Tripling down on financial illiteracy with Amy Adams (and MMT)

Written By: - Date published: 9:00 am, March 8th, 2018 - 128 comments
Categories: Amy Adams, Economy, Financial markets, infrastructure, jobs, Keynes, Steven Joyce, tax - Tags: , ,

We’re hearing a lot recently about fake news, and with the debates from different sides of the political spectrum so polarised, it can be difficult to even know what’s real. So let’s take a break for a moment and talk about the theory of something we all agree is made up: Money. I thought those of you not wanting to read about the TPP could enjoy an alternative post, and we did happen to have a replacement to one Steven Joyce announced recently.

Amy Adams has now replaced him as Shadow Finance Minister, a position she will likely still face gendered critiques for, (hopefully not from government MPs, but likely from members of the public) as only one woman has done the job of Finance Minister in New Zealand before, and she definitely faced gendered critiques. (A man who did what Ruth Richardson did would likely not have been so universally reviled after the fact, sadly, and may arguably have been regarded as a sound but mean-spirited fiscal manager. Instead, sexism arguably balanced out right-wing propaganda on the economy, and we coincidentally viewed Richardson roughly accurately, which probably felt unfair to her National supporters) I thought I would instead bust in with a hopefully non-gendered criticism that is largely of her backing of her predecessor’s ridiculous claim that Labour will face any sort of “fiscal tightness1,” and her refusal to fill in this imaginary hole they’ve been digging themselves into.

What Grant Robertson may face is difficulty in meeting the BRR promise to bring the debt-to-GDP ratio down to 20% within 5 years, although I will note that the Budget Responsibility Rules were openly predicated on kicking in after under-investment in housing, education, health, earthquake recovery2, and transport had all been handled, which is clearly a much bigger problem than we ever guessed during the election campaign, so if Robertson does have to abandon cutting 5%ish off our debt-to-GDP ratio, he is still soundly within the BRR’s principles, which Joyce has carefully ignored the contingent part of.

This post is going to be heavy on the economics, so apologies in advance, but you all probably know by now my penchant to be heavy on policy and theory. I will try to be available for Q&A or clarification in the comments over the next day or two if you liked the general message but don’t understand all the details, and I’m sure invitably I will have made some mistake or other here.

So, before we discuss why Joyce (and by extension, English and Adams) were wrong, let’s talk very quickly about Modern Monetary Theory. Those of you who remember discussion of Keynesian Economics on The Standard during a prior recession and how it was generally favourably regarded may see some similarities to the idea of counter-cyclical spending here, but without the talk of cycles because in reality that’s a little simplistic.

Modern Monetary Theory (from now on, MMT) is interested largely in countries with a sovereign currency. (for example, the UK Pound is sovereign, the Euro in, say, Greece, isn’t. Being the country in control of creating and destroying a type of money is the relevant thing) Rather than being overly concerned with cycles like Keynes, MMT instead reframes that concept by talking about the overall supply of money3 and whether it is sufficient, too scarce, or too common for the desired supply of real goods and services available within a country, and advocates using fiscal policy to control both inflation and unemployment by trying to get this number exactly right in terms of both supply and circulation of money.

The key to understanding MMT is to think of net government spending as creating money, and net government surplus as destroying it- this is precisely backwards to our usual thinking of budgets, but it is actually precisely accurate in terms of how fiat money, the type of currency we all trade in today, works. MMT claims that the idea of government ever having difficulty “funding” its spending projects is complete nonsense, at least so long as the government has citizens with useful skills and products to sell as taxpayers, and overseas investors who demand its currency. Taxation has a triple purpose under MMT: create demand for official government money, the only way to pay taxes, to change behaviour in the case of tax differentials or sin taxes, and as a means of controlling inflation. (In reality, we actually do borrow money, rather than print it all when we go into deficit, because it has a better record of cushioning inflationary effects, but the important thing is that we retain the option to print money if we need to, which inherently improves our financial position) If those citizens make your resources into useful products, and offer useful skills, and you have access to the infrastructure you need to transport goods around and people to places they can use your services, then you have created significant demand for your fiat currency.

From this perspective, initially, the idea of limits on government spending for a country like New Zealand seem something of a nonsense- money is imaginary, we can just wish debt out of existence, and hey! We’re done!

In reality, debts paid off or recessions powered through by increasing the money supply are often inflationary4, and inflation acts a lot like a flat tax on the economy, meaning that things causing significant inflation are undesirable. Bubbles burst by decreasing the money supply through surplus, on the other hand, tend to suppress employment, which is good if you expect your economy is overall in a bubble, but terrible if you’re in recession. This is why to some degree Keynesianism worked- because often, surpluses in boom times and deficits in lean times are advisable, so long as your economy tends to balance well between recession and growth. There’s also another illusive factor- believing does, to an extent, make it so in the world of finance- business confidence is important regardless of how economics actually works before you factor it in, so the attitudes of a country towards the economy to some degree shape reality. In reality this is probably the starkest limit on New Zealand’s finances, because business here doesn’t seem to understand, the way say, business in Japan does, that a relatively high debt-to-GDP ratio isn’t necessarily a bad thing in a country with a sovereign currency and enough goods and services to buy with such an enlarged supply of government-backed money, and it believes in the fallacy that a government’s budget is like a household budget.

Now, we’ve got the basics down. Let’s look at New Zealand’s specific fiscal position, and you’ll also understand why I’ve mentioned certain examples as I get through this.

New Zealand’s debt-to-GDP ratio is, as of 2016, at about 24.6%, and is long-term is predicted to stay around the same level. Amy Adams claims Labour will need to add an extra $10b to that debt to meet its non-fiscal promises without raising taxes, which with some back-of-the-envelope calculations based on a GDP of about NZ$253.7b in 2016, would be a roughly 4% increase assuming 0% growth5. National’s “fiscal tightness” nightmare scenario is roughly an extra 4% debt-to-GDP, an astounding 28.6% total, even if we round up. This is me being incredibly friendly in my assumptions to Mr. English, Mr. Joyce, and Ms. Adams.

28.6%, nay, even 30%, is nothing in terms of debt-to-GDP ratio. While it might make business a little grumpy in New Zealand, in international terms, that wouldn’t scare a mouse. Labour has proven they can pay off more than 20% of GDP in three terms, easy, which is actually pretty amazing given they did it without austerity policies. With said austerity policies, National has added roughly 19% debt-to-GDP to our ratio, depending on how you measure. It took Greece, a country with no sovereign currency, a debt-to-GDP ratio of over 100% to enter a sovereign wealth crisis. And even that is no guarantee of disaster. Japan, a country with a sovereign currency, excellent natural resources, great technology and infrastructure, (arguably because of their debt) and rock-solid business confidence, maintains a whopping debt-to-GDP ratio of over 250% with no significant ill effects to date, other than perhaps an addiction to deficit spending. Even if we assume the point of runaway inflation is 80%, much less generous than what happened in Greece, which has a fundamentally weaker position than New Zealand does thanks to the Euro, we wouldn’t even be halfway there. We would still be in a very low-inflation position.

And we are definitely nowhere near at risk of even needing to use quantitative easing to pay back debt yet, let alone having high inflation. The only constraints on Labour’s deficit spending to address the social infrastructure problems created by nine years of John Key and Bill English are self-defined ones.

While I am fine with many of the Budget Responsibility rules6, Labour should understand that rather than always wanting to reduce debt, it should instead always be capable of reducing debt, but it should, ideally, wait to do so until our economy is overheated and needs a dose of cool water to start running surpluses, like Cullen did. It puts the country on the most solid of financial grounds, and by refusing to give up deficit spending during lean years, it sets us up to run those surpluses later.

The party should also understand that if inflation is a problem, the solution, to a reasonable extent, is new taxes. Kiwis are pretty under-taxed by OECD standards, at 17.9% average tax for single people, and 6.2% for a couple with children, we are either second-lowest, or lowest among the OECD in 2015, and we have noticable gaps in our wealth tax profile, creating perverse investment incentives.

As usual, the Greens have the obvious policy here: let’s have a tax on realized capital gain. (that is, your net profit from selling capital wealth, like a house. So you’d only pay it if you made an overall profit a year, for most people, by moving from a more expensive house or more expensive housing market, to a cheaper house or cheaper market. Selling a cheaper house and buying a more expensive one would incur zero tax) Genuine landlords could buy properties with the intent of holding on to them for the rent, but speculators and renovators would now pay tax on their income. The Greens propose excluding the family home, but I actually think we could go further and consider whether that’s unnecessary- if an exemption is required, we could try a lifetime sum exemption, (eg. your first $100,000 of capital gains are untaxed) but I think we could actually trial a CGT with no exemption at all, and the only people likely to be effected would be those moving to a cheaper home to pay off a mortgage lump sum, those selling a house they’re underwater on, or to buy some highly expensive but very necessary item or service. If we do need policy to address those situations, though, we could potentially allow those paying off their only mortgage to consider that a capital loss.

In conclusion: National is trying to manoeuvre the Labour-NZF-Green government into sacrificing deficit spending with its economic rhetoric, when in fact they should concentrate on increasing wages, balancing spending to the productive economy and against inflation and unemployment, and spend to address the infrastructure deficit, ignoring the debt entirely until such time as the economy starts over-performing, and then start running surpluses.

1 This is a Joyceism, not an actual economic term, as far as I can tell, as the closest term seems to be “tight fiscal policy,” which actually means deliberately slowing down economic growth to pay off debt or prevent a bubble. This is one of the many reasons Joyce has left National a legacy of financial illiteracy. So I have translated it to “unacceptably high risk of inflation to perform to the set policy goals under sensible fiscal settings” in actually meaningful words, as even Joyce’s explanation of being unable to pay for things is absolute rubbish. Robertson would probably not spend significantly less than promised on anything, but might engage in quantitative easing, or borrow money to dig us out of National’s very real hole of underinvestment before risking a default, because he is actually capable of passing his university papers.

2 For various reasons relating to my former employment there, I’m not going to discuss EQC too deeply on this blog. I don’t expect any legal issues but wouldn’t want to bring any down on this site by accident. I talk politics on @MJWhitehead on twitter, so if you want to ask me questions or discuss EQC in general, that is the place. I have my defenses of it and my criticisms. My expertise was in contents, invoice reimbursement, (internally it was called Urgent Works) small-value building cash settlement, and on-average-small-value cash settlement for multiple-unit buildings. (I can only give general impressions on anything else) I have gone into a bit of detail here because I expect this subject not to be mentioned in the comments please. (I also won’t hesitate to block people who come troll my twitter account, but will be patient with genuine concerns and questions) Kia ora.

3 Money, as opposed to Credit. Money is the thing you have when you’re holding a ten dollar note. Credit is what you have when you take out a mortgage, or look at the number in your bank account, and it is even more imaginary than fiat money, because it’s effectively speculating on the likelyhood that you don’t actually want to take your money out of the bank beyond the automatic tax deductions. (which aren’t imaginary) If we start talking credit too much, this will turn into an entire 101 course, and I’m not sure I’m qualified as a teacher to go into that level of detail on this subject. Seriously, I will make you fail your Econ 101 exams. I know the bits relating to government policy chiefly, not the rest, and I cheated by having a professional economist to discuss things with.

4 With the caveat that nobody really understands accurately just how or how much various factors cause inflation, we just have a bunch of experimental results with no good controls. It’s entirely possible there’s a way to do QE (deficit spending without borrowing, aka. printing money) without uneconomic long-term inflation, and there are definitely specific short-term situations in which it’s advisable because letting a depression start is more wasteful than the inflation cost, but overall, it weakens your economic position if the reason your circulation is too low is because you genuinely have enough government money in your economy, but it is, for example, locked up in unproductive investment due to poor tax incentives, such as holiday homes. This is, coincidentally, an excellent theoretical explanation for the observations in the Spirit Level: inequality is costly to the economy overall because money is invested in things that aren’t productive, and circulates too slowly because it is disproportionately saved by the rich, causing inflation as governments add more money to the economy to compensate for the slowing effect that has on growth.

