Tag Archives: Quantitative Easing

MODERN MONETARY THEORY ENHANCES DEMOCRATIC ACCOUNTABILITY

MODERN MONETARY THEORY (MMT) is a description or if you prefer, a systemic analysis of currency as it presently exists.

It reveals that taxation is important in driving demand for currency among other things, including the creation of unemployment. After all, there is no unemployment in a non-monetary economy.

Adam Triggs, a research fellow at the Brookings Institution and Crawford School of Public Policy at Australian National University (ANU) wrote back in 2019 that MMT ‘looks like a solution in search of a problem’. That is not the case. MMT shows that the new economic consensus on the monetary system is false and it also shows what tools are available in the modern money toolkit.

Triggs proceeds:

‘If its [MMT’s] stated objective is to achieve full employment, then it appears unnecessary.’ 

This simple sentence is misleading in the extreme. MMT is just what exists. It has a preference for sovereign currencies but can explain any monetary system.

The preference for sovereign currency is because it makes available more independent policy space, enhancing democracy. Triggs then defines full employment as an unemployment rate of five per cent. Oh, the horror! This relies on the mythical “non-accelerating inflation rate of unemployment” (NAIRU), which is sometimes transposed with the phrase “natural rate of unemployment”.

MMT defines full employment (as do all good economists) as frictional unemployment which is somewhere between one and three per cent with zero or next to zero underemployment. These are the people that are switching jobs or are ill. After all, there is no natural rate of unemployment, just as there is no natural rate of homelessness, no natural rate of poverty and no natural rate of illiteracy.

MMT shows that all spending is new spending and is effectively financed by “printing” money. However, the term “printing money” is pretty misleading in economic circles.

What economists usually mean, in fancy terms, is quantitative easing (QE) — the swapping of government bonds for cash. A plain and simple financial asset swap. Bonds are first bought with cash and when QE is implemented the bonds are swapped back for cash. The cash comes first. What MMT means is that all spending is new spending whether done electronically with keystrokes or with physical cash. So, no, QE is not MMT and nor did QE produce inflation anywhere as predicted.

Quantitative Easing explained simply.

MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Triggs talks about the world lending us our own currency which is just nonsensical. For that to be even plausible, lenders would have to get it from us first — the word “sovereign” does the heavy lifting here. Even then, unless in physical cash, it stays on accounts at the central bank. So how on earth is foreign savings in Australian dollars going to finance anything?

Triggs also delves into some new economic consensus falsehoods about rising inflation, interest rates and depreciating exchange rates — as if we do not have the tools to manage these. We do.

The closest thing to a genuine critique or critical analysis of MMT Triggs offers is an appeal to the authority of some “eminent” new economic consensus economists, including Olivier Blanchard, who is moving closer and closer to MMT.

Triggs tries again in 2020 to say MMT is just a rebranding of orthodox economics — what I have previously called the new economic consensus. This is simple to disprove as orthodox economics believes taxes and/or bonds finance government spending.

Stephanie Kelton, author of the bestseller The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, wrote a detailed operational paper that disproved that. The great irony is she was attempting to prove it.

In his 2020 article Triggs said:

For Kelton, the core propositions of MMT are that government budgets are fundamentally different from household budgets, that budget deficits are not necessarily bad, that governments should spend more when the economy is weak, and that governments should focus more on unemployment than budget deficits. She believes that the main constraint on government spending is inflation, that increasing the deficit need not make future generations poorer and that governments can’t run out of money if they have their own central bank, their own currency and no foreign debt.

If that all sounds right and logical to you, that’s because it is. Most mainstream economists have been making these points for close to one hundred years.

If Triggs accepts all this, he is approaching acceptance of MMT. However, to say most mainstream economists have been making these points for years is mistaken.

To quote the Australian developer of MMT, Bill Mitchell:

It is very strange – if all the major features of MMT were so widely shared and understood – how do we explain statements from politicians, central bankers, private executives, lobbyists, media commentators etcetera, etcetera that appear to not accept or understand the basic MMT claims?

Again, Triggs tries to counter with the inflation and/or hyperinflation argument against MMT — to which I repeat, MMT argues for control of inflation through progressive tax rates, the job guarantee and other new automatic stabilisers. It also explains inflation is a resource distribution issue, not a monetary issue.

Kelton herself reflects on this on Twitter in response to U.S. Senator Mike Braun:

‘If you get hyperinflation, then you didn’t follow the recipe. The recipe clearly defines the limits on spending.’

Kelton’s comment is a great counterpoint to relying on politicians to use the monetary system for anything beyond the public purpose. That is the reason we have democratic accountability and vote every electoral cycle.

This article was originally posted on Independent Australia on the 18th July 2021.
I improved the final paragraph.

