38 comments

1. silkwormJanuary 17, 2016 at 2:00 pm

   Is this how it should operate or does operate? If it’s not how we do things now, then how do we do things now? If we do operate this way, then what’s the problem?

2. RoswellJanuary 17, 2016 at 2:01 pm

   A very intelligent post, John.

3. flohri1754January 17, 2016 at 2:20 pm

   I believe (though it would take me several more readings to confirm) that this column would support the argument that IF the Commonwealth Bank still existed as “Australia’s Government Bank” many of the neo-liberal arguments favouring austerity and the “balancing of the budget” obsession would be “off the table”. That is, that a public institution that the government would turn to for all its borrowing needs and which would charge the government no interest for such borrowings for meeting society’s needs (if such a public institution still existed) would defang the neo-liberal arguments which all too often work against society’s best interests in order to enrich an increasingly small “elite”. It would be the ultimate debunking of the Costello way of operating Treasury.

   But the private banks (which fought an unceasing war against the CBA from its birth in 1912 to 1996 when it was fully privatized) would never allow such a creature to be brought back into existence. Killed at the age of eighty-four (is that a portent?). Sigh.

4. CarolineJanuary 17, 2016 at 2:20 pm

   Everyone needs to watch the video on Green Modern Monetary Theory’s FB page. It explains it brilliantly.

5. John KellyJanuary 17, 2016 at 2:48 pm

   Silkworm, yes, this IS THE WAY IT OPERATES NOW! The problem is that neo-liberal macroeconomists don’t want you to know this. They prefer the household model because otherwise, we would not have such a disparity between rich and poor.

6. John KellyJanuary 17, 2016 at 2:51 pm

   flohri1754, we DO have a public institution that the government turns to for all its borrowing. It’s called the Reserve Bank of Australia. This is where all our present debt is issued.

7. WallyJanuary 17, 2016 at 5:57 pm

   Thanks John.

   I will need to read this a few times to get my head around it completely but combined with your previous posts it all makes sense.

8. petermartin2001January 17, 2016 at 6:02 pm

   Yes a good article. The problem we all have is that our understanding of money is based on our experience as currency users. We have to earn money first then we can spend it later. Or we have to borrow it first then spend it later.

   Hardly any of us have any experience of being a currency issuer. So we have to imagine ourselves being in that position. If we can do that then it’s not to difficult to see that everything works the opposite way around from what we are used to.

9. JohnBJanuary 17, 2016 at 6:48 pm

   Another great post from Bill Mitchell – it amazes me the apparent ease Mitchell demonstrates in producing his almost daily ‘brief’ blog postings (his ‘brief’ is around 800+ words), each containing extensive detail and complexity – but generally expressed in ‘jargon busting’ lay terms.
   He always applies sound logic to the (intentionally) muddied waters of National fiat currency economics.

   I wish our so called political economic experts had the guts to consult or debate Mitchell on his analysis of proper economic management – no political group has the courage to publicly discuss (let alone adopt) his economic truths.
   Rejection by the LNP I understand – it is contrary to their sponsored objective of advancing neoliberal ideology, but for the ALP, Greens and other independents it is a copout. – they choose to stick with the status-quo, even though Mitchell’s applied logic/basic math effectively shows their economic thinking is locked into a ‘gold standard’ time warp.

   So called ‘progressive’ economic platforms contain neoliberal statements such as:
   Greens – “… Government financing should be responsibly managed so as to minimise intergenerational debt…
   ….the additional revenue required should be raised by taxing polluting industries….
   …to remain a universal health insurance system funded from progressive taxation….”

   The ALP have (strategically?) stepped around the issue, but still have clauses like:
   “…Future tax reforms will: Ensure there is a sound revenue base for all levels of government…..
   ….Labor will deliver a fair and sustainable tax system. This should provide incentives for all Australians to work and undertake productive enterprise, while guaranteeing adequate revenue to fund the proper role of government….”