5This is an outrageously friendly assumption to Ms Adams that she does not deserve, but I am making a point about how extraordinarily weak her claim of Labour’s “fiscal mismanagement” is. I have also been very fair to her by characterising her stance as “tripling down.” We’re probably now to “quintupling down” if you count multiple attempts to find anything even slightly resembling a hole by Mr. Joyce, after completely abandoning any pretense he can in fact read spreadsheets, add up to 11.7 billion, or indeed, use terms from economics to describe what his dislikes about his opponents’ fiscal plan.

6The bits of fiscal policy Labour has tried to lock us (both the nation and the Greens) into in a defensive gambit that are the most problematic are the “no new taxes” and “reduce debt to 20% of GDP” bits. I will say that these items are highly controversial and do not necessarily have the same sort of mandate from Green members that their own policy package does, or even the rest of the budget rules. There is no particular advantage to keeping a low debt-to-GDP ratio and looking more fiscally tight in the long-term than your neighbours, (and that, National, is how that term is actually supposed to be used) other than if you want to improve your country’s credit rating, which I don’t think we’re in urgent need to do, quite frankly. Germany, a country whose fiscal policy has been described as unnecessarily fiscally tight compared to the rest of the Eurozone, has three times more debt-to-GDP ratio than Labour wants to maintain in the long run. I think sticking to half or two-thirds of Germany’s example is perfectly adequate.

Image Credit: http://www.wcn.pl/sklep/menu/banknoty1941.html, through Wikipedia, using CC-BY-SA license. This is an actual example of hyperinflation in pre-war Germany. (Edit: Wayback machined the URL)

128 comments on “Tripling down on financial illiteracy with Amy Adams (and MMT) ”

  • Comments are now closed

  1. Frankie and Benjy 1
    8 March 2018 at 9:36 am

    Great post. Sad that National are still relying on smoke and mirrors to fool some voters.
    The Image credit link says “page does not exist” when translated.

  2. Pat 2
    8 March 2018 at 10:18 am

    while agreeing that 24,28 or even 30%debt to GDP is of little consequence (aussie currently over 40%) I cant agree with assumptions drawn from your examples of Greece and Japan.

    Applying Japans experience with multiples of debt to GDP ignores fundamental differences between its economy and our own….primarily trade balance and the demand for its goods and consequently currency ….and it is these external factors that can remove internal control of the economic activity and inflation……obviously it is impossible for all economies to run constant surpluses.

    The assumption that a sovereign wealth crisis wont kick in until above (your generous?) 80% of GDP is IMO baseless ….there is a debt Rubicon that destroys a currency and economy but it varies in both time and circumstance and is not formulaic…as you yourself note, fiat is supported by confidence.

    As i see it it is the great flaw of MMT.

    • Matthew Whitehead 2.1
      8 March 2018 at 11:18 am

      That’s not what MMT says, that’s just the evidence we have from other inflationary feedback loops- that they only seem to have become evident in countries at roughly 100% of debt-to-GDP ratio. That’s not to say the inciting incidents didn’t start earlier, but could have been avoided with quantitative easing from a more bold fiscal manager. It’s just to say the 100% ratio is where, under normal circumstances, you’d look at an economy and go “well they probably have high inflation.”

      I actually acknowledge the factors you mention- Japan has more demand for its valuable resources and experience than New Zealand does, which leads to its excellent balance of trade, and its success in the past has led to private business being willing to support government debt, etc… etc… The point of mentioning Japan is not to say “we could borrow as much as Japan,” just to say “high amounts of borrowing do not itself lead to an economy entering an inflationary death-spiral, you can actually safely exceed 100% debt-to-GDP if you know what you’re doing”

      Confidence is the great flaw in all economic theory, especially if it operates on an uninformed, garbage-in, garbage-out basis, like New Zealand’s understanding of government budgets does.

      • Pat 2.1.1
        8 March 2018 at 12:24 pm

        Confidence may well be the great flaw in all economic theory but if you reduce that confidence as I submit MMT does then the outcomes are unlikely to improve

        “The point of mentioning Japan is not to say “we could borrow as much as Japan,” just to say “high amounts of borrowing do not itself lead to an economy entering an inflationary death-spiral, you can actually safely exceed 100% debt-to-GDP if you know what you’re doing” ( which is pretty much how MMT addresses external debt, or rather dosnt)

        I would suggest it would be fairer to say…..you can safely exceed 100% (or any figure you care to put up) if you have a constant trade surplus and offshore investments ……which very few economies do or are capable of.

        And that is the point….it is not a model that will work for most economies and I would suggest it is one that would certainly not work for NZ.

        There are controls that could be implemented to make it function (not improve) but I would submit that they would never receive the backing of the majority of any population currently due to the restrictions it would impose.

        • CS 2.1.1.1
          8 March 2018 at 7:08 pm

          http://bilbo.economicoutlook.net/blog/?p=5402

          MMT in an open economy

          Pat check out Mitchell on MMT in the open economy.

          Perhaps MMT in the form of a increased deficit to GDP ratio would cause some increased inflation which may devalue currency somewhat and increase the price of imports (helping the export sector mind you). The floating exchange rate will do what it will do.

          However, it would be a relatively small price to pay for full employment and an overall increase in aggregate demand. Right now with excessive government parsimony we are in a stagnant deflationary fug where a good chunk of the populace is becoming an underclass. The surpluses suck money and demand out of the economy like blood letting sucks the life out of a patient. It forces private debt to increase. And households are indeed households – unlike governments, they can default.

          The current strategy based on private debt growing is not a sustainable strategy.

          Note I am not saying deficits don’t matter. They do. It’s just they have to seen in a functional way – how big should the deficit be to ensure full employment of all underutilised capacity including idle labour in the nation?

          A universal job guarantee at a decent minimum wage would be an excellent way to ensure we always had the right level of deficit spending.

          • Pat 2.1.1.1.1
            8 March 2018 at 7:51 pm

            “For a real world example of the benefits of adopting a floating, sovereign, currency we can look to Argentina.”

            http://bilbo.economicoutlook.net/blog/?p=5402

            10 yr bond rate approaching 7% in a low interest rate environment awash with QE

            current inflation rate of around 25% and constantly in double figures

            central bank rate of over 27%

            and this is your MMT shining example?

            It is a deeply flawed theory even though I would wish the magic money tree were true.

            • Cs 2.1.1.1.1.1
              9 March 2018 at 1:05 am

              No mmt advocate would hold Argentina up as a “shining example” of economic management. Argentina was mentioned in the 2009 article context vis a vis relative benefits of floating sovereign currency versus pegging and perils of debt in anything but your own currency. Argentina is a big ball of complexity with a long history of high inflation whose problems are many but suffice to say 25% inflation is not what mmters want. Last time I looked reserve bank in nz was struggling with 1.6 % however. Deflation is going to be the dominant problem and I don’t see monetary policy fixing it with households at peak debt.

              • Pat …
                9 March 2018 at 7:54 am

                You miss the point…your linked article further states

                “This is a lesson all countries should learn. International capitalism, ultimately does not really take ‘political’ decisions – it just pursues return.

                The clear lesson is that sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies – such as the introduction of a Job Guarantee – which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.

                Argentina’s defiance has lessons for Australia. Many critics of the Job Guarantee argue that the international financial markets would wreak havoc on the Australian economy if it was introduced here. This is clearly just a neo-liberal myth. My view is that the international investment community would soon realise that rather than being a threat to their activities, the introduction of a Job Guarantee would provide them with an even better investment climate in which to chase return. It is time that we abandoned the neo-liberal myths and instead realise that in capitalism ‘greed comes before prejudice’

                MMT does indeed provide Argentinas default history as an example of how a country (economy) can default on offshore debt and still retain access to the market but fail to acknowledge the cost of such action…
                this is dishonest.

                As I said to MW..”There are controls that could be implemented to make it function (not improve) but I would submit that they would never receive the backing of the majority of any population currently due to the restrictions it would impose.”.

                The article continues on to outline such control…

                “The national government can always service its debts so long as these are denominated in domestic currency. In the case of national government debt it makes no significant difference for solvency whether the debt is held domestically or by foreign holders because it is serviced in the same manner in either case – by crediting bank accounts.

                In the case of private sector debt, this must be serviced out of income, asset sales, or by further borrowing. This is why long-term servicing is enhanced by productive investments and by keeping the interest rate below the overall growth rate. These are rough but useful guides.

                Note, however, that private sector debts are always subject to default risk – and should they be used to fund unwise investments, or if the interest rate is too high, private bankruptcies are the “market solution”.

                Only if the domestic government intervenes to take on the private sector debts does this then become a government problem. Again, however, so long as the debts are in domestic currency (and even if they are not, government can impose this condition before it takes over private debts), government can always service all domestic currency debt.”

                What does mean in the real world?…Essentially those with access to FX are able to freely purchase offshore whereas the government (which itself does not generally have a FX income stream, unless it sells public assets offshore) denotes all its borrowings in the National currency….think about that….in the NZ context who has access to FX?..Fonterra, tourism operators…generally the owners of exporting companies, not the overwhelming majority of citizens.
                So who determines what that valuable FX is spent on and for who?

                The Government could regulate and place restriction on that FX spend, however that would be a disincentive to earn it.

                There are also issues relating to imported inflation …a floating currency will only flatten out the peaks and troughs not stop the trend….the determining factor is the proportion between in flows and outflows and whether they are bi directional…..NZs have been constantly negative for decades….theres a lot of countries selling ag produce and wanting to buy the latest tech be it machinery, medicines.. whatever.

                Finally, with the perception a government can issue currency at will consider the political pressure that may be placed upon any administration to provide any and all goods/services.

                Thanks, but no thanks.

                • CS …
                  9 March 2018 at 10:31 am

                  “Finally, with the perception a government can issue currency at will consider the political pressure that may be placed upon any administration to provide any and all goods/services.”

                  This is indeed a potential problem. The government cannot issue “currency at will” without thought to the context in which it is operating. It can deficit spend to offset private savings decisions and CAD leakages sensibly and judiciously. In the current context of deflation and a deficiency of aggregate demand with middle class households and poor households severely constrained in their spending, I would submit that that means increasing fiscal expansion to levels to the kind which you yourself admitted would not cause any mainstream economist to loose any sleep even if they believed in bond vigilantes (Australia 40% public debt to GDP). MMT would submit that a Job Guarantee programme that expands in recessions and contracts in booms is a good way of getting the deficit spend right by intervening and spending “at the bottom”. Norway on the other hand with a huge export surplus is sensible to run a surplus otherwise inflation would result.

                  Yes there was a big cost to Argentina’s default – due to being unable to service debt in foreign currency. But if you read the history of Argentina under the currency pegging regime, the foreign debt regime and the IMF’s poster child austerity/neo-liberal prescriptions prior to 2001 you will find that things were a lot worse. The export strategy combined with the currency pegging was a horrendous disaster even if inflation was controlled for a time. The default and return to sovereign currency did improve things. The small scale experiment with the Job Guarantee was successful. Yes Argentina continues to have problems including creditors who don’t give up . One key component of the particularly high current Argentinian CPI inflation I understand is that the new more neo-liberal government has removed all subsidies on public utilities – as part of a “reduce the deficit drive. ”

                  There are potential external ramifications with MMT. But not insurmountable ones. It is mistake to equate functional fiscal expansion that maintains appropriate levels of aggregate demand with hyper-inflationary money printing with a decimated supply side and a sudden mass international rejection of the NZ dollar.

                  Try as it might, current monetary policy is close to a zero lower bound, is not “getting things going.” There needs to be more fiscal expansion.

                  I was under the impression that all NZ all government securities ARE denominated in NZ dollars. But were you suggesting something else? Who currently decides who gets access to the valuable foreign exchange NZ earns – well the forex market with a floating exchange rate.

