RBA liabilities

Discussion in 'Markets & Economies' started by mmm....shiney!, Jan 11, 2022.

  1. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    The corresponding assets would be Treasury notes/bonds the RBA bought on the secondary market from the banks with money it created out of thin air.
     
    leo25 likes this.
  2. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    From that Bill Mitchell article
    What always annoys me about the Bill Mitchell's and MMT'ers of the world in general, is that in being so determined about showing how super-smart they are by being the "true", "modern" understanders of how central banks work, they complete obfuscate the fact that, at the end of the day, it is simply a backdoor for governments to take real resources out of the economy and redistribute them in whatever way it sees fit, and that this can be done without real consequence. Which is simply bulldust and utopian nonsense that feeds anti-economic, anti-prosperity outcomes.
     
    markcoinoz and mmm....shiney! like this.
  3. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    There's a few things about Bill that annoy me, the beret being one. Lol.

    You don't think that price inflation (which they acknowledge as a real consequence of fiscal stimulus and job guarantees) is an adequate enough indicator of the upper limit as to how far a government should interfere in the real economy?

    And in order to draw up some boundaries, what indicators should governments be monitoring that signal it's time to take steps to reverse economic decline and support the private sector?
     
  4. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    MM Theorists would argue along these lines about the boundaries governments should work within.

    At the bottom end you've got declining or stagnating wage growth, productivity and business investment and perpetual levels of unemployment and underemployment. They hold that "natural" unemployment levels are a myth, and I can't really fault that idea. Must there be a group of able bodied people in society who shall remain constantly unproductive?

    And at the top end you've got price inflation and labour shortages in the real economy as a result of the "job guarantee" taking too many resources out of the real economy.
     
  5. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    Or to put it another way, at one end you've got the under-utilisation of resources in the real economy whilst at the other you've got the real economy starved of resources because they can't compete. :)
     
  6. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    Yes. "Natural" unemployment levels are a myth. But the MMT'ers say it's a choice by government based on how much they choose to spend. Not that it is principally caused by government interfering with the economy and the pricing and flexibility of labour in the first place.

    To the MMTers like Bill, creating employment through the government by changing money supply is not fundamentally about how productive the jobs created are. Sure, when pressed they'll admit to things like believing in cost-benefit analyses and productivity, but in the first instance they always focus on the helicopter view of the macroeconomy and ignore the micro. The micro is an afterthought for MMTers (and Keynesians) rather than the other way around (for Austrian, Chicago, neo-classical and classical economists alike). Meddle first. Figure out how to reduce the unintended side-effects of the meddling second.
     
    Last edited: Mar 5, 2022
  7. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    Yes, I do think that price inflation is an adequate indicator. For me, if (in the absence of natural disasters, war, or large demographic changes) it isn't negative, then the government has interfered too much in the real economy. For Bill, it's "the vibe of the thing" at a particular point in time. If you ask him today, he'd probably say it's a positive number that is in the single digits, but if you asked him in the 70's or 80's he'd probably have said low double digits is fine.

    Edit: For extra emphasis: DEFLATION is the natural state of a healthy, prosperous economy that is beneficial for the vast majority of the people interacting with it. INFLATION is a sign that it is being interfered with and manipulated for the benefit of some at the expense of the many.
     
    Last edited: Mar 5, 2022
    markcoinoz likes this.
  8. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    Then they would probably tell you that wages have been declining yet corporate profits are rising so businesses must have more capacity to spend on labour. And looking at the raw statistics rising profits in the face of falling wages is a tough one to defend. It's not something I wish to get into though as it's a bit value ridden. :p

    Yes, MMT is essentially a macro thing.

    The job guarantee is not simply about changing the money supply, though the government will need to foot the wages bill, it's about identifying unmet need and then providing a workforce and the budget to meet that need ie become productive, with the end goal that at some point in time that workforce moves over to the real economy where, Bill and others acknowledge, wealth is more effectively enhanced.

    I'd say that they would take an historical perspective on inflation bearing in mind the current economic conditions and outlook eg just like reading RBA monetary policy minutes. So in the main over the past 40 years the target would be single digits, with the target under 5% for the majority of that time, and a short period in the mid-70's where even low double digit inflation would have been a target.

