal Treasury. These are the only measures of money that are relevant to the operation of the overall economy. However Federal Treasury is not a bank – it does not take deposits. Therefore Treasury’s account with the RBA is not a transaction account – it is an operating account, and therefore the credit entries within it are not a form of money. In other words, it is a post facto account of the government’s fiscal operations. An analogy is the aggregate of financial assets – and also equity – of commercial banks, which is likewise not a form of money used by bank depositors and bank borrowers. Thus when a bank advances a loan, no money is transferred, it is created as credit money in an account of the borrower.

diannaartJune 29, 2018 at 4:36 pm

@ John Kelly

Part of my concern regarding MMT is how to sell it to the uber-Right/libertarians/religious crowd.

As with free speech, they (RWNJ’s and lefty control freaks) only approve of regulations when they are the primary controllers – they see anyone else’s regulations as not just an imposition but something which must be destroyed, no matter what.

Also, MMT is sounding all too fair and reasonable – RWNJ&LCFs do not like this because they are born to rule and if others (the people born to be ruled) start living fruitful lives … where will it end? RWNJ’s prefer a permanent state of fear – not humanity.

If I am sounding a bit flippant – its not meant to be; controlling authoritarian types believe that “life was not meant to be easy” and are determined to fulfil this prophecy at all and any costs.

They completely miss the point that life was meant to be lived – which, if MMT works, would enable the majority of people to thrive.

Besides, am too tired to even think about how tax would work, let alone balancing production with demand, and thinking up ways to regulate without oppressing.

Before I forget, thank you for supplying some interesting thoughts on the issue.

Kaye LeeJune 29, 2018 at 7:51 pm

economicreform,

“The Reserve Bank of Australia is an independent central bank”

“The Act lays down procedures which are to be followed if there is a difference of opinion between the Australian Government and the Reserve Bank Board as to whether the monetary and banking policy of the Bank is ‘directed to the greatest advantage of the people of Australia’. First, the Treasurer and the Board are to endeavour to reach agreement. If they are unable to do so, the Board is required to provide the Treasurer with a statement on the matter. The Treasurer may then submit a recommendation to the Governor-General who, with the advice of the Federal Executive Council, may determine the policy to be adopted by the Bank. The Treasurer would then inform the Reserve Bank Board of the policy so determined and the Board would be obliged to implement it.”

You said “Federal Treasury is not a bank – it does not take deposits.”

I am not a bank either. Deposits from my clients go into my bank account just like deposits for Treasury go into its bank account.

You then say “Treasury’s account with the RBA is not a transaction account – it is an operating account, and therefore the credit entries within it are not a form of money.”

I don’t know what an operating account means but the RBA seems to disagree.

“The Reserve Bank provides a range of banking services to the Australian Government and its agencies, overseas central banks and official institutions. Principal amongst these is management of the Australian Government’s core accounts. Also important are transactional banking services which are provided to some 90 government agencies on a commercial basis. The transactional banking services are associated with more conventional banking activities, such as making and receiving payments.”

You say “The RBA creates and issues state fiat money”

It issues banknotes. It does not issue bonds. “While the Reserve Bank manages the consolidation of the government’s accounts, the AOFM has responsibility for ensuring there are sufficient cash balances in the OPA to meet the government’s day-to-day spending commitments and for investing excess funds in approved investments, including term deposits with the Bank.”

You further say “The bonds purchased by the RBA from the private sector are effectively the same as bonds which could have been purchased from Treasury directly”

I don’t see how. In one instance, the RBA credits a private account. In the other, it credits a government account.

I’m sorry economicreform. Your contribution made me far more confused, not less.

economicreformJune 30, 2018 at 12:20 am

Kaye quoted an RBA statement: “The Act lays down procedures which are to be followed if there is a difference of opinion between the Australian Government and the Reserve Bank Board as to whether the monetary and banking policy of the Bank is ‘directed to the greatest advantage of the people of Australia’. First, the Treasurer and the Board are to endeavour to reach agreement. If they are unable to do so, the Board is required to provide the Treasurer with a statement on the matter. The Treasurer may then submit a recommendation to the Governor-General who, with the advice of the Federal Executive Council, may determine the policy to be adopted by the Bank. The Treasurer would then inform the Reserve Bank Board of the policy so determined and the Board would be obliged to implement it.”

This is in accord with my understanding. However note that the Treasurer on behalf of the government has the whip hand. It is in the interest of the RBA to cooperate with Treasury and attempt to reach an agreement. I suggest that it would rarely (if ever) be necessary for the government to go to such lengths as submitting a recommendation to the Governor-General / Executive Council.

Kaye said: You said “Federal Treasury is not a bank – it does not take deposits.” I am not a bank either. Deposits from my clients go into my bank account just like deposits for Treasury go into its bank account.

You missed my point. Let me spell it out. Commercial banks have deposits with the RBA, and the credits in it are known as reserves (exchange settlement funds). They also take deposits from the public, which is part of their obligation if they wish to be registered as banks (i.e. depository institutions). Federal Treasury does not take deposits from the public, or anyone else, so it is not a bank … implying that its deposits with the RBA are not reserves. Those Treasury deposits in the RBA are also clearly not bank credit money or currency. Therefore those deposits do not satisfy any accepted definition of money. They are given a monetary value (as indeed are all commercial bank financial assets and equity), but that does not mean these financial assets are money.

Kaye said: You then say “Treasury’s account with the RBA is not a transaction account – it is an operating account, and therefore the credit entries within it are not a form of money.” I don’t know what an operating account means.

It means that an operating account is not a transaction account, but merely a record of incoming and outgoing money. Even though such an account may be described as holding financial assets, it does not imply that such assets are money, nor does it imply that any money is transferred into it or out of such an account.

Kaye said: but the RBA seems to disagree. “The Reserve Bank provides a range of banking services to the Australian Government and its agencies, overseas central banks and official institutions. Principal amongst these is management of the Australian Government’s core accounts. Also important are transactional banking services which are provided to some 90 government agencies on a commercial basis. The transactional banking services are associated with more conventional banking activities, such as making and receiving payments.”

That is misleading waffle and mumbo-jumbo. When Federal Treasury spends, new reserves are created by the RBA and credited to the payee’s commercial bank, and at the same time new bank credit money is created in the payee’s commercial bank account. There is no transfer of money.

Kaye said: You say “The RBA creates and issues state fiat money” It issues banknotes. It does not issue bonds. “While the Reserve Bank manages the consolidation of the government’s accounts, the AOFM has responsibility for ensuring there are sufficient cash balances in the OPA to meet the government’s day-to-day spending commitments and for investing excess funds in approved investments, including term deposits with the Bank.”

