RossGittens, SMH, 29 August 2020, We’re edging towards a big change in how theeconomy is managed
Response:
To date, the RBA has not engaged in Quantitative Easing. It has not needed to. The governor of the RBA, PhilipLowe, made this clear in his evidence to the House of Representatives Standing Committeeon Economics on the 14th August. Nor has the RBA been monetising governmentbond sales to finance the fiscal deficit. The RBA has been engaged in monetarypolicy. It has lent to the banks to ensure that they can continue lending tohouseholds and business, and it has engaged in open market operations to betteralign the yield curve. At the same time, the government has been selling bondsto finance its deficit. Many commentators have concluded, incorrectly if webelieve the governor of the RBA, that its lending and open market operationsare effectively monetising the deficit even if that is not the RBA's intent.
I believe the governor, who alsostated that these transactions will be unwound. That is not what MMT advocateswant to hear. They believe these transactions can be funded by the governmentwith money created 'out of thin air'. It is in fact the case that the RBA can,if necessary, create money 'out of thin air'. The government cannot do that.The RBA is the only entity in Australia that can do so. But Philip Lowe hasmade it clear that there is no bottomless money pit and that money created in aMMT-style vacuum will not last indefinitely. It will be sucked back. The RBA'sopen market operations involve repurchase agreements (Repos) with privatesector financial institutions, which means that the RBA has been buying bondsfrom the private sector which must be bought back from the RBA by thosefinancial institutions after three years.
MMT states that a government thatprints its own banknotes, mints its own coin, and has a floating exchange rate,can create as much money as it needs, and that it does not need taxation revenue orrevenue from the sale of government securities to finance its expenditure. Itclaims that the government faces no financial constraint. MMT is wrong. Thegovernment can only pay for its expenditure if it has sufficient funds in itsaccount at the RBA. Its account at the RBA cannot have a negative balance. Thegovernment can access a temporary overdraft facility at the RBA, but if thereis a risk that the balance in its account is insufficient to cover itsexpenditure, the Australian Office of Financial Management (AOFM) must sellgovernment securities to raise additional funds. Government securities must beserviced. Interest payments must be paid as they fall due. When governmentsecurities reach their maturity date, they must either be retired or rolledover. The decision to roll over securities is not the government's decision tomake. The independence of monetary policy, for which the RBA is responsible,and fiscal policy, for which the government is responsible, means that the RBAis not able to lend money to the government. MMT advocates in Australia refusesto acknowledge that these financial constraints exist.
MMT claims that it uniquely knows howmodern economies really work. It is US-centric and Fed-centric. MMT adherentsin Australia are wrong about aspects of the independent implementation ofmonetary policy by the RBA. They constantly confuse how the Australian economyreally works in the 21st century with how they believe it should work. Theylive in a world of metaphor and analogy with descriptions of early forms ofmoney in primitive communities, archaeological scratchings, feudal serfdoms andearly colonial exploitation of indigenous peoples.
If MMT can divest itself of its unnecessaryintellectual clutter, there are two positive contributions that it can make toeconomic policy in dealing with the COVID-19 crisis. First, it has much to saythat is constructive about how deficit and debt can be used to boost aggregatedemand, end recessions, and reduce unemployment, although none of that isreally new. Second, and this may be MMT's one really significant contributionto economic policy, its proposal for a Jobs Guarantee Scheme to eliminateinvoluntary unemployment.
Roget Tonkin
31st August, 2020
