Not All Job Guarantees are the Same

There’s been a number of articles I’ve read over the last few days on what we should do and what has been done in regards to people’s employment and well-being.

This article on giving rooms to the homeless reported by the BBC has shown the power governments hold and that it is not a lack of capacity to solve these issues but a political and collective will.

With reports that unemployment could reach more than two million people as a result of COVID-19 lockdown and corporations standing down staff in the thousands we have calls for basic incomes and ‘jobs guarantees’ that lack commitment to an understanding that unemployment is a structural issue caused by a lack of spending in aggregate and a system of full employment as envisioned under the UN Charter of Human Rights, which states:

Article 23 states (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment,

and what the Civil Rights movements fought for, a Job Guarantee. It is a concession to the neoliberal orthodoxy that Full Employment would be desirable but it is not possible. The orthodoxy has conceded that ‘financing’ such a goal is not an issue, with governments in many countries doubling the unemployment benefit despite calls of it being unaffordable and announcing other spending measures. It is clear currency-issuing Governments face no insolvency constraint and financing of all currency issuer spending is an appropriation bill through the relevant legislature. Even CNBC admits it.

There’s a number of macroeconomic arguments and social arguments we can use in favour of a Job Guarantee. The term has recently been used to characterise something that it is not.

The United Workers Union recently called for

  • – A jobs guarantee to be upheld by all employers; no layoffs during this time even if shifts are unavailable. Workers to resume work when shifts are needed again.
  • – An income guarantee payment of $740.80 per week (minimum wage) to everyone except those covered by the jobs guarantee, or others who have not been financially disadvantaged by COVID-19.

The latter is essentially a basic income for anyone without employment while the ‘jobs guarantee’ call is a commitment that nobody is laid off. A call to continue to have these wages subsidised is conceptually the equivalent of paying an unemployment benefit at someone’s income or percentage thereof. For the purposes of this crisis, it is a call to avoid income loss for workers that are stood down and hopefully they have employment to return too.

The call for wage subsidies is a sensible idea, especially during the COVID-19 crisis as spending retracts. I would conceptualise it differently and call it a jobseeker payment (accessible to workers who have been stood down) at a replacement wage, for those on low incomes there would have to be a minimum payment. I would advocate that after the crisis anyone unemployed and seeking work should receive an unemployment payment at their replacement wage for a period of time whilst they sought another job.

Taking note of the basic income proposed, in the absence of a full-employment policy, it is effectively a subsidy for low paid, shitty work. If you can only manage to scrounge a few hours a week and the rest of your income is ‘topped up’ by a welfare payment, we as a society are forgoing Full Employment and allowing capitalists to profit from precarious working conditions and low underpaid work. Where will jobs come from for those on a subsistence living that desire to work?

The phrase ‘jobs guarantee’ is not the same as a Job Guarantee which is an unconditional offer to anyone and able willing to work at a socially inclusive living wage.

I’ve written about Full Employment and The Right to Work movement in the linked blog posts and here I hope to further explain a Job Guarantee as envisioned within a Modern Monetary Theory framework and further expand on the linked posts.

The Job Guarantee is a voluntary transitional program that is designed to create employment to suit the individual and work is there to fulfil a public purpose. It works alongside a national skills framework and the aim is to aid the JG worker to find higher-paying employment. It allows statisticians to assess what skills are in what areas and assist policymakers in creating industry policies. It is not there to take away work from the mainstream public sector.


A Job Guarantee is first and foremost a replacement for the Phillips Curve. In short, the Phillips curve is the trade-off between unemployment and inflation and there is a conjecture that as the unemployment rate falls, the general price level will increase. Today that is discussed as the Natural Accelerating Inflation Rate of Unemployment (NAIRU).

MMT looks at the Phillips Curve and identifies the unemployed as a buffer stock of unemployed to discipline the rate of inflation. It replaces it with a buffer stock of employed as an inflation anchor. Once in operation, the JG pool would serve the same function as a NAIRU but without the social and health consequences unemployment brings. It is effectively a Non-Accelerating Inflation Buffer Employment Ratio (NAIBER)

There’s a lot of misunderstandings to inflation and its causes within the public discourse (and even amongst academics) This is an attempt to give inflation an understanding to layperson terms and how a JG serves to discipline it.

