MMT is gaining followers!

John Kelly, who writes for the Australian Independent Media Network blog posted a couple of very good articles in the last week.

John writes:

“I am not pretending to be an economist. But I am smart enough to see the difference between the government’s management of the economy and the way it should be managed. Either they don’t know how to do it, or they don’t want to, which is the more likely, and that means we, the 90% who feed the economy, are being played for fools by the 10% who feed off us and stay rich, because of us.”

Do Taxes Fund Spending

The Ridiculous Debt and Deficit Scam

If Dollars and Pounds are Really IOUs it Must Logically Follow that Government Debts Need Never be Repaid!

One common argument made by neoliberals is that government debts, and the interest payments that go with them, are potentially a burden to the next generation. You’ll hear that sort of thing all the time from politicians. Of course there is no empirical evidence for this assertion. The immediate post war generation don’t seem to have suffered from a collective war debt burden. That generation has been lucky and has done remarkably well, on the whole.

But why should this be? Let’s start from the understanding that dollars and pounds are no more than government IOUs. This view is now held right across the political spectrum. There is no real controversy. There’s no gold , no silver backing them up they are just government IOUs as described by the Bank of England.

So let’s just think about our own IOUs. Suppose we have run out of sugar and ‘buy’ a kilo from our neighbour by issuing an IOU. So our neighbour gives us the sugar and we give out an IOU. That’s how governments buy things of course.  Suppose we use up that sugar and need some more. What can we do? We can write out another IOU and give that to another neighbour and get some more sugar.

From a government’s perspective that would correspond to printing more money. After a while our neighbours lose confidence in these written IOUs , so the conventional argument goes, and therefore responsible governments should borrow funds in the market rather than just keep on printing new money. So how do we borrow back these IOUs? It’s really not possible. All we can do is offer to swap them for new IOUs called bonds. So we write out a new IOU to one of our neighbours promising that we will repay not just one kilo but two kilos of sugar but the catch is that our good neighbour has to wait 10 years to get them. If you do the arithmetic our neighbour will get approximately 3.5% interest on his bond over the ten year period. In return we get back our original IOU which we can then spend, responsibly, with a new neighbour.  Responsibly? Because we haven’t printed new money :-)  But we have printed a new bond :-(   Its better not to mention that!

So the first logical conclusion to be drawn is that there is really no such thing as government borrowing. More correctly, it should be described as government issuing. Governments issue either currency ( one form of IOU) directly or issue bonds (another form of IOU with interest) in order to get back their currency IOUs to be able to respend them.

Incidentally, if they do it the other way around from normal, and issue currency IOUs and swap them for bond IOUs the process is then known as Quantitative Easing! That’s another story!

So governments are in this odd position of never having anything except their own IOUs, so how can they possibly ever properly repay the holders of these IOUs? Governments can’t create any sugar (real wealth)  directly, how can they? So how can they ever repay their debts in any meaningful way? They can’t. They can forcibly confiscate IOUs through the process of taxation but that is not at all the same thing as repaying debts.

That all needs a bit of thinking about, but logically it must mean that no matter what governments borrow today there is no need for our children to worry about ever repaying our debts at some future time. If the government of the future time tries to impose a too high regime of taxation, in relation to what it spends back into the economy, and thereby creating recession and excessive unemployment, our grown-up-by-then children will vote them out at the next future election. At least they will if they have any sense and don’t succumb to the neoliberals of their future time who will be spinning them a yarn about debt burdens to future generations!

It is that simple.

Economic Imperialism: Fact or Fiction?

I recently wrote that no government debts need ever be repaid

I later noticed a couple of comments on Twitter along the lines of ‘not when they are created by a nuclear superpower like the USA’. So, the implication was that the USA is not paying its debts because its creditors are scared of it militarily!

In actual fact, the USA does repay its debts to anyone who wants them repaid. Anyone holding US securities can cash them in any time they like for US dollars and buy whatever those dollars will buy. Subject to US government agreement of course. China would , for example, be welcome to spend some of its US dollars on commercial aircraft from the Boeing factory , but probably not on military aircraft and it certainly wouldn’t be allowed to buy the Boeing company outright even though it has the money to do so. So there is an element of imperialism there, it could be argued.

Michael Hudson is known for his book “Super Imperialism”. Some quotes:

“Never before has a bankrupt nation dared insist that its bankruptcy become the foundation of world economic policy; that, because of its bankruptcy, all the nations what their economies transferring its bankruptcy to themselves, stultifying their industries, and paying tribute to the beggar.”

