I have received several E-mails over the last few weeks that suggest that the economics…
The new Australian treasurer’s comprehension of his brief is dire
I wrote last week in this blog post – We have a new federal government – finally some decency will hopefully return (May 23, 2022) – that Australia had finally rid itself of the disastrous conservative government that had violated our nation for the last 9 or so years. It was a moment to celebrate, given that we could not have fallen much further in the eyes of the world and that our society was falling apart from the neglect and inaction of that government and the favours it did for the cronies in business that supported it. But I stress the temporality of ‘a moment’. The new Ministers were sworn in yesterday and have hit the road running with all sorts of press conferences and statements. Some of the things I am hearing sound like an improvement. But the statements from the new Treasurer suggest that nothing much has been learned from the GFC, the pandemic and the period in between. And unless he changes his tack, we won’t see anything ambitious achieved in the next 3 years.
The Treasury lies continue
During the GFC, I wrongly thought that the economics profession would become so discredited for all the wild and erroneous predictions they were making about the solvency of governments, about bond yields and inflation that we might see some material change.
There was some change but the mainstream troops quickly regrouped, took over some of the new insights that Modern Monetary Theory (MMT) provides as if they had come up with them themselves, and moved back into dominant mode.
No careers were jettisoned.
Then the pandemic came and the same thought crossed my mind.
In 2020 and 2021, as fiscal deficits rose to relatively high levels historically and even the Reserve Bank of Australia started buying Australian government bonds, such that they hold around 90 per cent of the new debt issued since the onset of the pandemic, I thought well it would be hard to go back to the old narratives about fiscal balances and fiscal space.
It seems that I might be wrong again.
Central banks are all moving back into the inflation targetting mindset – well the Bank of Japan hasn’t caught the fever yet – and treasury officials and their political masters are resuming all this talk about how times are tough with the energy crisis and inflation is accelerating (because Covid is still a problem despite our attempts to deny that) but that the scope for fiscal policy interventions has gone because of the build-up of public debt from the pandemic.
It seems that we didn’t change the record, it is still stuck and we have had the volume on the hi-fi down for a few years.
Our new Labor government in Australia is ridden with ‘factions’ – left and right. There is nothing worse, I can tell you, than a Labour politician that identifies with the Right faction.
For UK readers think Blairite.
For US readers think blue democrats.
For others you can fill in your own context.
The new Australian Treasurer, who is in charge of fiscal policy is from the Labor Right faction and claims to be a ‘fiscal conservative’.
I hate that term.
For a start it means they don’t actually understand what fiscal policy is about – they talk in terms of ‘$A1 trillion of debt’ – which is the new mantra in Australia, without mentioning that the change in the level since 2020 has almost all been bought by the central bank – which is part of government anyway.
Government buying its own debt (Treasury -> RBA), paying itself interest (Treasury -> RBA), then paying itself to redeem the debt on maturity (Treasury -> RBA), then, to top it all off, paying that redemption cash and income flow back to itself (RBA -> Treasury) and calling it ‘dividends’.
Hilarious really.
But the art of fiscal policy has nothing much to do with financial ratios. They just reflect what is being done in the economy with the policy interventions.
The correct appraisal of whether fiscal policy is responsible, imaginative and sound is whether the functional outcomes that are the target of government policy interventions are achieved.
Do we have full employment (properly defined)?
Do we have a coherent climate response?
Are we providing good quality (energy efficient) homes to low income earners?
Are our hospitals effective?
Is public education delivering on its ambit?
etc etc
Functional aims.
If we answer yes to that and we are operating within the real resource space that is available to government (which means we are at full employment with the correct distribution of resource usage between public and private to achieve the aspirations of society) then the number that is accounted for at the end of each financial year as the fiscal deficit or surplus is just a passing curiosity.
Those financial numbers should never be the target of policy makers.
The aspirations are the targets and the numbers will be whatever it takes to achieve the targets for societal well-being.
Fiscal conservatives don’t understand that, which is why the Labor Right are unqualified to be in charge of fiscal policy.
Cue to the first few press conferences that the new Treasurer has given in the last few days.
The new Treasurer published an Op Ed today (June 2, 2022) in the Murdoch press – with the headline “There’s no use mincing words: our challenges are dire”.
I won’t link to it because I don’t want that masthead to get any traffic.
