Federal budget is not like a household budget

Cross-posted from The Conversation:

Treasurer Joe Hockey is experiencing difficult times. Deteriorating terms of trade and an uncooperative senate mean that he cannot deliver the surplus when he said he would and he cannot continue to cut government expenditure without risking a recession.

I have some comforting news for Joe Hockey: the importance of the whole deficit/surplus thing has been greatly exaggerated – with a lot of help from Joe himself of course. The focus on deficits and surpluses distracts us from what’s really important in the macro economy.

Hockey and Abbott are very fond of using household analogies when discussing government finances – Hockey again compared Australia’s economy to a household budget in his Mid-Year Economic and Fiscal Outlook. However, a government that is sovereign with respect to its own fiat currency bears no resemblance at all to a household. Such a government creates the money we all use, either physically on a printing press or, more importantly, electronically in the accounts of financial institutions.

Licence to print money

Everyone understands that governments can create money. Most people also understand that governments don’t just create all the money they need for all the things people want because it would cause inflation. Inflation is the devaluation of money. If you have a really good season for growing apples and there is a glut, the price of apples falls. Similarly, if you have a glut of money, the price of money falls. That’s inflation.

So, here lies the key insight. Inflation is the limiting factor for government expenditure, not taxes or borrowing. A government that can create money doesn’t need your money from taxation or from borrowing in order to spend. There is no limit to how much money a sovereign government can spend, but if government spending plus private spending exceeds the productive capacity of the economy then you get inflation.

The real calculation faced by government should not be about how much money the government has – it has an infinite amount. The calculation should be about the capacity of the economy to absorb government spending without driving inflation.

Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.

The slowing Australian economy combined with the dramatic fall in global oil prices mean that inflation is set to fall and unemployment is rising. This is precisely the kind of environment into which the federal government could spend without borrowing (i.e. create money). Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.

The government could spend more

Can the government just spend as much as it wants on whatever it wants? Of course not, the result would be out-of-control inflation. Can it spend a lot more than it currently is without substantial negative consequences? Absolutely.

The much discussed “quantitative easing” in the US, UK and EU is an example of this kind of spending (though very poorly targeted). The US Federal Reserve has created trillions of dollars out of thin air and used it to buy risky financial assets and government bonds in order to take the risk off the balance sheets of financial institutions and improve their supply of money. The money was created with keystrokes on a computer which simply credit the accounts that these financial institutions hold with the Federal Reserve. There has been no runaway inflationary impact of this “printing” of trillions of dollars.

This reality of fiat currency is very difficult for many people to grasp but it’s not quite the magic pudding that perhaps it appears to be. When a government creates money, it isn’t creating value from nothing. The value lies in the human and capital resources that are underutilised in the economy. The money created by the government is simply the lubricant needed to mobilise these resources.

So, productive government spending is limited by the capacity of the economy to provide the goods and services that the government wants to purchase plus the goods and services the non-government sector wants to purchase. During economic downturns, and especially in recessions, there is spare capacity in the economy which can be employed by government. It’s possible, with this in mind, to quite easily return to the post-war days of genuine full employment even during an economic downturn.

Some basic realities

Until people understand the basic realities of monetary economics we cannot have a meaningful discussion of government finances. Rather than worrying about deficits and surpluses we should be asking whether the economy would benefit from greater or lesser government expenditure or taxation. This calculation balances unemployment, spare capacity, and the need for infrastructure and services against inflation risk. It’s a complex calculation but the underlying principles are pretty straightforward.

Let me just restate for emphasis: the need for balanced federal budgets is a myth. Like many myths, it does have some factual historical origins. Back when currencies were backed by gold it was possible for governments to go broke. Because modern currencies are not backed by anything material, sovereign governments cannot run out of money and can never be insolvent in their own currency. Somehow, mainstream political thinking hasn’t kept up with the dramatic changes in the monetary system that occurred more than 40 years ago.

The first of our politicians to really understand this and to communicate it effectively to the public will have at their disposal the tools to completely reshape our economy for the better. I know politicians can be slow off the mark but 40 years is long enough. It’s time they caught up.

Article by Warwick SmithResearch economist at University of Melbourne 

Unconventional Economist


  1. MB editors going to provide some comment on this article?

    It is anathema to what they have been preaching

    Also waiting for Flawse to respond

    Genuinely curious to see an MMT debate

    • Maybe, what really matters is what exactly is the deficit funding? If it’s capital formation in productive industries whose “unlokcing” of productive capacity will pay back the deficit many times over, then no problem really. If it’s funding consumption today at the expense of 28 year olds like me tommorrow, then there may be a problem. Real question is, what is our deficit funding?

    • Cant see much wrong with it apart from the exclusion of the shadow banking system (which is a pretty big exclusion but made to make the point about federal budgets) – we live in a modern monetary world, not a commodity backed monetary world. Money is not “real”.

