Fiat Money & Credit Money

In the first couple of posts on government spending, I’ve inevitably written about the money creation process – i.e. where money comes from, how it enters the economy. I’ve spoken explicitly about how the government creates fiat money; but without talking about how commercial banks also create money, or more correctly credit money, we’re missing half of the story.

Professor Steve Keen gives a technical treatment of this on his blog

Credit money is different to fiat money. Fiat money can be thought of as a final means of payment. In the economy as a whole, it is money that can extinguish all debts. This government created money does not need to be paid back. Remember fiat money is created by the government when they credit bank accounts held by the private sector.

Credit money on the other hand comes with a corresponding debt. It needs to be paid back at some point down the line. It may be used to pay off a debt, but one debt is merely replaced by another. So when banks create credit (make a loan), by definition it must be paid back. This is the fundamental difference between state/fiat money and credit money.

Banking; the conventional story

Now when we think about the role of banks, there’s a popular story that gets bandied about. This story says banks are simply financial intermediaries. That they simply act as middlemen between savers and borrowers, suggesting that they take in deposits, and they make profits by lending a portion of those deposits. This theory of how banking works is called the loanable funds approach. In this approach, banks create (credit) money by lending out the deposits of the private sector (households and firms). Where do the deposits come from in the first place? From the government creation of fiat money, referred to as the money base.

Money base is created when the government credits the bank accounts of the private sector. So the conventional theory says that only when this occurs, i.e. a deposit is made with the bank, will the bank then lend out the deposit to a borrower, and keep a small fraction as reserves for prudential reasons. Remember in the last post I spoke about how reserves are held to ensure payments clear on a daily basis. From that first loan extended by a bank, call it bank A, the borrower may then go and spend that money on a house. The seller may receive the payment in the form of a deposit in another bank B. Bank B can then loan out that deposit keeping some small fraction as reserve, and the process plays out again. The next borrower takes the loan from bank B, and spends it at a retailer. The retailer receives the payment in the form of a deposit in bank C. The process plays out again…. In Professor Keen’s example, an initial injection of $1000 of fiat money with banks holding onto 10% as reserves and lending the rest creates an additional $9000 of credit money ($9000 of corresponding debt). After an initial injection of fiat money or money base, the banking system ends up multiplying this initial deposit by several magnitudes. This is supposedly how banks create money.

This loanable funds approach provides some of the theoretical grounding for ideas like government spending causing inflation. If government creates lots of deposits in the banking system, the banks will end up making huge amounts of loans to the private sector multiplying the supply of money/credit, and the amount of credit will outpace the supply of goods and services causing inflation.

This approach also provides some of the theoretical grounding for ideas such as giving money to the banks to stimulate the economy in times of recession. The idea ofcourse that when money is given to the banks, they lend it out to households and firms who will use the loans to increase consumption and investment and create employment.

If you’ve tuned into what has been happening globally, central banks around the world have engaged in what is known as quantitative easing. Remember in the last post I discussed how central banks, when they try to maintain the rate of interest, they sell the excess reserves created by the government as bonds to the private sector, draining reserves from the system and maintaining their target interest rate. With quantitative easing, the central bank instead tries to create some quantity of excess reserves, and it will do this by purchasing those bonds from the private sector. When the central bank buys government bonds – the commercial bank recieves payment in the form of increased reserve balances. The central banks demand for government bonds increases the price for government bonds, which encourages banks to lend out the excess reserves for other profit making opportunities rather than simply buying bonds. This will supposedly stimulate consumption, investment, and employment as banks lend out the reserves.

The Evidence?

So how do we know this theory is wrong? In the aftermath of the global financial crisis, in 2008 the US Federal Reserve tripled the money base over 2 years. That is, it created nearly $1.8 trillion of fiat money out of thin air (after approval from the government/treasury), and ‘purchased’ government bonds from commercial banks, adding reserves to the system, in the hope that banks would lend it out and stimulate the economy. What did the banks do? They simply sat on the reserves.

