Etorri al da DTM-ren garaia? (Bill Mitchell)

Has Modern Monetary Theory’s time come?

(https://www.eurekareport.com.au/investment-news/has-modern-monetary-theorys-time-come/147104)

Alan Kohler catches up with Bill Mitchell, Emeritus Professor of Economics at the University of Newcastle, to discuss whether Modern Monetary Theory still has a place in current economics.

By Alan Kohler · 26 Mar 2020

Bill Mitchell is an Emeritus Professor in Economics at the University of Newcastle in New South Wales. And he is one of the founders, possibly the founder of Modern Monetary Theory and he says that he gave it its name, Modern Monetary Theory and is an exponent of it.

He responded to a column that I wrote in The Australian last Monday in which I said that Modern Monetary Theory’s time has come, but Bill says, all very nice but I misunderstood it. So I thought it’d be good idea to get him on the blower and get him to explain it, which he has done at some length. It’s a very long interview. Sorry about that, but it’s really worthwhile. It’s one of the more interesting interviews I’ve ever done I must say and well worth listening to.

I’ll summarise it in the Weekend Briefing so that if you don’t have the time to read the whole thing or listen to the whole thing, that’s fair enough. I will provide a summary for the Weekend Briefing, but really I’d urge you to either read or listen to the whole thing; it’s about three quarters of an hour. Very, very interesting.

So here’s Bill Mitchell, Emeritus Professor of Economics at the University of Newcastle.

Entzun elkarrizketa artikuluan bertan:

Eureka Report

Emeritus Professor Bill Mitchell

48:18

Table of contents:

Name origins
Inflation
QE
Fiscal stimulus

Theory origins

Countries practising MMT
Bond issuing

Bill, I wrote a piece for the Australian this week saying that Modern Monetary Theory’s time has come and you immediately put up a post saying that I didn’t know what I was talking about or words to that effect and that I misunderstood MMT. Now you, I think describe yourself as one of the founders of MMT with Warren Mosler. Perhaps in order to set me straight and to help our readers understand MMT, take us back to when you thought of it and what were the circumstances and what was the thing that led to it, in your thinking, and Warren’s, perhaps?

Yeah, well, I mean, Warren and I come from totally different backgrounds, of course. I’ve come through an academic background, so I sort of work things out by looking at data and studying history and things like that. And Warren’s background was in Wall Street basically in America. He was a banker and he started the trading in the initial Chicago Futures Exchange, and so he had a sort of hands-on non-academic background. We worked out things from a totally different background. I started working it out, what’s now called Modern Monetary Theory, I started my part of it when I was a student at Melbourne University in the late 1970s. And it was at the time, if you recall, the Razor Gang was cutting expenditure because after the OPEC oil crisis, we had inflation and they thought the solution was to cut spending and solve inflation that way.

Unemployment for the first time had really gone up and I was doing agricultural economics and we were studying the wool price stabilisation scheme. And so I understood from that that if you had a bumper stock of wool, you could get basically create full employment of wool and regulate the price. I sort of started thinking along those lines and then when the Japanese commercial property market crashed in the early 90s, I wondered how Japan had been able to escape with one negative quarter of GDP as a result of the biggest commercial property crash in history. So I started to look into Japan and its monetary system, how its central bank operated, how the fiscal policy interacted with monetary policy, how bond markets started to work and those things.

Now, Warren worked out a very detailed understanding of how banks work and how the banks interact with the central bank and how bond markets were because he was a fixed income trader, so his basic day to day life was doing deals on speculative expectations on bond market movements. He had worked out that – he did a very big trade in the Italian Lira Bond at the time, in the early 90s, when everybody was predicting it would crash. This was during the ‘91 recession when everybody was predicting that yields would rise and bond prices would fall. And he obviously worked out that the Bank of Italy basically controlled all yields if it wanted to and that there would be no real possibility of the yields rising that the government really was the issuer of the currency, couldn’t run out of money and so the bond markets were really not, not in charge. It was the government in charge, which allowed the bond markets in the space to operate.

This is when Italy had the Lira, it wasn’t part of the Euro, right?

