Thursday 2 April 2020

Where is all the money coming from?

Covid-19 will cost us heaps - but don't worry; or should we!

As these strange days turn into weeks and months, it will become increasingly important for us to understand where money comes from. The Federal Government is committing billions of spending to combat the health and economic impacts of Covid-19 but where is it coming from?  Already Ministers and commentators are speaking of massive debts being incurred.

No financial limits
Our Federal Government  is a ‘currency issuing sovereign government’, which means that it issues its own currency and is free to purchase any ‘goods or services’ available in Australian Dollars that it wishes and is authorised by the Australian Parliament. It does not need to borrow before it credits a supplier’s, contractor’s or employee’s account. Contrary to all the ‘pollie speak’ over the past decades, there is no financial limit to how much the Federal Government can spend into circulation and it does not need our taxes to enable its spending.

There are however finite, practical limits to Federal Government spending; the productive capacity of the nation must not be pushed beyond its real, physical limits by the money put into circulation otherwise undesirable inflation will be generated.  The Government can control the amount in circulation by the collection of taxes. 

The radical ideas above - no need to borrow and no financial limits on Federal Government spending - are encompassed by Modern Monetary Theory. MMT explains how the system actually works! We have a very complicated and extensive monetary system and MMT covers every aspect even though the basic ideas are quite simple! But it is important to understand that MMT is not a new system of government finance; it is a different way of understanding what already is and how it functions.

MMT and Turbo-Jet Propulsion
It is vital that greater numbers of us make the effort to see the system through the insights of MMT because Modern Monetary Theory has the same relationship to our politicians’ professed concept of Federal finance as the theory of turbo-jet aircraft propulsion has with the concept of aeroplanes clawing their way through the skies with wooden propellers.  Our political class - and their supporting commentators - have a very elementary concept of Federal Government finance - we pay taxes, then they can provide the public services.

Like the theory of turbo-jet aircraft propulsion, Modern Monetary Theory has been developed by looking at the existing factors and relationships from a different, more fundamental angle and has, like turbo-jet propulsion, the potential to revolutionise how the public is served by the system – for better or worse! Airliners or bombers!

A Wicked Problem
Unless more of us get a grasp of these ideas, we may be dragged into times of unnecessary scarcity, austerity and greater inequality by uncomprehending politicians; we could be having properly funded public schools, hospitals and transport links and enjoying near-zero under-employment. The danger is that if politicians do come to understand that there are no financial constraints on spending - and Covid-19 spending is demonstrating just that - the Government of the day may spend heavily to buy the next election, overspend on corporate welfare or indulge other extravagances with our money. There is form here!  

Understanding how a system really works allows its potential to be used and its limits to be recognised. We are going to need the full potential of MMT – backed by widespread public understanding - to rebuild Australia decently. 
   
The ‘wicked problem’ of political ignorance of MMT versus understanding the potential and misusing that knowledge, is very well debated in the latter part of the discussion between Alan Kohler and Bill Mitchell on Bill’s blog and in Bill’s subsequent comments posted there. 

From the Horses.......
To increase your understanding of where money comes from and how it can be used, listen to the founders of MMT, Professor Bill Mitchell of University of Newcastle, NSW and Warren Mosler in An Introduction to MMT at a recent ERA conference in Adelaide

Also, Google Modern Monetary Theory and follow any link that names Prof Bill Mitchell, Prof Stephanie Kelton, a respected US proponent of MMT or the Adelaide based, ERA.

See also my post, 'Paying for public Services......' of 16 January 2017







1 comment:

  1. I would very much like to be in touch with Colin Evan Cook. I'm looking for his nephew, my childhood friend Stuart....

    ReplyDelete