When I say inflation I am talking about something very specific, that is a continuous increase in the general price level. The JG serves to discipline demand-pull inflation, so for the purposes of this discussion we will ignore cost-push. You can think of demand-pull as spending ‘pulling-up’ the price. One-off price rises are not inflation but they may lead to inflation if something does not ameliorate the conflict between wages and profit.

You need to appreciate that there is a distributional struggle [Conflict Theory of Inflation] over national income (GDP) between labour and capital.

We can view this conflict as perhaps leading to wage-price or price-wage spirals. As workers bid for nominal wages, capital seeks to maintain its profit and may increase prices and/or lay off workers to decrease costs as prices increase workers bid for more wages until the conflict is ameliorated.

Any Marxist will tell you, as well as an official in the RBA that we cause unemployment to discipline the inflation rate. (NAIRU approach) The RBA would use wanky terms like adjusting aggregate demand (total spending) and they morally justify it to themselves by adhering to natural rates of unemployment and fear-mongering over (alleged) a threat of inflation.

The JG is a buffer stock of employed that releases the JG worker when a better offer is made. It serves as a mechanism to ameliorate the conflict while maintaining price stability and full employment. It can not be inflationary as there has been no counteroffer made once the worker is released. Purchasing workers from the bottom of the market can not be the source of inflation either as they have been rejected by the market. What purchasing the unemployed does is set a floor for wages.

The JG is an automatic stabiliser that adjusts spending levels to ‘loose’ full employment and it targets directly where the spending is needed (the unemployed) . It is described as ‘loose’ because ideally, you want the JG pool as small as possible as we seek better employment opportunities for those workers.

The JG sets a floor for wages. If you think about the current floor for wages, it is $0. If you’ve been rejected by ‘the market’ the bid for your labour is zero. We then have pernicious welfare regimes that punish people into forcing them that take the shittiest job and the lousy wage and often risk their own lives! A JG, set at a socially inclusive wage, eliminates this as well as eliminating underpaid socially exclusive wage levels, it matches the desired number of hours demanded by the labour force and sets a living floor for wages. It effectively becomes the minimum wage and private employers are forced to compete with the JG.

Once the JG is in operation as workers leave the JG pool total spending increases (but government spending declines) as they leave the JG pool for better work. The reserve happens when workers enter the JG pool. Total spending decreases (Government spending increases)

The Social aspect of a Job Guarantee

There has been literature since the 1930’s on the ill effects that involuntary unemployment brings on the individual. This includes:

– loss of income
– impacts on mental and physical health
– deteriorating skills and loss of skills
– lack of motivation/self-esteem
– family/relationship breakdown
– poverty for those reliant on workers income
– results in other social issues (e.g homelessness, increased crime etc…)

A Job Guarantee is designed to create work for the individual, rather than find a job that doesn’t match the skill set of the unemployed. The work would be of public benefit and assist the JG worker in upskilling and finding work in the private or mainstream public sector.

The types of work that can be done can include work in the arts. We could pay musicians to give workshops on band dynamics, pay them to create and assist in the organisation of community festivals, we can have arts programs where artists can paint murals in public spaces and aid others in their own skill development. Surfers could be paid to pass on surf life safety skills and teach others how to identify and avoid rips. They could take part in sand dune rehabilitation. There is massive potential to enlist thousands of unemployed in ecological restoration and plant trees along with other flora to mitigate against climate change. There are activities we consider community engagement that become paid employment. Running and participating in community gardens is one example.

By having a direct employment program we target money directly to the areas that need it (the unemployed/underemployed) and it has profound social transformative effects. It is a vehicle that begins to transform some of the structures and norms that produce and reproduce poverty and gender disparities.

Work matters, however broadly defined. Work empowers, enhances individual worth, and allows one to lead a richer life, gain new knowledge and skill, and contribute to self, family, and society. Work is life-affirming. While certain pursuits are solitary and individual, even they deliver benefits when performed as part of a greater community.