A Rational Debate on Spending?

Twitter is full of comments around MMT being something you do – rather than something that is, We have articles like ‘Don’t let the Reserve Bank just give the Government money’ and articles that the leader of the opposition tells shadow cabinet to find cuts and spending offsets ahead of campaign.

How Governments Actually Spend

The foundations of MMT are quite simple. Currency issuing governments spend via appropriation bills, the spending is authorised and the relevant account at the central bank is marked up. That bank then credits the appropriate customer. Irrespective of past fiscal positions or the balance the government runs or the bonds they choose to issue, this process doesn’t change. There should be nothing controversial about that. That is the way government spending operates.

The idea that somehow our treasury departments are at the mercy of central bankers or bond market traders is ridiculous. We have seen the Australian government spend some $200bn over COVID and central banks around the world have been purchasing debt on what is called the secondary market. (referred to as Quantitative Easing)

I won’t walk through the whole process here you can read this post and this post. The crux of it is the Australian government creates the dollars via appropriation bills. The finance.gov.au website says there are two types of appropriations:

annual appropriations—a provision within an annual appropriation Act or a supply Act, that provides annual funding to entities and Commonwealth companies to undertake ongoing government activities and programs

special appropriations—a provision within an Act (that is not an annual appropriation Act or a supply Act) that provides authority to spend money for particular purposes (e.g. to finance a particular project or to make social security payments). Special accounts are a subset of special appropriations.

And continues with ‘While appropriation Acts authorise the drawing of money from the CRF [consolidated revenue fund]*, they do not authorise the spending of that money. Legislative authority is required for the Commonwealth to enter into arrangements to spend relevant money for a particular purpose.’

*The CRF is a ‘conceptual’ account created under the Australian constitution. All ‘money’ irrespective of where it is, exists within the CRF. A group of accounts the Australian government holds at the Reserve Bank are known as the offical public accounts (OPA) The numbers in these accounts do not form part of the money supply.

Think of the CRF as a transactional account that records what has been spent and what has been taxed. The numbers in it aren’t what can be spent. The authorisation of spending that comes after the appropriation is found in the Public Governance, Performance and Accountability Act 2013. It has its genesis in the Audit Act 1901. I am working through understanding and detailing the changes. Today the PGPA Act of 2013 under section 51 says

(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2)  However, the Finance Minister must make an amount available if:
(a)  a law requires the payment of the amount; and
(b)  the Finance Minister is satisfied that there is an available appropriation.

The UK for example has its origins in the Exchequer and Audit Departments Act 1866 where the first three subsections state:

(1) This section applies in respect of sums which Parliament has authorised, by Act or resolution of the House of Commons, to be issued out of the Consolidated Fund.
(2) The Comptroller and Auditor General shall, on receipt of a requisition from the Treasury, grant the Treasury a credit on the Exchequer account at the Bank of England (or on its growing balance).
(3)Where a credit has been granted under subsection (2) issues shall be made to principal accountants from time to time on orders given to the Bank by the Treasury.

If you want further evidence that bond issuance or taxes are irrelevant to government spending the UK Government used what they call the Ways and Means facility. They describe it ‘as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.’

The UK Treasury scrapped the issuance of bonds entirely.

“HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.”

As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.

It is coaxed in language to give readers the idea bonds are used to fund spending in ‘normal’ circumstances.

‘The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations.’

The markets never ‘fund’ treasury operations. The appropriation bills do that. The authorisation of the spending marks up an account at the central bank and this is what gives the banks the ability to purchase bonds. It doesn’t matter what the past fiscal positions are. What matters is spending today and whether there are available real resources.

What has been happening with QE is that the debt management departments of treasury have been issuing bonds, having financial institutes buy them and the central banks have been buying them a week or so later. The UK stopped with this whole charade for a while on April 9 2020

So when stuff.co.nz writes

Purchasing debt (issued in the form of bonds) on the primary market means that instead of purchasing bonds from third parties like banks and investors, the Reserve Bank would buy the bonds directly from Treasury itself. One part of the Government would buy bonds issued by another part of the Government, cutting out the middleman. It’s a big move.

They have no clue what they’re talking about. Bond issuance funds nothing. Bond issuance switches currency in reserves to securities accounts. The latter is interest bearing. Though now the interest is paid from the treasury arm to the central banking arm of the government and the central banking arm then credits the treasury. Apparently ending this will be a great cause of concern.

But Treasury’s biggest concern was that skipping the secondary market would give New Zealand a bad reputation as it would look like the Reserve Bank was simply printing money for the Government to spend.

What is so difficult for financial journalist Thomas Coughlan to grasp. Financial institutes in New Zealand obtain NZD in their reserve accounts at the Bank of New Zealand via the NZ Treasury marking up the account. The dollars come from the appropriation bills. There are no printers, just keystrokes.