Oh, yeah, it was early 90s. It was during that big ‘91 recession. So this was when Italy was the same as Australia and had its own currency, whereas now, of course, it uses a foreign currency, the Euro. Warren had worked out those things and we came together in about late ‘94 through a very early internet discussion list. And we realised that we were sort of on the same page coming different directions. And we started this project, which later I called Modern Monetary Theory¹.

You gave it the name, did you Bill?

I did, yeah, I gave it the name during the Global Financial Crisis because up until then, we had a loose knit project. We were working together. Warren was starting to use his financial clout to fund young researchers in America and try to build up capacity in America. So more and more young academics came into the project. But for a long time we just mucked around in the normal academic way, we went to conferences and published papers. Then in 2004, I went to a seminar on IT and they were saying there’s this new technology called blogs. This was the sort of beginnings of social media. So I figured well look, no one in the academic profession is listening to us, because the economics profession is a really closed shop and it’s heavily conditioned by what we call group think and denial.

So I started a blog and that really started to proliferate the ideas out and I’d have to say, and you probably felt a bit of this the other day, on social media, but MMT, as it’s now called is probably the first economic paradigm that has grown through social media and from then, it just has grown in interest.

I think before you and Warren got together and started really kind of focusing on this, you were all called Post-Keynesians, weren’t you?

I never felt comfortable with Post-Keynesian, but yeah, I mean, Heterodox Progressive Post- Keynesians. There’s a whole school of academics, a whole group of academics who identify themselves as Post-Keynesians. It’s a broad church, but essentially, it’s about taking the insights of John Maynard Keynes and applying them to modern institutional structures because Keynes was of course a very closed economy type, fixed exchange rate system. And we now live in very open economies with global capital and floating exchange rates. So yeah, we were sort of broadly within that camp. I never felt comfortable with that because I’d sort of come out of a more classical tradition with Marx and Kalecki and these characters. Whereas, you know, my other colleagues in an MMT, very firmly came out of the Keynesian tradition.

You said in your blog post, replying to my column, that MMT is neither right-wing or left-wing, but it is progressive, isn’t it? I mean, and perhaps in answering that, you can start to explain what it is because you said in there that it isn’t a policy or a fiscal policy, it’s a way of thinking about things. It’s really a lens. You put it as a lens through which, it allows you to see the true workings of the monetary system.

Yes.

I mean it is progressive, isn’t it?

Well, it can be. I liked your article, but the reason I said that you had misunderstood MMT was because you were saying that it’s now MMT’s time and implying that we were going to move to MMT. That’s a common misconception on both the people that attack us and the people who like us. And the point I make always is that in just the same way as I wear glasses so I can see better as I get older, MMT is like a lens as you say. It’s a framework for getting a better understanding of the institutional realities of our monetary system, our banking, central banking and fiscal system and the opportunities that the capacities of the currency issuer, the government have.

In that sense it’s neither right-wing nor left-wing. To operationalise that understanding that for example, the government has no financial constraints on its spending. To operationalise that into policy, you have to add a value system. So when you say it’s progressive, I’m what is popularly called a progressive person, and I suspect you are, but that just means that I have a particular set of values about how I want the government to operate. Whereas you could imagine a person who was extremely free-market oriented and believed all that stuff, but who had the same understanding of the monetary system that I have as an MMT person, and they would have a completely different policy set to me, which I would call a right wing policy set.

But we share the same understanding. I think the point is that what MMT understanding exposes are the sort of arguments, well we can’t do anything about unemployment because we can’t afford to do that. We don’t have enough money. Politicians are always saying we don’t have enough money. Well they’ve got as much money as they want. So therefore, when they say that they’re making a political value statement rather than a factual statement about their capacities as the currency issuer, I think that’s the point.

So, you’re saying that a sovereign country that issues its own currency has no financial constraints on what it spends. The only constraints are on the capacity of the economy to produce, whatever it is they buy.