Sorry to say that this is a very misleading statement. The balances are not cash, i.e. they are not currency, and neither are they reserves.

Kaye said: You further say “The bonds purchased by the RBA from the private sector are effectively the same as bonds which could have been purchased from Treasury directly” I don’t see how. In one instance, the RBA credits a private account. In the other, it credits a government account.

In the hypothetical case where the RBA might buy bonds directly from Treasury, the deposit of new credits in Treasury’s RBA account frees up fiscal space for the government to spend newly created money into the economy, and indeed that is the government’s purpose in selling Treasury securities to the RBA. When the government spends that new money, two things happen – (a) reserves are commensurately created by the RBA and transferred to the payee’s commercial bank, and (b) the payee’s bank commensurately creates new credit money in the payee’s account. It is important to recognise that new money is created right down the line, i.e. there is no transfer of money.

economicreformJune 30, 2018 at 12:31 am

In a nutshell, for the RBA any incoming money simply goes out of existence (the reserves are destroyed, and any associated bank credit money disappears from the money supply), while for any outgoing money the dynamics is reversed – the two forms of money are simply created, rather than being transferred from anywhere.

Kaye LeeJune 30, 2018 at 8:01 am

So everything that the RBA says it does is waffle and mumbo jumbo?

They say they make payments out of government accounts. You say they don’t.

They say the AOFM must ensure there are sufficient funds in the accounts to cover spending. You say they don’t.

They say the overdraft facility is strictly limited. You say it isn’t.

Sorry. I cannot just accept what you say. It is completely at odds with the evidence.

Mick ByronJune 30, 2018 at 8:19 am

If the MMT cult ever want to try to win over the masses,they sure have their work cut out.
Here we are,at 72 comments, even those with doubts are knowledgeable and they still can’t explain/sell the message.
Maybe it’s me {I’m still one of the masses though!} but the message seems just as far away as ever and the responses to questions vague and not hitting the mark in satisying those asking the questions
Seems after so long the songsheet would be complete and the cultists could all sing the same tune
{and I hope the words don’t include “household debt”}

KyranJune 30, 2018 at 12:21 pm

At the risk of displaying my ignorance, what is the problem? Many of the comments seem to confuse and conflate two different thought streams. Some are concerned with explaining the concept and others are engrossed in the practical mechanics of the delivery.
It’s reminiscent of little johnnies republic referendum where he demanded a model, rather than a confirmation of the concept. Lucky for him he utilized an ego infatuated with its own brilliance to go off on a distraction.
It seems to me MMT has been widely used for decades now and that the ‘conservative’ side are much better at it. If you look at the Wiki for ‘Bank of Japan’, it is evident that Japan started using the theorem during WW2. The global banking and monetary system utilized MMT to respond to the GFC and there was nary a query. In my ignorance, I cannot see any difference between MMT, Japan’s ‘Qualitative Easing’ or the US equivalent, ‘Quantitative Easing’. It is a matter of reality that the ‘gold standard’ was either ineffective or inoperative for decades prior to its being discarded. MMT was in practice as soon as currencies started being traded against each other without the need to be ‘underwritten’ by a gold standard, or universal equivalent base measure. Whilst the US currency was a replacement for a while, its application as an underwriters value has been ignored for decades. The following article is a good summary through the Japanese experience.

https://www.washingtonpost.com/news/wonk/wp/2017/10/30/japan-is-showing-world-leaders-how-to-save-their-economies/

As for conservatives understanding it better and using it more effectively, look at the way conservative governments, globally, argue economics. There are constant constraints on government spending when that spending is directed to ‘social’ policy areas. “We can’t afford it”, “We will have to introduce cuts elsewhere”, “We’ll have to increase taxes”, “We will have to introduce austerity measures”. On and on they go. Live within your means, household budgets, credit cards, every possible comparison indicates a government that does not understand the reality of MMT.
Yet, conversely, those same governments see no constraints on government spending when that spending is directed to ‘corporate’ or ‘security’ policy areas. “The Banks are too big to fail”, “Fossil fuels need subsidizing”, and so on. We are in the process of the most obscene spend on armaments in Australia’s history, accommodated by foreign defence contractors, which we can afford without constraint.
Oddly, there is usually bipartisan agreement with progressive parties. My premise is that they deny the very existence of MMT when it suits, but utilize it at every opportunity when it suits.
Gonski, NDIS, NBN, the environment, etc – can’t afford it. Armaments, corporate largesse, security – name your price.
As for MMT as a means to addressing social as opposed to corporate spending, Martin Luther King wrote a book in 1967, ‘Where Do We Go From Here: Chaos or Community?’

“So what, exactly, was King’s economic dream? In short, he wanted the government to eradicate poverty by providing every American a guaranteed, middle-class income—an idea that, while light-years beyond the realm of mainstream political conversation today, had actually come into vogue by the late 1960s.
To be crystal clear, a guaranteed income—or a universal basic income, as it’s sometimes called today—is not the same as a higher minimum wage. Instead, it’s a policy designed to make sure each American has a certain concrete sum of money to spend each year. One modern version of the policy would give every adult a tax credit that would essentially become a cash payment for families that don’t pay much tax. Conservative thinker Charles Murray has advocated replacing the whole welfare state by handing every grown American a full $10,000.”

https://www.theatlantic.com/business/archive/2013/08/martin-luther-kings-economic-dream-a-guaranteed-income-for-all-americans/279147/

That’s only one excerpt and the whole article is worth a look. There is no need to explain MMT, just point out its historical application.
Thank you Mr Kelly and commenters. Take care.

paul walterJune 30, 2018 at 1:28 pm

Thanks, Kyran.

economicreformJune 30, 2018 at 1:43 pm

Kaye: You have either misrepresented what I said, or did not read it carefully enough.

Kaye said: “So everything that the RBA says it does is waffle and mumbo jumbo?”

I did not say that. I agree with much of what comes from RBA sources.

Kaye said: “They say they make payments out of government accounts. You say they don’t.”

Some of the orthodox economists attached to the RBA seem to believe that government accounts with the RBA are transaction accounts and that the credits therein are money. That is their misguided belief, and it is a belief that defies logic. They are wrong on this issue and have not thought clearly about it. The credits in those accounts are not transferred anywhere when federal government payments are made. They are post facto entries, in the wake of the federal government’s fiscal operations. There are many other economists, especially MMT economists, who would repudiate that misguided belief of the economists just mentioned.