   MMT convincingly demonstrates that taxation is not the source of government ‘spending’ revenue, but a tool for equitable economic load distribution and implementation/provision of social objectives/structures, an instrument of managing employment and economic activity.
   The domestic and international wealth base for new spending results from the nations stable, efficient, productive mobilisation of its available resources – economic strength emanates from a vibrant sustainable, fair social/business system.

   Yet none of the major party’s leadership can bring themselves to confront/debate issues directly pertaining to everyday macroeconomic reality.
   Dismissive retorts from politicians such as “I disagree”, are no longer good enough – there are some sound practical issues here that need proper examination and consideration.
   Cognitive dissonance anyone ??

10. JJJanuary 17, 2016 at 7:21 pm

    While I appreciate that the author intends to illustrate the confusing state of affairs. A flow chart would help immeasurably to actual comprehension, thus understanding, and thereon to the ability to communicate to others.

11. totaramJanuary 17, 2016 at 8:28 pm

    I have said it before and I’ll say it again: Many people can just say “I disagree” or even more forcefully ” I don’t accept MMT”. So it is better to start with the National accounting identity and the sectoral balances (which form the basis of MMT but which mainstream economists don’t want to talk about because they are already too confronting to them). It is very hard for someone to say ” I don’t accept accounting”.

    Once you get people to see that the Government “debt” is less than the “private sector” debt by a huge amount, they begin to wonder why we should worry more about the former than the latter. Then you also tell them that the Government cannot default on its debt (another hard sell – “but what about Greece?” ). At that point you bring in the difference between currency issuing nations and currency users like Greece. At that point people are “sort of” ready to understand how the system really operates, which is what the above post is about.

    With regard to the actual operations, as described above, I am a little unclear about whether treasury can simply credit accounts with spending amounts, without issuing bonds equal (in value as obtained by sale through tender) to the spending amount. Hence the talk of “borrowing to spend” and the “interest paid on deficits”. Someone needs to explain or explore this little detail.

    So when John Kelly says that the “we DO have a public institution that the government turns to for all its borrowing. It’s called the Reserve Bank of Australia. This is where all our present debt is issued”, This is not STRICTLY true. Debt is issued by treasury by selling bonds. The RBA buys and sells bonds to maintain the interest rate as explained above. I am happy to be corrected if wrong.

    The point here is to get it absolutely right regarding the actual operations so no one can then find fault and say “gotcha!”.

12. Glenn KJanuary 17, 2016 at 8:52 pm

    the added complexity to this explanation is when one considers imports / exports. Whilst a currency issuing government uses many levers to manage the total amount of money in the economy for interest rate maintenance and inflation / deflation; the “fly in the ointment” is the cost of imports. Imports must be paid with an outflow of currency and the value of the currency is linked to many things outside of the currency issuers borders which must be considered. I am being a bit simplistic here, but this is another knock against Free Trade Agreements, which should more properly be called Corporate Trade Agreements. Tariffs are a monetary control mechanism which have been too easily given away by governments.
    Happy for someone to correct me if you think I’m wrong, or provide greater clarity.

13. NeilWJanuary 17, 2016 at 9:49 pm

    Government spending *causes* taxation and an increase in private sector financial saving that balances the initial spending – to the penny. It does this for any positive tax rate by virtue of a simple arithmetic progression (my income = your spending less tax). The level of saving is what is known as the saving rate of the nation and after a few capital transfer jiggle that translates into what the politicians call ‘the deficit’, but what should actually be called ‘our savings’.

    This whole financial process can be summed up in what should probably be called Mitchell’s Law: “spending creates its own funding”.

14. NeilWJanuary 17, 2016 at 9:58 pm

    “Imports must be paid with an outflow of currency”

    Nope. That is a mistake of viewpoint. You are looking at a country view and seeing the wrong thing.