    For me though, a government with a monopoly on the issuance of currency must continually inflate the money supply, so a negative rate would be undesirable. And there are solutions to protecting purchasing power with privately issued currencies that are capable of being inflated/deflated in relation to the CPI or basket of goods etc. Kind of a dual system where the government pays its bills in fiat while the consumer saves or spends in private currencies or spends government issued fiat.
     
  9. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    The best way to stop the unintended side effects of meddling is to not meddle in the first place. Meddling is the problem not the solution. Time and time again, that has been a key finding of economics over the past couple of centuries (with the Iron Law of Regulation, being but one of the lessons). To ignore it is to repeat past mistakes.

    And this is the pretense of knowledge. If Bill (or someone Bill fancies to redistribute resources) is such an awesome entrepreneur that they can sufficiently predict in advance what the future needs of the economy are and to successfully take people and train them in something that will be productive and useful next year (or in five years time), then the market would frickin' love to fund such a program. Capitalists would be positively tripping over each other to throw cash at Bill to do such a thing. In which case the role of the government to "solve" the problem through currency creation is unnecessary at best, and actively harmful because of other unintended side effects at worst.
     
    Last edited: Mar 5, 2022
  10. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    At the moment we have a system where all spending originates with the government. It’s a system where if the economy is flourishing then all is good, if the economy is in recession then it’s because the government is not spending enough, if the economy is overheating then it’s because the government is spending too much.

    While we have the current system where the government has the monopoly on the issuance of currency, then the MMT crowd believe they have best practice to maximise wealth. And I tend to side with them in that regard because our current crop of planners are doing an awful job.

    I would much rather see an end to the monopoly though, but quite happy for the State to keep issuing fiat.
     
  11. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    Currently, capitalists are unwilling to spend because we're in a balance sheet recession where income is used to pay down debt rather than reinvested. When we were running our previous business for the past 10 years as the times got tougher, we just didn't replace staff, we cut back on investing in capital goods, so our level of productivity declined compared to previously in an attempt to remain profitable. This is happening across the Western world in the sphere where SMEs are operating. So MM theorists, and I side with them again, would see the State funding programs that privateers can't or are unwilling.

    So we get a 4 lane highway from Gympie to Cairns because no State government or private company is going to build that in my lifetime or the next yet we desperately need it. We get weeds and feral pests eradicated from our suburban, rural and wilderness areas. We get taxes slashed or abolished to encourage savings and investment. And if the price of bitumen starts to soar forcing privateers out then the government slows the pace of its road funding down until the sector cools, if the extra wages and income kept by individuals and businesses means that demand begins to outstrip supply then Treasury raises taxes to cool demand. Yes there will be unintended consequences because all economic indicators, maybe with the exception of the PMI, is historical, but the unintended or rather, deliberate consequences of governments pursuing austerity programs is real and even more harmful.
     
  12. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    Unless I am completely missing your meaning, spending doesn't originate from the government. It originates from the RBA.

    Say's Law is not negated by MMT. So saying that "we're in a balance sheet recession where income is used to pay down debt rather than reinvested" is completely misunderstanding how an economy works and the role of money and prices. Indeed it is so wrong and such a huge misunderstanding that I wouldn't even know where to start to discuss it further.
     
    mmm....shiney! likes this.
  13. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    Governments issue notes/bonds to fund spending. They don't need to, the RBA could just as easily credit the accounts of Treasury and then be spent from there. And the RBA is part of government anyway.

    Ok couching it in market terms then, currently the demand to pay down debt previously acquired to fund spending or investment is greater than the demand to acquire new debt to fund current or future spending or investment. Because of uncertainty the income earned in the production of a good is not being used to meet the demand for more goods (which is still present just not fulfilled) it's either saved or used to pay for the products already consumed. Have a look at new consumer credit supply, it peaked pre-GFC and has been steadily declining since, and the surge in savings during the pandemic.

    I've referenced this a number of times http://www.paecon.net/PAEReview/issue58/Koo58.pdf by Richard Koo.