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Source: US Federal Reserve

The graph above shows the money base tracked since 1959, as well as M2. M2 is the money aggregate used by the Federal Reserve (as well as the RBA in Australia) that measures the amount of money in the private sector including credit money. This includes money in people’s savings accounts, term deposits, superannuation funds, cheque and savings deposits held by businesses and firms. It is essentially a broad measure for the amount of money circulating in the system. You’ll see that there is substantially more credit money circulating in the system than fiat or base money. In the graph, there isn’t a big problem with the loanable funds story until about 2008 where you see the Federal Reserve start quantitative easing, and the money base triples in size over 2 years. Yet M2, or the amount of credit money the banking system would supposedly create does not multiply correspondingly.

The graph below shows the ratio of M2 to the money base. Remember that if banks simply lend out deposits created by the government as per the loanable funds approach, then the Federal reserve creation of money base should have corresponded to a multiplied increase in credit money. It did not. It had next to no effect, in fact the amount of credit money with respect to the amount of money base is at its lowest level in 50 years. Quantitative easing, or creating money base/fiat money and giving it to the banks has had no effect on banks’ credit creation. Something is amiss.

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Professor Keen explains additionally that if the loanable funds approach were true, not only should we see multiplied increases of credit money in response to base money, but by that very definition there should be some time lag between the two. That is, if the banks require deposits to make loans, we should see base money increase in the system first, and only then credit money increase some time after. This is the clincher. Professor Keen cites research by two leading mainstream economists that shows that M2, or credit money, consistently grows before money base. It has taken on average 9 months for money base to start growing in response to credit money growth. Notice that the causation is completely reversed.

Not only did the tripling of fiat/base money in the US cause no inflation (inflation is less than 2%), giving it to the banks created next to no employment. In January 2008 the unemployment rate was 5%, today it is 7.8%. This does not include the portion of the unemployed who have stopped looking for work, but say they want to work. If these people are included the unemployment rate actually climbs to 14.7%. This means there are still 22 million people in the US who are unemployed who want a job!

Source: Bureau of Labor Statistics

How can this be so?

Banks Do Not Require Deposits To Make Loans

Banks make loans first, and create deposits in the process. They do not loan out deposits as convenient a picture that may seem. How do they do this? Through double entry bookkeeping. Say you go to the bank for a $1000 loan. If you are credit-worthy the loan gets approved. The bank then credits your account with $1000. The bank also correspondingly adds to their assets this $1000 loan (a loan is an asset to a bank because it makes profit through the interest on the loan). The bank gives you $1000 and then essentially says that you owe the bank $1000. The money needn’t have come from anywhere. And the loan creates the deposit in the borrower’s bank account. Credit creation out of thin air again. And what does this credit creation depend on? Demand from credit worthy borrowers, not on reserves. If there is demand for credit and borrowers are credit worthy, the bank sees a profit opportunity and will make the loan. If the bank is short of reserves, it will borrow this at a later date from the central bank in the overnight market. Loans do not depend on reserves, they depend on demand for loans. This is why credit money grows in the economy first. With credit money there is a corresponding debt. This means whenever banks create credit money, they create debt.

So when you have a system that is heavily indebted (the ratio Private debt to GDP is 270% in the US and 160% of GDP in Australia) trying to stimulate employment by stimulating banks’ credit creation simply adds more and more debt to the system. This is an important point that Professor Steve Keen has devoted his blog to. If people have too much debt (their income cannot service any more debt), then there is no demand for banks’ loans, and no amount of additional reserves or quantitative easing will persuade the private sector to take on more debt.

Fiat money is different in this regard. There is no corresponding debt in the private sector as discussed. The government simply spends fiat money into existence, and the money does not need to be paid back. So the government is the only party that can create net financial assets in the economy. It can create money that can extinguish the private sector’s aggregate level of debt. If the private sector is heavily indebted, the government creation of fiat money can stimulate consumption, investment, and employment, because it does not need to be paid back – the private sector does not need to be persuaded to accept fiat money the way it needs to be persuaded to take on debt.