      But reality is all about what people perceive their world to be, and policy prescription is more about what can be done, not what should be done.

      I’ll leave it at that.

      • Well – you shouldn’t leave it there.

        The governments of the US and EU and China have been engaging in flat out global fraud. Printing money on a massive scale and simply flooding it into their financials – stocks, funds etc.

        This has leaked out looking for homes – Australian, Canadian, American, New Zealanderishians or whatever they are.

        Australia if it were responsible would use QE to generate massive infrastructure projects – rail, NBN etc putting money directly into the pockets of working Australians and pump the economy into life.

        I am a massive opponent of MMT as it a pandoras box which leads straight to global depression via currency wars – people need to realise this. Its happening now.

        Once you start the process, as evidenced, why stop – like war, weapons, nukes, carbon emission – others are doing it – I will to.

        The net result is a global devaluation of all currency resulting in massive inflation rendering all currencies irrelevant forcing a return to commodity backed currencies. Not a bad thing in the end like most radical solutions – raising rates.

        That said – not engaging in the wilful act of global destruction is painfully poor competitive practice – we could have a shed load of great national toys before the shit hits the fan which is what is going to happen anyway.

      • “I’m a massive opponent of MMT”

        May god save us all. If you don’t understand the system then fine, learn it.

        What you are saying is I don’t like driving on the left had side of the road so I’ll drive on the wrong side and take my chances.

        Best of luck with that idea.

      • Peter,

        It is somewhat misleading to conflate the operations of the monetary system with MMT.

        Insofar as MMT puts a spotlight on those operations that is fine but to suggest that MMT is just a description is misleading.

        It is not just accounting.

        If that was all it is about it would be quite boring.

        Clearly, it is political and the ‘just accounting’ line is merely a cloak.

        What is not so clear is the nature of its politics because so many of its supporters deny it – even while they are clearly very interested in politics.

        Basically MMT provides an explanation of how governments can be much more interventionist in the economy.

        It is the nature of the intervention that is interesting and in that regard a lot of MMT supporters can be quite vague as to how they believe governments should use this intervention.

        I think people should ask plenty of question as to what government is to do and how it is to be controlled when let off its fictious fiscal leash.


        The above is a good read.

    • It’s not quite as simple as printing. When a government spends into the economy it also creates a debit ledger entry that balance equally with the extra money created.

      Thus all money is created by debt. When people call for the elimination of debt, they are also calling for the elimination of money.

      The issue is having a balance that is appropriate for the size of the economy.

  2. “I have some comforting news for Joe Hockey: the importance of the whole deficit/surplus thing has been greatly exaggerated – with a lot of help from Joe himself of course.”

    Therein lies the problem. It’s an political problem as much as it is an economic one given the general aussie populace belief that surplus = good, deficit = bad, no matter what the deficit is funding.

  3. Something was missing from that article now what could it be ?

    Yesterday, upon the stair,
    I met a private banking sector who wasn’t there.
    It wasn’t there again today,
    I wish, I wish it would go away…

    It might have been very helpful if the author had made the point that the government is not the elephant in the room when it comes to driving inflation and deflation.

    It is the private banks and their endogenous money creation methods.

    Had he made this point he would have been able to explain that as the RBA bait rate campaign finds it hard to catch the unwary, it is likely that the slow rate of debt expansion will start emitting deflation death rays and the government will be faced with the choice:

    1. Maintain the money supply by running a deficit – preferably by cutting taxes in some equitable manner.


    2. Allowing deflation death rays to grind the economy through an old testament debt purification ritual.

    “… Somehow, mainstream political thinking hasn’t kept up with the dramatic changes in the monetary system that occurred more than 40 years ago…”

    Skippy – that is a Dorathy Dixie that you should find irresistible.

    • +1 pff

      The whole artificial complexity of our monetary system has been created by the finance industry to hide their parasitism and create their relevance and power

  4. I’d be curious to know how the banks would deal with the excess reserves that build up as a result of such a policy.
    Not a problem in the US where deposit rates are close enough to zero but costly in Aus at around 3%.

  5. I’m sure it won’t be hard for Joe to sell the benefits of higher inflation to Australians saddled with huge debts.

    • He doesn’t want to sell anything to Australians, he wants to stop from being assassinated by the bond holders and banks.

      Inflation is exactly the last thing they want. Moderate inflation would take a lot of air out of the imbalances we have created in our economy but nobody gets rich when that happens.

  6. As someone who grew up in the 1970s I always smile when I read about the Federal Reserve’s problems in raising inflationary expectations.

    If Rip van Winkle had fallen asleep in 1981, what would he make of a world in which central bankers struggle to keep the inflation rate up.

