This coming week a film arguing government deficits are good rather than bad, and the American economist who’s its key protagonist, embark on a tour of Australia.
The feature film, Finding the Money, and Modern Monetary Theory (MMT) economist Stephanie Kelton, won’t be visiting New Zealand. It’s interesting to consider, however, how Kelton and the film might be received if they did visit these shores.
Certainly much of the economic establishment, plus some politicians and pundits in NZ would probably dismiss Kelton and co as dangerous kooks, whose ideas would see the Government throwing money around like drunken sailors, turning our economy into some sort of Zimbabwean-style basket case with rampant inflation.
That’s not a narrative Kelton & Co are unfamiliar with facing in their native United States. They certainly turn conventional thinking on government debt and deficits on its head and have plenty of high profile critics, some of whom appear in the film labeling MMT "voodoo economics" and "a hare brained theory that basically says there’s a free lunch."
But a key argument in Finding the Money is they’re not actually proposing a radical new paradigm. Nor printing money and spraying it around for the sake of it.
Rather, they argue what they’re striving to do is explain accurately how the monetary system actually works. A key plank of this is that government deficits in countries where the Government issues its own currency, such as the US and New Zealand, are actually a good rather than a bad thing. Government debt is the private sector's savings.
“People don’t make the connection that the national debt is nothing but all these safe assets. It’s just our savings,” Kelton, a professor of economics and public policy at Stony Brook University, says. “You could take the [US] national debt clock that scares everyone and rename it ‘the US dollar savings clock.’ And I think everybody would have a very different kind of reaction.”
Or as Peter Coy, a New York Times opinion writer puts it; “The sectoral balances approach means every time you say the government should run a surplus, you are saying that everybody else should collectively run a deficit.”
And Randall Wray, a professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute; "The budget deficit that increases the private sector’s savings, dollar for dollar."
And then there’s this from Pavlina Tcherneva, associate professor of economics at Bard College;
“Money, it’s not something we dig out from the ground, we create it. It’s an accounting devise and money always has two sides.”
Opening both eyes
Kelton says looking through a conventional economist's lens means much of the public discourse is like going through life with one eye shut and one eye open, only getting half the picture.
"And then somebody like me comes in and says ‘let’s make sure we see the full picture’," she says.
The group telling the MMT story in the film largely comprises academics, pointing to former bond trader Warren Mosler as the instigator of their key ideas in the 1990s via a post-Keynesian economic group. It feels a bit like a ginger group, with Finding the Money’s website even asking for donations to help distribute and share the film.
However, Kelton’s certainly had some influence in the corridors of power. She was an advisor to Bernie Sanders' 2016 presidential campaign and worked for the Senate Budget Committee under his chairmanship. She was also one of eight members of an economic working group for incoming President Joe Biden in 2020. And Kelton's 2020 book, The Deficit Myth, Modern Monetary Theory and How to Build a Better Economy, gained wide publicity.
The US-centric film argues some key points including; as the Government's the issuer of the currency it can’t run out of money, for a currency issuer finding the money is never the problem, rather finding the real resources and managing inflation is, currency issuers don’t tax first, they spend first, and; taxes drive demand for a currency. Because of all this the Government's budget isn't viewed like that of a household.
The household analogy, however, is a simple one for voters to understand and often used by politicians. For example, in a recent speech to the NZ Economics Forum it was made by Finance Minister Nicola Willis. After noting the "government books have deteriorated, with deficits since 2019/20 and a return to a wafer-thin surplus not forecast until 2026/27," Willis said what the new government's doing is; "no different to what any household or business does when its finances come under strain."
The thinking's not too different at our other major party, Labour. Whilst NZ government debt increased dramatically during the Covid-19 pandemic under Labour, as it did under conservative governments in Australia and the United Kingdom and under both US presidents Donald Trump and Biden, the ultimate fiscal goal still remains a return to surplus and debt reduction, just in a different way and probably at a slower pace.