Kaye said: “They say the AOFM must ensure there are sufficient funds in the accounts to cover spending. You say they don’t.”

There are always sufficient credits (what you call “funds”) within Treasury’s RBA account to match government spending, because the government Treasury is the only entity within the broad economy which can create net financial assets (assets unmatched by liabilities) — and will always ensure that matching credits are there. However these credits are post facto, and exist purely for sterile accounting reasons. These credits do not “cover” government spending, they accompany government spending. As I said, federal government can create (and does) – out of nothing – as many financial assets as are needed to accommodate such accounting exercises.

Neither commercial banks not the RBA can create unmatched financial assets (also known as net financial assets) — all of the financial assets they create are matched by liabilities. And in open market operations, the RBA simply exchanges one asset for another. Only Treasury (through one of its agencies) can create net financial assets. If you do not understand this, then you do not understand the financial dynamics.

Kaye said: “They say the overdraft facility is strictly limited. You say it isn’t.”

I did not say that. Read what I said more carefully — and I do choose my words very carefully.
Moreover, overdrafts are not “strictly” limited. The limitations that have existed on direct borrowing of securities by the RBA since 1982 do so by the will of Treasury, who have implemented this policy for reasons of “sound financial policy”. The RBA goes along with all this, however note that Treasury has the whip hand in all these matters, and does not need to negotiate with the RBA on this issue. Ultimately the prohibitions which exist today do so because it is government policy (i.e. acting under the advice of Treasury economists).

Kaye said: “Sorry. I cannot just accept what you say. It is completely at odds with the evidence.”

You have not provided any evidence that contradicts or negates what I wrote previously.

Geoff AndrewsJuly 1, 2018 at 9:03 am

Yes, thanks Kyran. I’ve often wondered how Nazi Germany went from an economic wreck to an (almost) world beater in 10 years. MMT? Maybe someone loaned them the money? If the study/”science” of economics was valid, there would be no argument about the pros & cons of MMT. Economists seem better at examining the entrails than curing the patient.

Kaye LeeJuly 1, 2018 at 10:40 am

Kyran,

It is not the concept that worries me. What I am trying unsuccessfully to work out is what would have to change to allow us to embrace the potential. What constraints currently exist and how do we remove them?

In the Japan example, the Bank of Japan bought up government bonds injecting that money into the private sector. In my understanding, that isn’t what MMT is about. MMT says the government just spends money into existence. Bonds are irrelevant in money creation.

economicreform,

“Some of the orthodox economists attached to the RBA seem to believe that government accounts with the RBA are transaction accounts and that the credits therein are money. That is their misguided belief, and it is a belief that defies logic. ”

It’s not just “some economists” who believe that. It is explicitly stated on the official RBA site that this is how things work. You say I have not provided any evidence. The quotes I gave come from the RBA Act and from the RBA statement of how they operate.

“There are always sufficient credits (what you call “funds”) within Treasury’s RBA account to match government spending, because the government Treasury is the only entity within the broad economy which can create net financial assets (assets unmatched by liabilities) — and will always ensure that matching credits are there.”

How?

As for the overdraft facility, “strictly limited” are not my words. They are the words of the RBA. And why would there be any need for an overdraft facility if payments were not going out of the account????

How do you expect to convince the government to change if you don’t accept how they say they operate now? A journey starts from where we are now, not where we want to get to.

diannaartJuly 1, 2018 at 1:25 pm

Part of my condition includes brain fog – no smart-alec comments permitted.

Having been very unwell past couple of days, only my basic reptilian brain appears to want to post here today – my “superior” faculties are MIA.

I would like to see a bit less of ‘economicreform’ (brain freeze), more of ‘Kyran’, and keep on trucking Kaye Lee – I rarely misunderstand you.

As for the Right-wing conservatives using MMT – I bet they don’t think of whatever it is they do to people’s lives as making use of the infinite piggy bank – certainly not MMT’s pro-social aspects.

There are pro-social aspects of MMT aren’t there?

Have to go lie down again! @##*&&%^^!!!!!

Kaye LeeJuly 1, 2018 at 2:31 pm

According to the RBA, this is where we are now…..

Sound financial policy requires that the Government fully fund any budget deficit by issues of securities to the private sector at market interest rates, and not borrow from the central bank. The Bank subscribes to tenders when necessary for its own portfolio management purposes and provides registry services, but since October 2006 the Bank no longer acts as agent for the Australian Government in conducting tenders of Australian Government Securities.

It is not possible to ensure that the Australian Government’s need for funds are exactly matched day-by-day by issues of securities to the market. For one thing, issues generally occur only weekly. To overcome this mismatch between daily spending and financing, the Treasury keeps cash balances with the Reserve Bank that act as a buffer. The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender.

The Reserve Bank provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government’s daily cash position.

The Reserve Bank also provides transactional banking facilities to various Australian Government agencies. The main transactional banking services offered by the Bank include:

bank account facilities;
real-time New Payments Platform (NPP) services for payments and collections;
online payment services, including real-time card-based payments;
processing and distribution of bulk electronic direct credit and direct debit transactions, including welfare, Medicare rebates, salaries and vendor payments;
various collection services, including internet, phone and online card-based facilities;
overseas payment services, including direct entry, electronic funds transfer (wires) and cheque;
document printing services where agencies can electronically request the Reserve Bank to issue cheques and electronic documents on their behalf; and
cheque reconciliation, repository and verification services including a system that can assist in the identification of cheque fraud.

The Reserve Bank Board makes decisions about interest rates independently of the political process – that is, it does not accept instruction from the Government of the day on interest rates. This principle of central bank independence in the operation of monetary policy, in pursuit of accepted goals, is the international norm. It prevents manipulation of interest rates for political ends, and keeps monetary policy focused on its long-term goals.

With this independence naturally comes a need for consultation and accountability. The relationship of the RBA with the Government is one of independence with consultation, as outlined in Consultation with Government and Accountability to Parliament.

https://www.rba.gov.au/monetary-policy/about.html

https://www.rba.gov.au/fin-services/banking.html

economicreformJuly 1, 2018 at 3:44 pm

Kaye said: It’s not just “some economists” who believe that. It is explicitly stated on the official RBA site that this is how things work. You say I have not provided any evidence. The quotes I gave come from the RBA Act and from the RBA statement of how they operate.

