Here's something that might surprise people. There's a new theory of modern money and it is going to piss off all the people wanting budget surpluses.
The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there's no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges.
They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there's plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis. MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany's Weimar Republic in the 1930s.
Modern Monetary Theory has an intriguing link to Australia. The term was coined by veteran University of Newcastle economist, Professor Bill Mitchell, and he is a passionate advocate for the theory.
Mitchell argues that outdated "gold standard-type thinking" – from a time when governments accepted effective constraints on how much currency they could print – is wrongly applied to the modern financial system with fiat currencies, floating exchange rates and deregulated financial markets.
"The economics that apply now are nothing like the economics that applied under a fixed exchange rate, convertible system," he said.
Mitchell says a fundamental problem is that most people, including politicians, wrongly equate government finances with managing their own household budget.
"The way mainstream economics is taught plays on that analogy all the time in the sense that the government has a financial constraint just like you and I," he said.
If fact, says Mitchell, household budgets and government finances have nothing whatsoever in common. He doesn't even like to use the word "budget" to describe the government's finances because it implies they work like a household budget.
"A government that issues its own currency, like the Australian government, has no financial constraint. That's the starting point."
Which goes back to what Taro Aso was saying 5 years ago about the Japanese currency. Naturally, you can see a huge cadre of resistance to this notion of a government printing as much currency it needs. But in Japan, they've been doing this simply to stave off massive deflation that happens when the equivalent money simply sits in the banks. It remains true that printing money leads to inflation - but in the face of massive deflation, it might just be what is needed. After all, interest rates certainly have room to move up should inflation actually become a problem in Japan.
In Australia, it might be a little trickier because there already is a Property Bubble that shows no signs of abating. If the government printed money, chance are it would get sucked into the property market and simply inflate prices there without ever heading out to where the capital is needed. In fact, it's not as if it's working great in Japan either because even with negative interest rates, the money tends to go from the Central Bank out to the banks and then doesn't get invested. It doesn't get invested because there's no demand.
Which begs the question about helicopter money and just where this helicopter money is being dropped. For the last seven years, it is banks that have been getting the kid-glove treatment of low interest rates and Quantitative Easing programs to shore up their loan books and bottom line. Naturally the banks have bounced back strongly even as the actual economy has stayed stagnant in the G-20 world. When you think about it, the various QE programs and money printing programs on the whole have been showered upon banks. And there's no reason to think that banks would contribute to aggregate demand in the context where the banks are supposed to offer more credit to the already indebted private sector. Nobody wants more debt in this current context of record private sector debt.
If the government really wants their helicopter money to work, you need to shove it straight into the pockets of the ordinary citizens to bolster their spending - not hand it banks in the hope the ordinary citizen decides to up their credit card limit when they're already n debut to their eyeballs. The obvious-as-daylight answer is that governments should spend more on welfare payments. Just ramp it up to a living wage and let the people decide how that money should be allocated in the economy.
You can hear the howls of complaint that this is "rewarding" the 'dole-bludgers', but the point is, you're not going to get more aggregate demand out of a population that has little cashflow and maybe in hock to the eyeballs on credit. Debt relief from the bottom up is likelier to go along way.
Two From Pleiades
If you want to know why banks aren't particularly helpful, well I've got just the pair of articles for you from Pleiades.
The first is about how contemporary economic orthodoxy might be a big con job to enrich the 1%.
The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to Gross Domestic Product. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead that financialized economies have to carry.
What this means in the most general economic terms is that finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.
They also extract property ownership. In the sphere of public infrastructure – roads, bridges and so forth – finance is moving into the foreclosure phase. Creditors are trying to privatize what remains in the public domains of debtor economies. Buyers of these assets – usually on credit – build interest and high monopoly rents into the prices they charge.
In case you were wondering, the whole QE thing didn't really help people on Main Street; it basically fluffed the pillow for Wall Street so it could continue to exploit the real economy. That extract there also points out the folly of the Gillard Government when it wanted the post-mining-boom economy to be led by housing and construction. It was a dumb idea because houses aren't really capital investments in the sense that factories or even shop-fitting might be. A house is much moe like infrastructure. Once it is built, it does no provide production. Just like roads and public transports and utilities, it serves a vital function of providing shelter, but a house in of itself does not become a production centre in the economy.
In fact, this great muddling of infrastructure and capital investment has become worse in the context of privatisation and Private Public Partnership projects whereby a project like WestConnex is deemed worth doing even though it will have zero positive effect, simply because it costs $18billion. The logic of the government is that if it pumps 18billion through the economy, something's bound to stick. It completely ignores the fact that if you spend $18billion and the outcome is zero effect, then you've wasted the time and money.