Tcherneva, P. What do poor women want?, 2012, Levy Economics Institute of Bard College

In the Paper by Tcherneva on the effects of a direct employment program, the Jefes program in Argentina. (A program targeted at poor women) she states

[paying] special attention to poor women’s narratives [we] showed that their first exposure to paid work significantly boosted their self perceptions, promoted collective and individual empowerment, and made important qualitative changes to their lives. Found that the socialization of women’s work increased the respect and recognition women received in their own families and in the community at large.

Tcherneva, P. What do poor women want?, 2012, Levy Economics Institute of Bard College


We need an understanding that unemployment is structural. It is caused by a lack of spending in aggregate. As a monopolist over the currency, the Australian Government can always purchase anything for sale in the currency it issues. It is a policy choice. The Government of the day chooses the rate of unemployment.

Basic incomes (and even Universal Basic Incomes) are an admission that full employment is no longer possible and if we were to have it we would be dealing with inflation.

The JG crushes that argument, argues full employment and price stability is possible and the broader literature shows work is important for a sense of self, recognition in the community, and leads to vastly improves self-esteem and confidence.

This is an edited post originally by Jengis Osman originally published on Fighting Fish

Coronavirus (COVID-19), GetUp and the Job Guarantee

According to a new GetUp! campaign release:

COVID-19 has hit us hard – thousands of people have lost their jobs, millions more could follow.

But while private industries are forced to close, and many jobs will be unsafe for the foreseeable future – we need every pair of hands to help recover, rebuild and take care of each other.

The Government must institute a Federal Job Guarantee to coordinate the national recovery and connect unemployed people with meaningful, safe, and decently-paid work.

You may ask what jobs can we do with all the physical distancing we are doing?  Note my use of the word physical, not social.  Social distancing is what leads to extraordinary losses of support of all shapes and sizes and leads to a great deal of harm.

The GetUp release continues:

Everywhere you look there are opportunities to connect the untapped potential of people with the unmet needs of our communities.

We need more people than ever on our farms and in our warehouses. We need people on the other side of the phone when people seek health or Centrelink support. We need people who can prepare meals, and deliver them to those in self isolation.

The Victorian Government has just announced “Working for Victoria” – a proposal that could be replicated across all states and territories with immediate effect.

But we rapidly need the Federal Government to follow suit.

Bill Mitchell offers many suggestions of what type of MMT Job Guarantee jobs could be done whilst we fight the COVID-19 pandemic.  Bill writes:

Australia has just been ravaged by drought, bushfire and then flood – before the coronavirus hit.

There is so much depleted land, infrastructure and personal care services that are required arising not only from these natural disasters but also from years of austerity and outsources of public services.

There are tens of thousands of jobs that the Federal government could fund across the regional and urban space to help improve our society.

There will probably be a shortage of medical support staff. Thousands of jobs could be created to ease the load in the short-term on the depleted health care ranks.

The food harvest is facilitated in so small way by visiting ‘backpackers’.

For those workers in regional areas who are now unable to work because of the closures enforced by the government or by consumer boycotts (not going out anymore), the Government could help shift workers into the food harvesting sector for the time being while border controls prevent people from visiting and working.

And if we are to protect our aged members of the population, then we could ensure they are secure in their homes with adequate food and other supplies, are able to maintain their gardens (if they have them), and attend to other needs.

Thousands of jobs could serve this function for the time being. There would be no reason for such a person to take the risk of venturing to the supermarket, for example.

And what about the claims that these shifts cannot be facilitated quickly enough to avoid mass unemployment?

Well, I think I could retrain as a hospital orderly, for example, in a matter of hours or a few days at most, if I was required to.

The women who entered the factories in 1939 had no prior background. But productivity rose quickly.

So I advocate major public sector job creation to help workers adjust to the loss of their current jobs (while the crisis persists) and to provide a productive workforce to enhance our social offerings in terms of infrastructure and services.