                  I link to a reserve bank paper on the likely outcomes for NZ of a sudden stop of foreign capital flows given the largely nz dollar and /or hedged nature of our public and private debt and floating exchange rate. https://rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2011/2011dec74-4hargreaveswatson.pdf
                  “Overall, there is reason to think that a flexible exchange
                  rate and domestically denominated debt can be important
                  factors in mitigating the risk of a disorderly current account
                  reversal and altering the character of any adjustment that
                  does occur. It is difficult to find an example of a country with
                  those two factors experiencing a current account reversal
                  that looks like it was caused by a withdrawal of international
                  funding and rising bond yields. ”

                  You are a worthy opponent though Pat!

                  • Pat …
                    9 March 2018 at 11:17 am

                    “There are potential external ramifications with MMT. But not insurmountable ones. It is mistake to equate functional fiscal expansion that maintains appropriate levels of aggregate demand with hyper-inflationary money printing with a decimated supply side and a sudden mass international rejection of the NZ dollar.”

                    I dont believe I am making that equation…indeed much of MMT I agree with in respect of the domestic economy (provided sensible fiscal decision making)…..my area of concern has always been with the externals and the way MMT proponents fail to address the likely real world outcomes…they are glossed over or not discussed, and as said this is dishonesty by omission.

                    I also note that we (NZ) have room for fiscal expansion without MMT.

                    The point about gov debt only being in NZ denomination is that under MMT the government in effect abdicates the implied support of currency …currently debt can be issued cheaper to nation state than its private inhabitants enjoy due to the perceived security of the ability to repay and expectation of sound fiscal control,remove that and you will increase the risk premium to all borrowers…under MMT it leaves control to the market and expects market solutions, thats fine if your willing to pay for it in increased costs and reduced stability (a la Argentina)…..and NZers borrow and would continue to so under MMT…(at least as long as there were willing lenders)…as so often stated we run constant negative trade balances.

                    I will have a look at the RBNZ paper and post a reply later, but capital outflows are another area of concern although they are likely to be in any case…and a trade war may well be the trigger.

                    And final point….I am well aware that many of the problems I note with MMT exist within the current system to one degree or another however my argument is that by and large MMT accentuates them….no need to make a bad situation worse.

                    • CS …
                      9 March 2018 at 12:20 pm

                      “currently debt can be issued cheaper to nation state than its private inhabitants enjoy due to the perceived security of the ability to repay and expectation of sound fiscal control,remove that and you will increase the risk premium to all borrowers…”

                      A sovereign currency nation always has the ability to repay. Hence why institutional investor want to park their spare reserves in government bonds for a risk-free return. In fact I read some financial analyst type on interest.co.nz recently worried about there being a lack of nz bonds to buy due to decreasing deficits! They want them! It’s not “perceived security” – it’s basically assured security. Hence why JGBs were are all snapped up despite a credit ratings downgrade with no increase in yields or interest rates (which in a sovereign currency nation are always able to be set by the central bank – aka not Greece).

                      Read more here on credit ratings –
                      who are quite hilarious in their assessments http://bilbo.economicoutlook.net/blog/?p=15580

                      If an engineer was so wrong so often they’d be in jail.

                      “sound fiscal control” I assume is short hand for “not producing inflation”. Well, increasing aggregate demand via fiscal expansion (with or without debt issuance) in the right context need not create inflation. Increasing government spending does not produce inflation if there is spare capacity to bring into productive use. 11% labour underutilisation is spare capacity. It’s a massive waste of human potential.

                      People seem to think out of control inflation is just around the corner in NZ still – batten down the hatches …. yet stubbornly it refuses to appear. Why? Because we have high labour underutilsation and a demand gap.

                      Basically to me it all boils down to “it’s sad but unavoidable that we must keep the a significant proportion of our population impoverished and underemployed because if we don’t inflation will cause a huge financial exodus from NZ and we’ll turn into Greece or Argentina”.

                      The step from new keynesian thinking – deficits are ok in recessions but fiscal balance is required longer term due to crowding out, inflationary pressures, sustainability issues, etc – to – MMT – deficits are in some countries needed continuously to offset demand leakages and are functional is a big one I know.

                      Anyway, now I must fill my “underutilised labour” status with something more productive – housework!

                      Great debating with you.

                  • Pat …
                    9 March 2018 at 11:06 pm

                    K….thanks for the link.

                    Well aside from the bland descriptors the thing i took from that was the RBNZs blind faith in derivatives…..odd considering what has happened.

                    Around half in NZD denominated so plenty of scope for grief.

                  • Pat …
                    10 March 2018 at 7:44 pm

                    yes ..the RBNZ required I think a reduction to 30% offshore for mortgage money.

                    As you appear open to discussion I will put to you the same question as nic

                    What is the purpose of economics?

                    • CS …
                      11 March 2018 at 8:12 am

                      The true purpose of economics should be to work out the best way to employ and distribute resources so as to maximise well-being. I see it in a utilitarian way.

                      Currently the vast majority of what passes for “economics” is to justify economic settings that maintain power and control for a select few.

                      Economics is currently mainly the theology of neo-liberalism – largely. It provides the cover for the maintenance of power in the hands of a few and the exploitation of the many. It functions as what Marxists would call the ideological superstructure that maintains the underlying relations of production.

                      Economists that are given Nobel Prizes – like Lucas – go on to make speeches about the end of the business cycle prior to the GFC or like Blanchard that the outlook for the global economy in 2008 is ‘benign’. Or prior to the GFC that Icelandic banking is in great shape.

                      As I have said many times, if they were engineers they would be in jail because their buildings would collapse. But spouting prescriptions that impoverish billions gets them Nobel prizes!

                      That said, I think Post Keynesian and MMT economists get a lot closer to theories of economics and analyses of empirical reality whose prescriptions would achieve my utilitarian purpose of improving material well being in a fair and just manner.

                    • Pat …
                      11 March 2018 at 8:23 am

                      “should” is a wonderful word.

                      Would you describe say someone like Steve Keen as the Martin Luther of our time?

                      I would suggest that MMT may have less chance of succeeding (assuming acceptance by its needed partner) not because of errors but because it exposes too much to achieve its purpose.

                    • CS …
                      11 March 2018 at 8:40 am

                      I would say economists like Keen, Kelton, Wray, Mitchell and financier Mosler, perhaps historian Robert Skidelsky, Koo etc are iconoclasts and revolutionary thinkers in a way.

                      Keynes to a certain extent is still a revolutionary – in a mild paternalistic way (If only we had minds like that at work today!)

                      Yes MMT exposes the myths of neo-liberalism about how money functions in a modern, fiat economy.

                      IS LM curves and analysis is just plain wrong, flat earth stuff.

                      I like to (perhaps deceive myself) that history errs on the side of progress in order to carry on.

                      I live in hope that MMT and post-keynesian economics will triumph eventually.

                    • Pat …
                      11 March 2018 at 8:52 am

                      well I shant join the heretics until one is in the castle…..and im reasonably confident that wont be allowed to happen…..lots of alternatives for them to try first

                  • Pat …
                    11 March 2018 at 8:34 am

                    well understood…and in action as we speak

      • Nic the NZer 2.1.2
        10 March 2018 at 9:28 am

        “that’s just the evidence we have from other inflationary feedback loops- that they only seem to have become evident in countries at roughly 100% of debt-to-GDP ratio”

        Its not clear what this term is referring to. Its important to understand that inflation is basically related to the relationship between current spending (e.g GDP) and economic capacity (with some complexities like peoples expectations). The debt-to-GDP ratio is irrelevant to this and there is no evidence that high debt-to-GDP causes inflation.

        But to address the long term relationship between money, inflation and potentially high debt-to-GDP ratios there is a relevant point to be made. If there is inflation and those increased prices are paid then as a consequence money has typically been created to pay those prices. The causality definitely runs in that direction as a consequence of how banks (including central banks) work institutionally. So if you look at long term relationships between debt-to-GDP, money supply and inflation there will be some kind of correlation there (in a way that it can’t be increased money causing inflation). BTW if your referring to Ragoff and Reinhart in some way this was always the big problem with their paper, in identifying a correlation they don’t deal with the causation running in the other direction to what they are discussing.

  3. Bill 3
    8 March 2018 at 10:21 am

    I thought there was something within MMT suggesting that government most definitely does not borrow money, but rather create its own balance sheet through (more or less fictitious) money creation – that it can then wipe or add to (more or less) at leisure depending on how it’s reading economic signals – broadly, making judgement calls on whether the economy requires money to worth more or worth less.

    Maybe I’m thinking of something else, or have misunderstood MMT from my scant perusals of it – or something else. 🙂

    • Matthew Whitehead 3.1
      8 March 2018 at 11:26 am

      You’ve been looking at more basic/dogmatic approaches to MMT that insist that inflation isn’t a huge problem because you just apply a perfect tax policy which prevents inequality and has no unintended behavioural consequences. In the real world, printing money to pay down debt (not actually borrowing money) has inflationary consequences in most cases and essentially amounts to taxing people more than the extra money is worth, and doing so on an incredibly regressive basis. (arguably worse than GST) You can do it, but it’s an extreme measure that shouldn’t be resorted to except to either:

      a) Avoid a debt spiral into high-inflation.
      b) Avoid a recession turning into a depression.

      You can think of QE as risking inflation to reduce unemployment, and surplus taxation as risking unemployment to avert inflation, basically.

      In reality, even economists who believe MMT is fundamentally sound don’t think you should print money to solve every real-world deficit- some of them will be caused by tax evasion, by inequality, by insufficient tax rates or tax base, etc… etc…, and in those cases issuing bonds/taking on actual debt etc… is the less inflationary step while you work to fix the system. (The problem being, National doesn’t believe in fixing the system)

      So your understanding is correct, we CAN, theoretically, pay for anything we bloody well want to if we’ll take the consequences, even without taking on debt. But that doesn’t mean that governments always favour that approach.

      It’s one of those weird situations where having the option to do something is beneficial even if the circumstances under which you’d really want to do it are very limited. New Zealand budgets have tended to be so tight on average thanks to Labour’s defensive positioning on debt and early 20th century National not being keen on taking it on, that we’ve never really built up a level of debt we couldn’t repay within about 12-15 years or so, so New Zealand never really experienced anything like a responsible loose fiscal strategy before. (The closest we got was muldoonism, which was disastrously mismanaged)

      • Bill 3.1.1
        8 March 2018 at 11:51 am

        Borrowing money to spend into an economy versus creating money to spend into an economy – that could sit in a half forgotten ledger off to the side somewhere marked as “debt”, which the government could pay off when there are signs of over-heating in the economy, or even simply write off if circumstances suggested that be a course of action.

        Borrowing comes with penalties (that vary in terms of “pain” over time in relation to the total size of the economy), while a fictitious debt created solely as a tool to manage money flows is always painless.

        The latter would also (I’m thinking) lend itself to fine tuning far more readily than borrowing.

        But this stuff hurts my head for some reason and I really ought to be getting on with some stuff.

        Maybe I’ll try to rediscover where I found the basic idea that I’m probably mangling. Half thinking it might have come from Mark Blyth.

        • Matthew Whitehead 3.1.1.1
          8 March 2018 at 12:08 pm

          No, you’ve missed the point- borrowing comes with interest, QE comes with inflation. Of the two, inflation is by far the worse penalty, which is why the Greens only hesitantly floated QE that one time, and why National acted like Norman had put on clown makeup and thrown a pie into the air only to have it land right on his face. Borrowing is the less risky option, but having the option of QE is important, and Norman was actually right to consider it seriously after the GFC (it would certainly have been better than Bill English’s mildly Hooveresque approach of cutting government spending in response to a recession)

          The “penalty” only arises when you actually have the right size of government money, but say, some people are saving it rather than putting it into productive investment, or you have an overly fat capitalist class who are pulling the money up the class ladder much too quickly and not sharing it around to be properly circulated, and try to defeat that problem with QE, or just use QE for no real reason at all. If you’re actually in a situation where you have real goods or people willing to give lots of services that need government currency in the economy to get the credit or money they need to get paid to do productive things, then there is likely minimal-to-no inflation from QE. The trick is that things are a little circular that way- skilled labour and manufactured products don’t tend to lie around waiting to be sold as much anymore, we’re risk-averse and highly efficient that way in NZ.