“Effectively speaking, the United States has compelled the older nations of the West to pay for the overseas costs of the US war in Asia. Whatever they may desire, the central banks of Europe had no choice but to continue to except the paper dollar equivalents annually created as the domestic and overseas deficit of the United States increase. Otherwise, the whole of shaky structure of the world monetary system will collapse into rubble. America has succeeded in forcing other nations to pay for its wars on a systematic basis, something never before accomplished by any nation in history .”

Is this at all realistic? Michael Hudson should know better than to suggest the US or any other sovereign currency issuing country could become bankrupt! MMT has shown conclusively that to be a nonsense. America doesn’t have to force the US dollar on anyone or beg that its use continue. Nearly everyone is happy to accept it, but if anyone isn’t, that really can’t be enough to cause any loss of sleep in the US!

Does it matter if Iraq wanted to sell some of its oil to Russia for Euros rather than US$? Some allege this was something the US government couldn’t allow and was the cause of their invasion. If Iraq, or any other country, had, for example, wanted to buy European airbuses rather than an American equivalent,  the US may have felt a bit peeved but as far as I know there has been no suggestion that any purchase from a foreign competitor has ever been the cause of any war launched by the US. There is a lot of arm twisting going on behind the scenes though and it wouldn’t be unrealistic to describe that as economic imperialism. But that is not what Michael Hudson meant

The USA doesn’t pay down its debts is arguably what I should have written. They hardly ever have become less from one year to the next. Anyone wanting to cash in their US securities gets paid out from the issuance of new securities and as there is a healthy demand for those securities that’s never a problem for the US government. China, and many other countries, seem to be as happy as they ever have been to swap real goods and services for what , in effect, are just the IOUs of the US government. To suggest that they have to supply radios, calculators, mobile phones etc because the are commanded at the point of a gun seems really quite fanciful and conspiratorial. Nonsense even. Anyone selling their produce into the US market can stop at any time they like. There would be many in the US who would welcome exactly that. The more the US imports, the greater both their trade imbalance and national debt  becomes.

Economic imperialism comes about largely through the activities of the IMF and to a lesser extent the World Bank. They impose the most draconian conditions in return for loans and other financial help. They will insist on the privatisation of previously successful nationalised industries for no other reason than neoliberal ideology. They will insist that governments cut spending to run balanced budgets and create pools of unemployment where none existed previously.

That’s the real imperialism which is at work today. Not just in developing countries but, with the IMF assisted by the European Commissioners and European Central Bank (the Troika),  in the heart of Europe too. It really doesn’t matter, to anyone, not the US government, nor anyone else, if any  transaction is conducted in Euros or US dollars, or Japanese Yen. These currencies are all fully exchangeable on the currency markets and can be swapped at will either afterwards or before.  So let’s get it right and identify what should be our real target for opposition instead of what we might imagine it to be.

Can government debt ever be termed good, bad or irrelevant?

There’s an interesting article by Greg Jericho in the Guardian today. It’s typical on many articles which have appeared in the left-of-centre press which criticise the unfairness of Joe Hockey’s recent budget. Greg likes his graphs and statistics to make his point but, even so, he never really gets to the nub of the matter.

For instance he claims:  “Now, I know none of this will change anyone’s view that our debt position is good, bad or irrelevant, but at the very least it gives us some proper context.”

Does it? I wouldn’t use any of the words “good”, “bad” or “irrelevant” about the debt or deficits. The parallel would be the exchange rate of the A$ and, clearly in that case, what’s good for some is bad for others, but it isn’t irrelevant to anyone.

The Australian National debt can best be understood as the store of all financial assets, held both domestically and internationally, which are denominated in Aussie dollars. So the only way the government can remove its debt is to remove everyone’s assets too. I guess we all know that instinctively as no-one has questioned the imposed “debt levy” or “deficit levy”. We all know that it will transfer financial assets to government from the private sector.

Even Norway which could afford to pay it off actually has a National Debt of some $200 billion. It needs that ND to store everyone’s assets.

So whilst the conclusion of the article is correct, ie there is no debt problem, the reasons why aren’t quite correct. The simple reason there is no debt problem is that Australian inflation is very low but unemployment is higher than it should be. End of story.  The hidden assumption of all neo-liberal economists, even the ones like Greg with a social conscience,  is that government debt can be compared to household debt. That is not at all correct for countries which are sovereign in currency issuance.

It is correct for the Eurozone countries though. They have lost the ability to issue and are now currency users like the rest of us. Which is why many of them, and many of us,  are having a hard time right now!

