Okay, lots happening behind the scenes, so apologies for the lack of posting, but here’s an article to make up for it.
The Reserve Bank of Australia (RBA) raised interest rates again this week, claiming the move is necessary to keep inflation low and stable. But according to proponents of modern monetary theory, the RBA’s rationale is misguided. When the RBA raises rates, it is directly increasing the very measure of inflation it claims to be controlling. With wage growth stagnating and supply-side factors driving many price increases, higher interest rates will only slow growth, reduce government revenue, and diminish private-sector income. This undermines the RBA’s stated goal of sustainable employment and economic opportunity for all.
The RBA’s dogged focus on an arbitrary inflation target forces unemployment to rise and penalizes borrowers to privilege lenders’ interests. It’s based on an outdated “loanable funds” view suggesting higher rates attract saver funds and curb inflation. In reality, the RBA creates money electronically, so costs are not a real constraint.
As amateur MMT economist Darren Quinn notes, “Interest rate targeting results in deliberately creating unemployment to control inflation. This is unethical and counterproductive.”
Rate hikes redistribute income to banks and investors, depriving households and businesses.
Data shows mortgages have increased over $2,600 yearly from rate hikes, with another $4,000 hike expected if rates reach 4% – the prevailing view of experts like Centre for Future Work Policy Director Greg Jericho. For a $500,000 mortgage, repayments would rise $400 monthly. This policy disproportionately affects those who are struggling financially and benefits lenders, despite the fact that unemployment caused by the RBA’s actions is the real threat to price stability. When sustaining community welfare, should be policy’s goal, an understanding of money as electronically created by central banks for public purpose is essential.
It’s time to rethink RBA policy based on how modern money works, not discredited theories. Rather than weakening growth to control inflation, policy should support full employment and distributive justice. The RBA should invest in opportunities and well-being for all, not deprive the vulnerable to privilege powerful interests. An evidence-based approach recognizing monetary operations’ real potential could achieve stated goals, not continue producing results opposite rhetoric. With inequality deepening and recession risk rising, revamped policy improving living standards through job creation and investment in human potential is needed – not tightening harming most to advantage the few.
‘Flick a switch‘ certainly seems to be the Treasurer’s favourite turn of phrase and whilst ‘a lot of this requires decent responsible methodical working through the issues in the lead‑up to our October budget‘ is true – ‘a lot‘ does not imply all. Just like with the gas trigger, the newly elected government can just flick a switch, just as the LNP Coalition did at the start of the COVID crisis and it is even easier to do now.
If you could just flick a switch and make this cost‑of‑living crisis disappear … we would have already done that.
On Tuesday monring, he appeared on ABC News Breakfast and said the following:
MILLAR: Will you look at further rebates or one‑off payments? I mean, it is going to be a tough winter for a lot of people.
CHALMERS: … So, we’ll do what we responsibly can. We’ve tried not to limit our options, but we’ve been up‑front with people as well. If you could just flick a switch and make this cost‑of‑living crisis disappear or flick a switch and make a trillion dollars of debt disappear, we would have already done that. …
In this case the flick of a switch involves the stroke of a pen and obtaining a number of votes to pass legislation. Simples.
It is clear now to anyone following policy during the Coronavirus pandemic that poverty is a policy choice when the then Morrison government effectively doubled the rate of Jobseeker payments.
Whilst I grant you the Social Security legislation is long and complicated. The only necessary changes are the changes to tables in the act where calculation of social security payments are made (notwithstanding the entire legislation could do with some simplification). In particular reference to jobseeker payments that is section 1068 and change column 3B to $1235.38 and correct the other columns (e.g. couples) with which whatever multiple is in use.
This is not without precedent as we have recently seen it done for the first six months of the coronavirus pandemic. The Morrison government did this by giving the minister responsible for social security discretionary control of social security payments and operating with a sunset clause or expiry date. We can do this again and be legislated without the expiry date. The risk is this may be prone to abuse so would be improved by using automatic stabilisers, perhaps an index to wages as is currently done with the age pension. Given the current parliamentarymakeup these are not difficult decisions.
