Tag Archives: RBA

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.

Welcome to the Year of Modern Monetary Theory

The year 2020 is gone.  In Australia, on average more than one article in finance, media or on popular blogs about MMT appeared every day of the year.

This slideshow requires JavaScript.

We had Alan Kohler (financial journalist), James Culham (Institutional Portfolio Management, ANZ) and  Emma Alberici (ex-ABC economics correspondent) come to somewhat of an understanding with MMT.  John Quiggin (economist) review the Modern Money textbook, Nick Gruen (economist) outline it correctly on a podcast.  RBA Governors past and present (see Gallery above) comment on Modern Monetary Theory – even appearing in the senate select standing committee of economics.  It has had many runs in both the Australian Financial Review, The Australian and other media outlets.

Here’s hoping the trend continues. 🍷

Former RBA Governor says MMT is correct!!

Sometime back Joseph Noel Walker, host of the Jolly Swagman Podcast did an interview with the former RBA Governor Ian MacFarlane.  I asked Joseph if I could host just the MMT section here but he preferred a link to the full the podcast on his site.

I take it that he has a fear that the podcast will be taken out of context and I understand that fear.  This is definitely not the intent, much of the podcast does not revolve around MMT and do not wish to inflict things that are outside the foundational scope of this site on its audience.

The piece on MMT goes for a little over 29 minutes and begins around the 42 minute mark of the approximately 102 minute podcast.

You can click on the link below to go there.

One of the things Macfarlane says is that it is only peripherally about monetary policy but that is part of the point of modern monetary theory, that is not about monetary or fiscal policy but the monetary system.

Macfarlane walks us through the process of the monetary system in an identical way to MMT, from the Treasury to the Central Bank to the Bank to the Bank Customer, maybe with slightly different nomenclature.

The primary difference Ian Macfarlane has with MMT is a normative preference (and remains consistent with MMT) is that he prefers the current method of setting the interest rate by selling securities to the primary dealers (banks) first.

Current RBA Governor Phil Lowe (PDF) has said a very similar thing:

“I am confident that the Australian government will be able to raise money in the capital markets, at very low interest rates, to finance whatever level of spending is required. It’s true that, when they have to repay those bonds to us, they’ll have to raise money in the market. They’ll be able to do that. There’s very strong demand for these securities. The best way of doing this is the government entering the market, paying these low interest rates and deciding how much money it wants to spend.”

From an accounting perspective as  Marc Lavoie’s Friendly Critical Look at MMT (PDF) points out this exchange comes out as identical whether the central bank buys securities directly or through the markets.  So nothing of substance actually happens in this exchange.

MMT shows the Interest Rate is a policy variable and in other discussions there is more than one way to set the interest rate.

There has been a lot of fightback over MMT from various members of the current economic hegemony but as is increasingly clear, the MMT framework – which is primarily a description of macroeconomic operations – is correct.

Progressives should not be apprehensive about MMT. Here’s Why!

Often we hear about how Modern Monetary Theory is neither modern nor monetary – I think this is a simplistic view.

We heard it from RBA Governor Phillip Lowe and similar from the former RBA Governor Ian MacFarlane.  MacFarlane certainly has a better grasp of MMT than Phillip Lowe.

I said the following on John Quiggin’s review of the Mitchell, Wray, Watts textbook:

MMT uses the word ‘Modern’ in a polysemic way.  ‘Modern’ is intended as Keynes used the word in A Treatise on Money and since the closing of the gold standard window in 1971.

It is monetary as in it is about how money instruments (currency) shifts real resources (not to be confused with monetary policy) and it is a theory in the scientific use of the word – an evidence-based framework.

Economists often seem unable to break free of jargon or the specialised definitions of their profession. The average person is likely to hear the everyday meaning of words like “government debt”, rather than the economic definition, which in this case would be “net money supply”. We need economists to communicate more directly if they are to enhance our education of economic topics that are constantly misrepresented in the media. For example, people probably think of all the following as “monetary stuff”: my bank deposit; the government securities in my superannuation portfolio (bonds); the (“fiscal”) spending by the government of the day. Yet economists would want to point out important distinctions between these phenomenon. We need simple, clear language to understand these distinctions.

Currently, the Modern Money view is being challenged by other progressives as noted here and parried and riposted here.

It has also been targeted as having an “anti-tax” agenda by some progressives.  Sure they add a minor nuance to it as “movement MMT” but once again I think this is a misunderstanding which once again I hope I have clarified above.

