Modern Money changes everything

We have no need for government debt in the age of Modern Money, writes Dr Bronwyn Kelly, and everything changes as governments accept that money works as Modern Monetary Theory says it does.

In the run-up to the federal budget, Australians will once again have to endure being told there isn’t enough money.

But since at least the mid-1990s, theories that money is a finite commodity have been comprehensively debunked by a growing number of economists who accept the fact that money is created at the behest of the government.

Governments can create as much money as they need in accordance with their sovereign will. They can create more than we need; Although that would be quite unnecessary and stupid. Even so, the point is that money in itself is not a finite commodity, and governments can create as much money as they think is necessary for human well-being, our well-being and social cohesion, the natural environment, democratic stability, and the economy itself.

They don’t need to beg us to pay more taxes or borrow from private banks. They just need to create this by logging into their account at their bank, the Central Bank.

On the contrary, money is probably the only unlimited commodity on the planet. And so governments can and do create this whenever they want.

Like Mark Carney – Prime Minister of Canada and former governor of both the Bank of Canada and the Bank of England – freely affirmed that: fiat money like that “successful model” Increasing the money supply trumps all other experiments in currency creation, such as pegging currencies to one currency. gold standardIt failed and was abandoned in the 1970s.

The concept of money as a borderless commodity emerged with the development of Modern Monetary Theory in the mid-1990s (MMT). But MMT is not actually a theory. It’s just a fact explanation of how money works In fiat currency economies.

In the Modern Monetary Age, money no longer works the way it did under the gold standard; This means budgets no longer need to be framed by the false notion that money is a finite commodity.

Unlike a household, a government that prints fiat money, like Australia’s, never runs out of money. And this is something that even more conservative economists, neoliberal free market advocates, and private bankers will recognize when it suits them, especially when they seek relief from bailouts or other types of economic shocks for recent market or financial sector failures.

Twice in the 21st century – in the Global Financial Crisis (GFCin 2009) and the COVID-19 pandemic in 2020 – Australian governments have massively escalated their currency problems to save our economies and done so without batting an eyelid.

And in both cases the sky did not fall. Australia weathered both recessions relatively unscathed; This was an inevitable fate for countries that did not respond so skillfully to fiscal stimulus through deficit spending.

The Labor and Coalition governments that issued the GFC and Covid-19 stimulus weren’t waiting for the sky to fall either. Even the more conservative of the two, the Chancellor of the Exchequer, has come clean when it comes to federal budgets and public spending: “Everything is affordable if it’s a priority.”

In short, for most of the 21st century Australia was easily protected from economic disaster by governments that accepted that they were not like households and did not need to balance their budgets. They can maintain deficits for as long as we need, for the sake of our financial security, prosperity, and indeed the growth of the economy.

Australia’s economic growth over the 50 years to 2025 All but three years are positiveAlthough the federal budget itself runs a deficit 33 of those years (66 percent of the time).

Economic growth was positive between 2008 and 2022, except for one year when Covid-19 hit the country, but this long period of growth was sustained even though the federal budget was in deficit 100 percent of the time.

The high deficits and, in fact, the very serious public debt growth at that time did not lead to an economic contraction. Not so if governments accept the fact that they will never run out of money to repay any debt they choose to take on. They see no need to pass on these debts (or any debt) to future generations, or to prioritize the repayment of public debts over the welfare of the current generation.

Modern Money shows that they have a variety of other options for this if they follow the rules. functional finance. And anyone Rational analysis of macroeconomic policy options This report, available in Australia, shows that there is no need to prioritize repayment of government debt above our well-being and well-being in any given year or at any time.

This being the case, there is no argument in favor of developing federal budgets based on the assumption that money is a finite commodity. And there is absolutely no argument for giving less money than we need. Or to put it another way, there is no argument in favor of imposing austerity by cutting government spending on services we need, such as the NDIS.

All responsible governments need to do – now that we have thankfully entered the age of Modern Money – is to spend whatever we need to spend on our health, well-being and financial security, and then manage imbalances, inflation and injustice in the economy by prioritizing the use of fair taxation.

Fair taxation can curb excessive spending, whether public or private, much more effectively than increases in interest rates, and therefore the use of monetary policy to bring demand and supply back into balance should be discouraged. It is ineffective and harmful.

This, of course, is in direct conflict with Reserve Bank Governor Michelle Bullock and Chancellor of the Exchequer Jim Chalmers; Both appear to be using the line that public spending should be cut and interest rates raised to rein in prices.

Dr Chalmers heralds a so-called “responsible” budget and says: “We will save more than we spend”, This means that it plans to budget for excess. This is the exact opposite of what Modern Money and functional finance show we need.

At present, a budget deficit would be much more advisable for the welfare of the private sector and thus to prevent both rising unemployment and diminishing our capacity to insulate ourselves from the effects of inflation.

At the same time, if we want to control inflation without increasing unemployment, an interest rate hike is the last thing we need. This is obvious because increases in interest rates do not control prices; they raise them.

The RBA’s recent increase in the cash rate target is completely contrary to the public interest, not only because it will increase the cost of living but also because it will increase the likelihood of a recession.

From the perspective of modern money and functional finance, it seems that the Treasurer and the Governor of the Central Bank are deliberately causing a recession. Responsible, this is not. This is so cruel and unnecessarily so.

Modern Money and functional finance are two great gifts of modern economists. They offer us the path to lasting security, prosperity, security and prosperity. And yet, for some inexplicable reason, the Secretary of the Treasury and the Governor have chosen to deny us the benefits of these gifts.

Refusing to use these gifts is even more irresponsible and cruel because Modern Money and functional finance cannot come to our aid only at budget time. Embedded in functional finance is the understanding that we don’t need interest rate increases to control inflation (they don’t actually work), and we don’t need austerity – ever – to protect future generations from any debt the government might want to take on.

The reasons for this are explained as follows: Rules 1 and 3 of functional financeWe can use this to overcome all these problems.

In fact, in the age of Modern Money, we have no need for government debt at all; But even if governments wanted to take on this work, they could easily pay it back by doing what MMT and functional finance have shown they can do; They can create money and use it to pay off debts if they think it is necessary for the public good.

Although this is counterintuitive to those who have been taught to believe that government is like a household, this belief is not valid. And once we accept the evidence that money is the only unlimited good, there will be nothing stopping us from using it to manage the sustainable use of limited things like human and natural resources.

There is nothing to stop a government from spending on basic needs for our well-being and well-being. And there’s nothing to stop them from controlling the effects of total spending (public and private) by raising or lowering taxes as needed. Everything will cost us less in terms of the total prices and taxes we pay.

And there is nothing to stop governments from freeing themselves from the myths and shackles of neoclassical economics and neoliberalism.

Everything changes when governments accept that money works the way MMT says it does. And if they follow the rules of functional finance, they will find a safe way to break free from their chains.

Learn more about how we can reform macroeconomic policy and governance in ‘Public Interest Economics: a path to prosperity, security and sustainable consumption in a democratized Australian economy’ Written by Bronwyn Kelly, Founder of Australian Community Future Planning (ACFP).

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