    • True Stephen

      Peak debt + peak (western) population + automation/robotics/computing = natural deflation

      • Exactly, deflation is really a tribute to our ability to produce things easier.

        The issue is that a ford cost $500 in 1950 built in SA and will cost $30,000 and built in Korea in 2016.

        Productivity hasn’t reduced prices but has increased their obtainability. We can get more stuff for hours worked.

        We need more inflation, the issue is this will further the divide in equality. (As we are seeing in Australia as true inflation is driven by loans…)

        Taking out huge loans is the only path to riches as inflation which is paid for by taking more from the worker which (he may or may not notice due to productivity gains)

        I think our greatest issue is that we have actually reached a slowing down of the rate of productivity. We leaped from working with horses to john deers

        We cant really become more productive (at least not explosively more productive like the 1950’s -> 2000 and our system of endless inflation never work this out.

        I agree with leviathan, we should aim for some shiney toys.

        I wish economics aimed more for quality of life and not supporting the value of items.


  7. You could say it it this way for example- a currency like the dollar exists largely as numbers on spread sheets””

    December 8 at 4:25am · Edited · Like · 2

    That is all it is only some of those numbers are in red ink and some of them in black ink.

  8. Money in the Soviet Union
    In developed market economies, the fundamental types of money are cash (coin and currency) and the private checks of households and businesses. In the Soviet Union (as in most other STEs), there were few private checking accounts. Nevertheless, there was something like a checking account in the enterprise sector, and that was “bookkeeping money” on account with Gosbank.
    Indeed, these bookkeeping accounts were the only type of money used between one enterprise and another. Whenever one enterprise shipped its output to another enterprise which used it as input, the Gosbank account of the “output-enterprise” would be credited, while that of the “input-enterprise” would be debited. In this way, goods made their way through the production process without occasioning any exchange of cash.
    Besides this “bookkeeping money,” there was cash, which was used for only two purposes. First, enterprises paid their workers with cash provided by Gosbank (the account of the enterprise would be debited). Second, households purchased goods with cash, which was then turned over to Gosbank (the account of the store would be credited).
    The participation of Gosbank in virtually every financial transaction not only provided the financial clearing operations for these transactions to take place, but also enabled Gosbank to closely monitor adherence to the production plan. This monitoring function of Gosbank was known as control by the ruble.

    Da comrades, it work first time round good


      • Dude Vassar… bespoke I went to a “real” university F*&ktown edumicatioanl enterprise…. cuz it cost more… lmmao…

        My wife went to St. Hilda’s whats your point again, masturbation of some quality.

        Skippy… waiting for answer to simple direct question

      • kippy… waiting for answer to simple direct question

        WTF are you talking about? Fortune cookies?

      • Where was it put? Is reiteration a skill to far for you?

        BTW what f#ck difference does it make where your wife was nursed?

      • skippy said that money is an accounting system. Why is that difficult to understand.

        Money in itself has zero intrinsic value, but it can be converted to real goods and services which have value.

        If you went to your local pub and mowed the lawn in exchange for 20 schooners, then the publican would write 20 on the slate and as you drank each schooner one would be wiped off.

        No different to our banking system – the publican created 20 schooners on a slate.

      • No no no there’s why you guys like to make sh#t, what it would be really like is if the publican gave empty air because really that’s all he has…

        Accounting requires something to account for — this what you guy are doing and want us swallow:

        I draw up a contract with my self to loan myself USD5 Trillion, I then plug it all into a spreadsheet and start pay it off, now because I’m current on my obligations I have good credit and should be able to take my spreadsheet to the market/bank and say, hey I have 5 trillion in assets than I’m current on, who’ll loan 2 against it? This is your MMT derivatives mad house!

      • Ricardo was a moron with hugely self-inflated delusions that he somehow managed to infect the future with, the Surplus, like you, are just more morons who think economics is hard or has to be managed.

      • Tell you what Pete, if I turn up a week later and the pub is closed down, what happens to my beers mate?

      • Same as what happens if you invest in a dud investment – you do your dough. That has nought to do with monetary theory – I presume you know that.

        Learn to drink faster.

        You lose your asset of 20 beers and the publican loses his debt of 20 beers and it all balances perfectly.

      • Nah Pete, you’re not getting away with that hand-wave mate, you say the government can’t ever run out of beer! A patently stupid remark!

        You lose your asset of 20 beers and the publican loses his debt of 20 beers and it all balances perfectly

        Really? So why do banks need capital buffers? How come I’m not a secured creditor with seignorage?

      • It’s not handwaving. The publican doesn’t have the capacity to brew you another 20 beers (lets leave boutique brewers out of this) but when we look at governments they have an endless capacity to create digits on an excel spreadsheet.