We will find out how true it is that cost of living concerns will be ‘front and centre‘ after the Cabinet meeting today. I will not be holding my breath.
Chris Bowen, the new Energy Minister has warned Australia is on the precipice of a gas crisis, and the problem will not be solved quickly.
For the first time, the regulator triggered theGas Supply Guarantee Mechanism, citing a “threat to system security” as a result of insufficient gas supply to meet demand.
This is not the sort of challenge that you can flick a switch and solve overnight
The Treasurer, Jim Chalmers was questioned on Sky News by host Peter Stefanovic:
Are you looking at price controls and curbs on gas exports to preserve supply?
CHALMERS: First of all, the Energy Market Operator, earlier this week, imposed a price cap at the urging of the New South Wales Government, which is an important step and one of the tools at our disposal. I’m not prepared to commit at this point to pulling the trigger. That is the subject of some discussion and deliberation, but we need to be up‑front with your viewers, Pete. Whether it’s the trigger, whether it’s the price caps, whether it’s other policy levers at the disposal of federal and state governments. This is not the sort of challenge that you can flick a switch and solve overnight. This is the consequence of some near‑term pressures that you just ran through. It’s a consequence of cold weather, international developments, changes in our domestic market. But above all, these are the costs and consequences of almost a decade now of energy policy chaos. And our responsibility as the new Government is to make sure that we inject some certainty, some resilience, some robustness into the energy market, improve transmission, and to introduce more cleaner and cheaper energy. The failure of the last ten years, or nine years, to do that, has been a big part of arriving where we are today.
A price cap (ceiling) is a price control, so that’s a yes to looking at price controls.
There is the option of what is colloquially known as the gas trigger but even if pulled now, it cannot commence operation until the 1st of January 2023.
STEFANOVIC: When it comes to stopping or curbing gas exports to reserve that supply though, I note that gas producers have said that 90 per cent of the market is covered by long‑term contracts which are set at lower prices. So, if you were to go ahead with that, you’d be upsetting a lot of people, right?
CHALMERS: Well, that is one of the challenges that the Government and others would have to grapple with if we went down that path. I’m not suggesting necessarily to your viewers, or to you Pete, that we will go down that path. I’m saying that that’s part of the discussions or deliberations that need to happen now. That’s one of the challenges, you’re right to identify. But the trigger would not have immediate effect either. There’s a whole series of processes that we’d need to go through there. So, let’s just be honest and upfront about that. I know there’s an appetite in the Australian community, and certainly among the manufacturers, for some kind of quick fix. In the medium-term and the long-term, the only thing that would avoid this situation is a decent, sensible, collaborative energy policy. We haven’t had that for the best part of a decade. It’s one of the highest priorities of this new Government. We intend to implement it.
This is at least the second time the Treasurer has used the phrase ‘flick a switch‘ and just may be one of his favourite go to lines.
What the Government can do though is the enact new legislation and scrap the ADGSM.
The new law could require domestic markets have to always be fully satisfied first and that rule would have to be built into new contracts.
Yes, it is that simple. So we can put in price controls and curb exports.
The recently elected government is accountable to its Australian citizens.
As The Australia Institute video at the start points out, this is not a long-term solution. We need to accelerate our transition to renewables and that is very much part of the elected government’s Powering Australia plan.
It literally says:
… we are in a race. Every major economy in the world is moving toward renewables and if we do not seize this moment to invest in a homegrown renewables sector, Australia will be left out and left behind.
Given the Prime Minister has said parliament will not sit until the end of July, one can assume it is on the 9th of August for both houses as per the previous sitting agreement. Even better if he returns on the 20th of July or 27th of July as originally scheduled.
The legislation could be passed that day as an interim solution. Tanya Plibersek with her promotion Environment Minister & Chris Bowen as Climate Change and Energy Minister should push for on Day One.
This is how you drive the courage, compassion & connection with the Australian people.
Australian Modern Money enthusiasts are a passionate bunch. Many have got on their soapboxes about our newest Treasurer’s first appearance on 7.30.
