Australia on track to become pin-up boy of MMT failure

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An interesting piece today from John Kehoe at the AFR on how the RBA seized control of fiscal policy:

  • A month ago, Treasurer Frydenberg was on track to deliver an austerity budget.
  • But for months, the RBA and Treasury had been trying to turn him around.
  • Historically low unemployment was their goal.
  • Frydenberg shifted his fiscal trigger from below 6% unemployment to below 5%.

I put it to you that this great pivot has absolutely nothing to do with the RBA or Treasury. The Morrison Government has never shown the slightest interest in lowering unemployment to the point of triggering wage rises.

Its outstanding supply-side, trickle-down economic philosophy is openly hostile to wages. It has always done everything in its power to prevent that outcome. And still is via immigration.

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What changed is much more straightforward. Morrison fell behind in the polls as Rapegate and Vaccinate opened the polities’ eyes to criminal ineptitude in government.

As Ian Verrender sagely wrote a month ago at the ABC, we were all headed directly into a shower of gifts:

After a horror six weeks of scandals, mismanagement, missteps and recriminations, Prime Minister Scott Morrison and Treasurer Josh Frydenberg finally have something to celebrate and are on the cusp of proving that proverb wrong.

Between them, they’ve got cakes lining up to the horizon, multiple birthdays and combined Christmases all coming at once. And when the federal budget is brought down next month, they’ll have the knife poised to start slicing.

In case it’s passed everyone by, what with the economic and political mayhem of the past year, we are in the final leg of the political cycle. There’s an election looming sometime in the next 12 months.

And what better way to try to tilt the odds back in your favour than through a good ole cash splash. It’s not like it’s never been done before.

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Indeed. But what has not been done before is an inept Government using MMT to buy itself back into office.

For let us not forget, not only has the RBA “convinced” the Morrison Government to keep spending, it is the RBA that is printing the money to buy many of its bonds in the secondary market, preventing any consequences from being priced.

And this is where the rubber meets the road for post-Keynesian fanbois such as myself. I have campaigned for MMT in the full knowledge of the dangers of political misappropriation. But I did not think that it would present itself quite so quickly!

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It seemed more likely that it would take a full cycle for pollies to catch on to this newfound honey pot to buy influence. I had hoped that MMT would be deployed in constructive outcomes such as human and hard infrastructure (such as it is being under the Biden administration).

But we have the worst, most corrupt and least accountable politicians in the developed world. So it should not really be a surprise that it is they that are leading the charge into printed pork for everybody as a November election swings into view.

Moreover, as they print their pork today, what’s coming down the pipe in 2022 is much far less sanguine as the terms of trade turn from boom to bust, and house prices run out of regulatory slack as investors pile back in.

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We could face the triple whammy of all three income drivers – monetary, fiscal and commodity – turning from pro-cyclical up to pro-cyclical down.

I apologise!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.