        Of course a responsible government won’t spend recklessly, but what we have is a government who consistently tell the public that they are out of money, yet go ahead and spend anyway.

        You think the way you do because governments constantly lie to you to instil enough fear to get your vote.

        The biggest political conspiracy in the world and you have missed it.

      • It is hand-waving, I don’t dispute that they can do that, just like I can in the example I gave above, but where does the “money” go if the government loans to me and I default, and the government clears the loan from the book — where did the money go?

        You say to cancel debt is to cancel money, but by your pub example, we can all default tomorrow and apparently the $200 in my wallet disappears…

        EDIT: See there goes skippy with the well of contracts, what about the well of defaults?

      • “This is your MMT derivatives mad house!”

        Hey mig, just FYI the Nugan-Hand bank was created in just the manner you described and nobody batted an eyelid until it collapsed.

      • Mig the $200 in your wallet is an asset for you and a liability for the government.

        If you burnt it in a fire you would lose your $200 asset and the government would lose its $200 liability.

        Everything always balances. This is basic double entry book keeping.

        If you can’t pay your tax for example and declare yourself bankrupt, you lose your tax debt to the government and they lose that asset.

        Everything must balance. There is no other way.

      • I can see pilots flying A308 jetliners whilst reading their Sopwith Camel instruction booklet from my balcony.

        Glad I don’t live near the airport.

      • Your example of the publican is utter tosh, if I knew the public never pays for the beer I wouldn’t think 20 is a fair exchange because regardless of the worth to me the publican is getting my labour for nothing. So I’d ask 20k beers, hey can you spell inflation Pete? How you going to tax the excess of demand for free beer?

    • And so ends todays episode of ‘Skippy’

      The evil fauna thieving thieves are all trussed up and silenced in the back of their ’64 ford falcon station wagon as Sonny with a self engulfing grin a mile wide says to Skip….

      “Well done you marsupial marvel, look at how humiliated those evil people look, they will be looked after do not worry, years of hard labour splitting rocks for sure…”

      Fade out to that beloved bumpy catchy tune conjuring up images of Skippy and Sonny having even more fantastic adventures….

      After camera aside…..

      Sonny: Skip…cut that dementia shit…you know the muttering to yourself when you think the camera has stopped rolling….otherwise we will have to get a younger, smarter kanga

      Skip: What the shit you talking about dude, hand me some more of that illegal stuff your dad found growing up near the park boundary…..

      • Bob ex pat American here, emigrated over 15 years ago. Why?

        Great place to raise kids no matter if your rich or poor, the lines are not to bright around here.

        Skippy… at least they used to be, some would see it other wise…

  9. So western economies who already have private & public balance sheets chock full of debt (relative to GDP and historical norms) should just keep running large government deficits if they’re struggling to meet inflation targets? To what end? How’s that going for Japan?

    “governments can never be insolvent in their own currency”

    Depends on your definition of insolvent.

    What happens if a country running a large CAD finds their trading partners refuse to take their currency?

    What happens if a country holds a bond auction and no one bids?

      • Oh?


        You may argue that their central bank could have purchased the bonds, but if they do that then they risk having their currency or future bond auctions shunned. A problem given their CAD.

        MMT argues balance sheet semantics, while the rest of us live in the real world where “technically you could do it” doesn’t always align with politically or palatably feasible.

        MMT (or at least those arguing in it’s favour) also seem to assume a geographically closed system where no country relies on trade with others.

      • Not true – Russia held a bond auction yesterday with 0 bids. At some point it doesn’t matter if you issue your own currency or not.

      • Well put BB!
        “MMT … assume(s) a geographically closed system where no country relies on trade with others.”
        That, is the problem in a nutshell.
        Perhaps the author should get back to forte – “…how farmers can make use of carbon pricing to make money”

      • The underlying value of any currency is its capacity to produce real goods and services that are in demand.

        Japan for example has a massive debt problem but they are a manufacturing powerhouse. You can always swap any Yen that you have for a Toyota or a Mazda, so the debt issue is ignored by the traders.

        Whether or not others will accept your “tokens” or “chalk marks on a slate” depends on whether they have confidence in your capacity to give them something of real value in exchange.

        If your publican says that he will give you 20 schooners to mow his lawn then I think most people would accept that he has the capacity to deliver 20 schooners as required.

      • The Traveling Wilbur

        @PF – But the publican did NOT create the 20 beers. He bought them from a brewery somewhere. With money.

        If you change your posited question to reflect the reality of that, it becomes: so “Would most people be happy to accept the publican saying, ‘If you mow my lawn I’ll give you enough money to buy 20 beers when you’re finished’ “?.

        And that, clearly, is like any other transaction we ever do. Subject to risk. Subject to the laws governing the country, including those relating to the supply and use of currency.