That’s a core thing about MMT, that the government’s got infinite capacity because when you think about it, spending is happening every hour of every day and how does it happen? It happens by someone in the department of finance instructing someone in the central bank type some numbers into some accounts. And the spending is going on like that all the time and they could add, at the moment we’re adding a lot of zeros to how much is being spent and nobody doubts that they can do that. Given that we want to avoid accelerating inflation, the constraint is the real resources that are available and so if nominal spending outpaces the capacity of the economy to produce real goods and services that we buy, then we put price pressures into the economy that becomes the constraint. And if the government wants to expand beyond, say if we’ve got a fully employed economy and the government has a political mandate to increase the size of the public sector for agreeing a new deal or whatever you want to call it, for example, then it has to work out how to free up resources that it can then buy without causing inflation. But that’s the constraint. Always that’s the constraint. Never how much money that government’s got, it’s got as much as it ever wants.

Milton Friedman said that inflation is always and everywhere a monetary phenomenon, is one of the kind of core ideas of MMT that he was wrong?

Well, it’s a parallel way of thinking. You know, he said that it was always to do with the monetary supply accelerating and too much money chasing too few goods. Now if you want to think about it like that, then it’s really too much spending chasing too few goods, because what we’ve seen since the Global Financial Crisis, but in the 1990s in Japan, as they were fighting their problems, we’ve seen money supply expand dramatically and with no inflation. And we’ve seen bank reserves, you know, I mean, what size are bank reserves now around the world, and what size are the asset side of the central banks’ balance sheets? In some countries, Japan, Britain, European Central Bank, Federal Reserve, and soon the Reserve Bank of Australia has got extremely huge expansion of their balance sheet assets in the form of government bonds and increasingly, corporate bonds. And that expands reserves in the banking system, and expands the money supply, no inflation. So he must have been wrong. They must be another reason why you get inflation.

So is it an oversimplification to think of it as being the central banks instead of buying bonds, creating money as they do with quantitative easing and creating money to buy bonds from banks to inject cash into the financial system, instead of doing that to buy bonds directly from the government and therefore monetise fiscal spending by the governments directly? Is that an oversimplification, that really, that’s what MMT implies whereas you put it to operationalise the idea?

Yeah, I mean, a lot of people misunderstand quantitative easing. Most people ignored Japan in the 90s, they became familiar with quantitative easing during the Global Financial Crisis when Bank of England and Federal Reserve, and then later the European Central Bank was engaging in very large exercises, which we call QE. And they thought that QE was about giving the banks extra money to lend and that would stimulate lending and would allow for gross capital formation, business investment to grow, and whatever. The problem is that that’s a total misconception that quantitative easing doesn’t work like that because all quantitative easing does is swap assets with the banks. So it gives them bank reserve, central bank just types in some numbers to reserves and they then take over some government or corporate debt off the banking sector.

Now, banks never lend out reserves, that’s a misconception. Reserves are there just for the payment system to allow the daily clearing of cheques, as we say. And banks might lend on the interbank market, the overnight market, the reserves too, some banks short of reserves on any particular day and another bank’s got excess reserves but they don’t lend them out to clients. That’s a misconception. The way QE works is that, by intervening in the secondary bond market say, the government bond market, it tries to up demand, drives down yields. So the central bank buying up the bonds in the secondary bond market forces up the price, drives down yields on all of the assets within that maturity range, say 10 years or five years or whatever it is that the central bank’s doing, and as a consequence lowers all other interest rates in that maturity, including all of the corporate and lending rates to corporations.

So the only way QE could be stimulative, in that sense, is if by lowering interest rates at the investment range where corporations borrow to buy capital, and the problem is that in a recession and certainly now there’s not going to be too much borrowing, and so QE is quite ineffective in that sense. The question then is do we really want the Reserve Bank to engage in QE? I don’t want them to engage in QE. I want it to monetise government spending. And as you say, the central bank is basically part of the government sector. It interacts every day with the Treasury to coordinate Treasury spending and taxation injections and drains from the economy and its own liquidity management processes, which are essential to maintain its policy rate? Which is currently 0.25. And so it doesn’t make much difference if the government stops issuing bonds all together to the private bond market and merely just continues to mark-up bank accounts as they do on a daily basis. If you want to have an accounting offset, the central bank can just have a whole lot of government bonds, it’s pretty irrelevant really, the accounting structures that they do. The essential point is that the bond issuance doesn’t reduce the inflation risk anyway.

