Alan Kohler went all MMT yesterday:
The RBA’s bond holdings represent only about 11 per cent of the government debt, well short of what the Fed or the ECB and Bank of Japan are doing, but it’s also true that the RBA has effectively financed all of the JobKeeper program with new money.
Is that bad? No, it’s good. In fact, why should future taxpayers fund any of the 2020 pandemic rescue stimulus?
That idea is based on the fallacy that the government is like a household or a business, and that what it borrows must be paid back. What’s the difference? Simply that a government issues its own money.
…Modern Monetary Theory, or MMT – for that’s what we’re talking about – does not suggest that the government has a magic pudding.
In a new book on the subject, called “The Deficit Myth”, economist Stephanie Kelton says: “Just because there are no financial constraints on the federal budget doesn’t mean there are no real limits to what the government can (and should) do. Every economy has its own internal speed limit, regulated by the availability of our real productive resources … 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 the government’s ability to spend money or in the deficit, but in inflationary pressures and resources in the real economy. MMT distinguishes the real limits from delusional and unnecessary self-imposed constraints.”
Quite right. There are other limits too: fairness, meritocracy and the normatives of capitalism. But it’s fundamentally true.
That stirred up a hornet’s nest of Coalition stupid:
I’m not a government Tim. I should be, I think, and the world would be a better place than it is, and I’m far from perfect, but there you go. Governments are not households. https://t.co/0FCn4Hbfyc
— Alan Kohler (@AlanKohler) June 22, 2020
A reminder that Tim Wilson is Chair of Standing Committee on Economics yet he has no idea how the monetary system works.
Next in was Finance Minister Mathias Cormann, glorifying in monetary ignorance:
“The worthlessness of Venezuela’s currency is the result of inflation, 46,000% a year, which in turn is largely caused by the printing of money to finance the government’s deficit of 30% of GDP.“ #wrongdirection #budgetrepairmatters @TimWilsonMP https://t.co/15kMNkd8uW https://t.co/AXPy800uW0
— Mathias Cormann (@MathiasCormann) June 22, 2020
Finally, James Paterson, Chair of Finance and Public Administration Legislation Committee, Chair of Parliamentary Joint Committee on Corporations and Financial Services, Deputy Chair of Finance and Public Administration References Committee, knows how climb the greasy pole. Kick the ABC:
The ABC shouldn’t be advocating wacky economic theories that have been proven to fail https://t.co/nnd556t4Bn
— James Paterson (@SenPaterson) June 22, 2020
The Coalition has potentially more to lose in an MMT world given its only claim to economic management is restricting government debt. But the stupidity actually deepened on the Labor side with Stephen Koukoulas hanging out the dirty laundry not once or twice but all day:
This is money… https://t.co/nGC1eNqqgq https://t.co/I0Ht0SkSkA
— Stephen Koukoulas (@TheKouk) June 22, 2020
There are so many explanations on what MMT isn’t, but very few as to what it is
— Stephen Koukoulas (@TheKouk) June 22, 2020
Rather than households, government debt should be compared to corporate debt:
Most (all?) ASX200 companies have debt to fund their business operations & they have always had debt.
It goes up and down according to the business cycle, expansion etc.
It remains remarkably simple— Stephen Koukoulas (@TheKouk) June 22, 2020
I was a little bit worried that my contempt for MMT was misplaced – but the more I read about it, the more confident I am about my assessment.
— Stephen Koukoulas (@TheKouk) June 22, 2020
So, Kouk didn’t know what MMT was, still doesn’t know what it is but has judged it harshly nonetheless.
MMT as an economic system is what Alan Kohler described yesterday. It’s the basic understanding that all money is created by government fiat, either by itself or by banks which it has authorised to do so on its behalf.
As such, for any government issuing its own currency there are no debt limits. It can print as much dough as it likes, whenever it likes. Either the central bank can buy government debt or just give people money direct.
That might or might not result in inflation depending upon a lot of factors but so long as you have a central bank with an independent inflation target then it won’t end in disaster for prices or currency.
The stickier questions are around equity, that is, how to distribute such largesse. And agency, that is, what happens to people’s motives when they are given free money.
MMT as a policy regime is obviously open to legitimate debate and could very well result in a government deciding not to go all MMT.
But, as usual, the pet shop has escaped its cages, flown mad, and pooped all over itself before it even understands what’s under discussion.