To repeat what I have said previously. Governments can increase spending as much as they like with no need for an offsetting increase in tax revenue or non-fiscal offsets if there is little to no risk of politically unacceptable inflation. This is what these people mean and is perfectly compatible with ‘academic’ MMT and is neither anti-tax nor about weakening workers power, it is about courage, compassion, connection, hope, optimism and empowerment of workers – those currently working and those that are involuntarily not working that desire to do so.

It is a little US-centric but you can see it demonstrated quite successfully by Stephanie Kelton here:

From about the 26th minute

We only need to be better than today’s unemployment policy choice.

There are also many that seem obsessed with taxation revenue instead of building capacity.

“…so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues)…”

To say this is completely misleading to all except but perhaps well-heeled economists. Even as Quiggin wrote and intended to mean “…Taxes are the primary instrument by which resources are transferred from private to public expenditure…” or any other economist that uses a similar phrase.

Saying it is paid by tax revenues gives the wrong impression.

Reframing from money’s ‘how will you pay for it?’ to ‘how will you resource it?’ makes it much clearer and shows money itself is no object [also the title of a Stephanie Kelton presentation].

This itself exposes it is not about an increase in tax revenues but about access to resources and thus resource constraints (inflation) which is detailed informatively by Scott Fullwiler, Nathan Tankus and Rohan Grey at the Financial Times.

Again to repeat myself. MMT’s foundational point is taxes drive the currency. The point about not increasing taxes or tax rates from proponents is that it may not be required to raise them to use particular resources, especially if they are currently idle.

We constantly get comments about revenue/tax revenue as well but revenue raised is  like a budget outcome is determined within the economic system.  We use the fancy word ‘endogenous’ for that.   As Beardsley Ruml wrote many years ago Taxes for Revenue are Obsolete and Tax Policies for Prosperity and he makes a very persuasive case.

Revenue raising evokes false frames for ways thinking about the Australian economy.



Saul Eslake on MMT


HOST: Now we’ve got a little bit of time for Q & A um I’ll try and summarize some of the questions and pose them to Saul.  Uh now there were a couple of questions Saul on uh modern monetary uh theory uh now you did sort of address that a little bit. There’s also a question um being asked about your thoughts on the RBA uh governor’s speech which you’ve sort of um already uh alluded to but maybe if i get um put these two questions to you so someone has asked uh… Adam Sadiq… giving your comment on government arrangements with central banks re: conversion of debt he’s asked are we effectively already seeing MMT in action?

Uh what are the implications of this? So another person’s also asked um you know is it a time to try uh MMT now? You’ve already sort of mentioned that you don’t agree with that. Maybe I could also roll that into another comment which another question that someone has asked about inflation uh you know a concern about inflation into the future with the the fiscal stimulus and the monetary policy in action scene they’re all sort of a little related?

ESLAKE: Yeah good  questions and thank you for those. Um I’ve said in a couple of other places that i don’t respond to proponents of MMT by referring to Weimar Germany or Zimbabwe or Venezuela or post-Soviet republics and so forth; all of which did experience hyperinflation in the wake of monetary financing of deficits because i know enough about the history of those circumstances to recognize that they were all examples of monetary financing of deficits in circumstances where the supply side of the economies in question had been devastated either by foreign occupation as in the case of Weimar Germany or Chiang Kai-Shek’s China or wartime destruction as in the case of post World War II Germany and Hungary or by egregious economic manage mismanagement in the case of any number of Latin American banana republics and Zimbabwe.

The evidence is including from 1930s Japan and Germany where MMT was effectively practised although they didn’t use that term that’s one reason why I don’t think MMT is especially modern uh that monetary financing of deficits isn’t inflationary in circumstances where there’s a considerable margin of spare capacity in the economy so you could in current circumstances experiment with MMT if you are having difficulty financing your budget deficit at acceptable interest rates in the ordinary conventional ways and I would note that Bank of Indonesia, for example, has gone a fair way down that path already as has the Bank of Korea and the Bank of England has raised the possibility that it might do.

I can also concede that in some cases and Japan comes most readily to mind the difference between what MMT proposes and what the bank of japan is actually doing could be seen as semantic in the sense that while the bank of japan and other central banks who bought government securities are receiving interest they’re in effect handing that interest back to the government in the form of dividend payments to the central bank and you could even say that the Reserve Bank of Australia is doing something along those lines.

