Purple House and MMT: the new money creation is real, it is not a “leftist” plot

A purple house, not a theory. Image by Alex Anstey

It’s happening now, MMT. The Reserve Bank is making money. It should be called Modern Monetary Practice, not Modern Monetary Theory. In a speech last week, and questions after, central banker Guy Debelle explained it. Michael west reports on the MMT debate and how it is being used to tackle the looming deep recession.

In the corporate press, they are outraged. They think the purple houses are a “leftist” conspiracy.

“You can’t paint the house purple,” they shout. ” You can not do that ! “

They do, however. There’s Reserve Bank President Philip Lowe standing right in front of their eyes, brush in hand, decked out in overalls, painting the house purple.

“You can’t do this,” they yell.

Yet the purple paint genuinely drips from Philip’s brush.

He can do it. He does it.

What Philip’s doctrinal critics really mean is that they don’t like it. They hate Philip who paints the house purple, they hate purple. Purple is on the left. Purple is irresponsible, purple doesn’t work.

Guy Debelle supports the MMT

Reserve Bank Deputy Governor Guy Debelle ticked all the purple boxes last week in an address to the Economic Society of Australia: We selected the relevant snippets to demonstrate what the bank actually does and why.

In corporate media, with the notable exception of Alan Kohler – who brought up the topic of MMT logically – they claim MMT doesn’t work because the national budget is like a family budget and needs to be balanced. .

However, sensible MMT supporters argue that if an economy is performing below capacity and there is little chance of inflation, then new money should be created until that unused capacity is gone.

Guy Debelle, both in his speech on the political actions of the central bank and in response to questions asked subsequently, confirmed that this is precisely what is happening:

  • The economy is performing well below its capacity
  • The specter of inflation is low
  • Therefore, the RBA creates new money (he calls it liquidity) by buying Commonwealth government bonds from the big banks.

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A ripe environment for fresh money

First of all, Debelle set the scene: “It was a major event in the economy. This will have lasting effects ”.

“We had a very sharp drop in production, a very sharp drop in hours worked, a very sharp increase in unemployment.”

The economy is running at full speed

“The main thing that we are trying to do is get the economy to grow stronger… this is the main goal… The main problem we have right now is that the economy is performing very, very well under this. of its capacity, and until we can try to solve this problem… this will be the main channel to try to meet low inflation expectations and try to revive the economy.

“Our main goal is to get people to work and keep the economy running at full capacity…”

There is little prospect of inflation

“As the RBA’s bond purchases increase the liquidity of the system, I do not see this pose a risk of generating excessively high inflation for the foreseeable future.

“Indeed, the opposite seems to be the most likely challenge in the current economic climate, which is that inflation will stay below the RBA target.”

“Low inflation resulting from” declining population growth and a low rate of technological progress … and the aging of the population, perhaps even more important … and a sharp increase in risk aversion, at least for a while ”.

“The most likely outcome is low inflation and a sluggish economy…. I see a lot of high inflation risks coming from any source at the moment. “

What the RBA is doing about it

The RBA buys Commonwealth Government bonds from banks in the secondary market (it does not buy them at issue, in the primary market, or directly from the government).

“As was the case with many other central banks, the RBA bought government bonds in the secondary market to alleviate the dysfunction of the Australian government bond market.”

“To date, we have purchased just over $ 40 billion in Australian government bonds. “

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“The RBA’s purchases in the second half of March and in April helped improve the broader functionality in the broader bond market.”

The RBA pays for these obligations by crediting sellers’ Exchange Settlement (ES) accounts with the RBA – this is a new (digital) currency. It increases the money supply and provides (potential) liquidity to the banking system. The aim is for banks to lend it to stimulate economic activity.

“As the RBA buys government bonds, the amount of ES balances in the system increases as we credit the accounts of the banks we buy them from. “

New money

“The $ 50 billion in bond purchases increased SE balances and dramatically increased the liquidity of the system.”

“As I said in my speech, when we buy government bonds, it puts more deposits in the banking system, therefore it increases the money supply.”

“The higher level of ES balances in the system … anchors other money market rates.”

“Since the end of March, ES balances have moved in a very wide range between $ 40 billion and $ 90 billion.”

Meanwhile, in corporate media, they continue to claim that the national economy is like the household budget and should be run like a household budget – ignoring that households cannot raise taxes or issue their own. currencies.

The reality is that the central bank is creating new money, just like its counterparts in the US, UK, Japan and Europe.

The question now is how much money will the government create to stimulate the economy? It’s a guessing game, although the sub-ability is huge at the moment, so the answer is ample.

Moreover, since the government has effectively privatized its QE, or subcontracted it to the big banks, will the banks lend it? How much can they lend if there is no demand for loans?

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