The UK Guardian have recently set up shop in Australia. I’m not sure why. They’ve just reported that Australia is running out of money.
Lenore Taylor has just written:
Treasurer Joe Hockey warns we’re “running out of money’ to pay for health, welfare and education”. Health minister Peter Dutton says he wants a “frank, fearless and far reaching discussion on our health system.”
Lenore presumably believes Hockey and Dutton writing “They’re right about the long term budgetary problem.”
Are they really? When any politician or economist tells you we are running out of money, that the piggy bank is empty, that is just not true. All economists know that’s not true so the question is why do they lie to you? (Acknowledgements to Prof Randall Wray on that one)
Australia can run out of resources, though, and resources would include human resources. So it is possible that at some time in the future everyone will be flat out doing other things and there just won’t be enough people available to look after the elderly, teach kids in schools, or work as doctors and nurses in hospitals looking after the sick.
Is that the case now? I don’t think so. Australia has just lost its car industry and of course its unrealistic to retrain all unemployed car workers to work as doctors, nurses and teachers. It may be possible to retrain some of the younger workers though. And it should be possible to retrain the children of the car workers who may, at one time, have had ideas of working in the car industry themselves.
But who’s going to pay for it? That’s always the killer question and one hardly anyone gets right. That’s because they think the Australian government is a user of the currency rather than an issuer of the currency. Just on a point of information it is an issuer. No one else is allowed to make Australian dollars except the government in Canberra. The Australian dollar doesn’t have to be borrowed back from China or anywhere else.
Of course if the government issue too many $$ it can generate inflation. But if they don’t issue enough there won’t be enough $$ in the economy to prevent recession. If they were only allowed to issue what they received in taxes there wouldn’t be any dollars at all in the economy. So, just on a point of logic, they have to issue more than they receive back.
Of course, if the government issue too many $$ it can generate inflation Oh I’ve already said that. But it might be worth just saying it more than once in case anyone is thinking of mentioning Zimbabwe or the Weimar Republic.
Peter, do you and the other followers of MMT really believe that every Aussie dollar, whether physical or electronic, is issued by the Australian Government?
Yes, except the counterfeit ones! Every dinky-di Australian dollar emanates from Canberra. They are the IOUs of the Australian government.
That doesn’t mean that Australian banks can’t write out their own IOUs too. They use their capital base to guarantee them, usually against the Australian dollar. But in principle they can, and sometimes do, write out IOUs denominated in US$ totally without any reference to the US government. There is no way the US government can stop them even if they wanted to.
If you like you can print out this comment and cut it out. You can take it as an IOU for 20 Thai baht. If we ever meet up I promise to give you 20 Thai baht.
If you were thinking about the banks PJM, then just remember that the “funny money” they create nets to zero.
Oddly, they can’t even create “bank notes”. That’s “currency”, and only the government can make those.
So what do you pay your taxes with , John A?
OK so I want to pay a £100 or $100 tax bill. I look into my bank account and I have enough money to pay it. Right?
Well not quite, because what I have isn’t real government money. I have IOUs of a commercial bank. But anyway I go on the ‘net, a click the right buttons and pass those IOUs on to the taxman.
The taxman could say “what the bloody hell are these? I don’t want commercial bank IOUs I want real money”. But of course he knows that via the clearing system the bank will pass on some of its reserves, which is real money, to the government.
But, if my bank had happened to be the Northern Rock at the height of its troubles the taxman would have been quite entitled to say “What the bloody hell are these?”
So if it looks like a duck and it quacks like a duck it ain’t a duck?
Methinks you MMT people just play with words to suit your own weird ideas! Just about everybody but you lot call bank deposits money!
It’s a different species of duck! Look, I call it money too in normal everyday conversation. Randall Wray refers to “money things”. I prefer to think in terms of IOUs and who’s written them out.
Very (funny) good comments you make here petermartin and PJM.
This is crucial for understanding the ‘funny’ money.
Here’s RW latest on this : http://www.youtube.com/v/WcGtNTEl_MU?start=7128&end=7664&version=3&autoplay=1&modestBranding=1&rel=0&showinfo=0
btw great blog Peter : Keeping it simple!
Government money nets to zero too. In fact it might be a fundamental property of the universe that everything nets to zero. For every atom of matter there is an atom of anti-matter!
I don’t know if Australia is a surplus exporter or a net importer but I think it does a lot of trading with China, now I’m on to China and that’s maybe a good place to be, given they defied the economist in 2007/2008 and continued to see their growth maintain a healthy presence.Peter, is it not the case the China has been following a programme of MMT for quite some time now and yet Osborne doesn’t see any problem in asking China to fund/invest in our future energy market and proposed HS2 line? and ain’t it a bit crazy to think that some Chinese cities are given iou’s to the tune of 60 billion per year to further their infrastructure while Britain gets steady worse through the lack of building progress.