The challenges in the economy are pretty clear. We’ve got high and rising inflation and, therefore, rising interest rates.
We’ve got real wages falling backwards quite substantially and we’ve got a trillion dollars of debt in the budget, which will take generations to pay off, but is not currently going to deliver a generational dividend.
And so, the challenges that I’m inheriting from my predecessor are pretty serious challenges. We want to be up-front about that.
We’ve already begun the work of trying to address particularly those three challenges that I mentioned.
The promises that we made during the election, the commitments that we will budget for in the October budget, are all about trying to increase the speed limit on the economy without adding to those inflationary pressures.
It’s economic orthodoxy to say, if you’ve got inflationary pressures, then you need to increase the size of the economy and you need expand its capacity and you do that with cleaner and cheaper energy, you do it by making the workforce bigger through childcare reform.
You train people so that they can work more and earn more in those higher-wage, higher-skill opportunities that emerge in an economy like ours.
And so, our economic plan, our economic agenda, is geared towards those inflationary pressures, and also getting real wages moving again, in a way that doesn’t add substantially to the budget bottom line, but improves the quality of the spending in the budget.
It will take generations to pay down the debt that we’ve inherited.
The budget is heaving with a trillion dollars in debt – not enough to show for it, because there’s all of these rorts and all of this waste that you and I have talked about before.
So the first step is Katy Gallagher and I will begin, as soon as possible, an audit of those rorts and that waste in the budget and that will be an important way to try and go through the budget line by line to make sure that we can either improve the budget position or invest the taxpayers’ money more wisely to get a proper economic dividend for the country.
We’ve already highlighted $11.5 billion worth of budget improvements. We did that when we released our costings during the campaign. We hope to find more budget improvements so that we can improve the budget over time.
But I’ve got to be up-front with you and with all of your viewers, Leigh, and say this is a big, substantial problem – you can’t just flick a switch and make a trillion dollars of debt disappear. It’s going to be a lot of hard work over a long period of time but that hard work has already begun. – Jim Chalmers, Treasurer.
I interpret these statements a bit more generously than most. They are a startling contrast to his 2019 comments.
“I don’t believe MMT is a sustainable funding model for the services that Australians rely on. The only way to properly fund these is by ensuring we have a sustainable level of revenue.
People raise MMT from time to time and I find the conversation interesting, and I try not to dismiss any genuinely-held ideas, but I’m not convinced.
Richard Holden is an economist I have a great deal of respect for and his views aren’t a bad summary of mine, at The Conversation.
Job Guarantee also very interesting and I’m following the debate in the US fairly closely.” – Jim Chalmers, MP.
Reviewing his comments today that it will take generations to pay off the debt is correct if we assume by paying off the debt, he means letting the government debt mature. We are always issuing new debt. The AOFM has announced its future plans. The followers of MMT know that over the course of time the total number of dollars that have been drained from the banking system to maintain the overnight cash rate is called the national debt.
“That’s just a rule someone made up.”
What I believe he really means is there is little productive investment coming out of that deficit matched with debt. As Ross Gittins recently wrote “Who said the shortfall between what a government spends and what it raises in taxes must be covered by borrowing from the public? That’s just a rule someone made up.” This is what I believe the Treasurer means by not delivering a generational dividend.
What is interesting are his remarks on the speed limit of the economy & reference to inflationary pressures, it is as if his words are taken from Stephanie Kelton’s NY Times best seller The Deficit Myth
Every economy has its own internal speed limit, regulated by the availability of our real productive resources—the state of technology and the quantity and quality of its land, workers, factories, machines, and other materials. If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits. However, the limits are not in our government’s ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy.
There is only so much demand that can be placed on our material resources—our workers, factories, machinery, and raw materials—before we push things too far. Once an economy reaches its full employment potential, any additional spending—whether it comes from the government, the domestic private sector (households and businesses), or the rest of the world (foreign demand for our exports)—carries inflation risk.
Chalmers continues about building capacity, increasing wages & removing inefficient spending from the reported rorts. All good things!