    Imports are paid with exports. It is in fact a simple swap transaction. When you buy imports with Aussie dollars, you’re not actually buying the imports. You’re using the FX system to pay for somebody else’s Aussie exports (because of course the foreigner has the ‘wrong’ sort of money to be useful to Aussie exporters). Then the parties essentially ‘swap’ the real goods – you get the imports you want rather than the exports you actually paid for.

    That rule holds even if there are more imports than exports. It’s just that the export that pays for the imports is then called ‘Financial savings in Aussie dollars’.

    If the foreigner trying to sell those goods refuses to accept those savings, then they simply won’t sell the goods in the first place and their own economy contracts. Difficult if you’re an export-led economy like Japan, or China. So instead they take your ‘foreign savings’ and bury them in vaults never to see the light of day again. That way they keep their own currency low and the exports flowing while simultaneously removing monetary flow from the target country. In the case of Aus, that’s because you have a government that doesn’t understand MMT.

    Watch how the Chinese ‘peg’ slips over the next few months. That way you know they are trying to collect more foreign savings and save their own industries from recession.

15. JohnBJanuary 17, 2016 at 10:00 pm

    totaram January 17, 2016 at 8:28 pm

    Re “So when John Kelly says that the “we DO have a public institution that the government turns to for all its borrowing. It’s called the Reserve Bank of Australia. This is where all our present debt is issued”, This is not STRICTLY true. Debt is issued by treasury by selling bonds. The RBA buys and sells bonds to maintain the interest rate as explained above. I am happy to be corrected if wrong.”

    As I see it….all from Govts. accounts point of view:
    Fiat currency issued by the sovereign govt. is essentially publicly issued debt – issued money is a promise by govt. to pay holders of that currency the value represented by the currency token (in gold standard convertible currency days, they promised to deliver gold in exchange for those ‘notes’).
    So, money spent into the economy is in itself govt. debt issued to the private sector.

    When it comes to issuing bonds, the govt. issues interest bearing promissory notes to private sector buyers (banks) in exchange for the return of an equivalent value of (debt in circulation) currency delivered from the private buyer (bank).
    So, in effect, the govt. exchanges an interest bearing contract (govt. debt in another form) for the buyers return of previously issued govt. debt (currency) – a govt. paper contract debt created in exchange for already issued currency debt. It is irrelevant who is buying the bond (provided the transaction is denominated in AU$).

    For the govt, that transaction is effectively (except for the additional interest liability) a one for one swap – with no change in aggregate govt. debt level.
    Bond sales are thus seen as an interest (target) control tool.

    Please correct me if I’ve got it wrong.

16. bossaJanuary 17, 2016 at 10:56 pm

    This subject needs to be framed in such a way that the “average punter” can understand it and this article did not do this.

    I feel that the terminology needs to be defined so that people actually know what is being discussed. e.g. The word debt has a very different meaning for a household than a sovereign government.

17. Matters NotJanuary 17, 2016 at 11:11 pm

    The more I read re the experts explaining MMT, the more confused I become. I suspect that sometimes the fault lies with ‘sloppy’ use of language and the inability to provide ‘conceptual’ clarity. At other times …

    Above I read:

    You are looking at a country view and seeing the wrong thing

    FFS. What the hell is a ‘country view’? As for ‘seeing the wrong thing’, again please explain.

    But the inability to communicate goes on. Try this piece of nonsense.

    When you buy imports with Aussie dollars, you’re not actually buying the imports.

    Hilarious! So you can actually buy imports with Aussie dollars. The writer’s simple assertion. But hold on because you’re not actually buying the imports. My question is why does one assert that you are buying ‘imports’ with Aussie dollars and immediately assert that ‘you’re not actually buying the imports’.

    Not sure which of the two assertions above I am meant to take seriously because they seem contradictory. And if the writer can’t see that they are contradictory then it’s ‘game over’.

