Modern Economies – Australia’s Monetary Sovereign Currency Government
The Australian Government uses its own currency. Modern monetary economies use fiat currencies – money declared by a government to be legal tender. Not convertible by law to something else; not fixed in value against Gold, for example. Latin word fiat, meaning “let it be done”.
Australia has a monetary sovereign government, as do most others. The Eurozone countries are not monetary sovereigns: each of them use the Euro instead.
State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government and State and local taxes, stamp duties etc.
The Australian Government spends by crediting the reserves of a commercial bank which are held at the Reserve Bank and having the commercial bank credit the bank account of whoever is to be paid. Money enters the system when the government spends – by using its computers’ programs and keyboards.
A monetary sovereign government has a floating exchange rate, and no significant foreign currency debt.
The Australian Government’s capacity to spend is independent of taxation revenue.. Tax revenue cannot fund spending. Governments spend first and tax afterwards.
Tax is all about the social consequences – the total impact of each tax on the real economy and on people’s well-being. In a modern economy, spending and taxing are economically separate activities
You can’t pay your tax bill in the currency the government issues until it has been previously spent into existence by the government and a Sovereign Currency Government requires payment in its own currency.
Taxes exist to limit inflation. It’s necessary for us to pay taxes to keep total spending – government and private – at a level which will not be inflationary.
Taxes can be used to advance economic issues or address social issues, stimulate research and local manufacture and much more. All taxation should be regarded from the point of view of social and economic consequence.
Borrowing and Debt
The Australian government is a currency-issuing central government. It cannot run out of Australian dollars. It’s never forced to borrow Australian dollars, although it choose to borrow. It’s Bonds are a useful part of our financial system. A currency-issuer has no financial constraint, it never has to ‘finance’ the spending of the currency only it can issue. It can run a pure deficit, without borrowings.
For every lender, there must be a borrower. That means that across our financial system, surpluses and deficits always add up to zero. The government’s deficit is the private sector’s surplus. A budget surplus drains savings from the private sector and that leads to loss of jobs and less work done.
Australia’s Sovereign currency-issuing Government can issue debt-free money – and it does this already see RBA has purchased a total of $A40,250 million worth of Australian government bonds
Inflation is the continuous rise in the price level for goods and services. If the price level starts to continuously fall, that is a deflation.
All spending carries an inflation risk. If nominal spending growth outstrips productive capacity, then inflationary pressures emerge.
Government spending can always bring idle resources back into use, without generating inflation. At full employment, a government wishing to increase its resource use has to reduce non-government usage. By curtailing private purchasing power, taxation, while not required to fund spending, can reduce inflationary pressures
Governments can cause inflation if they spend too much or not tax enough when it is needed. If this happens, the total level of spending in the economy exceeds what can be produced by all the available resources – labour, skills, physical capital, technology and natural resources.
Governments can control inflation by spending less or withdrawing money from the economy by increasing taxes when that is required.
Money creation only produces inflation when the economy is at full capacity.
The only serious inflation in the post Second World War period that was global had nothing much to do with fiscal policy behaviour.The 1970s inflation was driven by the politically-motivated supply-shock (oil price hikes by the Arab OPEC nations).
Hyperinflation – massive inflation levels – currency debasement from governments massively increasing money supply (“printing money“).
“The empirical reality, … of what actually happens in hyperinflations shows that they are not the results of well-governed states abusing the money creation process. Rather, hyperinflation is typically a symptom of some underlying economic collapse, as happened in Zimbabwe and Weimar Republic Germany.” See Blog Positive Money
In addition to those Countries discussed briefly below, several others suffered hyperinflation in the 20th Century including Yugoslavia, Mexico and Armenia. Each of them suffered some underlying economic collapse first.
- Armistice ending fighting in 1918. Allied forces occupied the Rhineland. Treaty of Versailles imposed an enormous debt on Germany that could be paid only in gold or foreign currency.
- Gold depleted; German government attempted to buy foreign currency with German currency,
- Quantity of German marks on the market caused the currency to fall rapidly in value, which greatly increased the number of marks needed to buy more foreign currency.
- Caused prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-falling German currency.
- Deficit financed by issuing bonds and simply creating more money, both increasing supply of financial assets on the market, further reducing the currency’s price.
- German people realized that their money was rapidly losing value,and spent it quickly – ever-faster increase in prices.
The government and the banks had unacceptable alternatives. If they stopped inflation, there would be immediate bankruptcies, collapse of civil order, insurrection and possibly even revolution. If they continued the inflation, they would default on foreign debt. Attempting to avoid both unemployment and insolvency ultimately failed when Germany had both.
John Maynard Keynes, principal representative of the British Treasury at the Paris Peace Conference’ –
“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.” See for example Wikipedia.
“Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of polities, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling.” (Keynes 1919)
Corrales, Javier (7 March 2013). “The House That Chavez Built”. Foreign Policy…. excessive dependence on commodity exports can distort an economy in fundamental ways. Occurs when a country that is excessively dependent on commodity exports experiences a price boom. The sudden inflow of foreign currency raises the demand for local currency, yielding an uncompetitive exchange rate. This overvalued exchange rate, if unaddressed, can kill the country’s other exports as well as stimulating an avalanche of imports, which can hurt domestic producers. “
Most critics cite anti-democratic governance, corruption and mismanagement of the economy as causes of the crisis. See Wikipedia
The causes of Zimbabwe’s hyperinflation are essentially these-
- Takeover of productive, white-owned commercial farms. Unskilled and inept management, by those who had no earlier chance to learn, saw a collapse of food production. Unemployment around 80 per cent.
- Infrastructure decaying and ruined by turmoil. Railways could no longer work properly. About 60% decline in export mineral shipments in 2007.
- Manufacturing collapsed.. Raw material shortages. Manufacturers saw the central bank stuff-up access to foreign exchange, required to buy imported raw materials.
- The Reserve Bank of Zimbabwe used foreign reserves to import food because the domestic food supply collapsed. Importers of raw materials cannot get access to foreign exchange..
- Government feather-bedding supporters, rorting – falling productive capacity. Result inflation and then hyperinflation.
- Even if the government had have been running fiscal surpluses, the hyperinflation would have occurred such was the depth of the supply contraction. See – Zimbabwe for hyper ventilators 101
- There remains a widespread inaccurate and obsolete understanding about how a modern economy actually works. The ALP and the Liberal/Nationals have shared this unfortunate view at least until recently, apparently. The Government, ominously for Labor, has shown signs that it is beginning to wake up – see all manner of economic stimulus in response to COVID-19.
- Liberal/National Govt ‘bending’ stimulus measures to suit their neoliberlal philosophy -See The JobKeeper Payment is a scheme to support businesses and not-for-profit organisations significantly affected by COVID-19, to help keep more Australians in jobs.
- Governments can control inflation by spending less or withdrawing money from the economy by increasing taxes when that is required. Concerned that the politicians we elect have the flexibility to advance our well-being versus pork-barrels and popularity. – “because we don’t trust politicians”.
- Hyperinflation does not result from well-governed states abusing the money creation process – it is a symptom of underlying economic collapse. We are oil imports dependent and weak on refining capacity Agriculture Transport Defence Supply? This holds the seeds of economic collapse in the future?