And you can expect questions from Labour's new Finance Spokeswoman Barbara Edmonds over whether the Government's promised tax cuts will be fully funded and/or affordable.
Think about this. https://t.co/bR8VIrvd1Z
— Stephanie Kelton (@StephanieKelton) February 21, 2024
Money creation
A key point of Finding the Money is governments, and banks for that matter, create money. Governments by spending, banks by lending. Additionally it argues government taxes "destroy money," which is probably something those of a libertarian bent could agree with.
We certainly witnessed money creation in the Reserve Bank's efforts to prop the economy up during the pandemic.
When Covid-19 hit in March 2020, tipping the world into massive economic disruption and uncertainty, the Reserve Bank embarked, for the first time, on quantitative easing, or QE. This saw the Reserve Bank buy about $53 billion worth of government and local government bonds from a range of banks with newly created money. Additionally home lending banks were able to access $19 billion of three-year money priced at the Official Cash Rate, just 0.25% for most of the period, through the Reserve Bank's Funding for Lending Programme.
The Government hadn't first raised taxes or embarked on bond issuing programmes to fund these central bank initiatives. So if money can be created, or printed, to buy government bonds or be provided for banks to lend, surely it can also be created to do other things?
From an MMT perspective it's important to note the NZ Government borrows in NZ dollar denominated bonds. This, as S&P Global Ratings' Martin Foo noted in an episode of interest.co.nz's Of Interest Podcast last year means; "They have a central bank that, to be frank, can print New Zealand dollars if needed in a stress scenario." S&P, of course, has a 'AAA' domestic currency (NZ dollar) sovereign credit rating on NZ with a stable outlook. That's its highest possible rating, and means the Government can borrow money cheaper than local government and the private sector.
Careful analysis required
Creaking infrastructure, whether it be water pipes, sewerage systems, Cook Strait ferries, housing supply and affordability, roads or public transport, is a major topic of discussion in NZ at the moment. Viewing government finances through an MMT lens, the Government could create the money to fund key infrastructure projects. However, that doesn't mean it should just charge ahead and do so, Kelton says. A careful analysis, including of the likely inflationary impact should be undertaken before a decision is made.
"If you want to do $2 trillion of infrastructure investment, what are the real resources that we’re going to need, where are we going to get the contractors, the architects and the engineers, the steel, the concrete, the machines? Show me that you have access to the real resources. Or are you going to have to compete for those, and that tells me that you’re going to be bidding up prices," Kelton says in the film.
"The best defence against inflation is a good offence. It’s to think about it ahead of time, it’s to consider before you allow a vote [in Congress]."
As for banks, the film argues private banks create money, rather than the conventional idea they lend other people’s money, and this can also add to inflationary pressure.
If banks lent other people’s money; "we wouldn’t get global financial crises, we would not get speculative bubbles in housing," Wray argues.
Harking back to the US response to the Great Depression and World War II, the film argues from an economic perspective the issue wasn’t finding the money to combat these challenges. Rather, it was reconfiguring the economy and acquiring the resources to do so. Moving on from here, there's subtle promotion of the Green New Deal, a US congressional resolution introduced by Representative Alexandria Ocasio-Cortez and Senator Edward Markey in 2019 that emphasizes environmental and social justice while calling for new job creation.
Climate change is labeled "the ultimate inflationary pressure in front of us," with the film's narrator noting; "we will need to very carefully manage our real resources while we decarbonise the economy if we want to keep prices stable in the future."
Whilst those promoting MMT tend to have progressive political leanings, Kelton noted in her book; "MMT can be used to defend policies that are traditionally more liberal (e.g. Medicare for all, free college, or middle class tax cuts) or more conservative (e.g. military spending or corporate tax cuts)."
Money an organising tool not a scarce resource
Towards the end of Finding the Money the narrator acknowledges being able to create money doesn’t solve all our problems.
"The real challenge resolves around how we can organise our collective resources to allow humanity and the rest of the living world to thrive, within planetary boundaries. If we have a vision for a better future money is not the scarce resource we need to go out and find before we can start building it. Money is the organising tool we can use to organise our people and real resources to make that vision a reality."