Just looking at the situation, we now find ourselves that the government, the Australian government has been announcing fiscal stimulus but they’ve been announcing amounts of it, you know, so it started off at $17.6 billion² and now its latest one is $66 billion in fiscal stimulus or help for companies and so on. But what they’re not doing is saying it’s unlimited. They’re not saying we are going to, you know, in an unlimited sense help pay for people’s salaries and keep companies alive. And you’re saying that that’s a political decision because from their point of view, all that stuff involves issuing bonds and going further into debt, which they don’t want to do. But you’re saying they could go unlimited with the Reserve Bank monetising the spending.

Well at the moment there’s not going to be very many real resource constraints when you’ve got, I did an estimate yesterday, you know, we could have 2 million people unemployed and they’re real resources and we’re going to have lots of businesses with lots of inventory unsold and lots of factories with spare capacity and lots of importers with lots of inventory. So you can hardly say, and I’m not saying you are saying it, but the government could hardly say that they’re coming up against an inflation barrier. In that context, there’s current stimulus ignoring the $40 billion that they’ve got in their unspecified account that they approved at the last minute that they haven’t announced that they will spend yet. That’s their little buffer. Their current stimulus is only 4.2 per cent of GDP, which was almost exactly the same as the two Rudd stimuluses in 2008/early 2009.

It’s almost as if the Treasury has got a fixation on 4.2 per cent. But that’s not a very large stimulus when you think that, you know, Britain’s going for about 15 per cent, Japan regularly goes above when it has a crisis, it regularly goes above 10 or 11 per cent and my bet is if you’ve got a million and a half to 2 million people unemployed, then you’re going to have to go closer to 10 per cent. And if you think about it that, you know, before this corona crisis, the pursuit of the surplus was already a straining demand in the economy. We’ve got a household debt of 180 per cent of disposable income, corporate debt, about two and a half times their financial assets. And you’ve got GDP growth before the crisis was already what, about, you know, it depends how you calculate trend, but it was already at least one and a half percent per annum below trend growth.

And you had 13.9 per cent labour underutilisation, either underemployed or unemployed. Well, in that context, you’re already probably about, your deficit was probably already about one and a half percent of GDP too small anyway. So then you start a crisis where what looks like being a total meltdown and what did Warwick McKibbin come up with, 8 per cent of GDP collapse. It was his estimate. It could be bigger than that. It could be a bit smaller, but it would be somewhere up there if they don’t do much. And so you’ve got massive capacity for the government to spend at the moment and it doesn’t have to worry about inflation at all. Eventually it will have to worry that inflation again and at that point, the depths that have to be smaller. But at the moment, 4.2 per cent is too small and I think that they will come to realise that I think what they’ve done in the last two weeks is abandoned for the time being, their mentality, their surplus obsession. Because you know, events have overtaken them and they will soon see that the rest of the world is going 10 or 15 per cent of GDP. They’ll have to go bigger.

But they’re still stuck. They have abandoned their surplus obsession obviously, but they are still stuck in the mindset of thinking of deficit as debt. Are they not?

Well, institutional arrangements with the Australian Office of Financial Management mean that deficits is debt. That’s true. They haven’t yet got to the point of saying, well, we won’t issue debt. We’ll just instruct the Reserve Bank to credit the bank accounts for us and then conduct some appropriate accounting arrangements to record that. They haven’t got to that stage yet. And whether they do, they probably won’t get to that stage. I would recommend them to get to that stage. And even people like Adair Turner in Britain who was the chair of the Financial Services Authority, the prudential regulator, he, he’s been recommending that. So it’s not just crazy people like me.

But no one’s got to that stage, have they? You say that UK is at 15 per cent of GDP stimulus and so is Spain and so is France and I think Germany is there too, everyone’s kind of at around 15 per cent of GDP is stimulus, but they’re all going to be issuing debt to pay for that, aren’t they?

