Simply put, the nations money supply is mainly made up of IOU’s for government debt, IOU’s for private debt, with a small amount of credits / debits for a overseas balance of payments surplus / deficit. Thus if both government and private sector pays down debt at the same time, the money supply disappears- there is no pool of money that circulates independently of those sources. For the government to pay down debt means that the private sector has to take on more debt for a given size of economy. Since household debt is limited by capacity to repay, and households will always want to pay down debt, it behoves government to carry sufficient debt to maintain the money supply. That governments are forced by convention and law to convert ‘free debt’ at the RB into ‘interest bearing debt’ held by the private sector, is a political choice, not a God-given commandment.
Money created as government debt (called ‘fiat’) and money created as private debt (called ‘credit’) are the two sources of the money supply. If Government debt goes to zero or into surplus, private sector banks become the de-facto monetary sovereign. This is somewhat like placing a nations defence in the hands of mercenaries- they become the de-facto military sovereign. There are countless stories throughout history of how that story ends.
Austerity brings with it fear of job-loss and, if not actual pay-cuts (yet), certainly an unwillingness to pursue better pay and working conditions. Thus it is seen as a means of disciplining the workforce both financially and psychologically.
In the context of NZ’s large Balance of Payments deficit, Austerity cuts discretionary spending power. As necessary spending is largely on NZ-produced goods and services like food and rent, and discretionary spending is more on imported goods and services like cars, iphones and foreign holidays, this, in lieu of the capacity to increase exports, has the effect of reducing the Balance of Payments deficit.
I believe that Willis, Seymore, & possibly Luxon understand this quite well, yet do it anyway for ideological reasons. Lower ranking MP’s and the general public do not know, despite the information being in the public domain from some academic and various RB sources. Mainstream media however does nothing to remove the veil of misunderstanding.
From a political point-of-view: That cuts are continuing despite the knowledge that economic contraction is now costing more in lost revenue than the government is saving in expenditure is mystifying until you understand that a massive push towards a sea-change in ideology is underway, and fiscal inefficiencies in tax-gathering vs expenditure are considered a ‘price worth paying’ to achieve that change.
From a treasury official’s point-of-view: As the main causal factor in the weakening NZ dollar, the Balance of Payments deficit is, as it should be, considered far more serious than the government’s fiscal deficit, which is well within the realms of ‘normal’. Thus the Treasury establishment is happy to trade off the same worsening of the fiscal position in return for an improvement in the Balance of Payments position. I recently described this as ‘government and treasury pulling in the same direction for different reasons’.
Counterpoint: Keynes never intended a world where fiat money was used to prop up a zombified, overly rigid global system of trade. He wanted the very opposite - free trade between nations with controls on flows. Support for deficit countries, curbs on surplus countries. Anglo-Saxon nations all suffer from the same problem. We can’t afford our standard of living. We import more than we export. Wages have been stagnant for 30/40 years & labour share of income has been declining. Instead of natural feedback loops suppressing production in response to declining demand (due to lower wages), we used fiat money to prop it all up. So companies can keep generating profits even though demand has fallen. Welfare - originally intended to help people dealing with unexpected, temporary shocks, has become a substitute form of wages. All paid for with fiat money. If Anglo-Saxon countries were honest they’d say: we can’t afford our trade deficits, we need to stop consuming imports until our production capacity has caught up. And producers (industry) would have to take surplus profits & reinvest to produce cheaper products instead of buying yachts, ski chalets & politicians. These are all feedback loops that have been destroyed by fiat money. A bit of magic money is fine of course - if you’re a young person buying a house (ha! That’s a joke) you’ll be able to persuade a creditor that your future production will cover the capital & interest cost. But if you’re a 60 year old. Not so much. Same for companies - if you can show a stable production surplus you can borrow against it. But if you’re losing customers & in decline? Not so much. Anglo Saxon economies can generate decent, reliable yields & can sell gov bonds on this basis. But we have debt levels that suggest we’re about to unearth new forms of energy & new production thresholds. Now maybe the US will use AI to create a new production thresholds. BIG MAYBE. Or maybe someone cracks nuclear fusion. But failing that, Anglo-Saxon nations are mature production economies wheee the low hanging fruit has been plucked & taking on debt is like eating yourself from the inside. There is a solution to all this - allowing feedback loops to re establish themselves. Allowing stock markets to respond to production not money printing. Forcing producers (industry) to innovate, lower prices or fail if they don’t pay workers enough. Forcing citizens to pay for public goods with taxes - trust me, these will be cheaper than what privatisation charges. Allowing companies to collapse for lack of demand. But we don’t do this. We subsidise low wages with welfare. We subsidise zombie companies with low interest rates. We subsidise global oligarchs with money printing - so that they don’t EVEN NEED TO CHARGE FOR TGEIR SERVICES! (NB: a third of Tesla’s profits are from subsidies against fossil fuel cars. Subsidies!) We tell voters that we won’t put up taxes. And all the time we keep consuming goods made by oppressed workers, controlled by fat Western oligarchs & sold to suckers in Anglo-Saxon countries who’ve been told the lie: it’s ok, if things look bad, we’ll print. The emperor has no clothes & MMT’s solution is to print more clothes. We need to restore feedback loops between consumers & producers so that the price of labour rises, the cost of welfare falls & bad companies collapse instead of turning into global overlords.