Now debt is not a bad thing per se. In fact debt is necessary. If debt is used to create investment, create goods and services, and produce more than enough income to consume those goods and services and service that debt… well this is the debt that fuels technical progress, and rising standards of living. However the inevitable outcome of banks’ ability to create credit out of thin air and their profit motivation to do so means that the banking system wants to create as much private debt as possible. To do this their lending standards over time fall, especially in good times. The fall in lending standards means banks end up financing activity that will NOT produce enough income to service the debt created. So there inevitably comes a point where creation of debt starts to outstrip the amount of income being generated. When the private sector starts to feel this debt burden, this is when a crisis starts and you see a downturn in the economy. There is a fall in demand for goods and services as people start paying off their debts, employers start laying off staff, prices of assets like houses and shares get re-evaluated downwards amplifying into a recession. I will save the detail for a later post.

Reality Check

So when you hear about the boom and bust cycle, what this business cycle actually refers to is a financial (banking) sector cycle. A debt cycle. Booms are driven by private sector credit creation, and busts occur when private sector debt exceeds the debt servicing capacity of the economy (when the income generated cannot keep up with debt service costs). Notice how small a role government spending and fiat money creation actually plays in this process. This boom and bust cycle, this debt dynamic, occurs independently of government, it is how capitalism works because it is how banking works. In fact this kind of debt cycle is not unique to capitalism, and traces back thousands of years to antiquity. It follows that there much room for fiat money creation to reduce volatility in the debt cycle.

One of the greatest failings of modern economics is how it has obscured, rather than aided our understanding of money.  You would think economists would be all over it, but their models do not include money and debt – what they essentially model is a barter economy where everyone simply exchanges one set of goods and services for another set of goods and services. When we start to understand money, more specifically fiat money and credit money, then we start to see solutions to things like unemployment, how we can fund public initiatives and even the transition to a low carbon economy.

If we can regulate banking such that lending standards remain strong over time, and encourage banking credit to finance investment and some consumption rather than speculation, we’ll avoid large asset price bubbles, and reduce volatility in demand and employment. If we use government money to create employment for those who want to work but cannot find it in the private sector, we can have true full employment and utilise idle labour for productive initiatives without inflation problems. The full story is that we live in a system of Credit and Fiat Money. The banking system and government sector can create credit money and fiat money at will, let’s use it!

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“The chicanery of this week’s economics” by Ann Pettifor and some notes

Here’s a great little article Ann Pettifor also wrote today on the budget discipline farce, this time in the UK context. Seems like people are having this problem everywhere! Enjoy the read.

I’d like to make a couple of notes:

You’ll notice that she talks about the relationship between the UK government and its central bank, the Bank of England (BoE). We have a similar relationship here in Australia with our central bank, the RBA, that I didn’t go into in the previous post for simplicity.

Essentially the Australian government (Treasury & govt departments) have a group of bank accounts with the Reserve Bank of Australia, called the Official Public Account Group (OPA). These accounts show the daily cash position of the government. All of the private banks (CBA, Westpac etc) also have an account with the Reserve Bank, and these accounts show the reserve balances of each private bank. (reserves are essentially money held to ensure payments made throughout the economy clear on a daily basis).

Professor Bill Mitchell covers the mechanics of government spending and the payments system here. Below are the key points:

1: When the government spends, say makes welfare payments, it simply debits its own accounts with the RBA and credits the accounts of the private banks at the reserve bank – these credits appear on recipients’ accounts held with their respective private bank throughout the system.

2: When the government taxes, say collects income taxes, the accounts of the private banks with the RBA are debited (and the accounts taxpayers hold with the private banks are debited throughout the system), and the government’s account with the RBA is credited.

3. If the government runs a deficit, it has simply net credited the private sector (accounts held by the private sector).

4. If the government runs a surplus, it has simply net debited the accounts held by the private sector.

Government deficits create private sector savings. So the government cannot face an insufficient supply of savings. These are operational identities. They are true by definition.