Yeah. But what they’re also doing, and this is where QE does resonate because what they’re also doing, I mean, the ECB, the European Central Bank has announced unlimited bond buying. So it’s even broken with all of their stuff about capital keys, you know, where they had to buy in proportion to the size of the economies in Europe. And they couldn’t buy anymore a particular government – they’ve just abandoned that. They’ve said they’ll buy unlimited quantities of debt and they’re encouraging the European Commission to abandon the fiscal rules, limiting the member states running deficits. What they’re effectively saying is that they will go into the secondary bond markets whenever they want and buy unlimited volumes of member state government debt and the Federal Reserve has done the same thing.

The Bank of England has done the same thing. The Reserve Bank of Australia starts to engage in QE, they will be doing the same thing. So sure, we’re still issuing debt in the primary market to the bond dealers, but the bond dealers know that the next day they can offload that to the central bank through a QE program. So in effect, and since the GFC, the Bank of Japan, the ECB, the Federal Reserve have been basically doing this. And in other words, what difference does it make that they buy in the secondary bond market the day after or the hour after it’s issued in the primary market? No difference at all. They’re basically directly funding governments and they have been for 10 years in several countries. So you’ve now got the ECB has got what, 40 per cent of all government debt on its books and the bank of Japan has got 46 per cent of all of the government of Japan’s debt on its books.

So they’re already doing it, Alan. And we have no negative consequences as a result in terms of the standard things of inflation, yields are negative in many cases. On long term bonds, 20 year and 10 year bonds, yields are negative. So all of the sort of fear of central banks doing that, that come from the mainstream economists haven’t proven to be correct. And that’s why the body of work, it’s now called MMT, is a much more accurate way of understanding the dynamics of the monetary system.

So, you’re saying that Europe and England and the US even, and Japan are all practising MMT now, effectively?

Well, that’s, that’s the point and it’s not a matter of practising MMT, MMT is the monetary system, it’s a better way of understanding the monetary system. Japan’s my test case and I have quite close relationships in Japan with you know, people in government. Japan has demonstrated for nearly 30 years now the principles of MMT by running a monetary system where, you float your currency, you set your own interest rate, you issue your own currency. The Bank of Japan has been demonstrating on a daily basis that the main principles of mainstream economic theory that has dominated policy around the world are incorrect.

Bond markets can’t set yields if the central bank doesn’t let it. You know, you’ve got huge deficits in Japan. You’ve got the largest gross public debt ratio. You’ve got a huge build-up of government debt on the central banks’ assets in its balance sheet. It’s been buying massive amounts of government debt in the secondary bond markets. In other words, really directly funding the deficits and yet you’ve got zero interest rates, deflation, and negative bond yields out at long maturities on the yield curve. Now, if I asked a mainstream economics student to explain that they wouldn’t possibly be able to explain that, whereas MMT can explain it.

But what about the fact that the bonds are sitting on the central bank balance sheets and that they aren’t simply doing an account or putting money into the government’s account as you suggest, a better way to do it. Does that make a difference? I mean, what’s going to happen to those bonds that are sitting on all of the central banks’ balance sheets?

Well, they mature in the same way that if you and I held a government bond or a superannuation fund holds a government bond, it matures and you get paid out the principal. Whereas in the case of us owning it or a superfund owning it, the government pays the non-government holder the principal after paying the holder a stream of interest payments over a period of time. Whereas in the case of the bonds held by, say, the Bank of Japan, the Ministry of Finance, they mature, they get paid and in that case, it’s sort of like the right pocket, giving the left pocket some money. It’s an internal government transfer. It’s just an accounting transfer. And a lot of people were worried during the Global Financial Crisis, particularly in Europe, people were worried that if a government becomes, like in the case of Greece or Italy, if they became insolvent in 2012 where it was really likely that they might, if the ECB didn’t act, what would happen if all of those bonds that the ECB was holding on its balance sheet if their government went insolvent and couldn’t really pay the debt?