And Kelton adds even if the MMT view were to become the accepted norm, there'd still be disagreements about the best way to use the deficit.
"But at least we would be having the right debate…The question isn’t 'will it increase the deficit?' The question is 'will it increase inflationary pressures?'," she says.
What about MMT in NZ?
So what are the chances of any NZ politicians trying to change the conventional discourse around government deficits and debt to an MMT one? As we strive for a net-zero carbon emissions economy, against the backdrop of other challenges, there'll be more pressure on the Government's balance sheet. However a politician publicly championing MMT, and trying to change the narrative around government deficits and debt, wouldn't find the going easy.
It's much easier to keep telling voters the Government needs to tighten its collective belt, just as households have had to do. And that too much debt is a bad thing. Detailing why you believed new thinking was needed wouldn't be easy in an environment where some political journalists, who report politics like a sport, are want to say "explaining is losing." Then there's political opponents and the dire results they'd say your policies would lead to.
Ultimately governments make political choices. Whether it be a Covid-19 lockdown and rolling out a wage subsidy scheme, or offering tax cuts benefiting those on higher incomes and landlords, governments typically manage to find a way to fund what they really want, or believe they need, to do.
For her part, Kelton appears to be realistic about her and her allies' chances of moving the dial to a place where their world view becomes the dominant one.
"Do I think we’re going to win? I won’t say no, but it’s going to be a hell of a fight," she says.
79 Comments
Ill-informed = ignorant; agreed, re first poster.
Kelton makes two incisive comments - quoted above - which suggest she's on the right track.
"If you want to do $2 trillion of infrastructure investment, what are the real resources that we’re going to need, where are we going to get the contractors, the architects and the engineers, the steel, the concrete, the machines? Show me that you have access to the real resources. Or are you going to have to compete for those, and that tells me that you’re going to be bidding up prices,"
"The real challenge resolves around how we can organise our collective resources to allow humanity and the rest of the living world to thrive, within planetary boundaries. If we have a vision for a better future money is not the scarce resource we need to go out and find before we can start building it. Money is the organising tool we can use to organise our people and real resources to make that vision a reality."
Thank you Gareth - great article
Real resources that NZ lacks and must acquire (in competition) in (largely ) USD.....unless we are prepared to adopt autarky and all that presents.
Id suggest we are not (in the overwhelming majority) prepared to accept such a restriction.....and so we will continue until we cannot.
Elmo boy - first those countries’ debt is borrowed in US dollars. That means they don’t meet the MMT requirement of sovereignty. Second they likely failed to consider the resource/ inflation constraint. Third, they weren’t actually trying MMT as far as I’m aware.
NZ is a sovereign currency issuer whose debt is denominated in NZ dollars.
“the NZ Government borrows in NZ dollar denominated bonds. This, as S&P Global Ratings' Martin Foo noted in an episode of interest.co.nz's Of Interest Podcast last year means; "They have a central bank that, to be frank, can print New Zealand dollars if needed in a stress scenario”
Good article Gareth. As someone with an unhealthy interest in govt financial operations in NZ I can confirm with 100% certainty that our monetary system works exactly as described by the MMT folk. Govt spends new money into the economy (creating liabilities in the form of settlement account balances) and then swaps those liabilities for bonds. Govt does not sell bonds to 'borrow', they sell bonds to change the form of their liabilities. And, yes, govt liabilities are, by any accounting standard, private sector savings. This is not a political position - read Michael Reddell's descriptions of monetary operations for example.
Yes. My biggest beef with MMT is that we don't really understand the consequences as we've come to accept that what Keynes may have recommended at a 'down' period in the economic cycle has become a permanent fixture in the economic blueprints of most of the developed economies and in countries such as Japan and China.
It's hard to take MMT seriously when ultimately it barely addresses the issue of currency debasement and the value of people's time and labor. Bitcoiners obviously have an issue with the tenets of MMT. That doesn't mean Bitcoiners disagree with the general theory, but they may have a different perspective on how it impacts people on an individual level.