          • Bill 3.1.1.1.1
            8 March 2018 at 12:31 pm

            How does QE that’s spent by way of up front production necessarily come with inflation? If there is too much stimulus, then sure. But that’s back to the fine tuning.

            How would such a thing have played out back in 70s when Capital essentially went on strike and we got stagflation? (High unemployment and high inflation off the back of bugger all investment?)

            Obviously Keynesianism couldn’t tackle that. But it seems to me that direct government stimulus (not through borrowing at stupidly high rates) would have undercut the Capitalists who were monkey-wrenching shit to get back the power they had before WWII.

            • greywarshark 3.1.1.1.1.1
              8 March 2018 at 12:54 pm

              Yeah. Why couldn’t we have had that?

            • greywarshark 3.1.1.1.1.2
              9 March 2018 at 10:59 am

              Stick in there Bill. You miss the point? Maybe the point is that the economy is supposed to serve the people but some have found the way to tweak approaches that end up with the people serving the economy. And then that has bedded down into the received wisdom.

              Perhaps we can start off with a local closed economy that works like water. Water was used in the famous contraption that was built to demonstrate the economy by practical economic theorist Professor Bill Phillips (of the Phillips Curve fame), known as the Moniac machine. It is a dynamic model of a working economy.
              https://nzier.org.nz/about/monia-machine/

              In this theory I envisage the local dollars would be bounded like water in a dam but there would be a spillway where they connected with the main water flow. But there would be sufficient in the dam to provide for all reasonable needs, and the inflow would be kept up by proper care for the conditions in the employment and enterprise watershed which connects to the outside financial environment.

            • Matthew Whitehead 3.1.1.1.1.3
              10 March 2018 at 2:28 pm

              QE by definition isn’t spent by way of up front production, to my understanding, it’s probably just a lack of my precise terminology for fiscal expansion through productive deficit spending. You can pull it off with no-to-little inflation in my books, although my dad wasn’t so sure.

              And yeah, right-sizing your money supply through MMT can’t handle capital withdrawal and stagflation. You need to shape incentives through tax and policy to deal with that. (This is why I keep saying it’s actually important to have a differential between the tax brackets which you expect investors to lie in versus the corporate tax rate- (which bracket in a progressive income tax system you need this differential to kick in at depends on how you set up the brackets- it’s almost certainly going to be in one of them after the one that contains the median wage, though) if the corporate rate is lower, people seeking to legally avoid higher taxes will rationally conclude they should invest in productive business, which is what you want anyway, so it’s win/win)

              • Nic the NZer …
                10 March 2018 at 3:19 pm

                “right-sizing your money supply through MMT can’t handle capital withdrawal and stagflation”

                Its better not to talk about money supply size here. What is the relevant relationship is spending (which is a flow of money changing hands) in relation to economic capacity to supply those goods. When capacity is being pushed tends to be when inflation happens. Also note, contrary to mainstream theory, most businesses don’t operate near their functional capacity and have significant excess supply capacity which is likely to be utilized before they start raising prices.

                Capital withdrawal can at least always be replaced by more public spending and investment of course.

                The situation of stagflation is more difficult. What happened in the 1970’s is there were significant increases in external oil prices which are goods that are somewhat difficult to substitute for. This took income from capital and labour (and distributed it externally from most economies). This could have been resolved by resolving the disputes over the remaining income shares of labour and capital more reasonably rather than the spiraling price and wage hike conflict which ensued. In practice the pain of resolving this mostly fell on the wage side with the loss of lots of union bargaining capacity. Additionally the think big projects were actually quite sensible in trying to make NZ more energy self sufficient, though its not something which resolves itself quickly.

                I would argue having a coherent understanding of government fiscal capacity (e.g MMT) would have a much better impact on policy than what ensued. The quantity of money targeting policies which were actually implemented (and their total failure to have the desired impact) played a harmful impact I would suggest because many of the important economic decisions were made in a state of total confusion. Things which were supposed to have a major impact were having no impact, a lot of policy was extremely unpopular and soon new and troubling economic problems were emerging such as the 1987 share market crash or BNZ failure.

          • CS 3.1.1.1.2
            8 March 2018 at 2:59 pm

            Why is debt financed spending less inflationary than overt monetary financed spending – both leave the private sector with the same net financial assets – just in different asset portfolios? Bonds are almost as liquid as cash and can be used almost like cash.

            Bond issuance doesn’t trap pre-existing money and prevent it from being spent. Bonds mop up excess reserves created by deficit spending.

            Look into Stephanie Kelton’s descriptions of how bonds and monetary policy work.

            I think you are basically onto it MMT wise but should not confuse QE with fiscal deficits.

      • Nic the NZer 3.1.2
        10 March 2018 at 8:59 am

        “In the real world, printing money to pay down debt (not actually borrowing money) has inflationary consequences in most cases”

        This is incorrect. The actual consequences are related to the differences in what happens in the inter-bank system. Say the reserve bank is maintaining some OCR and the treasury just decides to spend (including debt repayment) by simply crediting the due account and not debiting its own (which you refer to as printing money). In this case the consequences are identical as there may (depending what else is happening in the economy) be an excess settlement balances in the inter-bank system. When this happens the 90-day bills rate tends to fall lower than the OCR and the reserve bank will probably have to engage some kind of liquidity management operation (they do this regularly anyway, its not unusual) to remove the excess reserves. After this happens the accounts end up roughly identical (though the reserve bank may carry more debt as opposed to the treasury) and therefore the inflationary consequences are identical.

        On the other hand if the reserve bank instead allows the OCR to fall (to zero eventually if this is a long term thing) then the inflationary consequences are just the inflationary consequences of having an OCR of zero long term. This may allow more investment to proceed than otherwise but in terms of inflation its really about how effectively the government is balancing its part (and total) spending/taxation against economic capacity rather than anything else.

    • Nic the NZer 3.2
      10 March 2018 at 8:40 am

      “I thought there was something within MMT suggesting that government most definitely does not borrow money”

      All government spending, taxation and borrowing happens in inter-bank settlement accounts operated by the central bank (or in cash which is similar enough). By definition this money must all have been created by the central bank at some point (which is part of the government). So this is true by definition basically. Its all borrowing back and re-spending and all the money originated from a part of the government where it can create as much as needed at all times.

      It also implies that if the government wanted to spend it can do so by simply crediting a separate account without debiting any account, or by running an overdraft system and borrowing from the central bank to credit its account before transferring to another. The question about doing this is how its going to effect the rest of the economy.

      There was a post up on Michael Reddells blog recently where he describes off the cuff a lot of Reserve Bank of NZ spending happening this way (while he last worked there).

  4. Pat 4
    8 March 2018 at 10:48 am

    continuing thoughts…

    The only realistic hope of a successfully operated MMT system would be within an entirely closed economy…..there is only one entirely closed economy in existence and that is the globe…therefore any serious proponent of MMT must also advocate the demise of the nation state and advocate for one world government/economy.

    Whose?

    • Matthew Whitehead 4.1
      8 March 2018 at 11:35 am

      Um, no, it doesn’t require that, and no, making a global macroeconomy would make the whole thing impossible to regulate by manipulating its currency most of the time, (ie. moving money into and out of the economy) because you would get confidence shocks or material shortages in countries that were too small to be worth regulating. That’s a disaster if you model it using MMT’s assumptions.

      Most advocates of MMT for looking at government budgets would recommend, for instance, the dissolution of the Euro, and every country that can manage the logistics of buying/making the coins and notes for their own sovereign currency do so in order to be able to self-regulate. Far from calling for the demise of the nation state, MMT says that it is fiscally sensible to maintain maximal economic sovereignty. Economists who subscribe to it to any degree would be incredibly skeptical of even small currency mergers, like a joint Australia-New Zealand dollar.

      • Pat 4.1.1
        8 March 2018 at 12:54 pm

        That reply still assumes nation states…” in countries that were too small to be worth regulating.”

        And obviously MMT requires sovereign currency however the point of closed economy remains unaddressed

        • Matthew Whitehead 4.1.1.1
          8 March 2018 at 2:40 pm

          What precisely do you mean by a closed economy? I made several points that imply exactly the opposite in my post, (ie. national-level currencies don’t become viable without demand for goods and services produced by people who live in that country, and intrinsically some of that demand MUST be international for the country’s largest industries) just like I did with international currency mergers, but you appear not to have taken that in.

          Have a re-read, or look for more info on MMT, and come back and let me know if you still have questions.

          • Pat 4.1.1.1.1
            8 March 2018 at 7:31 pm

            are you seriously asking what a closed economy is?….one that is entirely self sufficient, off the top of my head i would think the closest current example may be North Korea…and that is not necessarily by choice.

            • Matthew Whitehead 4.1.1.1.1.1
              12 March 2018 at 3:51 pm

              I asked what you precisely meant because I never implied anything of the sort in the post and you’ve not given any backup for your assertion that a closed economy is needed.

              Now you’ve clarified, I can flat-out say you’re wrong. There is nothing about MMT that implies closed economies for its assumptions to hold, in fact that would make demand for a country’s sovereign country lower than in the default, more-open economic setting, because people wouldn’t be trading other goods, services, and currencies for yours in order to buy your country’s goods and services, and the only point of official government money would be to pay government taxes.

        • CS 4.1.1.2
          8 March 2018 at 7:22 pm

          This is a great article
          http://bilbo.economicoutlook.net/blog/?p=10389
          All about MMT and current account deficits.

          Enjoy!

          • Pat 4.1.1.2.1
            8 March 2018 at 8:32 pm

            “A current account deficit reflects the fact that a country is building up liabilities to the rest of the world that are reflected in flows in the financial account. While it is commonly believed that these must eventually be paid back, this is obviously false.”

            http://bilbo.economicoutlook.net/blog/?p=10389

            magical thinking….i re refer you to Argentina which has defaulted 7 times over the past 200 years and pays the price every day.

            • Cs 4.1.1.2.1.1
              9 March 2018 at 1:08 am

              You most certainly can default on sovereign debt if it is not in your own currency. Like Argentina’s.

    • Nic the NZer 4.2
      10 March 2018 at 9:04 am

      “The only realistic hope of a successfully operated MMT system would be within an entirely closed economy”

      Pat, NZ already operates an MMT system. MMT is just a description of how money works. Your saying the equivalent of NZ’s economy would be more successful if it became closed (and continued operating its own currency) but I don’t think that is true or what your trying to imply.

      • Pat 4.2.1
        10 March 2018 at 9:21 am

        Not what Im saying at all…Im saying what I said.

        That is that control is lost with externals or expressed another way, remove the externals and you have a better hope of control.

        MMT is a system insomuch as monetarism (Friedman) is a system…both seek to explain how economies work as do all schools of economic thought…..history would appear to indicate that no one has yet answered that question that holds up for more than a few decades…..there may be a reason for that.

        All theories are both right and wrong….depending on circumstance….the trick is identifying which theory applies to which situation.

        • Nic the NZer 4.2.1.1
          10 March 2018 at 9:44 am

          “MMT is a system insomuch as monetarism (Friedman) is a system”

          Let me just correct you there, but the key idea of monetarism is that there is a reasonably fixed relationship in the velocity of money and so implying the government will be able to control inflation by maintaining a quantity control (probably slowly increasing) mechanism over the money supply. It turns out this idea is a crock and it was abandoned entirely shortly after it was tried in practice everywhere it was tried.

          The RBNZ has been running a price, rather than quantity, target for settlement reserves since 1992. This mechanism and its effects is 100% in conformance with MMT, as is the failure of quantity targeting as a policy mechanism.

          • pat 4.2.1.1.1
            10 March 2018 at 12:34 pm

            I politely ask you to put away your textbook and bear with me…this may jump around a bit and take some time but it should make clear my thinking (an idea that has been forming)….it begins with a question.