I am not disputing what is written in the RBA Act. The RBA statement you kindly provided is a statement grounded in ignorance and ideology, masquerading as knowledge. Pronouncing something to be what it is clearly not does not change the reality. As the late Prof Stephen Hawking said so eloquently: The problem we face is not ignorance, but the illusion of knowledge. This simple fact is that Treasury account credits are not part of the money supply and are not part of the nation’s stock of banking reserves. In other words, they are not money. When government spends, new money is created right down the line. Also a reality. No money is transferred from anywhere. You need to grasp and understand that reality, otherwise we are talking at cross purposes and our discussion will go nowhere. Most heterodox economists and accountants understand that reality, neoclassical economists (who are dominant in Treasury and the RBA) do not. There is no point in responding to your other commentary and queries, as it is all irrelevant unless we can agree on the point I just made.

Kaye LeeJuly 1, 2018 at 4:20 pm

” Pronouncing something to be what it is clearly not does not change the reality. ”

I so agree.

Perhaps you can answer these two questions….

“There are always sufficient credits (what you call “funds”) within Treasury’s RBA account to match government spending, because the government Treasury is the only entity within the broad economy which can create net financial assets (assets unmatched by liabilities) — and will always ensure that matching credits are there.”

How?

And what is the need for an overdraft facility?

economicreformJuly 1, 2018 at 5:44 pm

The nature of federal government spending

I have no doubt that there are many orthodox economists (maybe even a few heterodox economists, but certainly no MMT economists) who would be inclined to claim that the credits in federal Treasury’s account with the central bank are a form of state fiat money – even if they recognise that these credits are neither banking reserves nor currency. And they would assert that this form of state fiat money is basically interchangeable with banking reserves. This viewpoint would be viable and make sense if (and only if) Treasury was incapable of creating net financial assets. However the reality is that federal Treasury is the only entity within our broad economy that can and does create and distribute net financial assets. It does this whenever the federal government deficit spends.

The significance of this fact is that within a monetary sovereign state the Treasury has no difficulty whatsoever in commensurately topping up its central bank account as an accounting exercise (to keep the orthodox economists happy) whenever it spends. It does this by issuing Treasury securities to the private sector, which are essentially exchanged for banking reserves. The aggregate of financial assets owned by the private sector does not change, and the reserves paid to the state go out of existence. Commensurately Treasury’s account is topped up. In regard to the government spending these processes can be either pre facto or post facto, but are usually the latter. Thus any of the post facto changes to Treasury’s account may be regarded as sterile accounting exercises.

The overdraft facility is rarely used, and whenever it is used it is only a matter of accounting convenience. In theory it is not really needed at all.

Kaye LeeJuly 1, 2018 at 6:05 pm

So the short version of what you just said is that they issue bonds which the private sector buys hence topping up treasury account.

That is absolutely no different to what happens now and conventional understanding.

And the bonds they issue just so happen to equate to the difference between revenue and expenditure.

I know you think accounting is irrelevant. That doesn’t really help.

economicreformJuly 1, 2018 at 11:36 pm

If this country happened, hypothetically speaking, to be confronted with a large scale war and needed to hugely ramp up its military spending, it would willing engage in deficit spending on a much larger scale than at present. It would not feel constrained from doing so by the magnitude of available credits in its RBA account (i.e. at the time the decision to ramp up its war spending was made). The decision to undertake that spending would come first, and any accounting procedures required would come second. If the government ever found itself time constrained in terms of selling more bonds to the private sector (including war bonds), as required for keeping the Treasury account in the black, then it would utilise a temporary overdraft with the RBA.

Kaye LeeJuly 1, 2018 at 11:57 pm

Emergency measures during wars are not really what we are talking about.

Besides which, what you are describing is what the RBA says it does now. If spending exceeds the balance they offer an overdraft which is extinguished when they next issue bonds.

Thanks for trying but, after this lengthy conversation, I am now back at square one.

I think I will just forget about MMT.

economicreformJuly 2, 2018 at 10:18 am

Perhaps I should have placed the word “overdraft” in quotes. Selling securities directly to the central bank is not an overdraft in the sense that a commercial bank offers an overdraft facility to a retail customer. A monetary sovereign government in debt to its own central bank is not really in debt at all, because it can service such a debt in perpetuity without any problem whatsoever, and in any case (at least in this country, and I suspect more generally) interest payments received by the central bank return to the government Treasury. In fact, the entire exercise would be a mere accounting adjustment, nothing more.

The point being made above is that there is nothing sacrosanct about conventional government practices. A democratically elected government which is also a monetary sovereign sets the rules and practices (via its parliament), and can change any of them if the need arises to do so. In extremis, you can be certain that what needs to be done will be done, and if previous practices and conventions are perceived as a hindrance then they will be overturned or by-passed. Including selling securities directly to the central bank, which frequently occurred in Australia prior to 1982, and still occurs frequently today in other countries such as Canada.

A second relevant point is that because the federal government creates and issues the nation’s currency, and also because it has the unique ability to create and distribute net financial assets, in reality it is not financially constrained in the way that central banks and commercial banks are constrained. Our conventional practices and policies (enthusiastically supported by neoclassical economists) are directed at creating the illusion that the federal government is so constrained, however this remains nothing more than an illusion.

Part of that illusion is the cultivated perception that federal government spending is funded by taxation and borrowing. However, as pointed out previously, (a) the real primary purpose of taxation is not to fund anything, but rather, to withdraw purchasing power from the economy in order to keep a lid on inflation (there are other important secondary purposes), and (b) borrowing from the private sector is not borrowing in the sense that commercial bank customers borrow, because Treasury securities my be thought of as a form of (risk-free) broad state fiat money, interchangeable with banking reserves.

economicreformJuly 2, 2018 at 4:40 pm

Incidentally, the description of the financial dynamics that I provided above is consistent with Functional Finance, as first elaborated by British economist Abba Lerner long before MMT was conceived. It is also consistent with modern accounting ideas, as applied to government finances. So your decision to “forget about MMT” has no relevance in regard to the financial principles discussed.