What is the recent history on how our government funds/spends and taxes?
Was the funding of infrastructure building different a century or more back?
Sorry, being lazy and wondering if you have a quick answer? I'm just interested after vague memories of reading a book on the history of the Rimutaka incline and why and how that was paid for. Can't really remember much on the how it was paid for part.
Govt financing has been basically the same since the end of the gold standard. Govt spends by crediting new money to private sector, sells bonds to soak up money and provide safe haven for people's savings, and destroys money (and govt debt) by taxing.
Infrastructure investment in the 40s and 50s was basically done by RBNZ creating cash for building stuff. The govt used savings accounts (bonds) to soak up the money and prevent inflation etc.
We certainly witnessed money creation in the Reserve Bank's efforts to prop the economy up during the pandemic.
A recent Bloomberg article described central bank easing with the phrase “pumping money into the economy.” That’s a misconception. Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations. - courtesy of Hussman
by Audaxes | 13th Dec 21, 7:27pm As part of the package of monetary policy measures announced in mid March, the Reserve Bank began to purchase government debt from the private sector, to support the three-year yield target and address market dysfunction. Around $50 billion of government bonds were bought from March to early May, and around $1 billion in early August. These bonds were purchased by the Reserve Bank from a panel of commercial banks via auction, and were paid for with newly created money credited into banks' Exchange Settlement Accounts (these balances do not count as deposits, as they are not held with the private banking sector). Some of these bonds sold by commercial banks would have been purchased from non-bank investors, generating a flow of funds into non-bank investors' deposit accounts.[5] Box D: Recent Growth in the Money Supply and Deposits
Kooks in my view.
I have read the proponents of it. They seem lost in an accounting wilderness explanations. Double entry dances.
But such is not connected to the physical (apology here for channeling PDK). We need to look at the where meat and potatoes are and how they flow.
I have read the proponents of it. They seem lost in an accounting wilderness explanations. Double entry dances.
I find it very difficult to not accept MMT because I don't have the intelligence / chops to reject the theory.
Intuitively and instinctively, it's easy to think of MMT as nuts and dangerous.
Credit emerges when a creditable (pun, sorry) opportunity exists. Eg it's productive, profitable etc. (physical if you like). Although resource for the good activity would be better coming from wealth.
But we are short of those, so activity is reduced. But we could work on it methinks.
Pumping credit in. - really on poorer criteria - is a superficial remedy, supporting second rate activity. (Refer Te Kooti)
It being powered by credit flows is a problem, not a feature. Every borrower has a lender, but we act like money never needs to be paid back thanks to economic growth and inflation. Being in debt is favorable. You end up with a big lender/borrower imbalance
Eventually you are left with a society that does not save money. Not saving means excessive spending. Means excessive debt, asset bubbles and eventually sticky inflation.
Interest rates rise, like the lenders are saying right everybody pay back their debts. Everyone panics because how they thought the economy worked was just reversed...
This doesn't make sense. People borrowing from banks do not borrow other peoples' money. The bank creates the money out of thin air and credits it to the borrowers current account. Loans create money, money is spent, money becomes savings.... loans create savings. Total bank deposits in NZ are about $600bn - same as the total loans outstanding. If everyone repaid their debts tomorrow, total NZ bank balances would be close to zero dollars. Our financial wealth (in dollars) is debt. Debt is money. Money is debt.
Excellent summary reporting. So relevant and such an important topic.
I'd note that it is likely that Donald Trump's massive COVID cash injections (many, many non-essential workers received more in cash for staying home than they would have received going to work - such was the crazy design of that initiative) will be a significant factor in Joe Biden's dream run on most economic metrics.
Recognising this, he announced the massive infrastructure spend - and similarly defends the massive supply of weapons to Ukraine as being good for the American economy. It's like an understanding of and enacting MMT-type policies without admitting the theory has merit.