All this reminds me of when the Australian Government introduced its own notes.

In 1910 when the Australian Government banned private bank note issuance and issued its own via treasury there were objections. The hansards record the member for Wentworth, Mr Kelly ‘We ought further to be informed what guarantees the public will have that this particular method is not being adopted for the purpose of raising money without paying interest thereon by a Government which refuses to borrow. (House of Representative Hansard No.30, p.690, 1910)

There you have it, the same old arguments because some capitalist lose their free lunch. They’d rather keep the way spending works in the dark to demonise public expenditure, collect their interest bearing assets (bonds), watch governments cut public expenditure, privatise public assets, and maintain a desperate pool of workers that work for desperate wages.

And Australia’s opposition party plays into the narrative. The second article quotes that “Two shadow cabinet members, speaking on the condition of anonymity, told The Age and the Herald emphasising budget repair at a time when the Coalition government was prepared to spend billions sent “mixed messages” and “lacked imagination”.

And whoever those mysterious shadow ministers are, are correct. We have witnessed the largest government spending since World War Two and much of the arguments that demonise public spending are the same now as they were for the last century. It is getting tiresome.

But the status quo in the ALP remains. Richard Marles writes

“As Anthony has made clear, all policy proposals should consider options to minimise the fiscal impact and/or be fully offset by savings within respective portfolios,”

That is all from me!

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

MMT Does Not Advocate (or mean) “Monetisation”

Modern Monetary Theory in no way endorses “monetisation.” To the extent monetization is simply a name for quantitative easing (roughly, RBA purchases of long-term bonds), we either oppose it or find it only mildly effective and sometimes propose alternatives.

Whether it comes from Catallaxy, Rabobank or Saul Eslake, these ideas run rampant amongst the economics community.  Allow me to repeat, Modern Monetary Theory in no way endorses “monetisation.” At best we only find it mildly effective and have proposed other ways of achieving the same goal.

An example of an early MMT work that specifically criticizes even the use of the word monetisation is Warren Mosler’s Soft Currency Economics II, a paperback that is not too expensive at used book sites.

First, we believe that entities other than Canberra choose the form of Australian government liabilities through their investment, saving, financial-trading, and other choices.

Regardless of the public’s choice of assets, our central bank, the RBA, buys and sells assets to get its chosen interest rate(s). Of course, interest rates other than the cash rate are determined by other actors. The action of “the markets” (including huge banks) for bonds and other debt securities most closely approximate an uncoordinated supply-demand process. Unless, of course, market manipulation dominates there.

Critics across the spectrum have been gathering that the unique idea of MMT (perhaps because of its name) involves attempts to “pump money” into the system. This process would then likely generate inflation but would allow higher federal spending without tax increases.

In fact, as former Bernie Sanders aide and MMTer Stephanie Kelton puts it in her terrific new popular book (for example, on p. 36), you might as well think of bonds and money as “yellow dollars” or “green dollars”—more or less the same, except one pays interest.

Another place to find a good critique of the idea that deficits “pump money” into the economy is The Scourge of Monetarism by Nicholas Kaldor. In the writings in that 1980s book, Kaldor sought to dissuade British policymakers from an earlier round of fiscal austerity.

What MMT does is explain how the federal spending process works always. It does not call for a change in a method of financing. Moreover, the always-existing method of increasing spending does not require tax increases unless there is a macroeconomic need for them—say to dampen aggregate spending and cool down the economy. Hence, there is nothing magical about the number zero for the federal deficit or deficit increases. The federal government indeed never “pays for” new spending the way households or Australian States or local councils do. Hence, worries about higher deficits as such should not slow our crises responses ever.

This is a remix of Greg Hannsgen, Ph. D, UMKC graduate, Levy Economics Institute Research Associate post.  The original can be seen here.

What MMT Is Not… What MMT is…

Normally at Australian real Progressives we remix for an Australian audience but as this is a recent repost from multiplier-effect from L. Randall Wray and Yeva Nersisyan we did not wish anything to be taken out of context as it refers to specific U.S. events. Just replace Fed with RBA, President with Governor-General and the gist remains. We have dealt with most of these misconceptions  previously.

As MMT has been thrust into the spotlight, misrepresentations and misunderstanding have followed. MMT supposedly calls for cranking up the printing press, engaging in helicopter drops of cash or having the Fed finance government spending by engaging in Quantitative Easing.

None of this is MMT.

Instead, MMT provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, non-convertible currencies. It concludes that the sovereign currency issuer: i) does not face a “budget constraint” (as conventionally defined); ii) cannot “run out of money”; iii) meets its obligations by paying in its own currency; iv) can set the interest rate on any obligations it issues.