However, I would also go on to say having conceded that kernel of truth is one of the questions picked up to proponents of MMT that one of the key differences is that proponents of MMT typically argue that it should be governments who decide whether monetary financing should be adopted how much monetary financing should be adopted they often say 100% and when monetary financing of deficits should be turned off and they say that because they think elected governments, that is politicians should be the ones who decide when the marginal spare capacity in the economy has been exhausted and they say to quote Bill Mitchell one of the Australian proponents of MMT

“that that is when the last unemployed person works into the job guarantee office”

that runs the job guarantee that MMT proponents typically propose should be funded by inverted commas printing money the two problems i have with that are that politicians have amply demonstrated in the past that they can’t be trusted to as McChesney Martin famously could it take away the punch-bowl when the party started to get going they just simply have too many incentives to continue to spend money without either paying interest on it if they borrow it or asking people to pay taxes for it if they finance it in that way to be trusted with that decision and that’s not to say that central banks always get it right but they get it right more often than politicians do and ultimately, of course, they are accountable to politicians for whether they do get it right or not since politicians appoint them can sack them under certain circumstances and also hold them to account through uh parliamentary committees and the like.

The second thing is that i think the experience particularly of the 1970s after the first oil shock tells us that capacity is actually multi-dimensional that it’s not only labour but it can also be capital and just as the first oil shock rendered redundant large swathes of the capital stock that were being used at that time and the most obvious example of that is the concord but if you think more broadly that observation applies to a lot of the manufacturing capital stock that had been used in western countries on the presumption that energy would always be cheap that was in effect unusable after the first oil shock and one of the reasons for the stagflation that most western countries experience between the mid 70s and the mid 80s was that policymakers didn’t recognize that we reached potential GDP dictated by the availability of productive capital even though we still had quite high unemployment which also owed something to the demographic bubble that was hitting the workforce at that time and they continued with very stimulatory fiscal policy even though they’d effectively eliminated the output gap , hence resulted in higher inflation.

Now, this partly goes to the second question that you put me to while I don’t think there’s any risk of higher inflation in the near term at all. Indeed there might still be more risk of deflation than inflation for the next couple of years it’s probably the case that COVID-19 has rendered not usable a significant proportion of the capital stock that was in use in advanced economies before the pandemic hit.  Think for example the capital stock tied up in public transport systems, in civil aviation, in hotels, in conference centres, perhaps, in high-rise buildings that may never be fully utilized again.

That capital stock still exists but if we don’t recognize that it will never be used we may actually end up overestimating the level of potential GDP and hence not recognizing when we’ve hit when we’ve eliminated the output gap and if we continue to have stimulatory policy settings in those circumstances then we might end up triggering some unwelcome inflation.

Of course, if we still have high unemployment at that time and we want to reduce it even though we’ve reached the output gap dictated by a capital constraint then what policymakers would have to do would be to engineer a shift in demand to more labour-intensive forms of demand probably using taxation as the policy instrument. and while you know i don’t have any intellectual problem with that i can foresee quite a lot of political problems with it, that policymakers especially those who need to get re-elected every now and then would be pretty quick to identify.

HOST: Thanks a lot that’s a really interesting point too about the uh the spare capacity in the capital and I think people forget about that and focus on the labour market and the supply in the labour market.

Just a little quick follow-up for myself do you think that uh if central bank it’s worth completely in charge of any MMT that alleviates some of the dangers I suppose you pointed out of course they’re still appointed by uh the elected government and do you think that is just too much of a danger?

ESLAKE: Well that’s what Stanley Fisher is in effect proposing um but really and the more thoughtful MMT proponents are quite open and honest about this that in effect entails the subjugation of monetary policy to fiscal policy that monetary policy in effect becomes an instrument by which fiscal policy is implemented and you know I’m never one to propose that fiscal policy decisions ought to be hived off to an independent authority in the way that for example, Nick Gruen has done because I think fiscal policy decisions that is how much of your income is taken by the state forcibly and how much of it is spent on other people that’s an inherently political decision that ought to be subject to democratic processes and accountability in a way that I’d argue although some people would probably feel differently, doesn’t really hold with regard to the setting of the level of interest rates. I mean yes I suppose that has a quasi-political dimension but I don’t think he is as inherently political as decisions about taxation and government spending and the distribution of income are.

So uh you know I think that those sort of decisions do properly remain within the realm of people who we can vote out if we don’t like what they do or people who we can vote in if we prefer what they propose to what the people who are there already are doing um but as i say I think MMT proponents don’t really concede when they’re honest –  which you know I’m not suggesting that most of them aren’t – uh MMT proponents think that these decisions should be made by governments not by elected governments not by technocrats.

HOST: I think uh most of us probably agree that uh favour the technocrats with those decisions than the government.