18. Matters NotJanuary 17, 2016 at 11:33 pm

    bossa wrote:

    subject needs to be framed in such a way that the “average punter” can understand it

    So true! And I suspect that many of the adherents don’t understand it as well.

    terminology needs to be defined so that people actually know what is being discussed

    Are you suggesting that the ‘debate’ needs conceptual clarity at any number of levels? John Quiggin thinks so as well.

19. GlennKJanuary 18, 2016 at 7:04 am

    to NeilW, thanks for that clarity on imports/exports. Though it raises more geopolitical questions for me. Take the example of China. With all their FX in vaults – effectively retired – is it not a weapon they can use to push another country’s currency down by releasing it, so to speak? Or in the case of the USA, pushing their currency down to reduce the value of China’s FX reserves?
    Of course, this trading of imports/exports is a key lever in terms of exchange rate values.
    I had not considered your point that foreign income would be “buried in vaults” by other countries. But this makes sense when one accepts MMT as how our system works. hmmmmm

20. John KellyJanuary 18, 2016 at 8:03 am

    You will find this explanation of what happens with import and export dollars on page 36 of Warren Mosler’s book, ” The Seven Deadly Innocent Frauds of Economic Policy”

    So how do we pay off China

    Those worried about paying off the national debt can’t possibly understand how it all works at the operational, nuts and bolts (debits and credits) level. Otherwise they would realize that question is entirely inapplicable. What they don’t understand is that both dollars and U.S. Treasury debt (securities) are nothing more than “accounts,” which are nothing more than numbers that the government makes on its own books.
    So let’s start by looking at how we got to where we are today with China. It all started when China wanted to sell things to us and we wanted to buy them. For example, let’s suppose that the U.S. Army wanted to buy $1 billion worth of uniforms from China, and China wanted to sell $1 billion worth of uniforms to the U.S. Army at that price. So the Army buys $1 billion worth of uniforms from China. First, understand that both parties are happy. There is no “imbalance.” China would rather have the 1 billion U.S. dollars than the uniforms or they wouldn’t have sold them, and the U.S. Army would rather have the uniforms than the money or it wouldn’t have bought them. The transactions are all voluntary, and all in U.S. dollars. But back to our point – how does China get paid?
    China has a reserve account at the Federal Reserve Bank. To quickly review, a reserve account is nothing more than a fancy name for a checking account. It’s the Federal Reserve Bank so they call it a reserve account instead of a checking account. To pay China, the Fed adds 1 billion U.S. dollars to China’s checking account at the Fed. It does this by changing the numbers in China’s checking account up by 1 billion U.S. dollars. The numbers don’t come from anywhere any more than the numbers on a scoreboard at a football come from anywhere. China then has some choices. It can do nothing and keep the $1 billion in its checking account at the Fed, or it can buy U.S. Treasury securities.
    Again, to quickly review, a U.S. Treasury security is nothing more than a fancy name for a savings account at the Fed. The buyer gives the Fed money, and gets it back later with interest. That’s what a savings account is – you give a bank money and you get it back later with interest.
    So let’s say China buys a one-year Treasury security. All that happens is that the Fed subtracts $1 billion from China’s checking account at the Fed, and adds $1 billion to China’s savings account at the Fed. And all that happens a year later when China’s one-year Treasury bill comes due is that the Fed.
    removes this money from China’s savings account at the Fed (including interest) and adds it to China’s checking account at the Fed.

    The crux of the issue is that with export and import income, no money actually leaves the country.

21. Glenn KJanuary 18, 2016 at 9:30 am

    Thanks John. interesting. Then it goes back to the very basic issue of a country having productive capacity – without this then the currency is worthless. Circle back again on this, and austerity measures stifle productive capacity and send an economy gurgling down the drain in the wrong direction – exactly opposite of what should be done…. correct?
    My original point here where I was thinking about import/export is that with more imports than exports, something very real has to leave the country to pay for it. I was thinking hard currency, but probably more correctly it is productive capacity – something produced (be it goods or services). Is my thinking correct? If so, then really a govt’s economic policy should all be geared around maintaining and expanding productive capacity (leading to management of unemployment rates, interest rates, money supply, etc etc)

    am I missing something ?