Ann Pettifor writes “the British government has a bank [its Central Bank] that can create £10 billion…to lend to the British government…[and] this money can be used for the purpose of financing British government expenditure and investment”.

This occurs because not of operational constraints, but because of institutional or political constraints. The primary policy instrument of central banks, the BoE and the RBA, is to set the interest rate, or the official cash rate, on overnight loans in the money market. This is the rate of interest paid on loans to private banks – and why would private banks require these loans? If they don’t have enough in their reserve balances held in accounts with the RBA. Remember reserves are money held to ensure payments made throughout the system every day clear. On any given day households and firms will be making payments to each other. In the aggregate, at the end of each day these just represent flows of money from one private bank to another, representing changes in the individual private bank’s reserve balances at the RBA. Sometimes there may be a case where one bank is short of reserves – in this case the RBA stands to lend this bank whatever reserves it desires at the given rate of interest. By guaranteeing the smooth functioning of the payments system, this overnight market ensures the economy as a whole also operates smoothly.

But when the government runs a deficit, it net credits private sector accounts at the RBA. This creates excess reserves in the private banks accounts with the RBA. The private banks need to hold some minimum amount of reserves to ensure the payments system functions, but the net credits in the private sector translate to more reserves than the banks need to clear transactions made day to day. With excess reserves, this means there is less demand for the RBA’s loans, so the official cash rate gets bid down. That’s right – government deficits actually have a depressing effect on the interest rate (often you’ll hear in the mainstream media, that the opposite is true). So the excess reserves create less demand among the commercial banks for the RBA lending. This has a depressing effect on the official cash rate, but as I mentioned earlier, the official cash rate is the primary policy instrument of the RBA. It wants to maintain that rate to affect whatever intentions it has for the management of the economy.

It follows that it does this by issuing government bonds. Government bonds are offered to the private banks as an interest earning alternative (interest paid using a “computer mark up”) to holding excess reserves, and so excess reserves are drained from the system maintaining the RBA’s target official cash rate. So this should help give some background for some of what Ann Pettifor is talking about regarding the mechanics of government spending through the central bank. There is still no operational constraint on government deficits, the issue of government debt/bonds to the private sector is merely an institutional arrangement.

The corollary:

1. Don’t let anyone tell you that government deficits puts upward pressure on interest rates. It does the opposite!!!

2. Don’t let anyone tell you the government needs to finance spending by raising taxes.

The Budget Discipline Bogey: We live in a Fiat Currency System!

On Monday I read an article by Ross Gittins where he expresses his concerns that with the federal election only a year away; wreckless spending promises, and waning taxation revenues will compromise our “budget discipline”. Yesterday I read an article by Peter Hartcher where he also stresses over the budget, this time for the US, saying “both spending cuts and tax increases are inevitable in any realistic scenario”. I know politicians everywhere have been spouting this stuff out the wazoo, but when did it become the conventional wisdom that the government, like a household or an individual, needs to balance its budget?? I respect both journalists, but I tire of both who in their endeavour to appear “balanced” or “centrist” end up conflating the economics of government and that of the individual.

We’ve heard from politicians about the need to be fiscally conservative, the need to exercise budget discipline. So when Mr Gittins and Mr Hartcher echo this what they are suggesting is that the Government needs to run a balanced budget over the long term, just as any fiscally responsible household, or individual would. And it is taken as given why this should be a good thing. To most people the answer would appear obvious. “If I spend too long in debt without an ability to pay that debt off I’ll go bankrupt” so the argument goes, “the same way I’ve got to be fiscally responsible with my budget to avoid going bankrupt, the government must do the same”. I assume this is the logic that the government needing to balance the budget is based on. Except the use of the word logic to describe this deduction is a complete misnomer. Why?