So agree with the author - that government money creation has to be spent on things that will not generate inflation - and that's so ironic from the point of view that tax cuts generate inflation. Hence, neo-liberalism as a theory always sends us down the wrong track, not only in terms of asset sales, but also, inflation-wise.
To me, that government budgets are not household budgets is as easy to understand as the current opposite mantra. The thing is, the current mantra about 'belt tightening just as households are having to do' gets repeated more than its MMT theoretical opposite. Propaganda (repeat a falsehood ad infinitum) works.
Joe Biden's dream run on most economic metrics
If you accept headline metrics about the US economy espoused by mainstream govt media releases without critical examination, then I could agree that they're experiencing a 'dream run.'
And this is the issue as it relates to MMT. So the US has $2 trillion in annual deficits. Until the US govt can control spending, its hard to see how they're not destined to have high levels of inflation. The Fed just prints and finances the govt.
MMT would argue this is all hunky dory.
Until the US govt can control spending, its hard to see how they're not destined to have high levels of inflation.
Austerity, as it's referred to in neo-liberal economics, is not an inflation buster. Historically, quite the opposite. It depends on what the government spends the money on. If you helicopter money like Trump did (and GR did here during COVID as well) - you will get inflation (and asset bubbles!). If you spend it on creating industry/jobs; infrastructure, et. al - you' don't.
If you helicopter money like Trump did (and GR did here during COVID as well) - you will get inflation (and asset bubbles!). If you spend it on creating industry/jobs; infrastructure, et. al - you' don't.
Sounds like you're talking about the Quantity Theory of Credit (Richard Werner) but that is about credit creation via private banks.
The point of helicopter money was to put money in people's wallets to prevent the economy from collapsing. Similar across the Anglosphere.
And I disagree that it had much of an impact on asset inflation compared to the actions of the Federal Reserve.
Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements
As a matter of arithmetic, the trends of US government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it? This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that "dominate" central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially those related to the banking system) if fiscal dominance became a reality?
The premise of this argument is that creating money necessarily leads to inflation. (i.e. Milton Friedman's "Monetarism")
Back here on planet earth, the Federal Reserve, according to its own audit, created $16-$29 trillion in 2007-8 to backstop the failing financial sector as the subprime loans and derivatives they created crashed. Where was the inflation then?
In the Cato institute's published history of 56 historical hyperinflations, none (NONE!) were initiated by "over-printing" currency. This applies to Weimar Germany and Zimbabwe too. In most cases, a shortage of goods and a balance of payments problems predated the money printing.
As for the "outrageously high debt-to-GDP"... conventional economists Reinhart and Rogoff tried to calculate when that ratio led to problems like impaired GDP and inflation. Their suggested debt ceiling: 90% of GDP.
Yet the Japanese have had debt that's 240% of GDP with no such inflation (until the COVID supply shortages).
Meanwhile, Reinhart and Rogoff's paper has been widely debunked. Their examples did not distinguish monetary sovereigns like Japan from non-sovereigns like Greece. A graduate student discovered they even had an error in the formulas on their spreadsheet calculating their magical 90% ratio. Not exactly a ringing endorsement.
As for Friedman's economics, I'd suggest reading his student, Elton Rayack's "Not so free to choose" ... not nearly as well known as Friedman's work, but it dismantles his conclusions. Friedman's economics was tried during the Pinochet era in Chile. Here's from that book:
"Contrary to Friedman's claim that Chile's free-market experiment is an economic miracle, the overwhelming evidence indicates that the experiment has been an economic disaster. In eight of the nine years under the Chicago [i.e. Friedman] model, the unemployment rate was in the double-digit range, three to four times greater than the average of annual employment rates in the decade prior to the takeover by the junta, and in 1982 and 1983 soared to well over 20 percent. Throughout most of those nine years, real wages were significantly less than what they were in 1970 and in 1983 they fell below the 1970 level by 13 percent.