KyranJuly 3, 2018 at 9:09 am

By way of apology Ms Lee (1/7, 10.40am), it was not my intention to accuse anyone else of conceptual ignorance, but to declare my own. I genuinely cannot see the difference in concept between MMT and the various ‘easing’ (printing money) or ‘austerity’ (removing money) doctrines or theorem.
As such, my ignorant response to your comment “What I am trying unsuccessfully to work out is what would have to change to allow us to embrace the potential. What constraints currently exist and how do we remove them?” is ‘Nothing, other than start using the same language for all of the theorems’.
My premise is that this theory has been in practice for decades, albeit under another title or name. As such, the mechanics of its implementation are a redundant discussion, insofar as all we need to do is look at what we have been doing. It is a question of finding a clear language rather than using different labels for the one practice. The conventional economists consistently discredit MMT whilst promoting ‘quantitative easing’. I genuinely don’t get it.
With regard to the Bank of Japan reference, it was made after I’d read the Wiki, which I didn’t include in my comment. My apologies for my oversight.

https://en.wikipedia.org/wiki/Bank_of_Japan

The article I did include made reference to bonds only in the sense it was one of the levers available to the Japanese. As such, I couldn’t agree more that bonds are irrelevant to the overall discussion.
Subsequent comments haven’t been informative to my ignorant opinion, as they refer to the labelling and allocation of funds after their creation. As such, aren’t they merely accounting practices and terminologies? Whether we allocate these funds through the RBA, Treasury, or the Wonderful Magic Pudding, is merely an exercise in accounting or bookkeeping. Whilst the common economic explanation is that taxation and bond issuance, etc, are means by which the government raises revenue, these again, seem to be distractions to the underlying reality – the government creates money. There can be no doubt that taxation removes money from the economy, but that is simply a ‘lever’ available to the government to manage the economy. As to whether this money is then either destroyed or recycled, is a matter of pedantics, as it is only a bookkeeping exercise. As for bonds, they have been subject to international market manipulation for decades. You may be interested in this article.

https://www.thebalance.com/how-much-u-s-debt-does-china-own-417016

My premise, meagre and all as it is, is that the only threat to a currency is its valuation, of which there are only two measures – internal and external.
In the internal sense, I mean the internal economy of the issuing government. The only threat to the value of the currency internally is inflation. As the issuing government has control of the presses (or the account numbers), they can create as much as they like and allocate (or spend) it wherever they like. Its value becomes subject to measures determined by unit costs, whether it be wages (with hours being the unit cost) or produce (with weight being a unit cost) or other commodities (with things such as rarity being a unit cost). The only risks to the currency being issued are inflation or deflation, if too much or too little is thrown around. Other than those ‘constraints’, which don’t so much need removal as recognition, I cannot see any change (other than language) being necessary to allow us embrace the potential.
In the external sense, the conversation becomes much more fraught because the nature of the ‘common denominator’ has shifted so much in the international trade of currencies. Once upon a time, the ‘gold standard’ was the universal measure and currencies moved up and down in value against that one measure dependent on their economic performance. The ‘gold standard’ was removed as the common denominator and replaced by the US $ as the international measure. This always struck me as complete folly, in the sense that a ‘participant currency’ couldn’t rationally be a measure due to the number of different influences that could be manipulated. Which is what I meant by “Whilst the US currency was a replacement for a while, its application as an underwriters value has been ignored for decades.”
Since that time, international clearing houses have become little more than casino’s for very large corporations, very wealthy individuals, not to mention governments manipulating the values, eg Cina’s Yuan. Currency manipulation is now another plaything for these entities, and all of it is underwritten by the sovereignty of the currencies they are gambling with. Many have written about trends towards other ‘common denominators’, such as the petro dollar, and observed that we tend to destroy a country (Iraq, Syria, Iran, etc) rather than allow interference to the sanctity of the US $. The GFC, to my mind, did little more than underline that the gamblers (and, by default, the ‘house’) could not lose. Governments across the globe used their sovereign currencies to prop up these otherwise private losses, induced by their own greed. The Euro experience was an exercise in manipulation in that the sovereign currency, the Euro, was used to punish or reward captive currencies, no better evidenced than the PIGS fiasco.
We used to measure these external factors through the balance of trade figures. Since we have dispensed with our manufacturing industry, these figures will continue to dis-improve as we have now become (or are becoming) a net importer.

https://tradingeconomics.com/australia/balance-of-trade

We have changed the way markets work and how they are measured, but the global trend seems to be that the markets (in particular market losses) will be increasingly propped up by currency manipulation. The complicity of governments in this charade, to the detriment of their own people, is a worry, to say the least. It could well be argued that MLK back in the 60’s was doing nothing more than extolling MMT with a ‘social’ charter and that the ‘conservative’ side was quicker in recognizing the potential for using the same theorem for a ‘business’ charter. The conservatives won.
I probably still haven’t explained myself very well, so will keep trying to unmuddle my muddled thinking.
Again, my apologies if I caused any offence.
Thank you. Take care
Ps, diannaart, hopefully you are feeling better. You, too, take care.

Kaye LeeJuly 3, 2018 at 9:28 am

Kyran,

Nothing you or anyone else has said is offensive. This isn’t in any way personal. We are all just trying to understand and I appreciate the efforts that everyone is making.

Being a maths tragic, how we account for things is important to me. I know it isn’t to MMTers but I have to satisfy myself about how things would be done and I have to marry it up with what happens now and what changes might be necessary.

MMTers ignore or misrepresent how the RBA functions now and that has always really troubled me.

I so often feel, when I ask questions, that I just get bombarded with the same old stuff repeated ad nauseum. It’s like “here is an answer I prepared earlier”. It’s frustrating.

I have also been told that bond issuance and quantitative easing have nothing to do with MMT.

economicreformJuly 3, 2018 at 12:14 pm

Kaye said: ” … how we account for things is important to me”.

Which is fine, however that accounting process should not have to resort to “an appeal to authority”, which in my view is an excuse for avoiding the hard work entailed in sorting out the operations on a rational basis, using one’s critical faculties. Authorities are often wrong on a range of issues, and blind to their own prejudices, biases, their tendency to group think, and their ideological predispositions. Economic commentators and central banks are not free from this type of deficiency.

Kaye LeeJuly 3, 2018 at 12:16 pm

Are you suggesting that I have put no thought into this?

ARRRRGGGGGHHHHHHHHH

economicreformJuly 3, 2018 at 12:29 pm

” … MMTers ignore or misrepresent how the RBA functions now and that has always really troubled me. ”

I am certain that the first part of this statement cannot be substantiated.

diannaartJuly 3, 2018 at 1:27 pm

@ Kyran

This has helped clarify some of my pondering:

“We have changed the way markets work and how they are measured, but the global trend seems to be that the markets (in particular market losses) will be increasingly propped up by currency manipulation. The complicity of governments in this charade, to the detriment of their own people, is a worry, to say the least. It could well be argued that MLK back in the 60’s was doing nothing more than extolling MMT with a ‘social’ charter and that the ‘conservative’ side was quicker in recognising the potential for using the same theorem for a ‘business’ charter. The conservatives won.

Thank you, Kyran – the conservatives are still winning. Even when they fail miserably to contribute to a fair economic system, they claim to be better money managers, in spite of glaring inconsistencies such as massive tax breaks for the uber-rich and huge cuts to the most vulnerable or to parts of society’s fabric (the ABC, the permission to brand anything, for example renaming public facilities with corporate brands and much more). The neo-conservative practices a false economy based upon lies.