    So like any balance sheet you've got liabilities in one column and assets in the other. Prior to the GFC, and in Koo's Japan a decade or so earlier, growth was driven by debt. We were an economy powering on credit-fuelled consumption (and we still are in some sectors). Businesses and consumers added huge liabilities in order to fund assets and meet their needs and desires. That credit tap has all but dried up, we're no longer adding to the liability side of the balance sheet as we were before with a corresponding addition to the asset side, choosing to either forgo consumption and reduce existing liabilities or adding to the asset side of the balance sheet by way of savings (I'm ignoring the mortgage and new car market). Hence the "balance sheet recession" term.

    Now as far as Say's Law goes, and I'm just blowing this off the top of my head as I've never given it any thought before, but it could be somewhat obsolete. Rather than supply of a good creating demand, or production creating further production etc, it's debt that creates demand, or more accurately, satisfies demand. It's debt that creates future production, whether it's consumer debt or business investment loans. Remove the debt or the willingness to enter into debt and production falters, growth declines, and we slip into recession. The demand of course will still be there as I said before, just unfulfilled.

    Our financial system is a debt based system and that's the way the Monetarists and their banking buddies like it to be, but it's faltering because a large sector of the real economy is reluctant to fuel growth by taking on more debt, and those that do desire are finding the banks less than willing to extend loans to create more deposits which can be exchanged for assets or goods and services.

    Edit to add: I'm not talking about the RBA's balance sheet as per the title.
     
    Last edited: Mar 5, 2022
  14. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    And I feel I need to point out again that MMT explains how the current monetary system operates, it doesn't seek to prescribe an ideal system, just how the current system works and the implications for fiscal policy.
     
  15. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    I can quickly address this. I am not disputing the accounting identities at the heart of MMT. They are basic things that are no different to classical economics. There is nothing "modern" about it.

    My issue with MMT is that they take tautological accounting identities and ass-about cause and effect. Similarly, they abuse definitions with long held meanings. Like "savings" for example, where they say that "savings" can't happen without the government being in debt. Yes, it is trivially true that for the government to be in debt the private sector must have net savings. This is Says Law. It, however, does not mean that savings can't happen without government debt nor many of the Keynesian-type aspersions about "savings" that they parrot. Savings are good. Savings are necessary for capital accumulation. Savings are one of the key elements required for economic growth. However, in a fiat currency central banking monetary system, true savings have next to nothing to do with the level of monetary debt. The problem is not the classical economics. The problem is MMTers taking a word with a long held meaning, changing it and then proclaiming the classical economists are idiots but all they have done is create a strawman. It's propaganda for insidious purposes. There's a reason why socialists love Keynesianism and MMT and it's not because they love economic and personal freedom.
     
  16. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    You're right there is little modern about it, drawing upon economic thought in some cases a century old and our modern system began over a century ago finally culminating in 1971 when Nixon abandoned convertibility But there are very major differences between MMT and classical/other modern schools, chiefly that governments that have sovereignty over the issuance of currency are not revenue constrained. The implications of this is that:

    1. such a government can never go bankrupt unless it chooses
    2. taxes do not fund government expenditure
    3. governments should not seek to run a balanced budget, there are times when deficits should be the norm and times when surpluses may be the order of the day.

    The wise advocate of prosperous economic expansion would recognise these offerings and would look to other schools for additional guidance when implementing fiscal policy - because it's a fact of life that as long as the State exists, there is likely to be government fiat and interference in the market. So for example we take the business cycle from the Austrians, or say Adam Smith's ideas around absolute advantage as other theories used to guide practice in an attempt to avoid or mitigate unwanted side-effects of interfering in the market.

    What tautological accounting identities?

    I dispute that they abuse the definition of "savings". It has the exact meaning in MM theory as it does in other theories. How individuals go about saving and how governments may encourage or discourage saving though may differ.

    What MMT argues is that as all money originates from government spending, if governments operate net surpluses ie removing more money from the economy by way of taxation than individuals are able to afford after their major living expenses, then saving declines and growth begins to stall and eventually declines. Or simply put, if the government is removing more money than the real economy invests in productivity gains, economic growth ceases and we enter a recession.