        What you are attempting, incoherently, to argue is that the publican is like the government because he has the power to create a tradeable commodity simply from thin-air. Bollocks. That’s what, for example, miners do. What you should be arguing, if you want to make your point coherent, is that it’s ok for the government to create 20 beers, or 20 billion dollars, because, it’s the government, and everyone thinks (just like the publican creating beer being reasonable, ‘because they do’) that it is reasonable for the government to do.

        What facile logic. Yes, the government can do that. That does not mean it’s a good idea at any particular point in time – and it *certainly* does not mean that if the pub (or government) goes bust that everything ‘balances out’ as you stated.

        PS I was taught you should never cut your publican’s grass. ; )
        But then again, I wouldn’t expect ethics to be at the top of the list of people in your line of work. (p:

      • PF, none of your comments really address my questions.

        “If your publican says that he will give you 20 schooners to mow his lawn then I think most people would accept that he has the capacity to deliver 20 schooners as required.”

        So if 20 schooners is worth 1 mowed lawn, what happens if one day the publican can only deliver 15 schooners? Perhaps the gardener takes schooner credits for awhile, maybe even for years. Eventually the gardener holds so many schooner credits that he doesn’t want anymore and he notices the publican has some large bills coming due and isn’t sure he will be able to collect on his schooner credits in the future or worries that when he does collect the schooners may be diluted with water… what happens then? If the publican needs his lawn mowed, but no one will take his schooner credits he’s either going to be insolvent or taking a big hit to his standard of living with a partially mowed lawn.

      • BB – remember the value of the publicans “currency” depends on his ability to deliver the schooners. Once the gardener loses faith in the ability to provide beer he will stop mowing the lawn.

        In the same way that any supplier will stop delivering anything on credit.

        The publican will have to mow his own lawn, just as our country would have to provide all our own goods and services if other countries chose not to take our dollars.

        lorax will be happy.

      • MMT (or at least those arguing in it’s favour) also seem to assume a geographically closed system where no country relies on trade with others.

        Yep, that is exactly my issue with it, put very succinctly. It’s a very big blindspot, kind of like how the Chicago school totally ignores debt.

      • Conversely Pete, if you back your currency with something everyone wants, like gold, you will never have that problem… skippy won’t be happy….

      • no one really wants gold mig, it’s next to useless except for trinkets.

        It’s only if it can be exchanged for money that it has value, So you are trying to back a currency on a metal with little or no value when the real assets of a country is its capacity to make something of value or deliver a service that others want.

        Why does a lump of inert metal have a higher value than fertile agricultural land for example? if you were a caveman what would you value more highly – shiny metal or food that you can eat.

        What would you eat if you ran out of food but still had gold? How would that gold help you?

      • Land is great insurance against the money printers

        But I can’t stuff $200,000 of land in my suit pockets or safe box in another country and keep it away from the government

        It has had 6000 years of history to go to zero because of its lack of utility – strangely it hasn’t

      • “Once the gardener loses faith in the ability to provide beer he will stop mowing the lawn.”

        And from an outside perspective one might consider him insolvent if he is unable to pay for goods and services in return for those of similar value.

        I think we are on the same page. From an accounting perspective a government can’t be insolvent in their own currency (that is, owe debt that they can’t print to pay off), but they sure as hell can be from an external position and let’s face it, if another country was to reject payment in their currency/debt, how much longer are the internal constituents going to accept it?

        “no one really wants gold”

        There’s around 180,000 tonnes of it above ground and only a small amount of that’s for sale at any one time. Someone wants Gold and that includes the central banks you put so much faith in.


      • Travelling Wilbur

        Does it matter if the publican created the beers.

        Isn’t it enough that he added value by standing around for 12 hrs a day?
        Paid utilities and bought nice furniture and created an ambience?

  10. Wow. An article on the government budget constraint and monetary system which doesn’t mention the rate of interest once yet tells everyone to learn the basics of “monetary economics”.

      • Well one virtue is that the government becomes a profitable Ponzi scheme with negative rates. And the taxpayer is actually better off with bond financed deficits v money financed deficits.

        But that’s not the point. The point is that writing an essay on the budget constraint and the monetary system without mentioning the interest rate once, should be prima facie evidence that the essay has one or two issues.

    • The government determines what interest it will pay via the reserve bank. Interest rates are not that relevant in money creation.

      • Well lets see you analyse it then. I’m a government – I can create my own money as I choose and I get to nominate the interest rate that I pay. If the rates are high I can create even more money to pay the interest bill.

        Now sweeper you tell me why I should give a hoot about interest rates.

      • Because when inflation creeps up too high someone has to mop up the excess money in the system.