Current procedures adopted by the Treasury, the central bank, and private banks allow government to spend up to the budget approved by Congress and signed by the President. No change of procedures, no money printing, no helicopter drops are required.

In the old days, governments just notched tally sticks, minted coins, or printed paper money when they spent, then collected them in redemption taxes and burned or melted down all the revenue. Today all modern governments use central banks to make and receive all payments through private banks. Government spending is still financed by money creation, and taxes destroy money—but in the form of central bank reserves. Instead of wooden sticks, we use electronic keystrokes, which the government cannot run out of. Bond sales merely swap one government liability for another, while paying off bonds reverses the operation.

Critics make a big deal of the separation of the Treasury (the government’s spending arm) and the Central Bank (the issuer of currency), claiming the latter is independent and may refuse to “finance” Treasury spending. The separation of the Treasury and the Fed does not alter government’s ability to spend. The Fed is a creature of Congress and an agency of the U.S. government. Liabilities of the Fed (notes and reserves) are obligations of the United States just like Treasury securities. Yes, different arms of the government issue these, but it doesn’t change the fact that they are liabilities of the United States.

As MMT explains, since bonds can only be purchased with reserves (the government will take only its obligations in payments to itself), the reserves must be supplied first before bonds can be purchased. It demonstrates how the Fed provides the reserves needed to buy the Treasuries even as it never violates the prohibition against “lending” to the Treasury by buying the bonds directly. The Fed has to ensure that funds to buy the bonds are available to safeguard the payments system, to achieve its interest rate targets and for financial stability considerations.

None of this is optional for the Fed. It cannot refuse to clear government checks. It is the government’s bank, after all, and is focused on the stability in the payments system.

Case in point: the Fed engaged in repo operations last September to add reserves to the system when Treasury bond sales and corporate tax payments left the market without its desired level of liquidity, pushing repo rates above the Fed’s desired levels. Any disturbance in the Treasury market will have ripple effects as many financial institutions have sizable holdings of Treasuries. Indeed, the Fed’s very first intervention during the pandemic was in the form of repo operations, citing “disturbances” in the Treasury market.

Government can make all payments as they come due. Bond vigilantes cannot force default. While their portfolio preferences could affect interest rates and exchange rates, the central bank’s interest rate target is the most important determinant of interest rates on the entire structure of bond rates. Bond vigilantes cannot hold the nation hostage—the central bank can always overrule them. In truth, the only bond vigilante we face is the Fed. And in recent years it has demonstrated a firm commitment to keep rates low. In any event, the Fed is a creature of Congress, and Congress can seize control of interest rates any time it wants.

Finally, even if the Fed abandons low rates, the Treasury can “afford” to make all payments on debt as they come due, no matter how high the Fed pushes rates. Affordability is not the issue. The issue will be over the desirability of making big interest payments to bond holders. If that’s seen as undesirable, Congress can always tax away whatever it deems as excessive.


We hope the Coronavirus will teach us that in normal times we must build up our supplies, our infrastructure and institutions to be able to deal with crises, whatever form they may take. We should not wait for the next national crisis to live up to our means.


In conclusion, MMT rejects the analogy that a sovereign government’s budget is just like a household’s. The difference between households and the sovereign holds true in times of crisis and also in normal times, regardless of the level of interest rates and existing levels of outstanding government bonds (i.e. national debt). The sovereign can never run out of finance. Period.

That doesn’t mean MMT advocates policy to ramp up deficits. For MMT a budget deficit is an outcome, not a goal or even a policy tool to be used in recession. There’s no such thing as “deficit spending” to be used in a downturn or even a crisis. Government uses the same procedures when spending no matter what the budgetary outcome turns out to be. We won’t know until the end of the fiscal year as the outcome will depend on the performance of the economy. And the spending will already have occurred before we even know the end-of-the-year budget balance.

MMT recognizes that the constraint faced by government is resource availability. Below full employment government spending creates “free lunches” as it utilizes resources which would otherwise be left idle. Unemployment is evidence that the country is living below its means. A country lives beyond its means only when it goes beyond full employment, when more government spending competes for resources already in use. Full employment means that the nation is living up to its means.

The most important lesson we must learn from this crisis is that the ability of the government to run deficits is not limited to times of crisis. Indeed, it was a policy error to keep the economy below full employment before this crisis hit in the belief that government spending was limited by financial constraints. Ironically, the real limits faced by government before the pandemic hit were far less constraining than the limits faced after the virus had brought a huge part of our productive capacity to a halt!

We hope the Coronavirus will teach us that in normal times we must build up our supplies, our infrastructure and institutions to be able to deal with crises, whatever form they may take. We should not wait for the next national crisis to live up to our means.