Thanks for this comment. I need to learn more about the economics and politics of monetary policy. I admit to having a fairly superficial and largely conceptual understanding. Any suggestions for reading up on it?
Michael Pettis gives you a different perspective on trade. He’s like a pro American Michael Hudson (who is of course excellent). Also, William White, formerly of BIS. I recommend ‘The Price of Time’ as a truly excellent account of interest rates & how low rates have affected Western economies. Thanks for engaging & not being defensive. We’re all trying to make sense of this stuff.
Fiscal Austerity is premised on the idea of transferring resources to the class with savings capabilities as this is the driver of capital accumulation and therefore economic growth. Clara E. Mattei’s book ‘THE CAPITAL ORDER
How Economists Invented Austerity and Paved the Way to Fascism’ is a great book and even gives explanations for 3 types of Austerities: Fiscal, Monetary and Industrial. Great Article Again!!!
In even simpler terms, austerity that has been in place in the UK since the GFC and now in NZ, is a government method of transferring public tax to private profit. EF the rich get richer and well, well here’s a thing, the poor get poorer!
The situation with Winton Property is a classic example. Buy a piece of land, donate $100.000 to the National party in advance if an election after that party lied through its teeth to get votes, then that government changes planning rules and Winton stands to gain millions from NZTA (the tax payer - government) on the development of the land they ‘bought’ cheaply.
Simply put, the nations money supply is mainly made up of IOU’s for government debt, IOU’s for private debt, with a small amount of credits / debits for a overseas balance of payments surplus / deficit. Thus if both government and private sector pays down debt at the same time, the money supply disappears- there is no pool of money that circulates independently of those sources. For the government to pay down debt means that the private sector has to take on more debt for a given size of economy. Since household debt is limited by capacity to repay, and households will always want to pay down debt, it behoves government to carry sufficient debt to maintain the money supply. That governments are forced by convention and law to convert ‘free debt’ at the RB into ‘interest bearing debt’ held by the private sector, is a political choice, not a God-given commandment.
Money created as government debt (called ‘fiat’) and money created as private debt (called ‘credit’) are the two sources of the money supply. If Government debt goes to zero or into surplus, private sector banks become the de-facto monetary sovereign. This is somewhat like placing a nations defence in the hands of mercenaries- they become the de-facto military sovereign. There are countless stories throughout history of how that story ends.
Austerity brings with it fear of job-loss and, if not actual pay-cuts (yet), certainly an unwillingness to pursue better pay and working conditions. Thus it is seen as a means of disciplining the workforce both financially and psychologically.
In the context of NZ’s large Balance of Payments deficit, Austerity cuts discretionary spending power. As necessary spending is largely on NZ-produced goods and services like food and rent, and discretionary spending is more on imported goods and services like cars, iphones and foreign holidays, this, in lieu of the capacity to increase exports, has the effect of reducing the Balance of Payments deficit.
Thank you! I bet you understand this better than Nicola Willis.
I believe that Willis, Seymore, & possibly Luxon understand this quite well, yet do it anyway for ideological reasons. Lower ranking MP’s and the general public do not know, despite the information being in the public domain from some academic and various RB sources. Mainstream media however does nothing to remove the veil of misunderstanding.
From a political point-of-view: That cuts are continuing despite the knowledge that economic contraction is now costing more in lost revenue than the government is saving in expenditure is mystifying until you understand that a massive push towards a sea-change in ideology is underway, and fiscal inefficiencies in tax-gathering vs expenditure are considered a ‘price worth paying’ to achieve that change.