        Governments could do that through higher taxation, or the central bank could increase interest rates. Both ways will work but higher interest rates punishes borrowers and rewards savers, whilst higher taxation punishes wage earners. Which method is used has more to do with political ineptitude than common sense, so failing political leadership the central bank will do what it has to do and increase interest rates.

        Does that explain it/

      • Oh. So you mean governments need to pay interest in order for the public to accept its currency for a slightly diminished qty of goods and services every year. And paying interest in excess of GDP growth means a higher debt/future taxation requirement?

      • Governments and Central Bankers just pulling imaginary levers

        I’d prefer a balanced budget and sound currency please

        I don’t want anybody racking up debts in my name or wrecking the value of my currency – let alone a politician or Central Banker

      • No they can set whatever rate they choose and soak up the excess money in the system using taxation.

        This is a description of what can be done, nothing can be done about our inadequate politicians who do let us down, but that is a political failing not a system failure.

      • “Can soak up excess money in the system with taxation”

        … In other words… spending does need to be financed with taxation. Taxation is a hard budget constraint? Agree?

      • Tax shelters are just part of it

        Imagine tomorrow Australia announces they are adherents to MMT

        They are going to print the bejesus out of your currency and if it gets out of hand on the inflation front – tax you like crazy to soak up the excess liquidity

        Anyone with an IQ higher than 80 would export all their capital to avoid the AUD, domestic investment would tank, leading to more printing, eventually leading to a collapse in the AUD and an explosion of AUD debt balances (free money) which would be inflationary – so then they mop up the excess liquidity with higher taxes !

        People with IQs higher than 100 that don’t have the benefit of large holdings of physical assets that will be more valuable under MMT would leave the country if they had any chance.

        The history of Austria, Germany and Zimbabwe showed that the intellectuals (the service economy) were the worst off under these regimes.

        Venezuela is another recent socialist/money printing culprit with a bad outcome for its people who were meant to be liberated from the tyranny of free markets.

      • Imagine tomorrow Australia announces they are adherents to MMT

        Australia is already an “adherent” to MMT.

        They are going to print the bejesus out of your currency and if it gets out of hand on the inflation front – tax you like crazy to soak up the excess liquidity

        This is what we call a non-sequitur.

        The reason it never gets to the “tax you like crazy” part is because “you” _really_ means the top few percent of the population (since that is inevitably where the money and wealth accumulates), and they have disproportionate influence over policy and media.

        Personally, I’m undecided on the “active pursuit” of MMT.

        On the pro side, the idea that money is simply an accounting system and shouldn’t be a constraint on the utilisation of resources and effort makes sense, and the arguments against MMT – like the one above – are usually fallacy-laden screeds.

        On the con side, the temptation to game the system with catastrophic results is clear and the injection of money into the system seems to be always go straight to the top, rather than entering at the bottom and providing actual benefits before reaching the top.

        Channelling Stephen Morris, in the absence of any truly independent body to control the creation of new money and its recovery via taxation, without proper democracy it’s a system unable to achieve its real potential.

      • Central banks fiddling with the target rate is about fiddling with the demand for debt as the creation of loans by private banks increases the money supply because bank created money is treated as equal to government created money.

        It is ironic that some people fret about government printing money yet support manipulated interest rates which are directed to the same purpose – stimulating demand by expanding the money supply. The only difference between being who is driving and profiting by the expansion.

        For me it is clear that we have had ample demonstration that giving the power to private banks is fundamentally flawed.

        However, there are good reasons to limit the government from spending all the new money as well – especially given our decrepit insider dominated political system.

        That leaves one option, expand the money supply as required, subject to maintaining stability in the value – aiming for zero % inflation, by preferably taxing less on an equitable basis or by direct distributions also on an equitable basis.

        The idea that private banks should control most of the supply of new money and channel it into existing housing prices is simply loony.

        The only reason we do it was because people thought it was preferable to govt spending the money on white elephants – and that was a reasonable concern.

        We just found after the last 20 years that the private sector banks are just as good at creating white elephants as the public sector.

        At least by leaving more or giving more of the new money direct to individuals they can blow it, invest it, donate it as they see fit. That is pretty democratic.

  11. Cue assorted amateur magic pudding economists in 3…2….oh they’re already here.

    I miss blinky bill. What ever happened to him?

    • There is no magic pudding, only accounting systems. Choosing to not understand basic accounting means that you will never understand anything – of course that’s your choice.

      • Peter,

        There is plenty of magic pudding thinking possible with accounting entries.

        Even in Zimbabwe the credits equalled the debits.

      • Pfh – MMT only describes how the system works. If a government chooses to make poor decisions and print without the backing of production then MMT will predict that it will fail.

        No one denies that governments can print as much as they like. No one denies that banks create money when they lend. What people then need to do is get some understanding of that system and MMT and MMR go a long way in providing an explanation.