The reason the big end of town and especially banks like deals like WestConnex is because they profit first, and all the money that goes through their system somehow sticks into their profit structure through fees. But I digress.
This brings me to the second article which posits that the global financial markets are a great big Ponzi scheme:
HUDSON: Here’s what happened. Marx traumatized classical economics by taking the concepts of Adam Smith and John Stuart Mill and others, and pushing them to their logical conclusion.
Progressive capitalist advocates – Ricardian socialists such as John Stuart Mill – wanted to tax away the land or nationalize it. Marx wanted governments to take over heavy industry and build infrastructure to provide low-cost and ultimately free basic services. This was traumatizing the landlord class and the One Percent. And they fought back. They wanted to make everything part of “the market,” which functioned on credit supplied by them and paid rent to them.
None of the classical economists imagined how the feudal interests – these great vested interests that had all the land and money – actually would fight back and succeed. They thought that the future was going to belong to capital and labor. But by the late 19th century, certainly in America, people like John Bates Clark came out with a completely different theory, rejecting the classical economics of Adam Smith, the Physiocrats and John Stuart Mill.
HEDGES: Physiocrats are, you’ve tried to explain, the enlightened French economists.
HUDSON: The common denominator among all these classical economists was the distinction between earned income and unearned income. Unearned income was rent and interest. Earned incomes were wages and profits. But John Bates Clark came and said that there’s no such thing as unearned income. He said that the landlord actually earns his rent by taking the effort to provide a house and land to renters, while banks provide credit to earn their interest. Every kind of income is thus “earned,” and everybody earns their income. So everybody who accumulates wealth, by definition, according to his formulas, get rich by adding to what is now called Gross Domestic Product (GDP).
And there, lies the trick.
The dirty big secret is that banks are not a productive part of the real economy. They have never lent to business as stated in the current economic theory. When you think back to medieval banking, they sure didn't lend to businesses. The Medicis lent to governments and sovereigns - as did the Rothschild banks in the 18th and 19th century. Historically, and traditionally, banks simply don't lend to businesses if they can get away with not having to do so. Thus we begin to understand why all the helicopter money thrown about from the successive Quantitative Easing regimens have done so little to add to aggregate demand. The banks simply used that money to shore up their bottom line and handed the profits to the rentier classes. All that money created in the USA and Japan, ended up in the vaults of banks with no intention of being actually utilised. But you be your bottom dollar it got counted towards GDP when they paid themselves.
The rebound of the Big Four banks and Macquarie Bank in Australia tells a story where the historic low interest rates have allowed the flow of money to the rentier class as well. House prices have stayed inflated, but everybody is up to their eyeballs in debt. Even if interest rates were cut to zero, it's not going to help the ordinary citizen, but it will add fuel to the rush of money heading to the 1% - money which will stay unproductive and mostly locked into more rentier activity.
If you don't believe me, just today there's something on Macquarie Bank.
There are no flies on those Macbankers. No sooner had they tapped taxpayers for help during the global financial crisis than they raised $25 billion on global bond markets with a sovereign guarantee. It saved their bacon, then, with breathtaking flair, they doubled down.
Until now, it was common knowledge that the bank merely lent out its cheap government-guaranteed money again at higher rates and pocketed the difference.
What we didn't know is the quality and quantity of the loans. Revelations by the Australian Financial Review's this week however established the bank has since ploughed $33 billion into junk loans.
It is the biggest junk bond binge in the nation's history, a sub-prime tour de force.
Unlike other famous gamblers such as Wild Bill Hickok and Nick The Greek, who punted their own money, the Macbankers – newly monikered the Junk Yard Dogs – have gambled everybody else's, after blithely leveraging it 10 times.
The upshot is that the bank now has more junk debt than it has equity and its default rate is five times that of the major banks.
It poses the question, should taxpayers be subsidising, not just Macquarie's garish executive bonuses, but standing behind what appears to be more of a leveraged hedge fund than a bank?
How the hell are those junk bonds going to help aggregate demand? Clearly the helicopter money went to the wrong part of town to shore up aggregate demand. The better thing to do would be to hand the welfare recipients more money and raise interest rates, and stop pretending going back to surplus is something noble (It's not - it shrinks the real economy). We might even get back the semblance of the real economy we once knew. Heck, it might even grow at 5%. All the same, you don't even see the ALP advocating this because they too have drunk the 'Budget Surplus Is Good' Kool-Aid as well. It's a real shame the lobbyists keep winning in Canberra as they do in Washington D.C. and Tokyo.
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