            What is the purpose of economics (theoretical or actual)?

            • Nic the NZer 4.2.1.1.1.1
              10 March 2018 at 12:41 pm

              Actual. The only point of theoretical is to explain what is actually going to happen, obviously but that is true of all scientific theories anyway.

              • Pat …
                10 March 2018 at 7:39 pm

                again …what is the purpose of economics?…open to anyone.

                • Nic the NZer …
                  10 March 2018 at 11:23 pm

                  I don’t know if you can attribute scientific theories a purpose (going into morals is about what we do with the knowledge we have), but its purpose is to discover knowledge about the economy. In particular if some idea is demonstrated to be incorrect for the actual economy then this is not a legitimate economics (to me). Yes, its not mechanical a lot of legitimate questions economic theories may pertain to have aspects of politics, culture and psychology related into them. Many legitimate questions may not be able to have a firm theory about them either.

                  • McFlock …
                    10 March 2018 at 11:38 pm

                    Economics isn’t a science.

                    It’s not repeatable or refutable.

                    Any expected real world result is regarded as validation, any contrary result is explained away by people who are ideologically opposed to it, because real-world conditions are always unique.

                    It cannot predict daily fluctuations to any useful degree, nor can it predict sudden massive shifts like value crashes.

                    At best it’s a rule of thumb based on largely trivial observations, like weather prediction 300 years ago.

                    • Pat …
                      10 March 2018 at 11:46 pm

                      we’ll get to that

                    • Nic the NZer …
                      10 March 2018 at 11:59 pm

                      Just because economics practice doesn’t raise itself to the level of science (which I largely agree with) this doesn’t mean it can’t do so, or try to do so.
                      You should also not confuse the specifics of prediction with the validity of theory. Say you construct a model of a messy explosion, you could try to predict where all the pieces will land when the dust settles but your going to fail (the minutiae really matter here). This in no way detracts from the fact we have a good understanding of the physics involved here.

                    • McFlock …
                      11 March 2018 at 12:44 am

                      But for a given measure of messiness, you can. From ballistics, through applications of multipoint detonation, to building demolitions. Because, as you say, we know the basic theory.

                      Economics can’t do that for any measure of messiness, because it’s essentially chaos squared: it’s trying to analyse the chaotic system that results from 7billion individually chaotic human elements. The margin for error in each person has infinite consequences in the larger system.

                      How do we know we have a good understanding of the economics involved here? We have some elegant theories, but they are completely untestable. The act of measuring or isolating every other factor is in itself an input that might affect the responses of test participants. The models derived from those theories fail unexpectedly in unrepeatable ways, rather than like a physics model that tends to have a predictable area where it will break down (increasing pressure in a vessel will cause it to rupture at a roughly calculable point).

                    • Pat …
                      11 March 2018 at 12:45 am

                      thats because its not and never has had any basis in science….it is a religion

                    • Nic the NZer …
                      11 March 2018 at 9:34 am

                      There are plenty of similar sciences which are messy or must rely on natural experiments, in particular biology, astronomy. These are not reasons that economic knowledge can not be held to scientific standards or should not be.

                      If you want to continue this line of argument the onus is on you to provide a category for economic knowledge and justify it. If its not held to a scientific standard, is it then religion, is it fantasy e.g its valid specifically because it’s fiction?

                    • Pat …
                      11 March 2018 at 10:00 am

                      “There are plenty of similar sciences which are messy or must rely on natural experiments, in particular biology, astronomy. ”

                      https://link.springer.com/article/10.1007/s11270-008-9925-3

                      It is a religion and simply supplanted the role of formal religion after the Enlightenment.

                      it even has its own version of everlasting life….infinite growth in a finite environment.

                    • Nic the NZer …
                      11 March 2018 at 10:07 am

                      “thats because its not and never has had any basis in science….it is a religion”

                      You realize what you are saying here is not only that economics behaves as a religion, but it shouldn’t try to change that what so ever. This places you in the congregation, but you shouldn’t think everybody else has joined you in the pews.

                    • Pat …
                      11 March 2018 at 10:50 am

                      It would be more accurate to say I am an atheist living in a religious society who sees no advantage in being burnt at the stake in a vain attempt to expose the deception of the elites……people dont react well when they realise they have been conned
                      The French revolution springs to mind

                    • Nic the NZer []
                      11 March 2018 at 3:34 pm

                      I don’t think you will risk being incinerated just for saying economics ought to hold itself to scientific standards of factuality.

                    • McFlock …
                      11 March 2018 at 11:41 am

                      Economics is a pseudoscience.

                      The funny thing about biology and astronomy is that the real-world evidence is predicted within known margins for error by a scientific theory formed in part by isolated experimental results. If it doesn’t, that bit of “knowledge” gets a big question mark by it until someone gets a better theory or finds something that screwed the pooch.

                      If an asteroid changes course unexpectedly, it’s either not an asteroid or there’s something fucky out there.

                      Even something really messy, like meteorology, works within known parameters. It’s been ages since a deluge occurred when half the meteorologists were predicting clear sunny weather for the next week, a few predicted rain, and the ones who had been predicting a deluge every day for the last six months went around being congratulated for their brilliance at finally being right when everyone else was wrong.

                    • Nic the NZer []
                      11 March 2018 at 3:56 pm

                      Yes, me and Pat were debating what standards ought to apply to economics. We were not debating what standards tend to be applied.

                      Pat appears to treat all economic thought as religion, so its all valid so long as the right authority is saying it (and sometimes even if the authorities contradict each other). Needless to say this in no way helps to separate appart the actual true concepts from the incorrect factual claims made by authority figures.

                    • Matthew Whitehead …
                      12 March 2018 at 4:05 pm

                      Actually economics is a social science. Whether you devalue that compared to “hard sciences” like physics, chemistry, or biology, is your business, but it’s absolutely a science as much as history, political science, etc, it’s just much more difficult to test economic theories because there’s so many moving parts that it’s difficult to control for variables. (a common problem for social sciences and why there’s so much debate within them)

                      Now, whether certain economic theories are any good is totally up for debate, and whether certain economists are actually concerned with evidence and testable claims, also up for debate.

                      If we’re going by analogy, I’d say economics is a science, but most of its adherents run it like alchemy: way too many people involved are trying to figure out how to get to a Perfect State, (in this case, transmuting economies into free trade, rather than lead into gold) and very few are actually sufficiently concerned with looking at the scientific realities of why humans trade things with each other, and describing how money, budgets, etc… actually work, and even whether what they’re calling free trade is actually beneficial for society in the amounts they want it.

                    • McFlock …
                      12 March 2018 at 4:15 pm

                      History is a science, now?

                      The Arts faculty will be sorry to see it go…

                    • Nic the NZer …
                      12 March 2018 at 11:16 pm

                      “History is a science, now?”

                      Your quibbling (of course), I imagine that was a miss-statement by Matthew but at least with history we know that the things recorded as history are supposed to have actually happened. If they demonstrably didn’t they are thrown out, or ought to be.

                      I will be impressed when Pat finally admits that economic theories which are demonstrably not true, at least ought to be thrown out of economics. He also seems to have some kind of bee in his bonnet about MMT which I find a bit strange when epistemologically the only argument he has allowed for himself is a claim that MMT has the wrong authority figures saying it. If economics is not science you have lost the ability to argue what is being claimed is untrue, miss-leading or will have different outcomes to what is claimed. Your simply no longer in a philosophical position where truth is a relevant criteria.

                    • McFlock …
                      12 March 2018 at 11:29 pm

                      But my point was that economic theories can’t be “demonstrably false”. If real-world evidence doesn’t match the theory, the supporters of that theory have innumerable ways of arguing why.

                    • Nic the NZer …
                      12 March 2018 at 11:43 pm

                      Of course that happens, it has happened in other sciences as well from time to time. The problem is if your claiming economic thought is not science then philosophically your condoning that and you consider it acceptable.

                    • McFlock …
                      12 March 2018 at 11:55 pm

                      What has condoning got do do with anything? As far as I’m concerned the field is essentially bunk, predictions unreliable, and what’s called “economic knowledge” is essentially a reflection of personal bias.

                      Sure, if a bunch of economic analysts say something, then in the absence of any actual knowledge you might as well go with it. But pretty much every other facet of human existence should take precedence.

                      Economic arguments are fun, but raise the minimum wage to the living wage because it’s the right thing to do, not because you think it’ll be better or worse for the economy.

                    • Nic the NZer []
                      13 March 2018 at 9:37 am

                      “What has condoning got do do with anything?” All sciences started out being bunk at some stage. Its only when they started to throw out the unverifiable that they gained reliabile application in the real world, due to the scientific method.

                      Further if you don’t care about the facts of an economic discussions truth value and treat all statements there in as opinion (even the true or verifiably true claims) then your not an honest participant I would say. Most participants would agree statements made in such a discussion at least ought be true. You don’t care or one would expect require even your own statements to be true.

                      Also on that basis you gave up any hope of ever making economics scientific. In fact there is are a large amount of verifyable fact around economics, for example all the stuff overlapping with other sciences. Mostly the bits you are complaining about are strictly speaking true but not models which demonstrably apply to the real world. Yes it should be thrown out but you can’t do that if the criteria for throwing things out have been themselves thrown out.

                    • McFlock …
                      13 March 2018 at 9:58 pm

                      Economic facts are fine. GDP last year, for example. The unemployment rate, although it’s losing applicability as a measure of equity or alientation. Material deprivation indices.

                      But economic theory is bunk. At best any economic theory is a decent (but imperfect) rule of thumb for a particular narrow situation, but many economic positions don’t even get to that level.

                      And to my naive point of view, I always thought that if something was true, it conformed to reality. The idea that something can be “strictly speaking true but not models which demonstrably apply to the real world” is a pretty good example of econo-speak for “not true”, surely?

                    • Nic the NZer []
                      14 March 2018 at 8:06 am

                      No, the truth value of a fact comes entirely from the logic side. A simple example say I discover 2+2=4. On this basis i take two steps ahead and 2 steps to the left. Then i am 4 steps away from where i started, well no. So is it untrue that 2+2=4 on that basis? Of course not, whats wrong is that 1 dimensional model doesn’t apply in 2 dimensions.

                      Anyway i long since demonstrated that economics ought to operate as a science which was the point of the discussion. (yes i fully expect Pat to continue to religiously reject MMT, on the basis, that its true of the real world economy as far as it goes but actually he doesn’t know anything it says which is untrue, but anyway).

                    • McFlock …
                      14 March 2018 at 3:48 pm

                      What a load of bunk.

                      If you walk two steps forward and two steps to the left, you’re four steps away because you either turned into another corridor (and you can’t walk through walls) or you’re drunk. Whatever the distance is as the crow flies, we’re not bloody crows so the concept is largely irrelevant.

                      Economics ought to operate as a science in the same way fish ought to ride bicycles. It would make the world a better place, but sadly they just don’t have the legs for it.

                      The best example I can think of is Marx: his illustrations of the shortcomings of capitalism were economic facts that shone an uncomfortable mirror on “civilised” society. His theory about how we got that way is fair enough, and an important perspective, IMO. But his predictions about where we’d end up were complete bullshit.

                  • Pat …
                    10 March 2018 at 11:40 pm

                    lovely…but you are answering an unasked question.

                    to move things along let me suggest that economics purpose is control….the next question is control of what?

                    • Nic the NZer …
                      11 March 2018 at 12:20 am

                      See the problem here is you have some imagined course for the ‘discussion’ but actually this is not the way the discussion goes.

                      And no I don’t believe economics purpose is control, as I said already that is clearly a moral question. People may use economic ideas in ways which have moral repercussions, but that is not the purpose for such knowledge. Again this is the same as any scientific knowledge.

                      Why would I have a problem with what your putting across? Its because knowledge which has the moral question baked in tends to be of a theological nature.