    Savings can happen without government debt, but it comes at trade off, so either consumers apply for credit to fulfil their needs/desires as happened in the decade leading up to the GFC, or they reduce their discretionary spending and rein in their lines of credit. The problem that Richard Koo points out is that governments are willing to adopt deficit spending when a crisis hits, but they want to move back to positions of surplus long before the economy has fully recovered.

    a. showing government deficits and the obsession with returning to surplus prematurely:

    [​IMG]

    b. business investment fallen as credit has dried up:

    [​IMG]

    c. broad money linked to consumer and business credit:

    [​IMG]

    d. household savings and consumption, consumption steadily rising pre-GFC then declining until the end of lockdowns last year, savings steadily falling pre-GFC, slightly declining since the GFC with a spike during lockdowns because of business closures and government handouts:

    [​IMG]

    e. consumer and SME business credit completely gutted since the GFC:

    [​IMG]

    Now when you combine all of those factors you can see why GDP growth in Australia since the GFC has been flat:

    Screen Shot 2022-03-06 at 10.15.10 am.png

    That's a snapshot of the state of our economy, that's the result of Monetarist policy and it's reliance on credit-fuelled growth.

    Seriously? Who or what businesses use savings for capital accumulation? Businesses fund capital accumulation with debt, consumers fund capital accumulation with debt. The opportunity cost of saving enough to fund capital expenditure is too great. That's always been the case, even centuries ago.

    If savings are important for economic growth, let's say in order to secure a loan, then leveraging those savings through debt is even more critical.

    That's true. But there's also capitalists who understand and love MMT too and appreciate its opportunities to guide rational fiscal policy - and I'm not referring to the "crony" type, though like the socialists, they'd also love it.

    Edit to add: I haven't had a chance to proof read so there may be some grammatical errors, off to play bad golf.
     
  17. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    1. There is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity. This truism is at the heart of what I am talking about. It doesn't matter whether the government raises their money through the tax office or through money creation. It is still fundamentally taking real resources and using it for its own ends. Ends that have no accountability is a socialist's wet dream and MMT says that government can spend like a drunken sailor simply because of the truism that the government has powers beyond those of normal citizens. Classical economists knew that government's can spend without taxes. They knew that government's can't really go bankrupt in the same way that citizens can (but they're books can still go tits up at which point the country is fucked). They knew all about central banks and fiat currencies. But they built the body of economics based on even more fundamental truisms (like Say's Law).

    2. "Savings" in the true meaning of the word, is the restriction of enjoyment of consumers’ goods in the present — and the investment of the equivalent resources in the production of capital goods. No-one (not even the government) can invest in the production of capital goods if current consumption is not less than current production. Monetary printing and credit creation is a separate issue when discussing true savings.

    3. Those graphs don't show much because they all have different time dimensions. Put them on properly side by side and then it'll be easier to discuss whatever narrative you were trying to prove with them.
     
  18. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    Regarding the truism you mentioned, well maybe it's just not a truism. It's not true that governments can only spend or invest what they take from people. Governments have to spend first in order for currency to circulate in the real economy.

    Yep I'd agree with that. But that's different to the "truism". MMT argues that governments should utilise idle resources in order to meet demand. I've provided examples previously.

    No it doesn't argue that. We've discussed the constraints on spending previously.

    How? A nation that is not revenue constrained and is able to meet consumer demand can never go tits up, war or natural disaster aside.

    The old concept of savings is outdated because no one does that any more and haven't done for a millennia. Debt fuels growth because it is impossible to have enough savings to invest in capital goods in order to meet demand.

    When consumer and business confidence is high because the economic future looks rosy neither restrict spending in the present in preference to the future, they just go out and get loans so that they can have stuff now and also have stuff later. When consumer and business confidence is low because of economic uncertainty households and businesses restrict their spending and loan applications in the present, favouring consumption in the future. If current consumption is less than current production the only ones investing in capital goods are those that can secure debt in order to fund that investment. Money printing and credit creation is how currency is added and circulated in the economy. Money printing and credit creation has largely replaced the function of saving when it comes to investing in capital goods for production and satisfying consumer demand.