22. John KellyJanuary 18, 2016 at 2:41 pm

    Glenn K, while the money to pay for imports does not leave the country, it is taken out of circulation. It sits in the relevant RBA account of the receiving country and cannot be accessed. Money received for exports also sits in a foreign central bank account but is offset when the RBA credits the account of the exporter. Everything else you have said is correct.

23. Glenn KJanuary 18, 2016 at 4:43 pm

    Thanks John K. I was missing the understanding that no money actually leaves the country. But most people would not see it this way, and I still struggle with parts of that…… Think about when the USSR collapsed and Russia was raped by Multinationals and corrupt officials. There was a massive exodus of $$$ out of the country, collapsing the rouble. I suppose this occurred because the $$$ was not sitting in a reserve bank ledger but in actual banks accessible to the public. I recall reading J. Stiegliz’s comments in a book that the IMF could actually identify funds they were transferring into Russia to prop up the rouble, getting transferred to Switzerland within 24 hrs…

24. ka-chingJanuary 18, 2016 at 5:36 pm

    Australia Needs Money CREATION Reform And Honest Sovereign Money Policies.

    A letter to the Australian Ministers from Christopher Brooks
    The money creation racket is in essence so simple in method and yet so vaste in effect it is almost impossible for the human mind to contemplate that mankind could be deceived with such devastating impact over so many generations.

    I (Christopher Brooks) ask our politicians three simple questions!

    Do you understand where our money is created and the effects of the private money creation monopoly?
    Why do we choose money slavery over money freedom?
    If my referenced material or proposition is wrong please explain exactly where and how it is in error?

    Why does the Australian Parliament not exercise it’s rightful sovereignty over our money supply and economic life by issueing sensible quantities of credit through a common wealth agency on terms and conditions that benefit Australian interests?

    This correct and achievable action would save our Nation many billions, potentially tens of billions, of debt servicing cost every year.

    http://gumshoenews.com/2015/02/12/australia-needs-money-creation-reform-and-honest-sovereign-money-policies/

25. John KellyJanuary 19, 2016 at 9:50 am

    Yes Glenn, that was all private money, handled by commercial banks.

26. jimhazJanuary 19, 2016 at 10:12 am

    [This subject needs to be framed in such a way that the “average punter” can understand it and this article did not do this]

    That is because it cannot be other than contextually wrong. It is still seeking a free lunch. Might work for a short time, but cannot possibly be correct on the long term scale.

27. Matthew OborneJanuary 19, 2016 at 10:13 am

    Having unemployment a mechanism is cruel. We saw under Howard as unemployment got lower we started getting interest rate rises to put the brakes on the economy.

    A very nice way of saying sack thousands of people.
    Yet the people who are sacked are leaners who don’t want to work and therefore need to be prodded to all get jobs.

    Last year I discussed my view with a friend who said some people just don’t want to work.

    The common sense view would be to hope some people don’t want to work because the system needs a pool of unemployed and it is soul crushing for those who desperately want to work not to have jobs.

    We know since Howards time many more people are unemployed, presumably those people want to get back into paid employment, it would be a freaky coincidence if laziness conveniently coincided with demand.

    Obviously it doesnt coincide with demand.

    This government has accepted far fewer disabled people onto the pension, arguing the pension is set and forget, yet leaving disabled people on newstart is again just cruel,

    The Monetary system as it stands creates people to demonise.

    The government could provide employment but the argument will be they shouldnt because of the cost to the budget.

    Money is little more than a form of measure this particular form of measure has been twisted out of recognition from what can lawfully be practiced.