The Treasurer does put much of the focus on the debt & the budget bottom line. The debt is in service of targeting the overnight cash rate & the budget bottom line outcome is determined by many different actors outside of government spending and can not be successfully targeted by the government. This is known as an endogenous outcome.
And the debt can be disappeared with the flick of a switch, stroke of a pen, and so on, just by debiting the securities (debt on issue) accounts & crediting the exchange settlement (reserve) accounts. Or you can shift debt issuance to the purview of the RBA – very similar to the previous remark – and ta-da, no more national debt. The choice whether to do this or not is a political policy choice.
OK I just couldn’t help myself. I have to take issue with one of my favourite Australian economists yet again. A terribly nice guy.
We need a nominal growth target of 5-7 per cent. With zero real interest rates on long-dated bonds, that would cut public debt really fast, while allowing for positive nominal interest rates.
First some abbreviations that are in use in the comment
NGDP = nominal GDP MBS = Mortgage Backed Securities QE = Quantitative Easing ZIRP = Zero Interest Rate Policy
MMT proponents argue is that there is a difference between money created by fiscal deficits and money created by bank lending. When the government issues currency into non-government it does so through the Treasury directing its bank, the Fed, to credit non-government deposit accounts, e. g., to pay for fighter planes or to pay grannie’s social security. The transmission from reserves to bank deposits is direct and does not depend on bank lending. Moreover, since there is no liability corresponding to the assets created in non-government in crediting these bank accounts, deficit disbursements inject net financial assets into non-government. Conversely, bank lending nets to zero since each asset has a corresponding liability, so non-government net financial assets remain unchanged no matter how much banks lend.
The reason that NGDP targeting will not work is the flawed notion of the transmission mechanism from reserves to spendable bank deposits. When the Fed buys financial assets of whatever type, it simply increases bank reserves. The erroneous presumption about transmission is that that banks lend against reserves or lend out reserves. Neither is the case, as MMT points out. Rather, bank lend against capital based on demand from creditworthy borrowers willing to pay a rate that is profitable enough for the bank to risk it’s capital against. Increasing bank reserves does not spur banking lending and it does not affect the factors banks take into consideration in lending.
From this is simple to see why NGDP through increasing bank reserves, e.g., via QE, will not increase effective demand and spur increased investment to meet it. The transmission mechanism is bank lending, which is in abeyance, and increasing reserves will not increase it as the failure of QE has shown. Unless the Fed would buy real assets like houses instead of financial assets like MBS, it cannot not inject net financial assets into non-government, and there is no reason to expect an increase in effective demand due to increased bank reserves.The US is already at ZIRP and has been for some time. That has done nothing either. MMT predicted the failure of monetary policy — QE1 and QE2, as well as ZIRP, and QE3 will also fail unless the Fed would purchase real assets, which it is not permitted to do under current statute even under emergency powers, at least as I understand it. Time for fiscal policy to step up to the plate.
…the only difference between the market monetarists and ordinary old keynesians as I see it is that they precisely treat nominal GDP as if it is a policy instrument when of course it is the target.
As we can see there is an immediate contradiction between Hickey’s second paragraph and Quiggin’s view. Perhaps that’s not the transmission mechanism he had in mind. So I asked:
Whilst we could agree with fiscal policy as indicated by Hickey above, how exactly would the monetary policy part work?
Remember the goal of monetary policy is to get you to change your behaviour with existing income contra fiscal policy which does it with additional income.
What we end up with is that monetary policy as conventionally defined cannot do nGDP targeting but fiscal policy can. That raises the question of why you would target nGDP when there are many better targets to use.
Or we could invoke the colloquial version of Goodhart’s Law:
When a measure becomes a target, it ceases to be a good measure
We could continue to discuss how government debt is functionally the net money supply and how debt management is the mechanism by which we adjust rates and more but I feel that avoids the most provocative and productive question.
Would it not be better to target real outcomes & real supports with fiscal policy? Some examples could be any of the Australian Real Progressives goals.
Australian Real Progressives 