The Government Is Not Like You and Me

The government is unlike a household, or even a business. In Australia we run a fiat currency system, meaning by definition the Australian government is the monopoly issuer of the currency, or the legal tender, in the country. That legal tender is of course Australian dollars. A household cannot print Australian dollars, but the Australian government most certainly can, and does. It is for this reason that I find all this discussion on the government’s need to exercise fiscal discipline completely farcical. Though in reality the Australian government does not print money, it net credits bank accounts. It is the same process in the United States. As Professor Randall Wray from the University of Missouri-Kansas City puts it, they use “keystrokes”.

So it necessarily follows that if the governments debt is denominated in a currency that it is the sole issuer of, then it can’t default on its debts. That is the Australian government cannot go bankrupt. It faces no solvency constraint. It can service those debts by simply using keystrokes, net crediting bank accounts at a touch of a key.

European nations using the Euro however are different. Mr Gittins recognises this but still misses the point when he says “the euro wouldn’t be in trouble were it not for decades of fiscal (budgetary) indiscipline of so many nations”.  No, these nations are in trouble because they adopted a foreign currency, the euro, meaning they are unable to service their debts with keystrokes. Their debt is denominated in a currency they do not have sovereign control over. They do not issue the currency they use. Greece needs to get a hold of euros to service its debt – it can do that only by taxing its people or borrowing euros from elsewhere. It cannot use keystrokes. That is why countries with a fiat system issuing their own currency like Japan (the Yen) can run up a national debt of $13.64 trillion (230% of GDP) and still enjoy a robust economy, low unemployment, and a high standard of living. The ongoing economic malaise in nations of the Eurozone is specifically related to their lack of sovereign control of the currency they use.

So if we acknowledge that the Australian government faces no solvency constraint, then why fear budget deficits? I suppose then the argument may turn to inflation, although Mr Gittins doesn’t actually say this in the article. This is generally the case with people who spread fear regarding government spending, they tend to take for granted that everyone knows the government must balance the budget and so offer no explanation as to why. Anyways…onto inflation.

Inflation?

The argument goes that if you create too much money, you have more money chasing the same amount of goods. Necessarily the prices of those goods rise, meaning wages demanded also rise as people see the money they hold worth less and less everyday. This can turn into the doomsday hyperinflation scenario where the magnified effect of rising wages and prices means that inflation always rises faster than money creation can actually catch up. And so creating too much money, or more correctly, running too large a budget deficit (remember money doesn’t actually get printed, rather bank accounts get credited) will bring with it a high inflation danger. This is how the story goes.

This is based on the premise that money is “neutral”. That money has no “real” effect on the economy. That is the idea behind, “more money chasing the same amount of goods”. However this couldn’t be further from the truth. Money absolutely has real effects, and by real effects, we mean creating new jobs, goods, and services in the process. Think about an entrepreneur who has a new idea. It may be an ingenious idea to build a tablet computer in a world where everyone only uses laptops. But he has no money. The entrepreneur goes to the bank for a loan, only after he receives that loan of money can he then go out and lease a warehouse, buy materials, employ staff, pay for advertising, etc etc. This is a micro level case of an injection of money having “real” effects. That injection of money does not mean it simply chases the same amount of goods. Because we live in a dynamic system (time matters, things are not static), that injection of money leads to the immediate creation of employment and the future creation of new goods. Ann Pettifor, a fellow of the New Economics Foundation in London, puts it much more eloquently. She describes “credit creates economic activity, which creates investment, which creates savings”. You cannot have savings without money being spent in the first place. And where does this money, or credit, come from? Out of thin air – keystrokes. So inflation cannot be merely a monetary phenomenon. That is it doesn’t occur simply because there is too much money in the system.  There’s more going on there.

The funny thing is Mr Gittins actually knows this. We know he knows this because in another article he wrote a couple of days ago (“The Money Chain Rests On Trust”) he writes “the financial sector [the money chain] is the oil that keeps the economy ticking over”. What he means by this is that if you don’t have new money entering the system, the system stagnates, firms stop employing workers, people stop spending, etc. Money has ‘real’ effects on the economy.