"The record on economic growth is equally deplorable. In the decade of the 1970s, while Latin America's (19 countries) per capita gross domestic product increased by 40 percent, Chile's rose by a mere 8 percent. By 1982, Chile's per capita GDP, as a result of a severe depression, was actually 5 percent lower than it was in 1970." (p. 72)
I can't believe MMT get's any coverage, they are financial flat earther's.
Printing money does not raise our national standard of living, if nothing else Covid rammed that home. We are still struggling to contain inflation.
The only things that increases our standard of living is increased productivity and higher labour force participation - that's it.
I can't believe MMT get's any coverage, they are financial flat earther's.
Considering MMT is Neo-Keynesian, the ideas are mainstream and should be palatable to the likes of Cindy Ardern and Robbo.
Ironically, Robbo appeared not to really understand it. If he did, he would have been focused on promoting large-scale housing projects, regardless of public debt.
From Te Kooti.
"........Printing money does not raise our national standard of living, if nothing else Covid rammed that home. We are still struggling to contain inflation.
The only things that increases our standard of living is increased productivity and higher labour force participation - that's it. ...."
Yes, fully agree. In the end it comes back physical things. Not 'concepts'.
The only things that increases our standard of living is increased productivity and higher labour force participation - that's it. ...."
Only if the value of that production and labor are preserved over time. What's the point of being productive and having ample work opportunities if the rewards (typically money) are being debased?
Increased production, maybe. Look at Australia or Saudi Arabia - you increase standards of living by digging faster with a small segment of your population, not by increasing the efficiency of the bulk of your workers. In Saudi Arabia the locals don't even have to work anymore, how is that increased participation?
It's why NZ brings in lots of migrants who are are perhaps poorly skilled but boost the type of production that brings export earnings and thereby increase our standard of living - perhaps.
Or through another lens, slave labour used to be incredibly productive in raising living standards for anyone who wasn't a slave...
Or through another lens, slave labour used to be incredibly productive in raising living standards for anyone who wasn't a slave..
Bingo. And this is an argument that suggests the ruling elite's manipulation of money doesn't benefit many besides those who control or are closest to the monetary spigot.
Increasing production is not the same as increasing productivity. I’m sure most of us know that, increasing nominal output by increasing immigration is fools gold. We are doing this now, rents up, roads clogged, hospital waiting lists longer.
if anything, our standard of living is falling.
Without proper controls outside of the government and local government this would end in disaster
The ideal is good but governments and councils have zero control over their spend. In fact the more they spend (as per labour in nz) the less value or productivity we see. As they spend on populist items that get votes.. instead of what's needed (see nz recent report on our underspend on maintenance of existing infrastructure vs spend on new infrastructure.. or councils continued lack of investment in water assets despite ever increased rates.
If we had an powerful infrastructure body outside of government with a 5,10 , 20, 50 year plan... and some serious oversight and controls... maybe it could work. Otherwise one suspects we would simply borrow and waste a ton of money and ever 4 or so years a change of government would throw all previous investment under a bus).
If we had an powerful infrastructure body outside of government with a 5,10 , 20, 50 year plan...
This is the general objective of the Spatial Planning Act that the current government intends to repeal. It would have brought together all the various bits of legislation these agencies work under in respect of infrastructure provision (e.g., regional and city/district authorities, NZTA, Kiwirail, DOC, power providers, etc.) in a single planning exercise with an output plan that would provide certainty/direction to all these infrastructure providers.
re ... "Printing money does not raise our national standard of living,"
You sure about that? If the return on capital is positive, e.g. for every $1 spent you get back $2, then it really doesn't matter where the original money comes from.
Would you say the same thing of a business that borrows $1 million from a bank (who likewise created the money from thin air) and then made $2 for every dollar borrowed? No. You'd call that 'good business'.
Stephanie Kelton means well and is correct that Uncle Sam can't by definition run out of money. On the other hand the exorbitant privilege of the US dollar as global reserve currency is not unlimited & they've been testing it pretty hard.