The new Treasurer claimed that there were three challenges:
1. Inflation – Yes.
2. Declining real wages – Definitely.
3. “a budget heaving with more than $1 trillion in debt” – This is where we get depressed.
He traced these challenges:
… to before the pandemic – debt had already doubled, growth was below trend, productivity and business investment were weak, wages were already stagnant before Covid – and so it will take some time to turn things around.
He claimed that “No government, new or otherwise, can flick a switch and make $1 trillion in debt.”
They could start by announcing that they are no longer issuing debt to match their fiscal deficits.
Ending that ‘corporate welfare’ source would be a very good thing to do (note I am talking about this at the upcoming Levy Summer School – see below).
On May 25, 2022, just after the election, the new Treasurer and Finance Ministers gave a – Joint press conference, Parliament House, Canberra
All the weasel words of a fiscal conservative are there:
1. A declining ‘budget’ deficit is “a Budget improvement”.
2. Increasing tax revenue represent “improvements in the Budget”.
3. “there are more good ideas than there is room, in a Budget heaving with Liberal Party debt, to do everything” – when he should have said there are not enough available real resources to do everything!
These sorts of statements are meaningless really when one really understands what fiscal policy is about.
There is no sense that a ‘budget’ can improve or deteriorate.
The labour market can do those things but not a fiscal balance.
But the point is that when the new Treasurer says the state of the finances in Australia are in dire state, what really is the case is that his understanding of his brief is so deficient as to be dire.
The record is stuck.
Let’s move on to the music segment!
The so-called gas trigger
At present gas prices are rising quite sharply as we enter winter and this will hurt low income families particularly.
There is also a threat that supply will run short in Australia over the coming period.
You might ask how that is possible given that Australia is one of the largest gas exporters in the world and produces much more than we use domestically.
Well blame the power of the energy companies for that.
The rising gas prices are all due to external factors – the war in Ukraine has created an increase in world demand for non-Russian gas sources, which has provided local gas suppliers windfall profits through the export markets.
Our energy terms of trade are booming and as I reported yesterday company profits are reflecting that.
The only thing trickling down to workers is higher domestic prices rather than being able to share in the bounty that had nothing to do with smart investment decisions ny the local exporters.
It was pure luck for them that Putin went rogue.
There are other factors involved too – for example, the local energy companies have not invested in maintaining their old coal fire power stations because they preferred to gouge out profits after the privatisations and those generators are becoming less reliable and there is a shift to gas-fired electricity generation.
That is also increasing the demand for gas.
The energy companies (many of which are foreign owned) lobbied (perhaps blackmailed is a better word) previous Australian governments into allowing them to price locally on world prices rather than the local cost of production.
They also received undertakings from past governments that they would not be subject to any reservation schemes which would force them to supply the domestic market first up to local demand, before they could export the surplus.
They claimed if those guarantees were not met then they would not invest in exploration and would take their ‘bat and ball’ and go elsewhere.
The government should have told them to get on their bike.
There would be no shortage of other investors who would have filled the breach given the domestic market would still be profitable – just not as bountiful as supplying spot into the world market at times like this.
So that is why we are one of the world’s largest gas exporting nations but cannot ensure our domestic needs are met at reasonable prices..
Only one state forced a reservation scheme (Western Australia) and they are not having to endure the price hikes at present.
The new government has an out – there is the so-called emergency scheme called the ‘gas trigger’ but formally known as the – Australian Domestic Gas Reservation Mechanism (ADGSM) – which was legislated into being on July 1, 2017 to counter any domestic gas shortfalls in the future.
The mechanism allows the government to divert LNG exports back into the domestic market should the domestic market face supply issues.
It is not a price regulation scheme.
It can only divert uncontracted gas supplies and much of the gas market is supplied on long-term contracts so there is some limitation on how much diversion can take place within the current legislative framework.
The current legislation is in fact flawed and even if the government decided to trigger their legal rights, the law says that nothing would happen until next January.
So hardly a fix for the out-of-control domestic gas price rises.
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.
The companies are all claiming – as they would – that if their capacity to supply world markets is impeded our reputation as a reliable nation will decline.
Which is bunk.
They have been diverting supply into the burgeoning markets as circumstances change in order to maximise profits.
Everyone can see that.
The changes I think are necessary would just mean that their contracted supply for the rest of the world would be less – rather than less reliable.
It is crazy that low-income families are suffering while the foreign owned energy companies are pocketing booming profits.