Australia is a small net importer. China are doing what the Japanese did for many years. They have exported more than they import and have used that surplus to build up a large store of US government securities. About $3 trillion.
They nowdon’t have as as big an annual surplus as you might think. Its about 2% whereas Germany have an annual surplus of about 7%.
Their budget balance is about the same.
I need to look into how that has changed over the years. I suspect they are scaling down their surplus and diverting their resources into home consumption which would be sensible.
Incidentally, you could say all countries follow MMT. It’s a description of how all economies actually work. Previous theories, including to some extent classical Keynesianism were developed in an era when currencies were linked to one another via fixed exchange rates and to gold via the US $.
Thanks Peter, Home consumption sounds a good phrase! if I may veer off topic slightly, is there any reason why we can’t half mortgage payments by doubling the time of re-payments? say from a 25 year mortgage to a 50 year mortgage?
“Incidentally, you could say all countries follow MMT. It’s a description of how all economies actually work. Previous theories, including to some extent classical Keynesianism were developed in an era when currencies were linked to one another via fixed exchange rates and to gold via the US $.”
Didn’t we once have some system called something like the Bretton something or other that changed or was refined in 1973, I can’t recall if it was Nixon/Carter that had a change of heart over that existing exchange rate?
Going from 25 to 50 years wouldn’t make any real difference as interest rates are very low. The UK government can ‘borrow’ as much as it likes so repayments of capital aren’t a problem either.
There was a post war conference in Bretton Woods , in the USA, which linked all the major European currencies, and some other, to the US$ at a fixed exchange rate. There were still devaluations of course, but it was a considered a big thing to do that. The US $ was linked to gold at $35 to an ounce.
That all survived until the early 70s. The US$ came off the gold standard. Other currencies were allowed to float.
So then currencies weren’t linked to anything at all. They became just Government IOUs. That was something quite major and not fully appreciated at the time. Its only just starting to be fully appreciated and the MMT group have played a big part in that.
Thanks again Peter, it seem very much like all the evidence is there to prove that MMT is and always has been the best possible option. So why are so many in denial?
MMT is kind of counter intuitive in the sense that all our own experiences are as currency users so the tendency is to think that a government is a currency user too. But once you get that out of your mind and think of government as an issuer then everything makes perfect sense.
Just as the scoreboard operator in a Rugby match can never run out of points, neither can a sovereign government (ie the UK, Japan USA but not the Eurozone countries) run out of money.
A sovereign government can issue as much as it likes and the only potential problem is inflation.
That’s an inconvenient truth for the powers-that-be in various countries. They probably don’t want that to be too widely known.
Yes! I agree Peter, for centuries we’ve followed the rule of authority and command like some kind of religion, it seems that the powers to be always want some form of under class to control, I don’t know if their insecure or just simply don’t trust people in general.
Japan is another classic case where MMT has been conducted successfully for well over a decade.It is becoming increasingly difficult to understand why the UK government is implementing so much misery onto it’s people when it’s clear! that it doesn’t have to be like this!
Re China: by simply booking a lot of government spending as investment (in the national accounts), the Chinese avoid creating large on-paper deficits, not that I think they’d lose much sleep over that.
I’d hazard a guess they can do that because the difference between the private and public sector balances is somewhat blurred or arbitrary.
The Chinese clearly understand the “flow” nature of deficit spending, “water under the bridge”.
That’s probably the most important feature of fiat monetary systems that the neo-liberal agenda ignores or suppresses, for ideological reasons, but which underpins the descriptive part of MMT.
Wouldn’t China be an example of an export led economy? Germany, Switzerland, Singapore, Norway would be others
If there is money from export receipts flowing into the economy the problem Governments have is the reverse of in the importing countries like the USA, UK, and Australia. They have to either encourage the private sector to save it or the Government has to prevent it from being spent by taxing it away.
So there aren’t any deficits. Either internal or external.
No question Peter. But the scale of infrastructure spending could possibly exceed the contribution from their export sector. We’ll never know. Some Western commentary I’ve read has suggested the ‘real’ deficit could be 5%. I think there is a limited sort of bond market.
Either way, I think the Chinese would find Western speculation amusing, as would those with just the most basic understanding of MMT.
I honestly cant understand how people can believe the nation can run out of money. Its just so illogical. Is the CB going to tell the elected leaders “no” to clearing spending wires authorized, no demanded, by the elected representatives of the people? Its just a mystery to me.
DID YOU KNOW THAT A TOWN IN ENGLAND RUNS AN ANNUAL ‘BIGGEST LIAR’ COMPETITION AND THAT POLITICIANS AND CLERGY ARE EXCLUDED FROM ENTRY?
Indeed John Armour, how a currency owning nation like China builds it’s future needs is a simple question, they just continue to keep going because the basic premise of a unit currency isn’t and shouldn’t be constrained by an elitist belief that only the wealthy can be allowed to print a lifestyle on monetary value.Money is a means to build and provide so lets do the building providing and printing.