It is happening now, MMT. The Reserve Bank is making new money. It ought to be called Modern Monetary Practice, not Modern Monetary Theory. In an address last week, and questions afterwards, central banker Guy Debelle explained it. Michael West reports on the debate over MMT and how it is being used to combat the impending deep recession.
In the corporate press they are indignant. They think purple houses are a “Leftist” conspiracy.
“You can’t paint the house purple,” they cry. “You just can’t do it!”
They are doing it though. There is Reserve Bank chairman Philip Lowe, right before their eyes, paintbrush in hand, decked out in bib overalls, painting the house purple.
“You can’t do that,” they wail.
Yet the purple paint is veritably dripping off Philip’s paintbrush.
He can do it. He is doing it.
What Philip’s doctrinaire critics really mean is that they don’t like it. They hate Philip painting the house purple, they hate purple. Purple is leftist. Purple is irresponsible, purple doesn’t work.
Guy Debelle endorses MMT
Reserve Bank Deputy Governor Guy Debelle ticked every purple box last week in an address to The Economic Society of Australia: We have prised out the relevant excerpts to demonstrate what the bank is actually doing, and why.
In the corporate media, with the notable exception of Alan Kohler – who has approached the subject of MMT logically – they claim MMT doesn’t work because the national budget is like a household budget and has to be balanced.
However, sensible proponents of MMT hold that if an economy is running below capacity, and if there is little chance of inflation, then new money should be created until that spare capacity is gone.
Guy Debelle, both in his speech about the central bank’s policy actions and in response to questions afterwards, confirmed this is precisely what is going on:
- The economy is running well below capacity
- The spectre of inflation is low
- Therefore, the RBA is creating new money (he calls it liquidity) by buying Commonwealth Government bonds from the major banks.
An environment ripe for new money
Firstly, Debelle set the scene: “This has been a major event in the economy. It is going to have long lasting effects”.
“We’ve had a really large drop in output, a really large drop in hours worked, a very large rise in unemployment.”
The economy is running under capacity
“The main thing we’re trying to do is to get stronger growth in the economy … that’s the primary objective … The primary issue we have at the moment is that the economy is operating at a very very long way below capacity, and until we can try to address that … that’s going to be the main channel to try to address low inflation expectations and to try to get the economy going again.”
“Our main objective is to get people to jobs and to get the economy operating at full capacity … ”
There is little prospect of inflation
“While the bond purchases by the RBA increase the liquidity of the system [“liquidity” is a synonym for “money supply”], I do not see this posing any risk of generating excessively high inflation in the foreseeable future.
“Indeed, the opposite seems to be the more likely challenge in the current economic climate, that is, inflation will remain below the RBA’s target.”
“Low inflation coming from the “decline in population growth and a slow rate of technological progress … and the ageing of the population, possibly even more importantly … and a large increase in risk aversion, at least for a time.”
”The more likely outcome is low inflation and a subdued economy …. I do see much risk of high inflation coming from any source at the moment.”
What the RBA is doing about it
The RBA buys Commonwealth Government bonds in the secondary market from the banks (it does not buy these on issue, in the primary market, or directly from the Government).
“As was the case with many other central banks, the RBA bought government bonds in the secondary market to alleviate the dysfunction in the Australian government bond market.”
“To date we have purchased just over $40 billion in Australian Government Bonds.”
“The RBA’s purchases in the second half of March and into April helped to improve the broader functionality in the broader bond market”.
The RBA pays for those bonds by crediting the sellers’ Exchange Settlement (ES) accounts at the RBA – this is new (digital) money. It increases the money supply and provides (potential) liquidity to the banking system. The aim is for the banks to lend it in order to drive activity in the economy.
“As the RBA buys government bonds, the amount of ES balances in the system increases as we credit the accounts of the banks that we buy them from.”
“The $50B of bond purchases have increased the ES balances and provided a substantial boost to the liquidity of the system.”
“As I said in my speech, when we buy government bonds, that puts more deposits in the banking system, so that adds to the money supply”.
“The higher level of ES balances in the system … anchors other money market rates.”
“Since late March, ES balances have moved in a very wide range between $40B and $90B.”
Meanwhile, in corporate media, they continue to claim the national economy is like a household budget and must be run like a household budget – ignoring that households can’t raise taxes or issue their own currencies.
The reality is that the central bank is creating new money, as are its peers in US UK Japan and Europe.
The question now is, how much money will the government create to stimulate the economy? This is a guessing game, though the under-capacity is enormous at the moment, so the answer is plenty.
Further, as the Government has effectively privatised its QE, or outsourced it to the major banks, will the banks lend it? How much can they lend if there is no demand for loans?
Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.