                    • Matthew Whitehead …
                      12 March 2018 at 4:09 pm

                      Political science is the study of control. Economics is the study of trade. Neither have a “purpose” beyond finding out more about the thing they’re studying- if you have any purpose other than discovery of knowledge, what you’ve done ceases to be science. (or academics, if you want to be picky about what counts as science)

                      If you’re going to ask people things, you should wait for them to actually answer, as it gets VERY trolly very quickly if you don’t.

                  • Pat …
                    11 March 2018 at 12:32 am

                    I see the problem here as one of you are unwilling to answer a simple question for reasons unknown…I havnt mentioned science or morals, merely asked what the purpose of economics is…you appear to have no opinion as to its purpose (or at least one you are willing to state)….but are quite certain its purpose is not control….curious, and not terribly conducive to discussion

                    • Nic the NZer …
                      11 March 2018 at 9:57 am

                      I already answered your question several ways and times, Pat. The problem seems to be that your leading question was not leading enough and you got the wrong answer. I suggest you just go ahead and post your monologue.

                      I am quite certain economics doesn’t have a purpose because I don’t think any science has a purpose.

                      What you appear have been trying to lead to is that economics is basically a form of propaganda. To a greater or lesser extent this is true of certain parts of economic knowledge. Of course we can ask what the purpose of the propaganda is, who benefits, who its aimed at, what it accepts as truth, what it rejects. That’s all well and good until you get to the question your trying to answer with respect to MMT, e.g should you or more broadly the left accept it as truth? Of course the way I set this up its pretty obvious, nobody should accept propaganda as truth, ever.

                  • Pat …
                    11 March 2018 at 11:26 am

                    leading question?…..hardly.

                    Propaganda?…..more than that as propaganda dosnt require action.

                    MMT?….well as suggested it is simply a reforming sect of the religion….it still subscribes to the basic premise of unlimited growth, but even that aside the fact it removes much of the obfuscation limits its ability to succeed in its function…..control of populations (which you dispute)

                    Seeking to instigate anarchy over a poor order is not something I would impose on anyone, let alone my offspring ….not that its unlikely to occur in any case.

                    And it may all be moot..

                  • Pat …
                    11 March 2018 at 3:47 pm

                    ‘I don’t think you will risk being incinerated just for saying economics ought to hold itself to scientific standards of factuality.”

                    Lol…no i dont imagine I would…..and have no objection to making that statement….that is however short of advocating MMT as necessarily an improvement on the existing.

                    But Im not totally unconvinced of its potential merit

                  • Pat …
                    11 March 2018 at 4:33 pm

                    “Pat appears to treat all economic thought as religion, so its all valid so long as the right authority is saying it”

                    Thats a little misleading ….I said the role of economics is that which was once provided by religion and consequently its raison d’etre…that is not to say there is no logical reasoning in some of its presentation.

                    It needs it to maintain support

                    although like religion, the faith is being lost.

                    • Pat …
                      12 March 2018 at 8:16 pm

                      @MW

                      You may seek to gather gravitas through a self attributed misnomer but the fact remains that any theorem that breaches the laws of a real science, physics must by definition be an anti science…..curiously religion is also so described.

                      ‘Political science (another misnomer) is the study of control’…and economics is its method and indispensable partner.

                      If economics was ever only the study (and application) of trade practices it was long ago hijacked by the elites to serve its purposes…..and something that wont be willingly abandoned to the masses for that will mean abandoning control and consequent privilege….but you may console yourself with the belief you are doing gods work

                  • Pat …
                    12 March 2018 at 11:34 pm

                    “I will be impressed when Pat finally admits that economic theories which are demonstrably not true, at least ought to be thrown out of economics.”

                    Then you should have been impressed from day one…i have never said otherwise.

                    “He also seems to have some kind of bee in his bonnet about MMT which I find a bit strange when epistemologically the only argument he has allowed for himself is a claim that MMT has the wrong authority figures saying it.”

                    The bee in my bonnet is the fact the ‘invisible hand’ is firmly attached to the arm of the elites…..so MMT can make all the claims it likes about what will occur but they are only as good as the ability to determine the psychology and interactions of the individuals involved remembering that is endlessly dynamic.

                    The fact that MMT seeks to remove much of the window-dressing of economics in my opinion reduces its capacity to maintain stability…that is not a judgement on the motivation of its proponents rather an observation about human nature.

                    • Nic the NZer …
                      12 March 2018 at 11:53 pm

                      Seriously Pat, do some research into epistemology and come back when you can hold a coherent conversation about the topic. Also read your comments before hitting submit, many of them don’t even make grammatical sense.

              • Pat …
                12 March 2018 at 11:57 pm

                back at ya

                • Nic the NZer …
                  13 March 2018 at 8:11 am

                  “thats because its not and never has had any basis in science….it is a religion” -Pat

                  “I will be impressed when Pat finally admits that economic theories which are demonstrably not true, at least ought to be thrown out of economics.” – Nic

                  “Then you should have been impressed from day one…i have never said otherwise.” – also Pat.

                  Lying about what you said in the same thread of comments as you said it, is pretty dumb.

                  • Pat …
                    13 March 2018 at 7:49 pm

                    and those two statements are incompatible how?

                    The question is whether this lack of comprehension is deliberate or aphasiatic.

                    • Nic the NZer …
                      14 March 2018 at 8:11 am

                      I heard some good advice recently, which i really should have followed quite some time ago. One should never engage in a contest of wits with an unarmed opponent.

                  • Pat …
                    14 March 2018 at 10:50 am

                    then i shall have one final witless attempt..

                    Money is debt (economics)…..but it also power (politics)

                    It is well argued by Wray

                    https://www.youtube.com/watch?v=-KRi9nF8BiA

                    Where does that debt reside?…in the major economies and within those economies the top 10-20%

                    MMT seeks to democratise that debt which as an accounting practice is entirely rational…..it however ignores the power properties.

                    We know how power reacts to a challenge…..and it isnt to simply acquiesce.

                    https://www.youtube.com/watch?v=7NaJKdGxows

                    http://delong.typepad.com/kalecki43.pdf

                    What do you think will happen to the first country that adopts MMT
                    particularly if it is a smaller economy with little contagion risk?

                    Markets are not rational…they are manipulated for purpose….that is not science.

  5. Olwyn 5
    8 March 2018 at 11:47 am

    Thanks for your succinct and lucid explanation of MMT. The question that hovers for me, as a layperson with regard to these matters, is how much is fundamentally economic and how much political? Being more fiscally tight than your neighbours may signal that you are batting for the ‘right” team politically, with a good credit rating being, to some extent, a reward for your faithfulness.

    • Matthew Whitehead 5.1
      8 March 2018 at 12:15 pm

      Yeah, you’re getting it. The tight fiscal strategy is absolutely political. It’s of twofold benefit to right-wing politics:

      1) You pretend being tight is important but you actually run loose when you’re in government, so that you can give away maximum cash to your cronies and stay in power longer, while giving away bigger tax cuts to bribe voters, all the while pretending you’re Serious Financial Managers who know what’s right.

      2) You manipulate your opposing party into actually taking a tight fiscal strategy, to maintain your good credit rating, pay off your debts, and deliver as few promises to voters as possible, making them think there is less difference between the parties than there actually is.

      My whole thesis on political economics is that the left needs to abandon the defensive tight fiscal strategy in the long term. It might help to get them into power if people are really concerned with the opinions of big business, (lol) but it depresses their voter base, turns us into centrists in the long term. We need to play loose during recessions, or when recovering from a National government, and then go tight during bubbles/boom times, to keep that good credit rating, to normalize higher taxes, and to show that, like Cullen, we’re the real ones who know how budgets should be drawn up and are actually responsible with the economy’s reigns.

      (you’ll not I said nothing about purse strings. That’s because the government doesn’t have a purse, it makes money by fucking decree, or maaaaybe borrows it to avoid inflation)

      • Olwyn 5.1.1
        8 March 2018 at 4:02 pm

        Points 1) and 2) simply show where political power lies within this system, and we have seen how quickly those who do not conform to their relegated roles get punished – Cunliffe and Metiria here, Rudd in Australia, while Corbyn and Sanders have managed to stay in the saddle (so far) in the face of immense pressure. Prima facie, it seems that for the left’s abandonment of the defensive, tight fiscal strategy to succeed, a whole bunch of things need to come together – robust allegiances, grass roots constituencies, resourcefulness, confidence, energy and so on.

      • WILD KATIPO 5.1.2
        8 March 2018 at 4:45 pm

        Very nice, particularly … ” The key to understanding MMT is to think of net government spending as creating money, and net government surplus as destroying it ” …

        And …

        ” This is why to some degree Keynesianism worked- because often, surpluses in boom times and deficits in lean times are advisable, so long as your economy tends to balance well between recession and growth”…

        The Keynesian equilibrium…

        And interesting the statements you wrote above in points 1) and 2) , – as it has long been observed that Labour often comes in and rebuilds the mess left by National… that in effect , National are the spenders and Labour are the savers…

        Point 2) in particular can help to explain why Labour always seem to be forced into the corner of holding a tight reign to bring us into ‘surplus’ after National… manipulated , as you say. This explains a lot. It also explains just why National doled out generous tax cuts to the already wealthy and delivered diddly squat to low wage earners…

        This whole business and paranoia about govt ‘debt’ , – and reckoning that a national budget operates the same as a household budget… is exposed as well. The Japanese example being a classic : ” debt-to-GDP ratio of over 250% with no significant ill effects to date, other than perhaps an addiction to deficit spending”…

        Squarely sits what we have been led to believe for the last 34 years firmly on its arse.

        However, Japan has a fair few differences to NZ , but importantly, – the principles remain the same.

        Good post.

  6. dukeofurl 6
    8 March 2018 at 12:14 pm

    isnt the reason why japan can have eye wateringly high debt to GDP ratios, even compared to Greece, is that they fund the borrowing from domestic sources. ie Japanese are good savers, while Greece had external funding.

    Japan has both a high annual government spending deficit and low interest rates. And if you look at their trade situation they have a current account surplus, so an influx of money keeps interest rates low

    Another factor, which ties into some of your ideas about money, is that 70% of Government debt is held by the ( Reserve) Bank of Japan.
    https://www.economicshelp.org/blog/1178/economics/japanese-national-debt/

    • CS 6.1
      8 March 2018 at 1:54 pm

      Who creates the yen that the Japanese then save? How did they get the money to buy the JGBs with in the first place and to be such magnificent savers? That’s right, from the deficit spending of the Japanese government.

      Accumulated government deficits are private savings.

      The main controlling factor of the yield on JGBs is the Bank of Japan – it basically controls interest rates buy buying them directly.

      On the other hand if you run a constant CAD and a “ideological” government surplus (to look “prudent”), the private domestic sector must go into debt to sustain growth.

      Don’t know about you, but I’m not doing a whole lot of household saving these days.

      Greek debt was being “funded” by German and French savers/banks who were actually domestic savers prior to 2008 if you consider the euro area to be one country. Problem is, Greece has none of the powers the Bank of Japan has and can only tax the Greeks to pay back debt and is fiscally constrained by Maastricht rules so can’t grow its way out.

      • Tricledrown 6.1.1
        8 March 2018 at 9:05 pm

        Greek debt was run up by corruption by Goldman Sachs buying off Greek politicians left and right the EU has printed €billions which the German banks get for free and charge Greece high interest rates and have forced them to sell very good assets at fire sale prices.
        This is why we need a world banking overseer.
        To stop these vampire capitalists from screwing over small economies.
        Nauru and the Cook Island’s have been ripped off on our side of the world.
        New Zealand to being charged 6% for printed money during the GFC.

  7. Kevin 7
    8 March 2018 at 12:38 pm

    Best post I have read for a long time. Thanks.

  8. CS 8
    8 March 2018 at 12:55 pm

    Fantastic to see MMT being discussed more. Many thanks to the author.

    I direct everyone to the fantastic blog maintained by Bill Mitchell
    http://bilbo.economicoutlook.net/blog/

    The blog is truly a magnificent piece of blog scholarship and any query you have about MMT will be answered by trawling through its archives. It is also extremely well written and engaging – a kind of Keynes for our time.