From a treasury official’s point-of-view: As the main causal factor in the weakening NZ dollar, the Balance of Payments deficit is, as it should be, considered far more serious than the government’s fiscal deficit, which is well within the realms of ‘normal’. Thus the Treasury establishment is happy to trade off the same worsening of the fiscal position in return for an improvement in the Balance of Payments position. I recently described this as ‘government and treasury pulling in the same direction for different reasons’.
https://open.substack.com/pub/kevinmayes/p/on-the-true-nature-of-the-nz-economic?
Counterpoint: Keynes never intended a world where fiat money was used to prop up a zombified, overly rigid global system of trade. He wanted the very opposite - free trade between nations with controls on flows. Support for deficit countries, curbs on surplus countries. Anglo-Saxon nations all suffer from the same problem. We can’t afford our standard of living. We import more than we export. Wages have been stagnant for 30/40 years & labour share of income has been declining. Instead of natural feedback loops suppressing production in response to declining demand (due to lower wages), we used fiat money to prop it all up. So companies can keep generating profits even though demand has fallen. Welfare - originally intended to help people dealing with unexpected, temporary shocks, has become a substitute form of wages. All paid for with fiat money. If Anglo-Saxon countries were honest they’d say: we can’t afford our trade deficits, we need to stop consuming imports until our production capacity has caught up. And producers (industry) would have to take surplus profits & reinvest to produce cheaper products instead of buying yachts, ski chalets & politicians. These are all feedback loops that have been destroyed by fiat money. A bit of magic money is fine of course - if you’re a young person buying a house (ha! That’s a joke) you’ll be able to persuade a creditor that your future production will cover the capital & interest cost. But if you’re a 60 year old. Not so much. Same for companies - if you can show a stable production surplus you can borrow against it. But if you’re losing customers & in decline? Not so much. Anglo Saxon economies can generate decent, reliable yields & can sell gov bonds on this basis. But we have debt levels that suggest we’re about to unearth new forms of energy & new production thresholds. Now maybe the US will use AI to create a new production thresholds. BIG MAYBE. Or maybe someone cracks nuclear fusion. But failing that, Anglo-Saxon nations are mature production economies wheee the low hanging fruit has been plucked & taking on debt is like eating yourself from the inside. There is a solution to all this - allowing feedback loops to re establish themselves. Allowing stock markets to respond to production not money printing. Forcing producers (industry) to innovate, lower prices or fail if they don’t pay workers enough. Forcing citizens to pay for public goods with taxes - trust me, these will be cheaper than what privatisation charges. Allowing companies to collapse for lack of demand. But we don’t do this. We subsidise low wages with welfare. We subsidise zombie companies with low interest rates. We subsidise global oligarchs with money printing - so that they don’t EVEN NEED TO CHARGE FOR TGEIR SERVICES! (NB: a third of Tesla’s profits are from subsidies against fossil fuel cars. Subsidies!) We tell voters that we won’t put up taxes. And all the time we keep consuming goods made by oppressed workers, controlled by fat Western oligarchs & sold to suckers in Anglo-Saxon countries who’ve been told the lie: it’s ok, if things look bad, we’ll print. The emperor has no clothes & MMT’s solution is to print more clothes. We need to restore feedback loops between consumers & producers so that the price of labour rises, the cost of welfare falls & bad companies collapse instead of turning into global overlords.
Thanks for this comment. I need to learn more about the economics and politics of monetary policy. I admit to having a fairly superficial and largely conceptual understanding. Any suggestions for reading up on it?
Michael Pettis gives you a different perspective on trade. He’s like a pro American Michael Hudson (who is of course excellent). Also, William White, formerly of BIS. I recommend ‘The Price of Time’ as a truly excellent account of interest rates & how low rates have affected Western economies. Thanks for engaging & not being defensive. We’re all trying to make sense of this stuff.
Fiscal Austerity is premised on the idea of transferring resources to the class with savings capabilities as this is the driver of capital accumulation and therefore economic growth. Clara E. Mattei’s book ‘THE CAPITAL ORDER
How Economists Invented Austerity and Paved the Way to Fascism’ is a great book and even gives explanations for 3 types of Austerities: Fiscal, Monetary and Industrial. Great Article Again!!!
Thank you! I’ve learned a lot more about austerity in this comment section. Will read the book.
In even simpler terms, austerity that has been in place in the UK since the GFC and now in NZ, is a government method of transferring public tax to private profit. EF the rich get richer and well, well here’s a thing, the poor get poorer!
The situation with Winton Property is a classic example. Buy a piece of land, donate $100.000 to the National party in advance if an election after that party lied through its teeth to get votes, then that government changes planning rules and Winton stands to gain millions from NZTA (the tax payer - government) on the development of the land they ‘bought’ cheaply.
Shame on the lot of them!!