No government debts need ever be repaid !

No government debts have ever to be repaid provided they are denominated in their own sovereign currency. All that governments have are pieces of paper, or the digital equivalent in a computer, called currency, bonds or stock.

When bonds mature they can pay them off with currency. If they don’t have enough currency they can print some more. Or they can print some more bonds, to roll over the bonds previously issued, or create some more stock and sell them or swap them for shares of companies if they are in the process of nationalising something.

That’s all they can do. They can issue bits of paper, and tap keystrokes into their computers,  and call the end result whatever they like! But, their ability to net de-issue bits of paper is extremely limited. It hardly ever happens but when it does it is usually a mistake and is the cause of the recession that follows later.

So if no government debt has to be repaid why don’t they run up huge debts? Some would say they already have. The USA has a National Debt of $17 trillion. The UK $2 trillion. Germany $3 trillion etc. The answer, in a word,  is ‘inflation’. If that’s a problem it is a sign that governments are spending too much and/or taxing too little.

If inflation is too low, as it is considered to be in the Eurozone and Japan right now,  then it is just the opposite. The governments there need to crank-up their printing presses and start to bash away a lot harder on those computer keyboards!

Further Reading Debt is not Debt – Bill Mitchell

PS A nice D-Day cartoon from the Guardian:

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” (or what’s so hard about MMT)

Guest Post by John Armour

Last week Australia’s Prime Minister, Tony Abbott, said; “we are now borrowing to pay the interest on the money we’ve borrowed.” He added that if this didn’t stop we were “stuffed.”

This must make Abbott lead contender for the title of “The Stupidest Man in Australia.” His only serious challengers would be the Treasurer, Joe Hockey, and sidekick Mathias Cormann, who say equally dumb things on a daily basis.

Behind Abbott, Hockey and Cormann, one could reasonably nominate every member of the Press Gallery, the journalists (supposedly our best) who cover the important political issues of the day for the MSM, for the runner-up awards.

Last weekend, on the ABC’s “Insiders” program, four of the nation’s top journalists nodded sagely as one of them expounded on the necessity for “fiscal consolidation,” an oxymoron.

To those well versed in the mechanics of our monetary system it must seem as if our politicians and the press corps live in a parallel universe where black is white and water flows uphill.

Only in the blogosphere does one learn about the reality. Why is this so?

The answer seems to be that non-mainstream academic economists like Bill Mitchell decided to try using the internet to reach a wider audience, to describe how our monetary system really works, and bust a few myths, in the hope that the insights of MMT would then trickle up to policy makers and cut the rug from under the Neo-Liberal experiment.

One would have to say they have been spectacularly successful, but only up to a point.

Despite an enthusiastic lay following that seems to be growing exponentially, the advancement of MMT seems to have hit a wall when it comes to getting around the gatekeepers of the Neo-Liberal madhouse, the economists and financial and political journalists, who write for the MSM.

Keynes said the problem is not in understanding new ideas, but in getting rid of the old ones.

That’s certainly true, but MMT is just so damned confronting to deeply embedded “self-evident” truths. The instincts and “common sense” of Keynes’ “practical men” are of no help. MMT is counter-intuitive.

Proponents of MMT generally can’t understand why people don’t “get” MMT as it seems so obvious.  They may have forgotten however, that at their critical point of ‘enlightenment’ they had to jump a number of conceptual barriers to get to the other side.

In my experience, these are the six (seemingly) “impossible things” you have to believe (before or after meals, it doesn’t matter) to have any hope of ‘getting’ MMT.  Once you believe these “impossible things” however, the getting of wisdom follows quickly and logically.

The order of priority is based on my experience of the degree of ‘jaw dropped-ness’ as I’ve sought to explain to friends, family, and household pets.

(1) Taxes don’t fund anything

(2) The government doesn’t borrow from anybody to finance its spending

(3) The government’s fiscal balance (deficit) is the non-government sector’s surplus.

(4) The government creates currency by fiat (‘out of thin air’)

(5) Bond issuance is  not borrowing.

(6) Banks lend without reserves constraints imposed by the central bank.

They are of course not “impossible things” but the absolute reality of the sovereign fiat monetary system we actually operate under.

I could’ve added a few more but I needed just six to fit my literary allusion (“Through the Looking Glass”).

Warren Mosler’s great little book “Seven Deadly Innocent Frauds of Economic Policy” covers all these points in detail as does Frank E. Newman’s “Six Myths that Hold Back America.”