This is not to say that inflation is not a problem that needs to be considered. But that it is not a monetary phenomenon – i.e. high/hyper-inflation does not occur because of too much government spending but rather because of structural issues in the economy. We can see this when we consider everyone’s two favourite examples of hyperinflation, Zimbabwe and the Weimar Republic. Both were cases where the country’s productive capacity was shot. I.e. Both countries were war torn, industry had been decimated; in the case of Weimar there were massive reparations to be paid in terms of gold (not a currency it could issue without constraint), in the case of Zimbabwe there was an unprecedented fall in food supply as the country underwent land reforms. For more detailed analysis read Professor Bill Mitchell from the University of Newcastle and Professor Randall Wray’s musings on the subject:

http://bilbo.economicoutlook.net/blog/?p=3773

http://www.economonitor.com/lrwray/2011/08/31/not-worth-a-continental-how-modern-money-theory-replies-to-hyperinflation-hyperventilators-part-2/

It should be obvious, Australia, with a healthy, able, and educated population, good infrastructure, sound institutions, is in no danger of hyperinflation. So again, why a fear of government deficits and public debt?

Mr Gittins worries the government has “given no indication how it will pay for…increased spending on a disability insurance scheme, grants for schools and much else”. The conventional wisdom says that taxes need to be raised to pay for this, yet we’ve just debunked this above. The government does not spend with taxes collected, but rather simply using keystrokes. It net credits bank accounts, and money is created. So why do we have taxes, what role do they play?

So Why Tax?

Just as government spending adds money to the system, government taxation drains money from the system. Why would government need to drain money from the system? If it is overheating – in the sense that if there is too much demand and not enough supply in certain areas. So this is the way in which fiscal policy regulates inflation and keeps it in check. But this is not the Australian, or even the global environment of today. Is there really not enough supply? Are we at risk of high inflation?

Last I checked, there are 1.2 million unemployed Australians looking for work, and a further 900,000 underemployed Australians looking for more work. (Taken from Roy Morgan Data, http://www.roymorgan.com/news/polls/unemployment.cfm). That does not suggest a supply shortage of people willing to work. Now let’s turn to retailers. According to macrobusiness (http://www.macrobusiness.com.au/2012/10/retail-sales-in-detail/) retail sales are “well down relative to the prior decades growth rates”. No supply shortage there, in fact retailers are all whining about how people aren’t spending enough, there is not enough demand. Even the housing supply shortage is a myth. The National Housing Supply Commission reported a shortfall of 85000 dwellings. Phillip Soos uses Census data to break down in the following article (http://theconversation.edu.au/beware-the-rent-seeking-organisation-dont-be-dudded-by-housing-data-8112) how the NHSC reached this number by fudging the figures and including the homeless and those in need of social housing. I suggest you read the article. Even this is a case, not of not enough supply, but rather not enough demand – it explains part of the downturn in the construction sector.

The overwhelming trend in the developed world at the moment, and certainly in Australia, is one of deflation, pent up supply, and not enough demand. One need only look at the actions of the RBA (and Central Banks around the world) in cutting interest rates. So why are we continually hearing about the need for the government to balance the budget, and worrying about spending programs? I’ve continually stressed that the government faces no solvency constraint. It certainly does not face an inflation constraint in the current climate. I’d like to offer one more argument.

If you view the economy as a whole and look at financial flows, or where all the money in the system is travelling to and from, it is possible to divide it into three sectors. The government (public) sector, the private sector (households and businesses), and the external sector (the trade balance with the rest of the world). What this means is that the sectoral balance (the net amount of money being accumulated) of the private sector and external sector must equal the sectoral balance of the government sector. So if the private sector is running a surplus, and the external sector (or rest of the world) is running a surplus against Australia, then the government sector must be running a deficit equal to the two. This is an identity, it is true by definition, it describes how our system works. And Mr Hartcher, this is the same system at work in the United States.

Below is a chart put together by Professor Scott Fullwiller from Wartburg College showing sectoral balances for the US over the last 60 years.

