Monthly Archives: May 2014

“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.”

When Joe says he wants a surplus, he means for government but a deficit for everyone else!

The Australian public have just been told that: The ‘Age of Entitlement’ is over, we have been living beyond our means, we can’t afford to spend more than we earn, we are leaving an unsustainable debt burden for the next generation. Think of a neo-liberal falsehood and the chances are Joe Hockey will have used it in yesterday’s  budget speech. Most of all, we are told “we” need to move to balance the budget and achieve a surplus. Note that Joe means a surplus for government and a deficit for everyone else!

If the governments take more out of the economy than they spend back in, as they would by the definition of a surplus, and at the same time individuals and companies within that economy wish to save some of the money they earn, and if there is a drain of money from the economy to pay for net imports, then isn’t that a recipe for crashing the economy, Greek style?

There won’t even be any ‘improvement’ in the deficit. Joe knows that. All sensible economists know that depressing the economy will make it higher not lower. Tax revenues will simply fall by an equal or greater amount than the cuts he has made, as the economy spirals downwards. If he genuinely wants to reduce the deficit, if that is what is really important to him, he needs to press the fiscal accelerator pedal, not puts his foot on the brake. That way the economy grows, the tax take rises, people are more confident to spend and invest more, and as unemployment falls, workers start to pay tax rather than receive welfare benefits. If Joe hasn’t abolished those completely!

Edit: Further reading