Well, nothing would happen. They would just get written off because unlike a corporation whose assets become valueless if all of those bonds on central bank became valueless, well then they’d just write them off. A central bank can operate with negative capital. A private company can’t. And that’s because it’s part of government and not part of the profit seeking corporate sector. So it doesn’t really matter what happens to those bonds? I mean, the orderly way that they’re managed is they mature and they’re paid. In the case of Germany for example, that the Bundesbank has large holdings of German government bonds and it recently paid record amounts back into the German Ministry of Finance based upon profits that it made by holding those bonds, so right pocket giving the left pocket money.

The Reserve Bank’s approach to quantitative easing is different to the other central banks in that it’s targeting a particular interest rate on three year bonds, 0.25 per cent. Do you think that that, effectively means that the Reserve Bank’s QE is unlimited?

No, it won’t be unlimited because it’ll be at the volume that’s required to maintain liquidity consistent with a 0.25 interest rate.

Yeah, but I mean it’s a bit, it’s basically going to buy whatever amount is required to achieve that, right?

Oh yeah. But that won’t be unlimited because of volume restrictions. But the point is that yeah, they will do, you know, the parlance these days, isn’t it, is do whatever it takes. They’ve set a yield target and that implies a certain amount of liquidity management in the cash system that’s going to be required to keep the 0.25 target as that’s their monetary policy target and they’ll buy whatever’s needed to maintain that and you and I both know that they can obviously do that and the bond markets are powerless in that case. They can’t really influence that choice at all.

Do you think it possibly means that eventually the government stimulus from 2020, from this year, will end up on the Reserve Bank’s balance sheet?

A significant portion of it will probably end up on the Reserve Bank’s balance sheet. If you think about Japan, since 2012, the Bank of Japan has bought virtually all of the Japanese government bonds that have been issued, not directly, but indirectly for a secondary bond market. Prior to that, less than a 100 per cent and so now they’ve got about 45-46 per cent of all government bonds on issue, outstanding government bonds and similar stories around Europe, Britain, America. So I suspect that if the RBA does do this, which they’re saying they’re going to, then significant amounts of the debt that is issued by the Australian Financial Management to match the, not to fund, to match. This is the statement that the bond issuing isn’t funding and spending, it’s just matching the spending.

Explain that difference. Why isn’t the bond issuing funding the spending?

Because the government doesn’t need the bonds in order to spend. The government can just mark-up accounts whenever it likes and so the bond issuing is presumably for something else. Now if you think back, we’re both old enough to remember the period just after Costello was running surpluses. And by the end of the century, the Australian government bond markets were becoming very thin, if you recall, and who complained about that? The Sydney Futures Exchange complained and there was a Commonwealth government debt management review an investigation, I gave expert witness there, and it was decided that even though the government was going to continue to run surpluses, so clearly in the mainstream logic did not need to issue bonds at all, it was decided by the Costello Treasury, that they would continue to issue a certain volume of bonds each auction as what I call corporate welfare to the investment bankers.

And that’s what happened and nobody really picked up on it. The dissonance in the logic of why would they continue to, if the bond issuance was funding the government deficit, why would they continue issuing bonds after they mature, if they were running surpluses? And of course, the bonds being issued don’t fund the spending at all. All they do is drain reserves from the banking system. Now and you think of open market operations. Well then the central bank sells bonds to the private sector to the banks because in an era before we had interest payments on excess reserves in the banking system, the only way in which the central bank could maintain managed liquidity if there was excess reserves was by draining them by bond issuing. That’s an open market operation. So that’s sort of what bonds do. They don’t fund government spending, they help central banks…

Bill, this is where I lose you a bit because when the Office of Financial Management sells bonds to the private sector, they raise money, money comes in, right? Bonds go out, money comes in.

Yeah, sure. But that money’s just draining money from the non-government sector. That’s just giving the non-government sector a bit of paper and taking funds out of the non-government sector hands. In other words, just allowing the nongovernment sector to alter its portfolio of wealth. That’s all happening. The government doesn’t need that cash in order to spend because it issues the currency. So once you realise that, then it’s obvious that the funding that they’re taking out, yeah, they take funds. They mark down bank reserves and if you want to think about the central bank accounting system all that really happens is that they transfer money from reserve accounts into government bond accounts. That’s all that’s happening.