Many proponents of MMT appear far more interested in scoring points, disparaging reasonable comment, ignoring POV of others – which are not given lightly, but with a great deal of thought.

@ economicreform

” … MMTers ignore or misrepresent how the RBA functions … ”

*… I am certain that the first part of this statement cannot be substantiated… *

Take a look at what you have stated about extracts from the RBA’s own policies. Giving consideration to the RBA’s own policies is not appealing to a higher authority – how the RBA functions is a part of the topic of discussion.

No one is saying the RBA’ is 100% correct, but clarifying how the RBA is supposed to work is necessary. Any discussion regarding MMT needs/must include discussion of how our monetary system works at present.

I hope I am clear – only just starting to feel a little more functional than I have in days.

Kyran

Thank you for your kind wishes.

Kaye LeeJuly 3, 2018 at 2:27 pm

I wasn’t “appealing to authority” – I was quoting what THEY say they do. If you want to talk appealing to authority, check out how many times MMTers link to Bill Mitchell.

As for the RBA,….

I have been told it is the same thing as the government. It is not. Obviously the government can impose its will and obviously the government can change legislation, but they are not the same thing. They have their own rules.

I have been told that the RBA is the currency issuer. As you yourself said, it is the government who issues bonds to top up government accounts at the RBA to cover expenditure that exceeds deposits.

I have been told that tax is destroyed when it is credited to a government account at the RBA, but as this affects the amount/timing/need/decision to issue bonds, it hasn’t really disappeared.

As things stand, the government just keeps selling bonds on the open market to cover deficit spending. I want to know a different way than that. I get told they just spend the money into existence but the RBA won’t let them do that. So how do we do it differently? I am told we can’t just credit an account from nowhere – there has to be a bond issuance is the only way I have been told that the credit can happen. I understand if the RBA bought the bonds then that is the functional equivalent of just crediting the account but must we have the bonds at all? Is there another way?

And can I say how much I resent the arrogant assertion that I am unwilling to do “the hard work entailed in sorting out the operations on a rational basis, using one’s critical faculties”. That made me FUME.

economicreformJuly 3, 2018 at 5:42 pm

You might be right about MMTers appealing to Bill Mitchell, and my criticism would apply to those people as well. That does not mean the main thrust of MMT is wrong, however I take your point. Personally, I do not appeal to Bill Mitchell’s authority on anything – and disagree with him on some matters.

I don’t know who told you that the central bank is the same as government, but that view is obviously nonsensical.

Not sure what your next sentence means or implies, however when the RBA issues currency it does so in exchange for other financial assets (either banking reserves or Treasury securities). It cannot create net financial assets, in contrast with Treasury’s ability to do so.

The money (bank credit money and reserves) used for paying federal government tax is not directly credited to anything. None of it goes into any transaction account. It simply disappears from the money stock. And I do not understand why or how you think it affects the issue of Treasury securities.

” I get told they just spend the money into existence but the RBA won’t let them do that.” The RBA cannot prevent the federal government from spending, and by doing so, from effectively creating new money. It is true that Treasury cannot create new narrow money directly, however by simply directing the payee’s bank to deposit new credit money in the payee’s account, the new money is created. Treasury’s financial standing is never questioned by a commercial bank. Commensurately, the payee’s bank receives newly created reserves from the RBA as an asset – to match the newly created bank liability.

In the case of deficit spending, lets do some simple sums to see what is happening: (a) Government sells securities to the private sector (lets make this a private bank, for simplicity), (b) The bank releases some of its reserves as payment, which are then simply removed from the nation’s stock of reserves. (c) The RBA tops up Treasury’s account commensurately. (d) Government spends into the real economy, with either cheque or a credit transfer to a payee. (e) the RBA reduces Treasury’s account commensurately, and transfers new reserves to the payee’s bank. (e) The payee receives a new asset in the form of a deposit of newly created bank credit money. If you do the sums, you will find that a new financial asset – unmatched to any liabilities – has been created in the overall process of government deficit spending.

diannaartJuly 3, 2018 at 6:30 pm

@ economicreform

Do you actually have a point to contribute, or are you going to continue ‘xplaining?

Now, maybe I’m not, but others here are very bright, very thoughtful and cogent.

economicreformJuly 3, 2018 at 8:26 pm

Hi diannaart, my commentary was addressed to Kaye. And unfortunately I cannot interpret your question. Please elaborate.

Kaye LeeJuly 3, 2018 at 8:56 pm

I do not believe you when you say taxation payments are not credited to a government account.

I have to add I find your answers unnecessarily complicated and often not actually what I was asking.

economicreformJuly 4, 2018 at 12:04 pm

Hi Kaye, money can only be credited to a transaction account. A transaction account contains monetary credits which can be (and are) transferred to other transaction accounts, as a result of business undertakings by the account holder. This requires that there will be a marketplace of players whose accounts contain the same entities. Indeed that is one of the requirements for such an an entity to be described as money.

An important point to be made here is that those holding transaction accounts do not (and are not allowed to) create the creditary entities that populate those accounts. A second point is that such accounts can go into the red, meaning that an overdraft may be granted by the account creator.

Because federal Treasury possesses the unique ability to create net financial assets, it can always satisfy any accounting requirements for ensuring that its RBA account will remain in the black at all times. This includes any conceivable extreme situations, in which Treasury might feel obliged to sell newly created securities directly to the RBA. Treasury therefore has the ability to effectively create the entities that populate its RBA account. This is part of the basis for the claim that this account is an operating account, rather than a transaction account. It is a record of the federal government’s various fiscal operations, rather than a store of money. Notwithstanding any official story to the contrary, which is a carefully cultivated illusion.

Kaye LeeJuly 4, 2018 at 1:37 pm

I still don’t believe you. I have to pay tax every quarter. There is no way they could know that I have done that unless the payment is credited to their account.

economicreformJuly 4, 2018 at 2:20 pm

It is your right and privilege to believe anything you like.

economicreformJuly 4, 2018 at 2:37 pm

As I said, crediting a payment to an account does not imply that the credits within that account are a form of money. Likewise, the credits within commercial bank equity accounts (operating accounts) are also not a form of money – as the word “money” is understood by financial accountants, and as the word “money” is defined and used by the RBA as well as by the non-bank economy. The RBA defines the money supply (money used by the non-bank private sector) as either M1 (narrow money) or M3 (broad money). Neither commercial bank financial assets nor commercial bank equity (capital) is included in these definitions. Likewise for credits appearing in Treasury’s accounts with the RBA.