    MMT has given this long time progressive finally a plausible economic paradigm to replace the neo-liberal one. It is the way forward for the Left. And I’ve searched for a long time I can tell you!

    Best not to mention “money printing” or “deficits”. Call it “overt monetary finance” and “fiscal expansion.”

    One thing, as I understand it, MMT says that when the government spends it matters not whether it just uses ‘overt monetary finance’ or issues bonds. The effect on inflation will be the same. It is the spending and its relationship to the productive capacity of the economy that causes potential inflation, not the manner in which it was ‘funded’. (Bond sales, MMT argues, operationally come after deficit spending – the government borrows back the increased reserves they spent into the banking system in the first place via the deficit. Otherwise interbank interest rates would drop to zero due to the excess reserves). Mopping up the excess reserves doesn’t mean banks necessarily lend less making it less expansionary. The money multiplier is a myth. They lend when there is profit to be made and creditworthy borrowers creating money out of thin air. They are not reserved constrained. http://bilbo.economicoutlook.net/blog/?p=15753 is great on this.

    Also best not to call MMT a kind of QE. QE is a monetary operation swapping bonds for reserves. Overt monetary finance under MMT means fiscal expansion without debt issuance. I.e. actual spending in the real economy – not lining the pockets of financial institutions in exchange for government bonds or mortgage backed securities. QE is associated with asset price inflation and enrichment of the financial classes – not what MMT hopes to achieve.

    Finally, Bill Mitchell on MMT in an open economy for those who say it can’t be done because of imported inflation, capital flight etc. http://bilbo.economicoutlook.net/blog/?p=5402

    Even if MMT is not immediately intuitive and a hard sell due to misconceptions about households and governments, the very low public debt levels in NZ and almost deflationary environment we are in signal a need for fiscal stimulus – given the near zero state of interest rates – even from a mainstream New Keynesian perspective. Labour can at least admit that surely! Or at least not keep emphasising the fiscal prudence myth. Creating sustainable growth and stimulating the economy should be reframed as ‘prudence’.

    • Matthew Whitehead 8.1
      8 March 2018 at 2:42 pm

      Fair enough, I am not actually an economist, but understanding political science requires you to be enough of a one to get by in terms of fiscal policy if you want to be really serious, so I’m not familiar with every term. Thanks for the corrections.

      • CS 8.1.1
        8 March 2018 at 3:01 pm

        You are doing great work! Keep it up!

        • Matthew Whitehead 8.1.1.1
          8 March 2018 at 3:20 pm

          I found a REALLY great site with a series of videos on MMT that got me into it, but unfortunately I can’t remember its name, but it did an amazing job, probably far better than I did, explaining the basics, and had great dropping of relevant terms like “gross national savings” instead of national debt. It was directed at American audiences but was actually surprisingly internationally relevant, too, then discussed it with my Dad (there are benefits to being related to a former SecTres) to refine my understanding of the inflationary side of things. I love the term “fiscal expansion.”

          I think we’re also in agreement as to the order things happen regarding both debt and private credit.

          Good link to Bill Mitchell, too, I recommend everyone read it.

          • Matthew Whitehead 8.1.1.1.1
            8 March 2018 at 4:17 pm

            Oh, I found it!
            https://modernmoneybasics.com/facts/

            • CS 8.1.1.1.1.1
              8 March 2018 at 7:47 pm

              I think it might be time to organise another public event for MMT in NZ. Or a debate perhaps? A local New Keynesian (Brian Easton??) vs Bill Mitchell perhaps?

              A general event on public debt and what it is?

              Labour needs some intellectual backing for fiscal expansion. God knows, economists like Krugman and Summers and Blanchard are calling for it – but Labour doesn’t feel it can tentatively spend a bit.

              I am a nobody. But maybe you aren’t Mathew? Do you have access to power and influence????

              I am pretty sure a lot of people are interested in deficits and public debt at the moment – what with Trump and all….

              Warren Mosler btw – a prominent MMTer and multimillionaire made out like a bandit in the financial markets betting against all the mainstream predictions of what happens to sovereign currency nations with high public debt rations. Finance types would be interested.

              • Matthew Whitehead …
                12 March 2018 at 11:20 pm

                I’m not influential, no. My dad still gets some respect in some circles, but that’s about the closest I get. I’m just a Green Party member with more opinion on change than change. 😉

                Also: two Ts if you don’t mind, cheers! If you want to shorten it I am happy to go by Matt, and even MW or MjW in a pinch if you want to use my initials.

  9. Exkiwiforces 9
    8 March 2018 at 2:12 pm

    Thank you for an excellent post Matt.

    Would’ve like to know why QE wasn’t use in NZ during the GFC, but I think I know the answer to it? The politics of the Neo- Lib economic ideology.

    • CS 9.1
      8 March 2018 at 2:38 pm

      Even if they had used QE it wouldn’t have done much good. QE is an asset swap – exchanging bonds for lots of bank reserves. Just having reserves doesn’t mean banks lend out more money to productive industry. Banks are not reserve constrained. They can sit on piles of reserves and do nada with them if there’s noone wanting to borrow. Now direct government spending into the real economy puts money in people’s pockets and gets things going.

      • Exkiwiforces 9.1.1
        8 March 2018 at 2:39 pm

        Cheers for that.

        • Matthew Whitehead 9.1.1.1
          8 March 2018 at 2:44 pm

          I don’t recall Clark’s precise economic position up to the 2008 election, but I do remember the Greens were absolutely calling for counter-cyclical deficit spending at the time.

          • Exkiwiforces 9.1.1.1.1
            8 March 2018 at 2:54 pm

            Thank you Matt, I was more thinking about post 2008 election onwards?

            • Matthew Whitehead 9.1.1.1.1.1
              8 March 2018 at 3:13 pm

              Goff and Shearer both wanted tight fiscal policy, as I recall. Little’s position was similar to Ardern’s- relatively tight until we get to 20% of debt-to-GDP, but after that in balance over the long term, with loose and tight periods, however Ardern (and by extension, Robertson) has been clearer that she’ll spend more if necessary on social policy. (however in practical terms that means we go tight after we’ve plugged the holes from National’s mismanagement given we’re not exactly in a recession right now so much as a barely-above-stagnation) Cunliffe’s position was the most loose of all post-clark Labour leaders, and of course, for context, Clark (and by extension, Cullen) had a very tight fiscal strategy for the elections they actually won, but also had a record debt to pay off from the legacy of Muldoonism and the failure of Rogernomics to really address government deficits when it bailed out and liberalized the private sector. (to be fair to Bolger, his is the one National government in modern history that did manage to pay off any significant amount of debt, but the way his government did so was… basically monstrous)

              As to the Greens, because co-leaders don’t actually control policy development and it’s done democratically, party policy has been quite consistently in favour of a fiscal strategy that’s much looser during recession and while reforming the government to be a Greener place, however they do have some control over what policies are negotiated for in agreements with other parties, etc… Shaw has been the most willing of all co-leaders thus far to accept tighter fiscal parameters, but he’s also arguably had the most pressure on him to do so, too, given NZ First’s odd tight-on-taxes loose-on-spending position and Labour’s highly defensive fiscal strategy to date.

              As for ACT, I’m not sure they even understand fiscal policy.

      • Tricledrown 9.1.2
        8 March 2018 at 8:29 pm

        CS WE was confined to the world’s largest bank’s by Goldman Sachs insiders ,insider trading .
        90 Billion US Dollars was set aside to prevent foreclosures but the likes of Peter Theil and many other Republicans stopped just about all of this money to mainstream.
        In the US the QE is an IOU note .
        WE printing money Doesn’t necessarily create inflation.
        It depends where you spend it i.e. for building infrastructure to stop Gridlock.
        Building houses to reduce demand.
        The myth that printing money creates inflation is pushed by the neocons.
        Yet these banks print 40% + of their loans.
        Merrill Lynch printed $38 Dollars for every Dollar on deposit.
        NZ banks were forced to have 66% on deposit for every $ lent after the GFC.
        Trump has reversed the Dodds Frank act .
        But as with every other policy Trump has tried it will luckily fail as the EU and other large trading blocks are forcing these banks to keep their equity to loan ratios.
        Luckily.
        The US govt doesn’t have the power on the international banking scene it once had.

    • Tricledrown 9.2
      8 March 2018 at 8:09 pm

      Workforces we are a minnow the Goldman Sachs etc lent us money at 5.5%to 6% which they borrow from the Fed reserve at -.5%to +.5% which was printed QE so they don’t want us undermining their monopoly.
      Our govt just do what they are told.

  10. greywarshark 10
    8 March 2018 at 2:17 pm

    No quite the right place for this no doubt but thinking about the money level of circulation amongst people only from buyer to seller I wonder if we could boost the consumer economy and also the Made in NZ one by introducing a NZ only currency?
    This idea has been done before I am sure and someone will think it not good.

    But we do pay quite a high 15% GST rate for a poor country, and some of that income could be taken to run this currency by central government. Say it was called Kiwi Club and a business operating and paying tax of a certain percentage in NZ could apply to join, and the business would accept Kiwi currency instead of or as part of your usual prices. The business would keep note of these and account for them in your books as part of your takings, and you could use all or part to pay your taxation to central government.

    As a consumer member you would receive every month a certain amount of the Kiwi currency from government and a list of traders accepting them. They would be in different colours each month, so had to be spent within the month. There would be a limit on the amount each month, but there could be a temporary stop put on and the amount stay in credit for say 6 months and then paid to be used within the next month to allow help with larger purchases.

    Operation and advantages:
    * This would act as a boost to businesses which were members.
    * Spending would be directed to NZ entities.
    * There would be little import quotient in this system as the credits would remain in NZ, and the imports required for the product or service could be charged for in NZ currency, so there would be a part charge.
    * It would encourage people to buy NZ which needs encouragement as an idea. A lot of people like it but local is often dearer than imported prices, and local Kiwi currency would help in reducing the cost in NZ currency.
    * The idea would be to assist small traders I think rather than corporates which might qualify.
    * We need lots of small businesses, people able to make a living for themselves, even if it is at the lower range.
    * The change of colour would prevent much counterfeiting.
    * It would be helpful additional money to consumers and have a low inflationary effect.
    * I would suggest that the amount should be equivalent to 50 dollars a month.
    * It would have no value when the month was up and could be burnt.
    * The traders would have a fortnight to make their deposits for the month, while
    the colour was still valid.
    * Any small excess over taxation required would be returned annually in NZ
    currency.

    Just a thought. The system would be too convoluted and folksy for the eminent accountants on the tax working group. It requires some minds with vitality and a sharp practicality, who would see if it gets to the essence of filling the gaps left by our present national accounting system. I think it would prime the country, and probably be all spent each month. And the credits would go round and round and the advantages stay around instead of being shipped off. Any return of excess over taxation would be looked at carefully, because it would mean that tax was too light or too much being allowed in tax-free concessions.

    • CS 10.1
      8 March 2018 at 2:48 pm

      Funnily enough I’ve heard anti-EURO Italians talking about a similar scheme to recreate a parallel new Lira without formally leaving the eurozone. Basically you could pay taxes with it so it has value. Varoufakis had a similar plan up his sleeve with online tax credits for Greece in 2015. Shame he didn’t get to try it….. “the euro, like hotel california – you can check out but you can never leave” – well maybe you can. Italy as a much larger less import dependent nation might have a good crack at it.

      What you are talking about is basically a subsidy scheme for NZ made. You could just put tariffs on imported goods you know ;-)…..

      • greywarshark 10.1.1
        8 March 2018 at 3:20 pm

        It is actually not a subsidy scheme CS. Money and its methods is such an interesting subject.

        It would create money, only it would be limited to spending in NZ and the profits of any business sent overseas would in theory not include any of the Kiwi money.
        The traders would decide if they wanted to sell things at full price, just in the normal way. They might decide to drop the price for Kiwi currency at the beginning or at some other time just as supermarkets drop prices on some things and use them as a ‘loss leader’ to push through a lot of the stuff, or present themselves as competitive pricers.

