How (modern) money works

Words by Rui Sihombing & Aiden Bedford

If you’ve been fortunate enough to take a course with Steven Hail at the University of Adelaide, chances are that you’ve probably come across Modern Monetary Theory. If not, then you’re about to read up on an economic theory that just might reshape the way in which you view the political and economic debate in Australia. You might not necessarily agree with the conclusions at first glance, especially given the departure from the language we’re used to hearing. Nonetheless, with the steady proliferation of MMT ideas onto the scene, it’s certainly an idea to consider in the post-financial crisis world where the cracks in orthodox economic theory keep on showing.

So, what exactly is MMT? Simply put, it’s a theory of how money functions in modern economy. Summarised in just one sentence, the key point of MMT is this: Governments with their own currencies can’t go broke. Doesn’t sound so exciting right? It isn’t. And yet the assumption that our government faces a budget constraint is a fairly common one. Here in Australia, there’s a tendency to talk about the government spending as if it was an ordinary household, like you and me. “Keep on spending and this country will go bankrupt soon!” the politicians cry out from atop Capitol Hill. See, the issue here is that it’s simply not true. I can’t print Australian dollars at home without a knock on the door from the federal police. Our central bank, the RBA, is the only institution that can legally issue Australian dollars, and it does every single day, at will. It literally creates money out of thin air by typing figures into a computer.

There’s no inherent, intrinsic worth to the modern money that we use. In the past, money might’ve been backed by things like gold or even other currencies, but for Australia that hasn’t been true since 1983. Why does this even matter? Everyone already knows that anyway, right? That’s true, but for some reason we don’t frame our economic debate that way. As fingers point left, right and centre at debt & deficit figures, suddenly our money’s treated as if it were a necessarily finite resource. It’s even apparent in the words and phrases we use. “Budget”, “revenue” and “borrowing” are all terms that liken the Australian government to a constrained business or household. But again, it’s misleading. Imagine you heard that in a particular year, more money was taken out of the economy than was put in. Taking money out of the economy leaves ordinary people worse off, forcing them to go deeper into private debt to maintain their current living standards, and that’s exactly what happened in the early part of this century — the highest ever increase in Australia’s private debt. But then refer to this as a “budget surplus” and voila! Clueless (or manipulative) politicians battle it out for who can acquire this supposed holy grail. But the only time a budget surplus is absolutely necessary is to cool down an economy at over-capacity with runaway inflation and its associated problems. Does that sound like Australia now? Then we probably don’t need a budget surplus.

Does this make it clearer? As clearly seen, Government Deficit is still Non-Government Surplus

Now a classic response would be to point out Greece. Aren’t they basically bankrupt? Well yes, but the explanation for why Greece, and every other country in the European Union, can possibly go broke is actually fairly simple: the Euro. Their government debts are in a currency which their government does not issue. The Greek, French, and German governments can’t issue Euros. They’re not like the USA or Australia, countries with the ability to control interest rates and print money. The second classic response is the threat of hyperinflation. “Look at the 1930s Germans carrying around stacks of worthless notes in wheelbarrows! That could be us if we carry on printing money instead of having fiscal responsibility!” Sorry, but it’s a ridiculous comparison. Examples like Germany and Zimbabwe had their productive capacity and resources basically annihilated due to war and political turmoil. The relevance to Australia? Virtually none.

Australia today does not and cannot face a crisis of going broke with outstanding government debt. The question then is, what economic problems do we really face? Unemployment, stagnant wages, mortgage stress and gigantic private debt. When John Howard and Peter Costello ran massive budget surpluses they essentially forced households to take on billions of dollars of unsustainable private debt. Thanks to that, we’re predicted to see a recession as early as this year. What is to be done, then? Politicians will probably continue to rave on about “responsible finance” and “living within our means”, but as we understand these policies of trying to force a government surplus is what can create these very issues.

You don’t need to understand MMT to know that the budgets that need repairing in Australia are household budgets; that any financial ‘black hole’ relates to household finances; and that our financial system is fragile, our property market inflated, and our economy at risk because of the explosion in household debt. That this is not obvious to all is the result of an exercise in mass delusion.

There is really only one reasonable solution, if we want to avoid a financial crisis-style depression. The government has to spend more than it taxes. By doing so, it can ensure that the private sector can pay down its accumulated debt. So next time you hear someone talking about surpluses and deficits, step in and remind them about the facts. Peddling economic mistruths only serves the interests of those who benefit from them, and we should be aiming for an Australia where every single Australian call tell manipulative economic scaremongers to simply fuck off. So at this point it’s probably best to leave the final punchline to a key figure of MMT, the late Hyman Minsky: “Unless we understand what it is that leads to economic and financial instability, we cannot prescribe — make policy — to modify or eliminate it.”

(if any people would like to dispute the claims made within the article we would be glad to demonstrate these claims through mathematical accounting identities and models, as these have been omitted for simplicity)