Interview with the team at Radio Cultura
I did an interview recently with the team at – FM Radio Cultura – which is a radio station in Argentina.
They are running a series of podcasts on Modern Monetary Theory (MMT) through the aegis of Lola Books publisher Carlos Garcia and others.
I thank the team of Alejandra Piaggo, Cesar Crocitta and Carlos for their tireless work in promoting our MMT ideas.
I am talking about whether it is sensible to have an central bank that is institutionally separate from the rest of the economic policy making machinery in government.
There is a Spanish version available – HERE.
Levy Summer School
As I have previously mentioned, I will be presenting four sessions at the upcoming Levy Summer School in the US.
The school runs between June 10-18, 2022 and there are some sessions that will be streamed live via Zoom.
You can download the full program – HERE.
The highlighted sessions will be offered to the public via Zoom using the following link
https://bard.zoom.us/j/83597014068?pwd=SmNNUHJZYXhhamJ3RmlnWlJxMnAzQT09
and Pass-code 083828
You will be able to view my sessions as follows (the times are New York State times):
Monday, June 13 14:45-16:00 – MMT and ZIRP: What Happens If Treasury Stops Issuing Debt?
Monday, June 13 16:15-18:00 – Breakout Discussion: MMT and Policy Design
Thursday, June 16 10:30-12:00 – The Buffer Stock Approach
Friday, June 17 15:15-16:15 – Thirlwall’s Law (this is about the balance-of-payments-constrained growth theory).
Music – Oscar Peterson Trio
This is what I have been listening to while working this morning.
Three people can make great music.
This is a song I love to play on piano and no-one played it better than Oscar Peterson.
The was on his 1963 album – Night Train (Verve) – which is in my view one of the best all-round jazz albums ever released.
You can read about the song (written by Oscar Peterson) – Oscar Peterson – “Hymn to Freedom” – and learn that it was written for the Civil Rights Movement in the US.
This version was recorded live at the Tivoli Gardens Concert Hall, Copenhagen, Denmark in 1964.
The Trio at that time was:
1. Oscar Peterson – Piano
2. Ray Brown – Double Bass, who played in the Trio from 1951 to 1965.
3. Ed Thigpen – Drums, who joined the trio in 1959, after Oscar Peterson dropped the guitarist in the line-up.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.
“Monday, June 13 14:45-16:00 – MMT and ZIRP: What Happens If Treasury Stops Issuing Debt?”
Looking forward to this. It appears to me that the vertical circuit paying interest is a 400 year old mistake that needs correcting. The interest rate and the quantity of credit should be entirely a private sector matter for them to decide amongst themselves within the horizontal circuit.
For a sovereign currency backed by the power to tax, paying the tax vs the alternative of having your property confiscated and your liberty removed *is* the discount/interest rate.
No need for a freebie to banks on top of that.
A punchandjudy show to keep you entertained or a trainer running two horses in the same race.
That’s the conclusion Australians are going to come to when all is said and done. Just listen to what comes out of their lips when they talk about the war. As America flies around the world beating everyone with a big stick to stay in line. The rules based order doesn’t like democracy.
It is all the proof you need even though any history book will add hundreds of years of more proof if you need it. It is no different to how a king and the church operated when they created a narrative and framed it – See The Black Death: Lucy Worsley Investigates on BBC I player for details.
When the so called left won in Germany who did they put in charge of the treasury ? They Just love to outsource that job.
Just line up all the Western leaders up against a wall and take a picture of them and tell me the differences between them. It will take about 20 seconds.
Said from the very beginning it was only a matter of time before you were going to have to write that they have learned nothing from the pandemic. That article is just a few months away.
They know how it works, but every one of them will keep doubling down to try and hide the truth. The media are front running them and have already set the stage. All that’s missing are the characters that will deliver the message. From a teleprompter.
Once you take the viewpoint that of course they know how it works. Everything becomes so much clearer and you can see which class they serve.
Bill,
For the govt not to issue new debt to match its deficits would just leave treasury with a negative balance ?
(Not that it matters as Treasury is just numbers anyway)
Bill,
I wish you could somehow have a dialogue with the Australian treasurer just like you had with Alan Kohler. I don’t know if he is a creature of neoliberal economic dogma and thus believes what we know is incoherent theory and damaging to overall well being.
The status-quo is to be kept apace, until the circus burns down to the ground, all over the west, not only in Australia.