        Interesting about Italy, and the Hotel California quote. There is a lot of meaning behind many of the favourite musicians’ words, even unconsciously.

        and Matthew

        I refer to above. Regard the money as similar to a gift from a rich uncle or aunt.

        And I want to foster business in NZ. Fuck international and the drain of money out of the country to buy made-up goods that once we would have produced, manufactured in NZ. The small personal things, the clothes, the shoes, etc. And they will not be traded freely. It is directed money, that’s all. The money is going into the hands of people who want to buy NZ made on the spot stuff. It wouldn’t be perfect but it would give a great boost. Here in Nelson trade goes down every winter and people eke out a living till it expands. We have a ton of old age pensioners who would come out and buy from the registered traders because they couldn’t bear to see their Kiwi currency go dead at the end of the month. It would be like priming the pump on a lantern.

    • Matthew Whitehead 10.2
      8 March 2018 at 2:50 pm

      Sovereign currency is already inherently only spendable on goods and services in New Zealand. What you’re basically proposing is a roundabout way of implementing a subsidy on all New Zealand goods.

      That said, consumer groups that sell only NZ made products sounds like a fantastic idea in general, but I don’t think we need a special currency for it, just someone willing to set it up with some bulk-buying power.

      I’m probably a bit atypical for a Green in that I don’t mind international trade, I just want it to be done in a way that’s efficient, and less poluting. (eg. via electric motor ships powered by wind turbine) We should be alternating between supporting local business for redundancy and community’s sake, and supporting efficient international products that are traded fairly, not just freely.

  11. Ad 11
    8 March 2018 at 4:33 pm

    “While I am fine with many of the Budget Responsibility rules, Labour should understand that rather than always wanting to reduce debt, it should instead always be capable of reducing debt, but it should, ideally, wait to do so until our economy is overheated and needs a dose of cool water to start running surpluses, like Cullen did …”

    Budgetary constraints – particularly self-imposed ones – are a good thing. The public and the bank analysts don’t freak out, markets stay stable, credit ratings stay firm. And the coalition looks and behaves as if they have a discipline. There’s no way to separate the theory from the politics of government here. The public – rightly or wrongly – gives economic confidence to a Labour-led government far more grudgingly than to National, and that won’t change.. We are not discussing an economy; we are discussing a political economy.

    “The party should also understand that if inflation is a problem, the solution, to a reasonable extent, is new taxes. ”

    Inflation has only been at or near 5% twice in over 20 years. It’s not a problem and there is no sign that it will be. Also, Matthew, it’s not a Party; it’s a government. That government has Labour Greens, and New Zealand First in it. Your point would be fair in 1989, but not 30 years later.

    “In conclusion: National is trying to manoeuvre the Labour-NZF-Green government into sacrificing deficit spending with its economic rhetoric, when in fact they should concentrate on increasing wages, balancing spending to the productive economy and against inflation and unemployment, and spend to address the infrastructure deficit, ignoring the debt entirely until such time as the economy starts over-performing, and then start running surpluses.”

    Best to wait for the budget in May to see if they really need to be any more expansionary than they are. All signs show that they are plenty ambitious on both expenditure for opex redistributions and capex projects.

    If they wanted to start tweaking the “heat” of the economy, they already have that capacity through the revised targets of the Reserve Bank. If they needed to go further than that, then we will see that in the RB review.

    As was evident in the Treasury update, with a massive surplus we have a government with bold budgetary ideas, and the capacity to spend them, using an appropriate mix of debt and cash – and indeed public-private partnerships with Twyford in housing.

    • CS 11.1
      8 March 2018 at 7:58 pm

      “Budgetary constraints – particularly self-imposed ones – are a good thing. The public and the bank analysts don’t freak out, markets stay stable, credit ratings stay firm. And the coalition looks and behaves as if they have a discipline. There’s no way to separate the theory from the politics of government here.”

      That’s all very well. But there is collateral damage to this pointless parsimony- namely 11% labour underutilisation, stagnation, crumbling infrastructure and growing poverty. Also, there is the fate of the Italian PD. Electoral toast. Labour should look and learn. Austerity breads Trumps and Brexits and Lega Nords.

      As for credit ratings – AAA rated mortgage back securities anyone???

      What would really please markets is an economy with real growth (per capita not caused by immigration) and prospsects for increased sales due to an uptick in aggregate demand.

      The public and bank analysts are wrong about public debt. Failing to challenge them means the collateral damage – kids families – continues. It’s gutless.

      • Ad 11.1.1
        8 March 2018 at 9:12 pm

        In the May budget, no one, not even the extreme left, is going to accuse this government of austerity.

        Awesome to point out that bank analysts are wrong – until you try and do without them. We’ve got a tiny taste over the past 12 months about what choking loan capital feels like. They don’t have a duty to do anything for us, so it’s not a bad idea to keep them on side. There is not enough local capital here to do what needs to be done.

        Every indication in our infrastructure and housing market is that there is plenty of public and private capital available, and not enough capacity to build. In such an economy, public sector debt overheads are immaterial: the government should focus on production and productivity constraints instead.

        • CS 11.1.1.1
          9 March 2018 at 6:39 am

          “We’ve got a tiny taste over the past 12 months about what choking loan capital feels like. ”

          Explain further. I’m intrigued.

          Yes there are capacity issues in construction sector. Coupled with a lot of underemployed and NEET youth in NZ and a desperate need for social housing. A more activist government would have used fiscal policy to prevent this kind of bottleneck developing a long time ago.

          • greywarshark 11.1.1.1.1
            9 March 2018 at 11:48 am

            more responsible, competent but scheming government would have used fiscal policy to prevent this kind of bottleneck developing a long time ago.
            My version!

            Government would have had to be scheming to get round the strictures put on it by the financiers and those economists which were intent on capitalstic capture of our country. But instead they schemed how to personally advance themselves.

  12. Canary in the Coal Mine. 12
    9 March 2018 at 10:55 am

    As always for news posts and blogs the comments are as informativeas the main post.

    The primary issues NZ faces is that unlike Japan most of our trade is paid for by primary production that lacks any value added component at all! The second is that our most insidious export is the lifetime labor of home mortgage holders to foreign owned banks.
    Rather than the conflict between fiscal tightness and responsible management I view the contrasting approaches of National/coalition and Labour/coalition governments as sell everything below cost, contrasted with sell labor at cost, a hope for a profit on production.
    We would do better as a Nation to simply Nationalise all infrastructure assets and Nationalise all citizen, and permanent resident mortgages on NZ land held by foreign owned institutions. Then repay those mortgages at a fixed 3% interest rate. We could do this as the Crown holds the underlying title as sovereign, and in effect would then wrest the value of New Zealander’s Labour back from foreign owned banks.
    Increasing taxes to international levels -say 30%, and investing the recaptured value of Kiwi labor into developing and maintaining the infrastructure properly to increase the efficiency of production, distribution, and export would be a useful corollary. As would actual investment in value added production for export.
    The key problem we presently face is that private debt has strangled the productive capacity, and wellbeing of citizens because vast numbers of us have been living off our mortgages- in the hope of recovery via inflation- for decades allowing the bankers to hold us in rentiér servitude. Government to date has undertaxed, and failed to constrain the profiteering of bankers in part because of the narrow minded and stupidly approaches to economics held by succeeding governments.
    Lacking the true institutional depth, or capacity of the major EU, or Asian economies NZ has fallen into the trap of being conned by American neoliberalist ideals that bear little resemblance to the market square game of cups that presently fleeces unwary citizens and ministers alike.
    Removing the con men (bankers) from the market place, or at least rapping them on the knuckles with a cudgeon is the only way of rebalancing the market places relationship with our government and the populace.

  13. soddenleaf 13
    9 March 2018 at 1:58 pm

    Paying more mortgage! Key did that. National broke Flecters, broke the housing market, broke welfare, broke thousands of chch earthquake victims. The carnage is obilvious to the b team, nasty Nats, bendy and breaky.

  14. WILD KATIPO 14
    9 March 2018 at 2:08 pm

    … ” The primary issues NZ faces is that unlike Japan most of our trade is paid for by primary production that lacks any value added component at all! The second is that our most insidious export is the lifetime labor of home mortgage holders to foreign owned banks ”…

    In a nutshell.

    … ” We would do better as a Nation to simply Nationalise all infrastructure assets and Nationalise all citizen, and permanent resident mortgages on NZ land held by foreign owned institutions. Then repay those mortgages at a fixed 3% interest rate. We could do this as the Crown holds the underlying title as sovereign, and in effect would then wrest the value of New Zealander’s Labour back from foreign owned banks ” …

    Exactly !

    No more foreign servitude and domestic debt slavery !!!

    And if they don’t like that? Tough !

    Its either that or forfeit their right to conduct business in the manner that they have for too long been accustomed to. I’m sure that threat and the loss of profits ( even if the above course was taken ) would be enough for them to reconsider the losses and bite the bullet. Part of which would be the motivation of their seeing competitors accept the changes and still making a profit.

    Meanwhile if we were to borrow , it should be for developing value added industry’s . And this business about not having the trained personnel to develop those industry’s is hogwash as well ! Bloody pay them to train our nationals as part of the beloved PPP system. At least then we would be getting a long term return from investments of which this country has direct control over , ie : more than 50% shareholdings in , – try 80%. Unlike the current climate where profits are shipped offshore into some other foreign mugs bank accounts.

    There is nothing wrong with starting to seriously compete in the IT industry’s and its componentry for our fair share of the pie in the global markets for example , – with much of the profits funneled back into other development and social infrastructure.

    There’s no excuse for us always having to be dragging our heels and saying it cant be done , we don’t have the expertise or we don’t have the mindset or we don’t have the start up funds , or we don’t have the entrepreneurial skills or any other bloody limp excuses. You don’t got it? – then damn well make it !

    Our forebears will be turning in our graves at the lack of positiveness that we have become!

  15. Nic the NZer 15
    10 March 2018 at 10:34 am

    Your point 3 is a bit miss-leading Mathew. There is very little relevant difference between money in a commercial bank account and cash money. Commercial bank deposits are counted by the Reserve Bank as a broad part of the money supply.

    Money in bank deposit account is basically an accounting entry in the accounts of that bank and the bank can add credits and debits to those and do so for many transactions (including in particular extending loans). These banks then have accounts at the central bank (called settlement accounts) where payments are made between government, reserve bank and other commercial banks. In this case the central bank can add the credits and debits to those accounts and does so for many transactions. While the accounts are representing in different kinds of money (bank deposits vs settlement balances) they are all representing a kind of money and counted as such.

    Especially due to the OCR system, where commercial banks can access as many settlement balances as they need at a price (the OCR), the commercial banks can typically carry out their own transactions on their own accounts unconstrained by the system.

  16. Cs 16
    10 March 2018 at 11:39 am

    We need an Mmt event, Nic Matthew. These issues around fiscal balances need more airing. Progressive policy is hamstrung by current settings and wrong-headed economic theory.

    • Nic the NZer 16.1
      10 March 2018 at 11:58 am

      I think a significant but achieve able outcome would be to push for and institute a properly funded job-guarantee (to replace the current quantity of spending vs unemployment trade-off with a price anchor trade-off between job-guarantee salary vs non-job-guarantee salary).

      Labour (and I think NZ First) both discussed job-guarantee like policies during the campaign.

      Unfortunately this is far enough away from the in’s and out’s of fiscal policy fundamentals it doesn’t even get mentioned in this post.

      • CS 16.1.1
        10 March 2018 at 3:39 pm

        I agree about the job guarantee. It’s something that resonates – a fair day’s work for a fair day’s pay. If people can’t find a job in the private sector the government has a responsibility to give them one at a living wage.

        It is a key plank of MMT and I think it’s a vote-winner. Fantastic auto-stabilizer and inflation control mechanism.

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