It’s not giving the government any extra capacity to spend. So you’re saying really the decision to sort of, in a sense replace their spending by draining money from the private sector is a political one?

Well, it is these days. But if you think back to a very important thing happened in August, 1971 and that was when President Nixon closed the gold convertibility window and the fixed exchange rate system basically ended. It didn’t end exactly then, but that was the point in history. Now if you think back to the Bretton Woods system, the fixed exchange rate system then domestic policy, monetary and fiscal policy was tied up in managing the exchange rate agreements. So the central bank and the treasury had to work together to make sure that there was only as much liquidity in the, in the cash system, including the foreign exchange markets to allow the, in our case, the Australian dollar to meet the agreed parities with the fixed exchange rate system. Now in that context, bonds played a very important role because governments couldn’t just be running deficits and pumping reserves into the system, into the monetary system, which would have created downward pressure on the exchange rate. So bonds were one of the tools which governments used to maintain its commitment to the fixed exchange rate system. Now, once we floated our exchange rate, we floated in the mid-80s or something.

’83.

Yeah, ‘83 Hawke. Once we floated the exchange rate, well then domestic policy was freed from any of that and the bond issuance became unnecessary. Now if you then think back to that period, and there was a very important change in the way we structured our bond markets. We went from a tap system to an auction system, and if you go back and read the literature, you’ve had statements from the incoming AOFM and Australian Office of Financial Management officials saying, we’re going to continue issuing bonds because it places a political discipline on governments. Now that’s in the literature. And they knew that the bonds were unnecessary for governments to run deficits, but that they were an incredibly powerful political device, which governments became conditioned to obey because the opposition could say, look at the debt ratios. And so, yeah, I mean, this is a political choice, and moreover, I mentioned corporate welfare before, the bond issuance, you know, the 2001 episode with the debt management review proved this beyond doubt that the investment community loves bond issuing, can’t get enough of them because they know they’re risk free. And they allow them to benchmark all their products off the risk-free Australian government bond.

There’s another purpose of them too. And they’re used under the Basel agreements as part of the sort of capital adequacy assessments for our banking system, they’re the highest quality assets, of course, and they’re part of the regulatory structure, but that’s got nothing to do with government spending.

So we have to finish in a minute, Bill. I think we seemed to have arrived at the nub of the matter, which is that the problem with MMT then is possibly the fact that we don’t trust politicians because without the constraint of debt and the sort of the debt limitation, whatever it might be, and the need to issue bonds we think that politicians will just spend their heads off and not worry about anything and that will be terrible. There’ll be no discipline upon them.

Yeah, and isn’t that a sad statement of the quality of our political players?

But politicians have been like that since the Roman Empire. Let’s face it, and will always be like that.

Yeah. So do we really want to have a system where we lie to the people which is effectively what you’re saying. And an economist Paul Samuelson, the famous American economist once said, “If everybody worked out the actual system that is, that this debt isn’t necessary, etcetera, if everybody worked that out, they’d be demanding willy-nilly off their governments. And that’s probably true. But yeah, no, I accept that. That’s probably true. But do we really want to operate in a smokescreen of ignorance? And from my point of view, that smokescreen of ignorance allows politicians to make really poor political choices. To me unemployment is a scourge.

Would we allow governments to maintain high levels of unnecessary unemployment and despair because we’re in this, you know, smog of ignorance? I think I’m more optimistic about human capacity and I’d just like to think that we should have these things out in the open and we aim for a better political class, but you can call me naïve, if you think about that, but that’s my view. As an academic, I don’t think we should be having this smokescreen of ignorance about the way that government operates. We should have a much more informed political debate and based upon what really is the situation and then fight it out that way. But I accept your point, we don’t trust the politicians and so we have these constraints on them.

Well, that’s probably a good note on which to end, Bill, it’s been fantastic talking to you. I really have enjoyed it. Thank you.

You’re welcome, Alan. Thanks for inviting me. Take care.

That was Bill Mitchell, Emeritus Professor of Economics at the University of Newcastle.

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Podcast delakoa: Bill Mitchell Alan Kohler-ekin

Orain ote da DTM-ren denbora? Ez, beti izan da

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