Your newly elected government was forced by its donors to appoint some sort of blairite to assist the elites in the PRICE-PROFIT SPIRAL and the rest of the neoliberal mumbo jumbo.
Someone has to keep repeating “wage-price-putin” spiral to echo the elite’s mouthpieces – the media.
People might figure out that it has nothing to do with wages, and is just another version of austerity.
While the factors driving the current inflationary pulse are transitory……..I’m beginning to wonder if we should regard them as being effectively structural in the short to medium term.
From what I can see, the last time there was a series of major global energy shocks, the inflationary consequences reverberated to one degree or another for the better part of 20 years. Although the powerful trade unions that enabled wage-price spirals to occur in those days have since faded from the economic landscape, I’m not getting the sense that the geopolitical factors behind the current shocks are going away any time soon. The corporations who own the rights to extract the vast energy reserves from beneath Australia’s sovereign soil will continue to game and exploit the situation for as long as possible – that could potentially be years.
I see next to no chance of Putin backing down – once we sift through the western media version of events and realise it amounts to mostly just propaganda and we subsequently understand the reality that Russia views backing out or losing in Ukraine to be not an option since the enemy (NATO) would literally be almost at the gates of Moscow if they did…….it looks clear that the animosity between Russia and the US-NATO is set to continue indefinitely.
Meaning that Europe looks likely to continue throwing global energy companies/cartels free gift after free gift with sanctions on Russian energy, allowing them to maintain sky-high pricing. Euro-elites demonstrated with crystal clarity following the 2008 financial collapse that they have not the slightest qualms about inflicting hardship and suffering upon their own citizens – why would they not do the same now, choking their own economies to “get Putin”? Ensuring an ongoing bonanza for those who own the rights to extract fossil energy.
No doubt this will spur the faster development of alternative energy sources – but no significant offset is going to happen overnight.
I suspect that unless our new Labor government develops the testicular fortitude to take energy policy action that resource sector corporations are not going to be happy with, the situation will probably continue to worsen.
@ Barri mundee You can have a (monologue?) dialogue with the Treasurer and finance folks, or at least have the opportunity of being read by their online gatekeepers. I have had responses from Andrew Leigh to my e-mail approaches on money and banking without ever raising the moniker of “MMT”, as such. And even the RBA will engage, having pointed out their erroneous logic via information contained in published papers on empirical studies relating to the difference between causation and correlation issues vis-a-vis inflation and interest rates (they respond with their own orthodox papers in reply which is a sort of Gish Gallop of unreality but, hey, better than nothing). Perhaps, a bit like creating some ripples in a pool by throwing a stone.
In a similar way I’ve been at Alan Kohler whenever he’s used inappropriate language in his articles such as “taxpayer’s money” and also directed him to issues raised by such as Michael Hudson and Richard Werner with appropriate links. No responses from Kohler, but that’s not the point, and similarly with the politicians. Just now with Kohler he’s starting to go all MMT in a much more subtle way than I would if in a similar position, but then I have no mates in the public fronting orthodoxy or their sycophantic journos that I might not want to publicly fall out with.
The MMT understandings look to be breaking through (again) for Alan in his The New Daily opinion piece of 30MAY22. Reference to a AAA rating for the government is an irrelevancy but maybe he mentions such a thing so as not to scare the orthodoxy and show them he’s still one of them. He has failed to twig that inflation is not generalised but specific to certain “monopolised” sectors of essentials which are taking the opportunity to price gouge under the cover/smokescreen of the shrill media inflation calls, supply side pandemic caused restrictions, the Ukraine war and OPEC gouging.
Also the “snap-back” to a “taxes to pay for” is being revealed as an illogic by his words:
“apart from brief mining booms that lift company tax receipts, governments have never been able to raise enough money from Australian citizens to pay for their spending, which is why debt is pushing one trillion dollars.
And now, for the first time, the politicians are not even trying.”
is not followed up with an explanation that “trying”, as such, is in error because the size of the public debt per se doesn’t matter. Or is that a public step too far for Alan at this time due to a lack of widespread knowledge of the realities of money under an MMT understanding and he doesn’t want to to bring the wrath of the orthodoxy down upon himself? That may be so, by reason of these words: “and the extent to which MMT is correct that running deficits is OK.” where Alan spells out how the ALP with it’s “look at the size of the deficit” calls against the LNP spending have wedged themselves and alludes to a way out of that dilemna with (yet another) enquiry into tax.