The Deficit Myth explicitly made the argument that because inflation has been low in the past therefore it will remain low right as inflation kicked off with a vengance right after the book was published in 2020. It seems to me that the US ditched the gold standard in 1971 specifically to fund the enormous cost of the Vietnam war that so concerned JFK in 1963 before he was assassinated, since then they've constantly invented new wars to keep the owners of what Eisenhower referred to as the military industrial complex well fed.
The present situation is a feature not a bug, historically every paper currency has ended with debasement and every military empire has ended in corruption and collapse. The incessent public money bailouts for the rich and lack of investment in commodities present a risk of further inflation - in March 2023 the U.S. regional banks were failing before Uncle Sam bailed out wealthy deposit holders.
“Some ideas are so stupid that only intellectuals believe them.” George Orwell
Whilst I'm not a proponent of MMT, thank you for having a discussion about it. I agree with MMT as far as money shouldn't be the constraining factor (to upgrade infrastructure, build schools, hospitals, transportation etc) if resources (people and materials) are readily available. What concerns me, is the long term consequences of MMT and government deficits, and I have not yet read a satisfactory explanation of MMT's likely consequences.
MMT is a subset of Imperialism. Deficits don’t matter when you are the hegemon, where the world needs your currency to buy oil and conduct international trade, and where rules are made by you.
Deficits don’t matter if the US dollar is the world reserve currency, where everyone stores their surplus wealth in USD demand or US paper, Treasuries, will remain buoyant. WW3, the mother of all wars, could sadly be inevitable because a threat to the USD is an existential threat to an economic model based on debt. US public spending accounts for 37% of the economy. Moreover, there are 80 trillion US dollars of unfunded liabilities. The situation in the EU is even more debt-dependent, with 50.5% of the eurozone economy supported by public spending.
- Marc Faber
You should read some Fadhel Khaboub - he talks eloquently about exactly this hegemony, and how global south countries should focus on food and energy sovereignty and getting out from under the 'debt in dollars' thumb of imperialists. Fadhel is also one of the key proponents of MMT.
Forty odd years ago I did a few economics papers that included empirical studies of government's 'deficit spending' (and I've added to those over the years.)
What was extremely relevant is that mostly it worked well but sometimes it didn't, and either drove inflation or didn't provide the ROI expected. But in a nutshell - the pub-economics statement that "government deficits create inflation" is pure nonsense, and completely unsupported by the facts. Further, the pub-economics statement that "government spends on wasteful things" is likewise a nonsense as governments are the only organisation that will spend on things with a low - but enduring - ROI.
Neo-liberalist economic doctrine says government tax cuts (which result in government deficits) should be used as the market know best how to make the economy better through investment in new plant & capacity, and governments should not be directing investment.
This is also hokum as businesses will only invest in new stuff if they can make profits in the next few years. Ergo, vastly important investments that provide smaller returns but for far, far longer simply don't get made. Sound familiar?
Funny, but to this old dog MMT isn't anything new, or particularly 'modern'.
What MMT does do is refocus the narrative on 'good spending', i.e. spending that has an enduring and positive ROI. And where the money actually comes from is not significantly relevant.
And good spending can't be left to neo-liberal doctrine as their focus is driven by vastly short time horizons with privatized profits.
If we want the good things the public enjoyed from the state 50 years ago, we need to accept that governments are the only organisation that will provide them. And to do this, they'll need to first print the money and then borrow it back.
They also need the voting public to understand economics and stop being led by stupid sound-bites from pub-economics educated politicians and self-aggrandizing charlatans around BBQs. (Like I've said, Kiwis are none too bright.)
I have been asking a few old folks about why they think the cutting of the public service is a good idea, given that on a per capita basis, public servant numbers have remained pretty constant for the past decade. They are so all for it, its quite entertaining, they can't see they are going to get dramatically reduced services and hence more crime/social issues. And of course old peoples benefits won't be touched because they are sacrosanct. And if National see us into a depression cos they think austerity works in bad times, that's directly on them. Labour went too far the other way promising all sorts of spending which they shouldn't have, but I would argue going the other way in bad times is significantly worse. The government needs to be spending right now and cancelling multiple infrastructure projects is not the way to do it. Better governance of them is required though, the ferry project cancelling for instance is a debacle that will soon bite them back.