The number of jobs that could be created to absorb those losing their jobs elsewhere, which would add social value, is limited only by our imaginations.

GetUp finishes their release by asking you to sign their petition and demand a Job Guarantee to give people dignified work and strengthen our society?

Australian Real Progressives endorses this petition and it can be found here: We Need a Job Guarantee!

Right to Work: Full Employment is Not What it Used to Be

The right to work movement has its origins in the 14th century. Nowadays, within a USA context, it is a term used for anti-union laws under the guise of a right to not be a member of a union. They are laws designed to limit organising and collective power.

Work on a lords land circa 14th century was usually for a subsistence living and the surplus-value of your labour (literally your harvest) was the property of the lord. The peasants that occupied the land were not its owners. Agrarian property was controlled by a class of feudal lords. There were limits on travel for working people, ‘Villeins regardant’ were usually granted plots of lands to farm for a subsistence and these plots along with those on them could be bought and sold. ‘Bordarri’ who were usually tradesmen/artisans were usually granted a cottage to live in exchange for their labour. Conditions of servitude were inherited and you were bound in perpetuity. Under capitalism, the exchange value disguises the use-value of your labour and the capturing of surplus value by the capitalist class is more opaque.

There was growing demand for wage labour (most likely because of the leaving of taxes demanded a necessity for the sovereigns currency) Waged-labour was more cost-effective than feudalist servitude as it absolved the owners of needing to house and feed their workforce. There was less direct need for surveillance and motivation came from the workers needing to obtain income.

As waged-labour became more common there were a series of laws through Britain and the rest of Europe to preserve distress amongst the unemployed. The notion that it ‘built character’, ‘unemployment acted as a motivator and increased the productivity of the working class’, and it limited what the capitalist class saw as ‘excessive wages’ as workers competed for scarce work.

There were laws that under the guise of ‘providing for’ or to ‘assist’ the unemployed acted as a mechanism for forcing the unemployed to take any job at any condition. Elizabethan poor laws, such as the system of Speemhamsland, which was a sliding scale payment tied to the price of grain, designed to mitigate against rural poverty but ended up as a wage subsidy and resulted in increases in the price of grain, leaving the poor no better off.

There were also workhouses during the 19th and 20th century. The unemployed would be required to work in dangerous conditions, usually in a factory, for their below subsistence welfare payment. Conditions were often so pernicious, it resulted in death. It is similar to today’s modern-day mutual obligation requirements under our welfare system. Welfare recipients are required to undergo Work for the Dole or Community Development Program (CDEP) for their below subsistence payment. It is mandatory and there have been cases of workers dying as a result of the conditions. The CDEP is often work for a private for-profit corporation.

By 1848 during the Second Republic of France and the idea of a ‘right to work’ had gained traction having been popularised over the proceeding decade by Louis Blanc. The abolition of unemployment was a goal of the Parisian workers who had backed the Second Republic. ‘National Workshops’ were established where unemployed Parisian workers could show up and be paid. The scheme was contentious and had divided the cabinet, that resulted in a chaotic scheme. Many within cabinet wanted political reform not necessarily social reform such as the elimination of unemployment and wealth redistribution. The municipal engineers organising the work resented the use of unskilled labour. Often there was no planned work for the idle workers they would be paid one and a half francs a day to do nothing or two francs when work was given. The program started at approximately 14,000 workers and within half a year and expanded to 117,00 workers.

False promises were made to expand the program throughout The Republic, however, the ‘right to work’ was withdrawn which led to what is known as ‘The June Day Uprisings’, warfare amongst the national guard and the workers which left thousands of protestors dead.

The ‘right to work’ movement reached the political discourse in Britain in 1889 and became a goal of the Independent Labour Party. Ken Hardie an ILP member in parliament breathed life into the unemployment debate. His maiden speech to parliament called for a policy on employing the unemployed.