        MMT isn’t saying that money printing is a good thing, it just explains the process and predicts the results so that people understand what the outcome may be.

        What is appropriate for one economy may not be appropriate for another economy, that becomes a political decision. But understanding the economic consequences of that political decision then become important to the individual who may be investing, trading, living etc in that economy.

        It has nothing to do with magic pudding or any other silly tags put on by people who don’t understand the modern system of money creation.

      • Peter,

        The Bank of England just described how the banking system works that does not make the Bank of England a hot bed of MMT.

        You are confusing a description of the banking system with MMT.

        A bit like saying Holden when you are simply referring to a car.

        MMT is much more than a description of the current banking system and as Cullen points out – its description is not fully accurate anyway.

        Have you read that paper – I linked to above? You often refer to Cullen but gloss over his significant concerns re MMT.

  12. MMT is magic pudding rubbish.

    They presuppose some incredible ability for the money printers to estimate the future level of inflation (like Draghi focussing on his 5 / 5 inflation guess) and are comfortable letting them pump up the presses to fund unbalanced budgets.

    What happens under MMT when there is a breakout in inflation, nobody offshore is interested in your currency but you still have a wasteful government an uncompetitive economy that has been fuelled by fairy dust.

    It is no coincidence that the latest money printers still all operate government deficits.

    The USA has unemployment, growth and inflation figures that most countries would happily accept yet they remain with deficits for as far as the eye can see and are now addicted to money printing.

    Europe and Japan? Would anybody like to live in Japan at the moment on a fixed JPY income?

    Zimbabwe, Austria, Germany etc. show the inevitability of governments who thought they could introduce fairy dust into their economy with no consequence.

    Once they start – they won’t stop.

    Deflation used to be called progress.

    Governments may not be able to go broke but having your currency drop to cents in the dollar of your trade weighted index is a disaster that probably feels the same.

    • Incorrect – the value of any currency rests on it’s ability to produce real goods and services. You inability to understand that solitary point is your complete undoing.

      I’ve got a nice glass of red to consider, bye all.

      • The value of your currency is based on what people are prepared to accept / trade for it .

        I have a frame full of 100s of trillions of Zimbabwean dollars from a country who was very productive until they embarked on some MMT

        I guess Mugabe and Co just weren’t as smart or trustworthy as other Central Bankers?

        Their forward estimates of inflation were flawed and didn’t have time to implement real reform to ween the country of pixie dust?

      • I would suggest that Mugabe had as little knowledge of the monetary system as you have, which is why he failed and you too are likely to follow his footsteps unless you acquire some knowledge.

    • 8888888 the point is that government money creation can be used to stimulate production which is actually DEFLATIONARY
      It can be used to support employment and production while interest rates are raised to deflate asset prices

      The point is that we are not hostage to private finance. The government can manipulate debt, inflation, employment and asset prices as it sees fit.

      Instead, it seems many here would rather we suppress government deficit in order to allow private speculation to run rampant

      Money should work for the people, not vice versa

      • The point is wrong.

        History is littered with governments trying to apply their magic wand over market forces and failing miserably.

        All these imaginary levers – it sounds so clinical and scientific – it is chicanery.

        If you want to see private speculation run rampant – debase your currency to the point nobody overseas wants to trade with you and watch the speculators (people with brains) be the only winners as they horde physical goods.

        Hoarding started in Zimbabwe with gold and meat – eventually it was toilet paper. MMT theory has nothing to do with ‘the people’ it is a fantasy.

        Monetary systems are inevitably at the mercy of private finance – the value prescribed in transactions between free people will always eventually override any government mandated/controlled system.

      • You don’t have a choice about fiat currency – it’s the system that we have.

        Why you try to pretend otherwise is rather puzzling.

      • I am comfortable with a fiat currency system

        I just don’t want it debased by idiots who haven’t learnt from history

      • Except that QE was pure MMT

        And it worked very well for what it was intended to do

        The US is not in a zimbabwean collapse is it?

      • “History is littered with governments trying to apply their magic wand over market forces and failing miserably.”

        There is more litter in history of governments failing to pull the levers of power, and causing their economies to come unstuck, than governments who pulled them and come unstuck. Mindlessly pointing to the failures blinds you to the possibilities of success.

      • QE is an asset swap, the part you leave out is why some assets were at par. That’s the political part. So whom are the polies beholden to and why.

        Skippy… That the so called free market is not what some had envisioned by its authors, need to reconcile that stark observation. Its like watching thumpers as why gawd has forsaken them.

      • The US is not in Zimbabwe territory, no and in many cases it remains the tallest midget. But would you want to live there if you weren’t in technology or investment banking?

