Breaking Banks
Why the Government shouldn’t balance the budget.
Politicians say the economy is like a household budget, with the federal government playing the role of the doting 1950’s housewife. I like to picture ScoMo flitting about the house in a frilly apron… and now it’s finally relevant to one of my analogies!
This comparison… is ridiculous. A much more sensible analogy is that the economy is a meth empire, with the treasury/reserve bank of Australia playing the role of Heisenberg.
Money is a lot like meth. If you have some, you’ll only want more. Over time, you’ll need more and more to get the same effects. This is basically inflation.
Now in the land down under, Heisenberg’s meth is a true-blue colour, cause he’s an Aussie patriot, which he then sells it to the citizens.
Citizens either use the meth themselves, or trade it with other citizens for various goods and services, like tigers and… ahem…
-But try as they might, no citizen can cook that true-blue meth themselves.
Now citizens on meth are not always the most reliable payers. Heisenberg could demand payment up front, but then his clientele would not be able to afford his product. As a sneaky dealer, he lets them pay him back over time… usually by the 1st of July.
Did you guess what I’m referring to here? Did you say Taxes? Lucky guess.
So how does Heisenburg get his meth? Well, one way is to buy the ingredients from the clients but what’s the other option?
If there is more demand for true blue meth than there is supply, Heisenberg can always borrow some meth off his good buddy Gustavo. Gus has been stockpiling true blue meth for a rainy day and he’s going to make a profit by ‘lending’ it to Heisenberg, since he knows he will get more meth in the future.
Here’s the rub. As smart as he is, Gus can’t make true blue meth either. He’s just as dependant as the citizens. So even if Heisenberg doesn’t pay him back as much as Gus hoped, or does anything to offend Gus, Gus can’t kill Heisenberg because all his wealth is in meth. If Heisenberg dies, Gus goes broke, so Heisenberg holds all the cards.
Who in this analogy is Gus? Is he China? I bet he’s China. I heard China owns a lot of debt.
Well, not really. Gus might be a teeny-weeny bit Chinese on his mother’s great uncle’s side, but for the most part, Gus is just a little old lady with a savings account in Toowoomba. In fact, if you go check your super account, you’re probably Gustavo too.
Government debt is mostly held in the savings accounts of the public. It’s what the banks use the money you keep in their savings accounts for.
Government debt equals a citizen’s savings. If you get rid of one, you start to get rid of the other.
This is where the ‘household’ analogy falls down. When you normally think of debt, you imagine not being able to pay it back and having some scary men coming round to your house and taking your Jet ski. But the people you ‘owe’ also live in the house. Who cares if they take your jetski? It’s still in the house somewhere.
Moving on.
So, the two big ways to increase the amount of true-blue meth out there are taxes and borrowing off Gus (selling government bonds).
But what about cooking more meth? Seems obvious when I use this analogy, huh?
Why borrow meth or tax it off the client base if you can just make more?
I mean, I haven’t done chemistry, but it looked fairly simple. You could buy half the ingredients from the local Priceline.
Disclaimer: Don’t cook meth.
Well traditional economists… uhh… I mean… rival drug dealers, tell Heisenberg not to make any more meth. They worry he will flood the market and all the clients will get sick of meth. Eventually they will grow tired of meth and refuse to buy any more.
To anyone that’s lived in rural Australia, you know that’s not how meth works.
But when it comes to money, that argument starts to sound convincing. If you print more money, then the rest of your money just loses value, right?
“I saw what happened to Zimbabwe, I don’t want my savings to become the equivalent of Monopoly money,” I hear you shriek.
This one, I admit, is a little trickier to argue against because it just makes intuitive sense. But let’s give it a shot.
You see, Heisenberg has been reading Meth Monthly Times, MMT for short, and has noticed a gap in the market.
There’s a lot of people out there that haven’t even tried meth!? Can you believe it?
Some of these people might not even want to try meth but there is surely a percentage of people that just haven’t had the opportunity to taste those sweet sweet true-blue rocks.
Th… That’s what you do with meth, right? You lick it?
So, Heisenberg can make as much meth as he wants so long as these new clients get it. There will be more supply, but by increasing the supply, he also increases demand.
This demand we are talking about is unemployed people and underemployed people that want a job.
If you increase the amount of money but not production, you get inflation. But if more people are producing, you increase the amount of money and production at the same time. No inflation.
This is again where that household analogy falls flat. They argue you can’t spend money you don’t yet have. But for some reason, they forget the house has a money printer in the basement.
Instead, Heisenberg gives out a bunch of his newly cooked true-blue meth, and in payment, he gets these new clients to help him in the ‘kitchen’. By the time they’ve paid off their debts, Heisenberg has cooked more meth than he had before, and the clientele is now officially hooked (employed).
This isn’t that radical of an idea, in principle, but the big change is that instead of using the meth he can borrow or tax in order to entice these new clients, he can just cook up whatever he needs.
If the government printed a bunch of money and used it to guarantee a job to anyone that wanted one, the additional production created by these workers offsets any money that was printed in the first place. You wouldn’t need to tax the public or borrow the money.
We could do this tomorrow.
Like Kevin Costner always says, ‘Cook it and they will come’.
These are the basic ideas behind Modern Monetary Theory, or MMT for short. The ideas are by no means universally agreed upon, but they have been gaining traction over the past decade and it seems like Covid-19 has be the trigger to push them into the mainstream.
Any politician that tries to convince you the government is a household does not have your best interests at heart. The federal government is not like a household, and it can afford to fund just about every program that you want it to.
Yeah. Economics, bitch!
There are a few caveats of MMT that, while not needed to understand the concept, I will address here.
1. What about local government? Local government is like Jesse Pinkman. They might seem like they hold the same type of power that Heisenberg does, but they don’t know how to cook true blue meth for themselves. (I’ve only seen the first few seasons. I hope Jesse never learns how to cook meth otherwise I’ll look silly).
2. Does this mean you can just print infinite dollarydoos? Sorry to burst your bubble, but MMT does not mean infinite cash. MMT only works if there are underutilised people in the workforce (or underutilised resources), like right now thanks to Covid. Heisenberg could just keep cooking meth, but too much meth and his clients start to overdose.
3. We didn’t elect the head of the reserve bank. Should he have that much power?
… Yeah, that’s a good point and the answer is… uhhh….. Don’t think about it.
