Tag Archives: National Debt

Steven Hail Explains Modern Monetary Theory Again!

The Morrison government has announced a massive spending program and many Australians may be asking if we can afford it.

This podcast will answer that question.

We begin the podcast with an interview with Dr Steven Hail. Steven is a modern monetary theory (MMT) economist and in the interview we discuss:

  • Why the budget of our federal government (as an issuer of currency) should not be compared to a household or business budget.
  • The merits of a Universal Basic Income.
  • A Wealth Tax.
  • The US dollar.
  • The Euro.
  • Brexit.

For more head over to The Iron Fist and Velvet Glove

Your Honour, The Fight Started When I Punched Him (Back) 🙄

Some three weeks ago there were two announcements. One by the Treasurer, the other by the (RBA) governor.

The Treasurer’s announcement (some $17 billion worth of chaotic stimulus ) was gasp-inducing and it (almost) stole the show from the RBA governor. But the governor was very clear in announcing two significant measures (in four points). The Treasurer, in turn, hijacked and subsequently obfuscated the governor’s announcements.

The RBA governor, Philip Lowe announced two things:

1) the (target) cash rate down to 0.25% and

2) Quantitative Easing. He announced a minimum of $90 billion of QE. What he also announced was “bond-buying” and targeting bond yields.

This is where the hilarity (and bastardry) begins. 3 (4?) days later the government announced an additional $67(odd) billion of “stimulus” (I call that support). AND the Treasurer displayed his adding up skills: 17+90+67=174. Well done him. 🙄

He added fiscal measures to monetary policy. He added a few limes to bullet train engineering. In order to boast with a “really big number”. Another gasp!

What he, and the mainstream commentary neglected is to explain the RBA announcement. To explain the fact that 2) QE and 3) bond purchases and 4) squeezing yields are the steps of the same operation.

Instead, the Treasurer added the sum of monetary operation (targeting bond yields) to the sum/total of a fiscal operation (injecting $84 billion into the real economy). Money- money, who cares, the learned commentators in the MSM can’t tell the difference between a duck and a lizard, both break eggshells.

But it does matter and it does matter for a number of reasons.

Let’s start with the QE part. The part the MSM calls money printing. Incorrectly.

Steps

  1. the RBA credits government accounts with $X by marking up accounts electronically,
  2. Treasury issues bonds (more or less) to the value of $X.
  3. Traders in the Primary Bond Market bid and acquire the available bonds,
  4. the central bank (RBA) buys the bonds from the traders (secondary market).

This is what the RBA announced and promised: “print” money and buy bonds. Yay! There is an inverse relationship between the price of the bonds and the yields they deliver. The RBA’s buying up the bonds is squeezing the yields, making good on its third announcement (promise) to target a yield of 0.25%. Nobody knows how many of the government bonds it needs to buy in order to hit its (yield) target. It could be 50%, it could be close to 100%. (Beside the point).

Here comes the really funny part: the RBA types numbers into government accounts, Treasury issues bonds to roughly match the RBA account typing, AND THEN the RBA buys the bonds. WTF? So now the bonds are on the RBA’s balance sheets. The bonds are now an RBA asset which pays interest! So when the bonds mature the government refunds the money to the bondholder (RBA) along with the interest (0.25%?) to the RBA. The RBA has just made a profit. Do you know what happens next? The RBA returns the profits to Treasury? OMFG!

Well, this is what QE is. In this case, it is a really opaque and weird way for the RBA to honour every government payment. And it is a really opaque glass for the government to hide behind.

It is essential to realise that the government’s large spending announcements (totalling over $200 billion) were preceded by the RBA’s very confusing QE announcement, and tell me I’m wrong: no *taxpayers’ money* was mentioned by anyone. At all! That is no accident.

But once the population accepted this deficit spending the government is hinting at intergenerational debt. And we all know how that particular narrative is worked …

Except we should all realise that it is a lie and that the majority of the newly issued debt is in fact held by the issuer itself. As Bill Mitchell put it recently, the right pocket is paying the left pocket.

Zoltan Bexley is a woodworker, armchair economist, sustainability and social justice advocate

The National Debt is not What You Think

John Daley is the CEO of a major Australian think tank called The Grattan Institute. I read John Daley’s comments about public debt in Michael Bachelard’s piece in the Sydney Morning Herald.

John Daley observes that the federal government’s Coronavirus-related spending is causing public debt to grow. He believes that this creates a challenge because it means that taxpayers will have to pay higher taxes in the future. This is not correct.

What we call the public debt or the national debt is the savings of the non-government sector, held in the form of tradeable bonds called Commonwealth Government Securities (CGS). This is not a problem. It is in fact a good thing for the non-government sector to have savings. The federal government doesn’t have to issue bonds – it could, if it wanted, provide a different savings vehicle (such as term deposits at the central bank). But it isn’t a problem that the savings are in the form of bonds. The federal government services those bonds in the same way that it makes all of its payments: by having the central bank keystroke numbers into Exchange Settlement Accounts (ESAs). The public debt is not a burden on the government or on taxpayers.

Public debt is not a debt in the ordinary sense of the word. It is really misleading to even use the term public debt or national debt to refer to Commonwealth Government Securities. Ordinarily a debt is a burden – it requires the person who owes the debt to earn income to service the debt. That is obviously not the case with Commonwealth Government Securities because the federal government services those obligations in precisely the same way that it makes all of its payments: by keystroking Australian dollars into existence. The government cannot run out of keystrokes. Therefore CGSs are not a burden on the federal government. There will never be a solvency problem for the federal government in terms of financial commitments that are denominated in its own currency.

John Daley implies that increased deficit spending by the federal government today will eventually have to be offset by federal government surpluses in the future. That is not true, and it has never been true in the history of Australia’s federation. The vast majority of the time the federal government runs deficits. This is because in the Australian economy it is normal for both the foreign sector and the domestic private sector to run surpluses. When this happens, the federal government by definition runs a deficit that equals the sum of the other two sectors’ surpluses.

The constraint on the federal government’s spending is the productive capacity of the economy. The federal government should not target any particular fiscal balance. Whether the federal government should be running a deficit or a surplus, and how large, depends on what is happening in the other two sectors. The federal government’s fiscal balance should be allowed to rise or fall to whatever level is needed at the time to provide good quality jobs for all who want to work, ecologically sustainable production, and stable prices, while meeting the savings desires of the foreign and domestic non-government sectors. In Australia that will nearly always involve a federal government deficit.

The only circumstance in which it would make sense to have a federal government surplus is if the foreign sector were running a large deficit (or put another way, if Australia were running a large current account surplus with regard to the foreign sector). In that situation a federal government surplus would probably be necessary to delete some of the non-government sector’s spending power in order to prevent accelerating inflation.

Some people who can talk authoritatively about these topics include Steven Hail, Bill Mitchell, Martin Watts, and James Juniper.

Nicholas Haines works in the disability support sector in Brisbane, Australia. He has a Master’s Degree in Development Practice from the University of Queensland.