“…we ought to have some permanent machinery to deal with the unemployed, the conditions of which should be twofold. In the first place it should be elastic. Labour should be organised in what he might call skeletal battalions, which might be filled in times of distress to their full strength, and which might go down again to skeletons when employment was plentiful. In the second place, the employment should be of a temporary character, and not such as to induce the recipients of it to remain in it in preference to seeking employment elsewhere”

The right to work and having the government act as an ‘employer of last resort’ gained traction across the political spectrum over this period. The choice for policymakers was, admit they had the capacity to employ the unemployed during downturns and they could set up works to do or they could leave the unemployed to face destitution and misery, risk electoral defeat or a social revolution. The conservatives came with a counteroffer found in the works of a conservative member of the House of Lords, William Beveridge in Unemployment: A Problem of Industry.

Beveridge argued in 1909 though unemployment was a result of the capitalist system it was only necessary to eliminate frictional unemployment and provide relief for the unemployed through unemployment insurance. The conservative alternative to Labour’s ‘Right to Work’ was a system of labour exchanges between the public and private sectors and a contributory unemployment insurance scheme. By 1911, this was the system in place in Britain.

In 1919 E.G Theodore, Queensland Premier with the Australian Labour Party attempted to pass the Unemployed Workers Bill. The goal was to place the full resources of the State and Local Government in the hands of a council dedicated to the elimination of unemployment. The State Government would undertake major works to increase the number of jobs, there were powers that would order private employers that could assist to augment their projects, while local authorities would delay or expedite programs to deal with the seasonal variations in the number of jobs available. The council’s role would be to undertake research and commission vocational training. Welfare payments were to be transitional while employment was being organised.

Naturally, there were objections from the capitalist class towards this goal. Headlines described this system as a ‘loafers paradise’ by The Courier Mail

“The so-called “Unemployed Workers” Bill and its extraordinary provisions were widely discussed in the city yesterday. Needless to say, the measure was very strongly condemned as a premium upon idleness…”

Mainstream media warned of communist atrocities and the perils of socialism. The bill never passed but we saw a shift in the language used by opponents of full employment. Whereas in Hardie’s 1908 bill we saw opposition to full employment, laying open the capitalist class opposition to a system of full employment by 1919 arguments were around how methods of achieving full employment were flawed.

Much of the ‘economic’ theories being used (Quantity Theory of Money; late 19th early 20th century, Loanable funds theory; circa. the 1930s) were funded by industrialist and used as justification on why full employment was ‘unachievable’.

Throughout history, there have been different ‘monetary systems’ in place. Today we operate under a ‘fiat’ system. (Literally Latin for by decree). A fiat monetary system is one where a sovereign power issues its own currency and floats it on an exchange rate for trade.

The monetary system in use during post-WWII was a gold standard. Governments would specify a particular amount of gold specie in return for the currency that they issue. Thus currency was limited by the supply of gold.

During war periods the gold standard was often suspended. This allowed a government to spend without concern toward the gold supply. During the Napoleonic wars, Britain entered a period known as ‘The Restriction’ which suspended the gold standard and they invested in building their navy and colonising half the world. Similarly, the gold standard was suspended over WWI and WWII.

During times of war, it is ‘normal’ to have all real resources, including labour in use. There is often a shortage of raw materials and labour-power. Hitler used a fiat system to build Germany’s military. Japan avoided a Great Depression because the Japanese Prime Minister, Takahashi Korekiyo, took Japan off the Gold standard in 1931, and introduced a major fiscal stimulus with central bank credit. (Jargon for issuing money without issuing a bond)

The Great Depression was largely a result of insufficient spending, being tied to a gold standard and opposition to full employment by the capitalist class. Full employment policies have enormous political consequences as the threat of unemployment is taken away. It ensures workers have higher bargaining power, politically we have more power to ensure greater provisions of public service, which erodes capitals claims on national income.

The period of WWII in Australia saw full employment in Australia. As I mentioned in this post. Australia experienced a period of a full-employment policy were unemployment seldom rose above two per cent. The work of J.M Keynes and his General Theory influenced most western policy towards achieving this goal. Full employment was defined as more jobs advertised than demanded (Beveridge curve) and Keynes ‘pump-priming’ was used to ensure aggregate demand (total spending) was sufficient with this goal. Keynes very clearly articulated unemployment was a result of insufficient aggregate demand. (Spending in total)

Pump priming is a mechanism where you stimulate the economy enough to increase the marginal propensity to consume and the additional spending reaches enough to generate full employment.