Mick ByronJuly 4, 2018 at 3:15 pm

economicreform

“As I said, crediting a payment to an account does not imply that the credits within that account are a form of money.”
That sounds like hogwash,
When I pay my tax every Quarter, as Kaye Lee pointed out, it’s in go old $s. Are you trying to tell me their accounts can be transformed marshmallows or shiny beads?
My neighbours big dog got up onto my verandah last night and left me a lovely nest of “barkers eggs”. Maybe I could pay with that if hard $s aren’t important ?
Tell me, The MMT Cult aren’t off shoots of the Cargo Cult are they?
You don’t do MMT P.R. for payment do you?

diannaartJuly 4, 2018 at 3:41 pm

economicreform

Your comment(s) may well be directed at Kaye Lee, however this is an open/public forum. This means anyone, even yours truly, may comment on any of the comments placed on this forum.

I am not sure what you are trying to prove – apart from consistently being contrary to Kaye Lee or anyone who holds a different opinion.

Hence, I asked for a clear and succinct opinion.

I will try to help with the following 2 questions.

Do you see any use to be made of MMT?

Do you find it of interest that Kyran has posited that conservatives have been using a form of MMT for decades? For example, part of neo-economic belief is that a nation can run on little to no taxes and little regulation/interference by a (preferably) small government?

economicreformJuly 4, 2018 at 3:45 pm

Mick: In banking, not all accounts contain money. Only transaction accounts (or arguably term accounts) contain money. A commercial bank’s capital account does not contain any entities that may be accessed by, or transferred to, a retail customer’s account (depositor’s account). It does not form any part of the money supply, as defined by the RBA (Australia’s central bank). If it sounds like hogwash to you, that is probably because you are unfamiliar with accounting principles and practices.

Kaye LeeJuly 4, 2018 at 3:52 pm

“The money (bank credit money and reserves) used for paying federal government tax is not directly credited to anything. None of it goes into any transaction account. It simply disappears from the money stock. And I do not understand why or how you think it affects the issue of Treasury securities.”

You talk about issuing bonds to keep accounts in the black. If nothing is going into or out of accounts then how is keeping them in the black even relevant, or possible?

And how come the bond issue just so happens to equate to the difference between revenue and expenditure? It sure seems to me like they issue bonds to cover the deficit. How do they even know what revenue they are receiving if it just “disappears from the money stock”?

economicreformJuly 4, 2018 at 4:03 pm

Hi again dianaart, I am not trying to prove anything. And my objective is not to be contrary to Kaye or anyone else. My objective is to answer any questions directed my way as honestly as I can, based on my long years of independent thinking about financial dynamics – which thoughts have been confirmed in my conversations with a range of economists, including MMT economists. This does not mean that I fully agree with everything that is within the MMT story. However I happen to think the main thrust of MMT is a correct description.

In regard to your questions:

(a) MMT is essentially a description of how the financial system and government finances operate. Hence I do not see it as relevant or even meaningful to talk about its use. You might as well ask what is the use of the big bang, or what is the use of the theory of evolution.

(b) I have no interest in Kyran’s beliefs or conservative ideas in general. Taxes are an indispensable part of every government’s fiscal operations, and are needed to keep a lid on inflation … without taxation there would be hyperinflation. I do not believe in small government and neither does any MMT economist, quite the contrary actually. The essence of neoliberal thinking is that neoliberals hate government and foolishly imagine that an economy can be entirely run by the private sector for the benefit of the private sector. It has never happened, and it cannot happen.

economicreformJuly 4, 2018 at 4:23 pm

Thank you for your latest round of questions Kaye, which I will endeavour to answer as best as I can.

” You talk about issuing bonds to keep accounts in the black. If nothing is going into or out of accounts then how is keeping them in the black even relevant, or possible? ”

It is relevant for accounting purposes. Even non-transaction accounts are required to abide by the rules of accounting. Keeping them in the black signifies that incoming receipts exceed spending. In the case of commercial bank capital (equity) accounts, the level of capital determines how much lending a bank may engage in, owing to a statutory capital adequacy requirement. And when a bank spends, conventional accounting requires the equity account to be marked down, as a post facto response to that spending. However no money is transferred in the spending process, it is created. Essentially the same principle is operating in regard to federal government spending.

” And how come the bond issue just so happens to equate to the difference between revenue and expenditure? It sure seems to me like they issue bonds to cover the deficit. How do they even know what revenue they are receiving if it just “disappears from the money stock”? ”

Yes, of course — this is how it is intended to appear, and the rules of conventional accounting require it. And equally obviously, the tax office knows the volume of revenue from the recorded receipts. There is no logical connection between this knowledge of the tax receipts and the disappearance of money from the monetary aggregate M1 or the disappearance of reserves from the banking stock whenever a tax payment is made.

Kaye LeeJuly 4, 2018 at 6:49 pm

“Even non-transaction accounts are required to abide by the rules of accounting. Keeping them in the black signifies that incoming receipts exceed spending.”

Exactly. So there are receipts being credited somewhere and payments being debited somewhere.

“the rules of conventional accounting require [bond issuance to match deficit spending]”

Exactly

“the tax office knows the volume of revenue from the recorded receipts”

So my tax payments ARE credited to an account.

“There is no logical connection between this knowledge of the tax receipts and the disappearance of money from the monetary aggregate M1 or the disappearance of reserves from the banking stock whenever a tax payment is made.”

That makes NO sense. Of course there is a direct connection. My bank account goes down and their’s goes up.

economicreformJuly 4, 2018 at 7:56 pm

Kaye, the point you seem to have missed is that whenever a non-bank makes a payment to either a bank or to the federal government, a transaction account within the financial system is marked down, but no transaction account anywhere else is marked up. The money supply is reduced as a result of such a payment. What you seem to have difficulty understanding or believing is my statement that Treasury’s account with the central bank is not a transaction account, and the credits within it are not money.

economicreformJuly 4, 2018 at 8:06 pm

Moreover the federal government is not constrained by the status of its Treasury account from spending into the real economy, because it has a unique and unlimited ability to create net financial assets. The ritual of topping up and then reducing the credits within its Treasury account is a post facto and sterile exercise required by conventional accounting practice.

Kaye LeeJuly 4, 2018 at 10:00 pm

“The ritual of topping up and then reducing the credits within its Treasury account is a post facto and sterile exercise required by conventional accounting practice.”

Yes. A conventional practice that means that Treasury has to balance the books between expenditure and revenue and any deficit they fund by issuing bonds.