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You’ll notice the sectoral balances are expressed as a percentage of GDP. The External Balance is called the “Capital Account”. And that the government has traditionally run a deficit, and the private sector generally ran a surplus as a result. You’ll see during the Clinton years when the private sector went into deficit (a period when they started accumulating huge amounts of debt) the government sector started running budget surpluses.

In Australia today, the private sector is accumulating dollars; households and businesses are net saving. The sectoral balance of the private sector is in surplus. In the external sector, we have a current account deficit (a capital account surplus), we import more than we export, so the external balance is negative (the rest of the world is running a surplus against Australia). This means that by definition that the government sector is in deficit. The government is net spending. If the government was net saving and the external balance was still in deficit then the private sector would have to be net spending, or accumulating more debt. Let me reiterate – if the external sector is in deficit, households and government cannot both save!

This is quite a profound result – I wonder if Mr Gittins knows this. That if Australia is running a current account deficit (the external balance is negative) as it has done historically, then the private sector and the government sector cannot both run a surplus. One must be in deficit for the other to be in surplus. One must be spending for the other to be saving. So every time a politician or political commentator, or your neighbour says the government should return the budget to surplus, they are also saying that households and businesses should take on more debt. Private debt is roughly 160% of GDP, while public debt is only 6% of GDP. Households service debt using income earnt, and the government services debt using keystrokes. Where does that leave us? We don’t have a problem of public debt. We have a problem of private debt.

Quite a lot to digest for the first post… So it follows that government deficits can and should be used to pay for a National Disability Insurance Scheme, and for a Gonski Model of School Funding, or any other initiative that invests in our nation and its people. The government doesn’t need to give “indication of how it will pay for this”, because it should be obvious that governments that issue their own currency spending using keystrokes. It doesn’t actually need to borrow the money from anywhere, or tax it from anywhere, it simply wills it into existence. The government doesn’t need to be concerned about inflation because we are currently in a deflationary environment. Moreover that money that it spends on things like NDIS and School Funding, actually increases the nations productive capacity, it increases our human capital, it may actually mean we’re able to produce new things, create new industries and new jobs. If running the country was as simple as balancing the books, mums and dads everywhere could do it (no diss to mums and dads everywhere). What we create, we can afford. Stop reducing the national debate to an accounting exercise, and let’s start talking about the kind of world our generation can create. Mr Gittins and Mr Hartcher, it’s time to read up and start holding pollies accountable for what they say we can’t afford.

Hello

I’ve wanted to share my thoughts on economics and how we run our country for a while now. I suppose for one reason only – that our society, press, government, even schools are rife with misinformation on matters pertaining to economics. I am not an economist. I’m a student. But that I’ve learnt more following the work of certain academics through the internet than I have in my entire 6 years of formal university education should say it all. This includes an undergraduate and a masters degree in economics, the latter I’m trudging through now. I spend most of my time in class either dying of boredom or swearing in frustration. Why? Well for the simple fact that my university as most around the world teach the theory and prescriptions of one particular school of thought in economics that has proven time and again unable to describe the world in which we live, neoclassical economics. Neoclassical economics builds a beautifully elegant model of an economy, but it bears no resemblance to modern day capitalism. Professor Steve Keen remarks this mainstream theory of economics is “neat, plausible, and wrong”. What I intend to do on this blog is to share ideas, and comment on economic developments in our country/world, particularly items that come up in the media. Much of what I write is informed by brilliant economists and academics of today such as Michael Hudson, Steve Keen, David Graeber, and L R Wray, as well as those before them – John Maynard Keynes and Hyman Minsky,. If you want to go straight to the source I suggest you read their books, papers etc.. The following websites also have a great wealth of information:

http://www.neweconomicperspectives.org

http://michael-hudson.com/

http://www.debtdeflation.com/blogs/

My view of economics and how it relates to our world has been very much informed by the ideas you’ll see in those books and sites. Often I will recycle ideas or thoughts (and ofcourse give credit where it is due), but add my own musings on what is important and break the theory down in the context of the Australia as much as possible. Hope you engage. So.. onto the first post.