The right to work was once a goal of workers movements in France, Britain with the Independent Labour Party, and an early goal of the Australian Labour Party. It sat alongside universal suffrage and the eight hour day.

Systems of unemployment insurance were compromises over policy goals of guaranteed employment. Today the workhouses of the 18th century are back in a modern form (WftD, CDEP), the pernicious nature of making unemployment so unattractive so the unemployed take any available job, no matter how atrocious the conditions.

Full employment policies were introduced post-WWII though didn’t use a system of guaranteed jobs and provided unemployment insurance while workers waited for work to be created. However, there was a clearly defined goal of ensuring more jobs than work demanded.

This is an edited post originally by Jengis Osman originally published on Fighting Fish

There are no free-market capitalists in a foxhole

There is a famous saying that means something to the extent that there are ‘no atheists in a foxhole.’ Foxholes are the burrows used during wartime. Well, in the face of a potential global economic collapse, there are no free-market capitalists who suggest responding to the crisis by doing nothing.

None of the measures considered by the Australian government are anything like the free-market rhetoric we were hearing some months ago, particularly the desire to have a budget surplus. So the desire for their previous agenda never had substance to it. It was a smokescreen and an excuse for why they did not want to pursue what would be popular economic policies. But given a crisis lurks on the horizon, their hand is forced.

Why exactly do they do it? Why have a go at the unemployed etc?

We used to let markets keep to themselves for quite sometime when the West first embraced capitalism. Sure, there was protectionism in the form of Mercantilism as countries sought to accumulate gold against one another (keep in mind this was the old gold standard system), domestic economies were comparatively ‘free’ compared to what we have had since the Great Depression. The whirlwind of casino capitalism and stock market speculation in the ‘roaring twenties’ ultimately lead to the 1929 crash that would create the Great Depression, allow for the rise of Hitler, and ultimately WW2.

Since WW2 allowed for full employment as many countries embraced Keynes’ ideas, full employment policies would set the stage for the ‘golden age‘ that culminated in the stagflation of the 1970s. Since with full employment, labour was relatively more powerful than they were before, they could bid up wages in a way that Kalecki foresaw in his article ‘The Political Aspects of Full Employment’.

Unemployment became a policy tool to discipline labour and to avoid stagflation. That is why they do it. So the unemployed are the cost of ‘price stability.’ Keep people unemployed, avoid the economy booming too much, keep workers afraid and encourage them to demonise anyone who is lower than them on the economic ladder, and there’s your answer. That’s why they do it.

But during a time of crisis, the emperor has no clothes.




Quantitative Easing in Australia (Wonkish)

For the first time in our country’s history, Australia has embarked on Quantitative Easing (QE). On Thursday, the Reserve Bank of Australia (RBA) slashed the Cash Rate to 0.25%, which is effectively the floor of the Cash Rate before hitting negative interest rate territory [1]. With QE, the RBA will purchase government bonds to drive up their prices and hence lower their yields to lower interest rates throughout the economy, particularly longer-term interest rates [2]. Some tabloid journalists have referred to this as ‘money printing’ or ‘monetising debt,’ but neither of these claims are true. QE, like other monetary policy operations [3], does not create what we call net financial assets. If the RBA purchases a government bond, it sells reserves in return. The commercial bank holds fewer bonds, more returns, but their net financial assets are unchanged. What changes instead are yields as the decrease in the supply of bonds pushes up their price.