A subsequent article by Alan Kohler, in which he demonstrates by examples of how capitalist governments have failed the people in flogging off the people’s assets is further grist to the mill.
It is open to all to engage with the new and old community independents as part of the enlightenment exercise regarding money, banking, the government’s annual fiscal statement and that the economy is not money but the resources that are activated by money. Again, some may respond and many may not but, again, that is not essential if what you say is being read by their gatekeepers. Also the substantive understandings of MMT are out of the ordinary for these new and existing independents as they will mostly be in receipt of “I want you to do this”, “I want you to do that” from electors. All that I want is for them to engage their intelligence so they will understand the realities of the operations of the world of decision making for a currency issuing government that they are in or have just entered.
Spot on, Bill. Sigh. Have you seen Clarke and Dawe’s ‘The Energy Market Explained’? Two minutes well spent.
You might be able to have a dialogue with the Treasurer but until the general public understands monetary operations the Treasurer will keep spouting conventional wisdom. Which is why MMTed is so important and why I put a Continuing Ed course on monetary reality for my local university and write letters to the editor of our local paper.
Thanks Bill for providing the link for the June 2022 Levy Summer School. Will be listening to most talks if possible. Particularly interested in your talk on Thirlwall’s Law . Wishing everyone attending an enjoyable few days and some lively, productive discourse.
Best Wishes
Wayne Mc
Bill, Oscar Peterson is my all-time fav jazz piano player. Amazingly crisp, clean and inventive!
I remain fascinated by the largely unacknowledged impact of MMT on the emergence of an alternative global economic model. Russia, China & Co. seem to be building a currency creation system constrained by resources, as long advocated by MMT, not merely by the arbitrary amount of gold reserves or the artificial amount of tax/bond revenue. Leaving Incendiary politics aside, these developments should provide a fertile area for discussion and exploration by MMTers.
On the topic of inflation, I have some general and then some specific comments.
The distribution of rewards from economic activity and resources that the neoliberals advocate amount to this: nothing more for poor people nor for people on minimum wages. Everything more for the already rich shareholders. Wage push inflation is touted as the problem even when inflation leads wages which have been stagnant; which after all is the real world empirical case. Profit push inflation is ignored even when the profit share of the economy has soared and is still soaring while wages remain flat. This is the disingenuous economics of neoliberal rich privilege.
Even worse, differential inflation is ignored in favor of headline inflation. See this article from Blair Fix of the Capital as Power theorists grouping.
https://economicsfromthetopdown.com/2021/11/24/the-truth-about-inflation/
Examining differential inflation reveals that inflation is a “granular” or differential phenomenon not an “average-able” phenomenon. Inflations of different goods and services track in different ways. At the consumer end, the baskets of goods people buy, and even have to buy, influence how they are affected by differential inflation. Differential inflation also redistributes wealth. Referring only to headline inflation and only using headline inflation in macro-economic policy (as in neoliberal policy) misses the finer macro policies and welfare targeting needed to assist people in different segments of th economy. Welfare stabilizers will only partly assist. Structural changes are necessary too.
Newton,
The Russians are aiming to make the rouble gold convertible. They believe their vast gold resources give them an advantage.
Hi Bill
Another very insightful piece!
Could I just my thinking on one of your comment:
“Government buying its own debt (Treasury -> RBA), paying itself interest (Treasury -> RBA), then paying itself to redeem the debt on maturity (Treasury -> RBA), then, to top it all off, paying that redemption cash and income flow back to itself (RBA -> Treasury) and calling it ‘dividends’.”
You say the redemption cash and income flow back to itself, but I thought that upon maturity of the debt instrument the Treasury (AOFM) would go to market raise the cash and then repay the RBA. The accounting transaction would just be that the debt is extinguished so that the repayment amount (of the principal) wouldn’t flow back to the Treasury per se (but the interest repayments still would). Is my thinking correct here?
ALP are the neo liberals you have when you are not having the LNP.
Clarke and Dawe
2017
• https://youtu.be/ELaBzj7cn14
Michael West energy crisis
• https://m.youtube.com/watch?fbclid=IwAR1sX9mGNrT80-GNjbmsLMwk6fWh8ZHkB75VvgDw-NerOplAAyROv6bHmU0&v=nUi4tkfRMw0&feature=youtu.be&fs=e&s=cl