Letter from The Cape Podcast Episode 20 December 8, 2023 Hello and welcome to another episode in my Letter from The Cape podcast series, where I talk about Modern Monetary Theory or MMT as it applies to the real world challenges and problems. Recently, I had an enjoyable lunch in Melbourne with a well-known finance journalist and Media personality. I am just back from working for a few months at Kyoto University in Japan and so the conversation was all about economic policy in Japan and why the rest of the world was pursuing a different policy path in dealing with the current inflationary pressures. I told my dinner partner that in the face of the rising global inflationary pressures, the Bank of Japan had held interest rates constant at around zero. Further, the Government had also provided some modest fiscal support to households and businesses to ease the cost of living pressures, while they patiently waited for the supply-side inflationary pressures to abate. They clearly didn't consider the inflation to be the result of excessive spending and knew that pushing up interest rates would just harm households and business with outstanding debt and do nothing much to counter the factors driving the inflation. The rest of the world, as we know, took a starkly different path and have significantly increased interest rates. We know now that the inflation rate in Japan is now lower than Australia. The approach pursued by most central banks, including the Reserve Bank of Australia was misguided and has caused massive damage to the prosperity of many households in Australia, particularly low income families who were already stretched with large home mortgages. A few days later, the journalist wrote an article - 'How Japan escaped neoliberalism and lived happily ever after' - and I concluded it was a productive lunch that we enjoyed together. Source: https://www.thenewdaily.com.au/opinion/2023/12/04/alan-kohler-japans-happy-economics He posed the question: "How come the people of Japan get to have no rate hikes while we – and Americans and Europeans and British – get hammered with them?" He noted that Japan runs large fiscal deficits, the government has the 'second largest government debt in the world as a percent of GDP, interest rates are around zero, and, in terms of what matters, unemployment is very low, "politics is stable ... and there’s no shortage of infrastructure or housing – house prices have been fairly stable for 30 years". He also noted that the Bank of Japan buys "most of the debt" that is issued by the government by just swapping bank credits for the debt. How so? He wrote: "Japan has simply stopped worrying about budget deficits because they figured out that the central bank" can simply buy all the debt given their currency capacity and at the same time keep interest rates low. The Japanese government, quote, "simply ignores the economic orthodoxy that says the budget must be brought back into surplus". It was a good article. Soon after a former high ranking federal government bureaucrat responded to the journalists article. Source: https://johnmenadue.com/should-jim-chalmers-adopt-mmt-to-offer-swedish-services-with-swiss-taxes/ His chosen title was "Should Jim Chalmers adopt MMT to offer Swedish services with Swiss taxes?" - which immediately sends the message that he doesn't know what Modern Monetary Theory or MMT actually is, and, instead chooses to allow his readers to get a false impression of that body of work. He claimed to have "spent his Treasury career trying to balance government budgets" so the journalists article was, quote, "heresy". He then told his readers, quote, "that quantitative easing (QE) ... is MMT in disguise". The journalists article was not about quantitative easing, which is just an asset swap where the central bank buys a government debt in return for a bank credit it gives the seller of the debt. Importantly, the impact on the non-government sector of such a transaction is to leave its net financial wealth unchanged - the bond is sold for cash. The wealth portfolio changes - more cash, less bonds - but the overall wealth holdings are unchanged. The important point for Japan and any country that is running a fiscal deficit - that is, government spending exceeds tax revenue - is that there is a net increase in financial wealth in the non-government sector as a result. What the central bank does is irrelevant in this regard. An understanding of MMT would eschew any conflation between QE and MMT. Further, the commentator wrote, quote, "Japan has got away with MMT because its households and corporates prefer to invest their savings locally even though overseas cash accounts, bonds, property, and shares have offered higher returns." There are two points to make here, which goes to the heart of achieving an understanding of what MMT actually is. First, think about the opening title - that asked whether the Australian Treasurer should "adopt MMT" - which implies that MMT is a regime shift from some other system. Many people who are attracted or repulsed by the MMT ideas make that mistake - they say 'won't it be good if we shift to MMT' or 'won't it be a disaster'. The fact is that MMT is not a regime or a set of policies that a nation shifts to or away from. MMT is a framework for understanding how modern monetary systems work. It allows us to understand the capacities of the currency-issuing governments, such as Australia and Japan and most nearly everywhere else, and, the implications of using those capacities. Equally, it helps us understand the implications of surrendering those capacities - for example, the case of the 20 Eurozone countries, who surrounded their own currency in favour of a foreign currency – the euro. MMT is thus a superior lens for understanding the monetary system that prevails now. You don’t shift to an MMT system - rather an MMT understanding just helps us understand the current monetary system more clearly The point is that an understanding of MMT allows us to move away from the fiction that the Australian government is financially constrained in their spending, and therefore needs to raise funds through taxation and debt insuance before they can spend. An MMT understanding allows us to see that the constraints on government spending relate to the real resources that the government can buy with its own currency and put into productive use. Such a government can buy whatever is for sale in its own currency, including all idle labour. Which means that the existence of mass unemployment is a political choice, rather than being result of the government, not having enough funds to offer meaningful work to the jobless. Further, there are no MMT policies. To move from an MMT understanding to a specific set of policies requires us to impose a set of values or ideology. In this regard, MMT is largely apolitical - it is neither right–wing nor left wing. A right-winger with an MMT understanding will advocate a totally different suite of policies than a left-winger even though they both might share the same advanced understanding of how the monetary system works through their knowledge of MMT. Secondly, claiming Japan has been able to prosper with large deficits and the Bank of Japan buying most of the government debt because locals prefer to invest their savings in local assets is false. The fact is that the Japanese government could keep running those deficits with zero debt being issued and just instructing the Bank of Japan, which is part of the machinery of government to ensure the payments are credited to the relevant private bank accounts. The Australian government could do the same if it wasn't so wedded to the neoliberalism of mainstream economics. That's my last podcast in this series for 2023. We will resume in February 2024. Until then, see you later and enjoy the holiday period.