    Simply put we could employ all but we cant because we need a measure. How ridiculous when evidence suggests the newstart payment causes depression. We have a welfare safety net that actually causes depression in people relying on it.

    How does that help us?

28. Sen Nearly IleJanuary 19, 2016 at 12:49 pm

    It looks like we were lucky that our swan wasn’t mute in 2007, unlike the current flock.
    The article highlights the difference between slogans and truth. ‘debt crisis’ was easy to remember but rubbish the truth difficult to explain and was bloody impossible to understand. The voters preferred their own interpretation via rupert, koch, the today 9 twits and the abc regional rabbotts. So no opposing slogans the coalition economic claptrap rules.
    ps what a great day for a treasurer to be born!!!

29. RoswellJanuary 19, 2016 at 1:33 pm

    According to the OECD Swan prevented Australia from going into recession during the GFC and also saved 230,000 jobs. According to the then Opposition the GFC didn’t exist.

    Damn. Who to believe. 😉

30. Neil of SydneyJanuary 19, 2016 at 2:03 pm

    A very nice way of saying sack thousands of people.

    Under the Howard govt unemployment always went down. It was at 8.3% in 1996 and ended up at 4.3% in 2007. No Australian had seen an unemployment rate with a 4 in front of it since the 1970’s

31. WallyJanuary 19, 2016 at 7:10 pm

    Neil of Sydney

    No good comparing unemployment rates prior to and early in his term because John Howard changed the criteria on what was considered to be employed.

32. cornlegendJanuary 19, 2016 at 8:18 pm

    Wally
    Yeah, pretty easy to fudge using the Howard doctrines .
    Classed as employed after 1 hour paid employment.
    I assume the Green Army and Work for the Dole Schemes would be a LNP accounting trick as well
    Volunteering ?
    probably counted too, knowing these LNP scumbags

33. Sen Nearly IleJanuary 19, 2016 at 9:32 pm

    spot on roswell but we may be the only two who believe swan’s ploy of protecting our deposits rather than the banks was of genius proportions and two swallows who can point to eire who protected the banks and is just recovering, do not, a labor summer, make.
    Someone in labor has to act????
    ps wayne seems forgotten. Why?????

34. Neil of SydneyJanuary 20, 2016 at 9:26 am

    Classed as employed after 1 hour paid employment.

    Actually you are classified as employed if you work for one hour paid or unpaid. But working one hour/week to be counted as employed is an international standard. It is used in all OECD countries and has been used for a long time.

    It was codified by the ILO (International Labor Organisation) in 1982 and was used well before 1982 as a definition for being employed. John Howard had nothing to do with it.

35. Glenn KJanuary 20, 2016 at 6:33 pm

    what Labour did to get Australia through the GFC was absolutely brilliant. And I’m a Green voter btw. Labour’s mistake was a failure to get the message out of their success. Drowned out by the scumbag Abbott.
    By all accounts the rest of the OECD recognize Australia’s success in getting through the GFC. Wish Australian voters would……

36. Henry rodriguesJanuary 21, 2016 at 2:45 pm

    Thanks for this very enlightening article. Makes me more convinced that people with limited economic knowledge should not be allowed anywhere close to crucial policy making, for the sake of the country.

37. PJPJanuary 22, 2016 at 1:03 pm

    @ Henry rodriguez

    But it was those supposedly with ‘expert’ economic knowledge who are responsible for creating the fraud that is the banking system and the world economy as we see it.

    A couple of things, getting degreed and accepted into the stable of economists means one is a Keynesian and will therefore toe the line regarding the prevailing economic thinking, or put another way not rock the boat (even though it is sinking)

    At best economics is a voodoo science (a bit like trying to measure global temperature as a comparison) especially when half of economists disagree with the other half and NO ONE knows which way the markets will go (unless they are the ones rigging them of course – see LIBOR for example)

    So because they can’t all be right then someone is dead wrong – even though they are all still ‘experts’!

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