When I had interviews with difficult people, I would deliberately up the ante on the tech speak to shut them up. I am sure you don’t mean to do that but it sometimes feels like it. If you want to inform people, then you really need to work on your communication skills.

economicreformJuly 4, 2018 at 11:23 pm

Well yes Kaye, and all budgets are so balanced by definition. Indeed I would assert that there is no such thing as an unbalanced budget.

Kaye LeeJuly 4, 2018 at 11:40 pm

Exactly. So all ins and outs must be accounted for. Not just “disappeared” or “spent into existence”. What is debited and credited in this balanced budget?

economicreformJuly 5, 2018 at 1:22 am

It is unclear to me what you mean to imply by “disappeared” or “spent into existence”. An essential feature of MMT is that a monetary sovereign government has a bottomless pit of dollars at its disposal. This is so because each monetary sovereign possesses a unique and unlimited ability to create net financial assets. This it accomplishes by deficit spending.

Kaye LeeJuly 5, 2018 at 1:41 am

“It is unclear to me what you mean to imply by “disappeared” or “spent into existence”.”

Join the club. Those are MMTers phrases and ones you have used liberally.

” each monetary sovereign possesses a unique and unlimited ability to create net financial assets. This it accomplishes by deficit spending.”

Currently it is accomplished by bond issuance that equates to the deficit spending. Because the RBA won’t let them deficit spend without a way to cover it.

Once again we are back at square one.

economicreformJuly 5, 2018 at 1:49 am

I would say that the terms mean nothing when extracted without context and placed in quotes.

economicreformJuly 5, 2018 at 11:57 am

Also, your continued use of the mantra “back at square one” tells me that you have learnt nothing useful from our interchanges, and that it has all been a waste of your time.

economicreformJuly 10, 2018 at 2:08 am

And finally, the following link provides answers – given by RBA officials – to three important and unambigously posed questions which were directed to the RBA by Fair Money Australia – in relation to how the federal government operates its finances:

http://www.fairmoney.org.au/article-2017-03-24-rba-evidence.php

The three answers provided by the RBA substantiate everything that I have written above in relation to Kaye’s many queries. If Kaye finds herself unable to understand or believe what I have said, she might care to direct her attention to the RBA’s responses on these matters.

Kaye LeeJuly 10, 2018 at 7:28 am

“If Kaye finds herself unable to understand or believe what I have said”

The article confirms that “When a certain amount of money is spent against those accounts (the OPA Group) , the numbers in the accounts go down by an equal amount and are not allowed to go below zero.” which is what I have been saying all along.

economicreformJuly 10, 2018 at 4:20 pm

The RBA seems to speak with two voices, one of which acknowledges that the credits in Treasury’s primary RBA account are not a form of money (implying that no money is transferred from any account when the federal government spends), while the other voice claims that the government spends “out of ” its primary RBA account. As a matter of simple logic, these claims cannot both be right. It is obvious that statements from the RBA cannot be trusted. Putting it more strongly, their statements may be false and grossly misleading.

Since Treasury is not a bank, the credits in its primary account cannot be banking reserves. Nor are they part of the money supply, clearly. However some mainstream economists might be tempted to regard these credits as a form of state fiat money, interchangeable with reserves. I reject this viewpoint, for the simple reason that any entity entitled to be called “money” must be accessible and used by a marketplace of players for the purpose of effecting transactions. The Treasury’s RBA credits are only accessible to Treasury. A compelling case can be made therefore that they make up a post facto record of the government’s various fiscal operations. In other words, that such an account is an operating account, but not a transaction account.

it can be added that the fact that Federal Treasury possesses the unique ability to create and distribute net financial assets means that it can top up its primary RBA account with credits whenever it wishes, and without restraint, in response to its spending – in order to accommodate the accounting convention. However in my view that accounting, being post facto, is a sterile operation.

Kaye LeeJuly 10, 2018 at 7:27 pm

But will you concede yet that when I pay my taxes the ATO account with the RBA is credited and when they make a payment the account is debited? And that they issue bonds to keep those accounts in the black? Which is what this whole discussion has really been about.

And do you have any input on how this could be achieved (by which I mean accounted for) without issuing bonds? And is it possible to answer without using arcane terminology or dismissive phrases like “sterile operation”?

Oh and the quote I gave wasn’t from the RBA. It was from the author of the article you linked to to “provide answers”, It’s under the heading “What’s going on?”.

economicreformJuly 10, 2018 at 11:22 pm

” But will you concede yet that when I pay my taxes the ATO account with the RBA is credited and when they make a payment the account is debited? And that they issue bonds to keep those accounts in the black? Which is what this whole discussion has really been about. ”

There is nothing to concede, as I have not argued against the first sentence (which is common knowledge). What I have argued is that no money is transferred, that no money is stored, and that the OPA (primary government account at the RBA) is not a transaction account. In regard to Treasury securities, there are several reasons for their issuance. In the context of this discussion, the government issues newly created securities to the private sector in order to withdraw reserves from the banking system in order to counterbalance the creation of new reserves that – of necessity – must accompany the government’s deficit spending. The RBA can be regarded as nothing more than an accounting intermediary in the overall process. As I said, in deficit spending the increase and subsequent decrease of Treasury’s account credits is a mere accounting ritual. And if that deficit spending were to be accommodated by the direct sale of securities to the RBA, then any number appearing in the OPA would be functionally meaningless.

Mick ByronJuly 11, 2018 at 6:23 am

Has MMT ever taken into consideration the ever expanding Cryprocurrencies and what impact do cryptcurrencies have on the overall MM theory?

Mick ByronJuly 11, 2018 at 6:45 am

sorry, typo’s – Cryptocurrencies {need thinner fingers 😀 }

economicreformJuly 11, 2018 at 3:38 pm

Cryptocurrencies are risky financial assets, and are not regarded by central banks as a form of money – in part because they are currently not acceptable for the payment of government taxes anywhere in the world.

economicreformJuly 11, 2018 at 6:36 pm

As a follow-up to my previous response to Kaye, it can be added that whenever the RBA buys Treasury securities from the private sector (by issuing newly created reserves) as part of its open market operations in order to manage interest rates, the government immediately goes into debt (or further into debt) to its own central bank. This is equivalent to a direct purchase by the RBA from the Treasury. And as I have indicated previously, a government in debt to its own central bank is not really in debt at all, because the “debt” may be held in perpetuity – never needs to be “paid back” – and in any case the interest returns to Treasury. Any number appearing in Treasury’s account relating to that “debt” is functionally meaningless.

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