IMO unemployment is about to rocket, far higher than the private sector has any capacity to absorb. The number of IT people with "Open to Work" on their linkedin profile now is huge, these are the highly paid, productive spenders in the economy, who will vanish from the market soon. Just in Wellington there are dozens of job losses in private/public sector, it feels like retail is completely dead, hospitality sector is relying on cruise ships. There will be waves of business closures this year as the public service gets hammered and our infrastructure woes continue. 2024 is not looking good at all.
Thanks for a great post Chris. I just question your assertion that governments have a better longer-term view than private enterprise. It seems to me that governments are fairly short sighted at making decisions, based upon what is best for them to be re-elected within 3 - 4 years?
And sadly, the best way to get re-elected in 3-4 years is by delivering plenty of corporate largesse;
https://www.nbcnews.com/business/corporations/companies-backed-private-…
Governments have the choice to be long-looking. Sure, some - like this current lot - probably don't have the cranial capacity to do so, but nonetheless, they have the choice to buy/orchestrate long-term infrastructure, for the public good. Remember, the public good is much more important than 'making a profit', indeed the latter is not required at all.
Only the neoliberal twats since the mid-70s ('84 here) thought that everything should be done for profit - and the real reason they went that way was encroaching global resource scarcity, coupled with their drive to stay on top. Not that they understood that, or even probably understand it now.
You have a point about recent governments - but the finger has to be pointed at the media in that regard too; short-term shock/horror now move on - is lots of things but it isn't journalism. And that in turn, produces short-span-of-attention voters, and limits what governments can do - the Overton Window thing. Mind you, sometimes we approve of those brave enough to stick to their moral guns - Ardern might as well have stuck with a CGT; at least she would have been respected for consistency and couldn't have fared worse than she did, when she chose populism.
We need to be thinking 50 years ahead - and not just aspirationally; factually.
“At the end fiat money returns to its inner value - zero.” – Voltaire [just hope you die first].
MMT [magic money tree] is a combination of Keynesian deficit spending; the post gold standard ability of nations to create money at will; and quantitative easing (central bank financed government spending) pioneered by Japan. [from someone smarter than me]
See Adrian Orr here where he says the quiet part out loud. [Disclaimer, I’m not a promoter of Bitcoin]
"It's a great business to be in, Central Banking, where you print money and people believe it" - Adrian Orr
Government debt is the private sector's savings.
- savings, meaning one day it can be withdraw, and get paid with interest.
- government is not a bank, nor should it be. government taking deposit(savings) is questionable.
considering the real return on those 'savings' are quite low, the more of this type of savings in a country, the more trouble that economy might face. especially when the government got those savings wasted on non-sense crap.
Savings is the wrong terminology - liquidity is the better word.
I'd recall that the RBNZ printed 60Bn to 'support' banks and Wall St bond holders around the Covid nosedive - no to little interest paid. Why not do the same for non inflating spending - like hip / knee replacements, dental care, railway fare reductions both for commuters and business freight, police and defense - 10Bn ought to do it at zero percent on the Governments books. That's MMT.
liquidity is responsibility of FED, or central bank, not government.
government is not a bank, that's the key things. like any entity in an economy, their ability to utilize resources is the key to success, however, governments are not very good using resources to deliver to general public, and most likely to be a problem to the general public.
What...??!! Do you honestly believe government bonds don't pay interest? Do you believe there's a risk of insolvency if those bonds are payable in fiat currency that the monetary sovereign makes virtually without cost? (And what color is the sky in your world?)
I've read Aussies talked about retiring national debt altogether, and the financial sector protested, putting a stop to that nonsense.
The US actually did pay off its national debt in 1835 (thanks Andy Jackson!). As a result, people did their business with specie (gold) and over 7,000 varieties of private banknotes of varying reliability. There was no public currency. It was a business nightmare, and eventually led to the Panic of 1837, one of the worst of the Great Depressions.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.