    They're pretty much over the same time frame and contain data that backs my points raised ie GDP growth is fuelled by credit creation, whether it's private debt when the economy is booming or public debt when the real economy cannot afford to fuel growth by taking on debt. Prior to the GFC households and businesses engaged in a credit spree, since then growth has stalled even in the face of increasing broad money which suggest that the government has not made up the shortfall in private debt fuelling growth.
     
  19. bordsilver

    bordsilver Well-Known Member Silver Stacker

    Joined:
    May 23, 2012
    Messages:
    9,458
    Likes Received:
    396
    Trophy Points:
    83
    Location:
    The rocks
    1. It is a truism. Government's create nothing (except pain and heartache). They cannot give a house to Paul without taking the wood, bricks, mortar, land, labour etc from somewhere else. They cannot give purchasing power to Fran without taking it away from others (irrespective if that purchasing power happens through money creation or money redirection through taxation). [Except for the "pain and heartache", the same applies to other non-corporeal entities like "companies", "churches", and "nations".]

    2. Savings is savings. A good or service that is produced but not used for consumption is investment. By definition. Hence my beef that MMTers are redefining things to suit their philosophies and redefining savings is particularly insidious because it is foundational to capitalism.

    3. As I said earlier, "idle resources" is a function of the regulatory barriers affecting the pricing and flexibility of labour. If Bill (or someone Bill fancies to redistribute resources) is such an awesome entrepreneur that they can sufficiently predict in advance what the future needs of the economy are to successfully use these "idle resources", then the market would frickin' love to fund such a program. Capitalists would be positively tripping over each other to throw cash at Bill to do such a thing. In which case the role of the government to "solve" the problem and use "idle resources" through currency creation is unnecessary at best, and, at worst, actively harmful because of other unintended side effects.

    4. Aah. The reserve currency canard. Yes, every classical economist knew that a government/monarch could spend what they wanted with fiat currency as well. Up until the point that they can't, that is. This is nothing new.

    5. In terms of your graphs, one probably simply has to look at the periods 2002-2007 and 2008-2012 for business investment and GDP growth to disabuse most other linkages with the broad money and credit growth graphs. However, as I said you can't see any proper correlation and tell any narrative unless they are superimposed with the same timeframes.
     
  20. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

    Joined:
    Nov 15, 2010
    Messages:
    23,820
    Likes Received:
    6,148
    Trophy Points:
    113
    Location:
    昆士蘭
    The truism we were debating is that governments can only spend what they take from people. That is false as they don't need to take from people in order to spend but I'll concede to your clarification regarding purchasing power as every new $ in the economy reduces the purchasing power of existing $ through inflation. Hence why I support projects producing privately issued currencies on the blockchain that have a dynamic supply. Ultimately I see these operating alongside government issued fiat. That is not MMT policy but it solves the problem of inflation and protects purchasing power allowing governments to continually inflate the fiat money supply for eternity or until they collapse.

    Whilst savings may have been the basis of capitalism in the past that system is now outdated. In much the same way as hard currency is now outdated. Barbaric relics :p No that's not entirely true. Savings has its place as treasuries for example. The foundation of modern capitalism now is debt ie money creation, particularly in these times as there is a paucity of savings available to use to fund the production or acquisition of capital goods. Could it possibly be time to redefine some long-held assumptions or definitions? Every other academic field revises its laws/assumptions as required in the face of new evidence.

    I don't recall mentioning reserve currency at all. o_O The limit to a country's capacity to spend is only exhausted when demand exceeds the capacity of a nation to supply. There are a number of reasons that could happen, money printing alone is not one of them.

    No they wouldn't. They would only be tripping over themselves if they could secure funding for the investment and get a return. Successful capitalists are risk wary, if they're not then they become broke capitalists. And the investors behind the capitalists are even more risk averse. Hence the decline in credit growth to SMEs over the past decade. Yes regulatory hurdles are a burden but removing those hurdles alone is not going to flip a switch and magically enhance wealth while we have a plethora of special interest groups with political power in society. And they're not going to away or yield territory.

    Currency creation is one part of fiscal policy, the other is taxation. Stimulus packages and/or tax cuts can both encourage/discourage the utilisation of resources depending upon the state of the economy at the time. MMT argues that both policy measures are required in the stimulus and in the cooling phase.
     
    Last edited: Mar 6, 2022

Share This Page