What about claims surrounding ‘monetising the deficit.’ Usually what people mean by this is creating ‘new money’ to finance a budget deficit, which is inapplicable for a few reasons. First, if the RBA has a positive Cash Rate target, its supplying of reserves is non-discretionary and will increase or decrease when the demand for reserves changes so that the overnight interest rate aligns with the Cash Rate [4]. In other words, if we run through the scenario of the RBA directly purchasing public bonds as the government runs a budget deficit, the excess of spending over taxation would generate excess reserves in the commercial banking system. Such an excess would cause the overnight interest rate to fall to zero. In order to make the overnight interest rate match the Cash Rate target, the RBA would need to sell an equivalent amount of bonds (the RBA buys reserves in exchange) as it had purchased so that it eliminates the excess supply of reserves that it had initially created.

Second, the money (here I mean net financial assets) used to purchase public bonds is the result of deficit spending in the first place, which raises an interesting question of why we have a ‘public debt’ if the government is the issuer of Australian Dollars (AUD). Well, as part of the emergency response to the coronavirus, we have seen the ‘debt ceiling’ raised to about $850 billion [5], which makes it sound fairly arbitrary. The functional purpose of the public debt is not to raise revenue through borrowing from the public (people would have no net financial assets with which to purchase government bonds if those net financial assets did not exist in the first place through deficit spending on part of the treasury or ‘fiscal policy’ [6]) but, rather, to control interest rates. If there is deficit spending, there is a surplus on part of the recipients of the deficit spending. This means that commercial banks will have more reserves than before, putting downward pressure on their price (their overnight interest rate). To maintain a particular Cash Rate, government bonds are sold to the private sector to drain the excess reserves and so to prevent the overnight interest rate from falling. This happens to be equivalent to QE in not issuing bonds in the first place.

Will QE do much? I have my doubts. The idea of lowering longer-term interest rates is to raise the demand for credit to finance real investment on part of the business sector. The problem is that in a downturn, businesses will not invest if they do not expect to make money in doing so. Will refinancing effects allow for higher disposable incomes on part of households? Not if the assets that are the collateral backing the debt plunge in value (people will struggle to refinance if they are in negative equity).

In other words, shifting interest rates becomes akin to pushing on a string. As much as borrowing can be made cheaper through lower interest rates, the demand for loans must exist for credit to be created. During a downturn, people are less creditworthy as unemployment spikes and job hours are slashed, reducing the capacity for people to borrow. Businesses with fewer sales also have less creditworthiness. In this sense, credit expansion follows rather than leads the business cycle, intensifying booms and busts rather than stabilising the boom-bust cycle.


[1]. The way the RBA makes the overnight interest rate – the rate at which commercial banks lend to one another – align with its Cash Rate is through a ‘corridor’ system. In effect, because the RBA (usually) pays commercial banks 0.25% below the Cash Rate on their exchange settlement (ES) balances (the reserves that commercial banks have with the RBA), commercial banks with a surplus of ES balances have an incentive to lend them to other commercial banks at the Cash Rate because that yields more interest. By the same token, if a commercial bank wishes to borrow reserves directly from the RBA, they will pay a premium interest rate 0.25% above the Cash Rate, which provides them with an incentive to borrow at the Cash Rate from another commercial bank. This time, with the Cash Rate at 0.25%, the RBA has decided to pay commercial banks an interest rate of 0.10% on their ES balances rather than 0.00%.


[3]. Monetary policy is basically what the Central Bank does. The other arm of economic policy decision-making is called fiscal policy, which concerns government spending and taxation.



[6]. The private sector can create ‘money’ in the form of credit but this is not a net financial asset because private-sector lending to itself creates a financial liability. In other words, as part of an endogenous money supply, this is called ‘horizontal money.’ Vertical money creation is sourced through deficit spending as it creates net financial assets.

As another point, to avoid confusion, public bonds and net financial assets are not equivalents per se. Public bonds can be a component of one’s net financial wealth, but this is a portfolio choice. In other words, if the government did not issue public bonds, the recipients would still see their net financial assets rise when there is deficit spending. To make this point in another way, if a private agent used private credit to buy a government bond, it would not have net financial assets. While the government bond is an asset, the loan used to purchase the bond is a liability that must be paid back. As explained before, why public borrowing tends to coincide with deficit spending is to maintain control over interest rates as an instrument of monetary policy. With QE, this function is obsolete because QE floods the commercial banks with reserves.