        Further, I agreed with QE1 – but it wasn’t a business cycle cure – it was a liquidity cure. Good high rated credit that was made whole in time was trading no bid. The largest most secure companies in the world couldn’t roll their funding. I feel more pain should have been felt in the finance sector but that is no reflection on the monetary policy and is another story.

        But subsequent QE has been aimed at removing the business cycle and has been of dubious benefit. Unless of course, like all money printing episodes before, you are in the group that benefits from bubbles in high end art, high end property, equities, Maserati dealerships etc.

        US QE has also been matched and exceeded by other countries trying the same thing on a bigger scale. Hence now being the tallest midget and the rally in DXY.

        Let’s look at the scoreboard of ‘success’:

        USA, 2% growth, record number of people on food stamps, $17 trillion in government debt, government deficits for as far as the eye can see, equity market bubble, high yield/junk debt market bubble (in collapse), middle class real wages stuffed… a great ringing success that will no doubt lead to more QE in the future.

        It will be interesting to see what happens when the shale patch starts puking up unemployed people who were actually earning decent money.

        UK, record government debt, structural government deficit, high end property bubble

        Japan, the Yen on its way to halving to 200, now with trade deficits – the poster boy of QE forever.

        BTW: I have been long USD for over three years in terms of AUD and have recently gotten long the USD against the Yuan via options.

        China has embarked on the largest round of money printing in history and I feel the $5 trillion or so carry trade that has coinceded in emerging markets will have to be paid back at some point sooner rather than later – creating demand for dollars/

        QE in the world’s reserve currency is yet to play out across a cycle. It has almost been 5 years and all the QE economies remain basket cases – none of them look close to paying back anything – let alone ending financial repression.

        QE will be a victory when Yellen can increase interest rates to perhaps somewhere near the last ‘cycle’ high of 2.5% and the US government runs a surplus and reduces its debt burden.

        Good luck with that – QE4 will be on us in the next 24 months.

      • “Except that QE was pure MMT… ”

        No it really wasn’t.

        MMT explains that the limit on government spending is not money but the real resources of the economy. The inflationary effects of spending depend on where the spending happens.
        If you take trillions of dollars and buy junk financial assets and pour money into the private FIRE sector you produce nothing and create massive waste and lots of tasty rents.
        It is the last thing a government should be doing with MMT.

        Full employment, investing in productive enterprise, providing needed infrastructure and services are all things government could usefully do with MMT without the destructive effects of showering money on bankers.

  13. I find this article very insightful. Something that always bothered me, is why do we lend money from overseas to finance our government deficit? Money from overseas may as well have dropped out of a printing press as far as its inflationary effect, so why not borrow it from the national mint, spend it, then if you really want to, pay it back to yourself, instead of stupidly paying the Chinese for their useless Yuan. Of course, I realise it’s not quite that simple in so far as governments buy stuff from overseas, but it should be in large part true. Why do we do it?

  14. The article is a fairly good, straightforward description of the reality of how the system works. I have watched since stumbling across Australia’s foremost MMT proponent – Bill Mitchell – about 6-8 months after the GFC struck and the MMTers/Chartalists have been pretty well on the money as to how thing would transpire, strongly suggesting to me that MMT is a correct description of how things actually function.

    What is missing from the article though is any reference to PRIVATE credit creation and the role it plays. Perhaps the author did not want to sound too confusing but the point does need to be made that very significant debt problems do exist but they are mainly in the private sector and result from excessively free private money creation.

  15. So, the only reason Zimbabwe and Argentina are not the wealthiest countries in the world were not because of a bad system, but that they were poorly managed? The reason gold and the like have almost always been used as a store of real wealth was to prevent what is happening now, the creation of excess credit outstripping useful production. America hasn’t collapsed yet only because it prints the worlds reserve currency. It is the governments Government. They are insolvent, they are broke, they can never pay their debt, but everyone is too frightened to put the hard word on them. They will in time and then the “joke” will be over.

    • hyperinflation such is in Zimbabwe and Germany is not caused by printing. In both cases there were significant internal problems an an inelastic demand for foreign goods. eg war reparations. The printing was a symptom of the hyperinflation not the cause.
      The USA isn’t seeing massive inflation because they are in the middle of debt deflation, the Private money creation is reversing as the debt bubble deflates.

      As for the USA being insolvent and unable to pay their debts. The debts are denominated in US dollars so can always be paid. People might stop wanting to lend to them but that will only happen when people stop accepting US dollars. They still sell lots of things I want that I have to pay for in US dollars so I’m happy to take them and I’m not the only person.
      World reserve currency is really not as important or true as they would like us to think.
      If their printing massivly shifted their terms of trade you would see a change in exchange rates but that is self correcting except where demand is very inelastic ie zimbabwe and imported food.
      An oil price shock could do interesting things to them thats pretty inelastic? But the level of printing needed to break things is really stuipdly huge.