MMTed is a project run by the Centre of Full Employment and Equity
Business Office:
G15V 162 Albert Street
East Melbourne 3002 Victoria
Australia
© MMTed 2024
Contact
Phone: +61-(0)419 422 410
E-Mail: Bill.Mitchell@newcastle.edu.au
Video Transcript: (use scroll bar as required)
As the course proceeds and we develop some of the principles of Modern Monetary Theory, you'll start to learn that the type of economic narratives that you've been exposed to in the press and on TV contains a range of myths and so we'll be debunking those myths as we go and replacing them with a better understanding of the way the world works. And that will give you a better appreciation of the options available to government and the way you evaluate those options.
Now, the most elemental myth to give you a flavour, is the Household Budget Analogy. This myth entices you to apply your understanding and experience of managing your own budget to assessing the way the currency-issuing government manages its fiscal position. And as a household, you know that you have to seek funding options before you can spend. So you either get earned income, you can use prior savings, you can sell some assets that you've previously bought, or if that's not enough, you can then go and borrow. And for a lot of us, borrowing is the only way we can purchase things like houses, which is our largest form of wealth as we go through our lives.
And we understand that intrinsically, that if we spend too much, we've got to be very careful. We've got to rein in or pull in our belts, as they say. We can't max our credit card out or we'll get into financial stress. And we understand intrinsically that is households who use the currency that we're financially constrained.
And what we're encouraged to do then is to apply that cognition - that understanding of our own experiences to the currency-issuing government. And we're encouraged then to assess its spending and its tax options and whether its deficits are high or low within that frame. And of course, the frame is illegitimate and it provides us with no possible way of appraising their capacities and the options of the currency-issuing government.
Now, a currency-issuing government is not financially constrained and the way it spends is by typing numbers into computer systems, which then transfer funds into banks and create bank deposits and that that currency comes out of thin air.
And the government never needs to pre-fund its spending. It has to always spend first. Whereas a household like us, we have to fund first.
And so if we apply the Household Budget Analogy to a currency-issuing government, we'll make errors in assessing what the government is doing. We'll make errors in assessing whether that's good or bad.
So what we have to understand is that those sort of myths need to be eliminated from our knowledge set and what I'll be doing in this course and with the readings and the discussions and the other parts of the course, is building up a knowledge base that will give you a sound basis for saying what a myth is and knowing what the alternative reality is.
Let's get going.
End of Transcript
Macroeconomics is a controversy-ridden area of study. In part, this is because the topics are seen as being of great significance to our nation (in my case, Australia) and our daily lives, even though the details that are discussed are mostly difficult for us to understand.
The popular press and media in general are flooded with macroeconomics. The nightly news bulletins invariably feature commentators speaking about macroeconomic issues, such as the real GDP growth rate, the inflation rate or the unemployment rate. The advent of social media has given a voice to anyone who wants to be a macroeconomic commentator.
The ‘blogosphere’ has many macroeconomic hobbyists who enthusiastically share opinions and convictions on the topic, often relying on intuitively logical arguments to make their cases. The problem is, that common sense is not always a reliable guide to reality, and public discourse is not generally improved by giving every opinion an equal stage. Our instinct is to generalise from personal experience, and then expand those into universal truths. As you can probably imagine, the area of macroeconomics is a major arena for this sort of problematic reasoning.
A typical statement that is made in the public arena is that "the government might run out of money if it doesn’t curb spending". One of the important conclusions that you learn when you encounter Modern Monetary Theory (MMT) is that the issuer of a currency faces no financial constraints. Put simply, a country that issues its own currency can never run out and can never become insolvent in its own currency. It can make all payments as they come due. For this reason, it makes no sense to compare a sovereign government’s finances with those of a household or a firm. This raises a host of other questions, of course, and we’ll unpack a few of those soon.
Given that assumptions such as the household budget analogy are so persistent in the way we tend to think about the economy, it’s important to be aware of how others might take advantage of this. Politicians, for example, who seek to limit government spending or warn us that the government might run out of money, often attempt to give this statement authority by appealing to our intuition and experience.
They draw an analogy between the household and the sovereign government to assert that the same financial constraints that are imposed on individuals or households apply equally, without qualification, to the government. We are told that governments, like households, have to live within their means. This analogy resonates strongly with voters because it equates the amorphous, obscure workings of government finance to a more easily relatable subject and scale – that of our daily household finances.
Politicians and mainstream economists use this analogy with the knowledge that we will judge government deficits as being reckless, more so if fiscal deficits rise.
But, the government is not a big household. It can consistently spend more than its revenue if it creates the currency.
Households and firms are users of the currency; they must obtain the currency in order to make payments as they come due. They must either earn income, run down savings, sell assets, or borrow to obtain the currency. They can go broke. But the sovereign currency issuer can never run out of its own currency. Such a government can purchase whatever they like whenever there are goods and services for sale in the currency they issue. Governments such as Britain, the United States, Japan and Australia can never run out of money.
A government that issues its own currency cannot run out that currency just as a football game cannot run out of points.
MMT teaches that our experience in managing our own household budgets provides no guidance about the management of the government fiscal position, yet on a daily basis, we are told it does.
The government has to consider the real resources that are available to the economy and how best to deploy them. These are not financial considerations; there are no intrinsic ‘financial’ constraints that are relevant to a currency-issuing government.
In addition, fiscal surpluses (taxation revenue greater than government spending) today do not provide greater capacity to governments to meet future spending needs, nor do fiscal deficits (taxation revenue less than government spending) erode that capacity.
MMTed is a project run by the Centre of Full Employment and Equity
Business Office:
G15V 162 Albert Street
East Melbourne 3002 Victoria
Australia
© MMTed 2024
Contact
Phone: +61-(0)419 422 410
E-Mail: Bill.Mitchell@newcastle.edu.au