By Denis Hay
Description
Explore currency sovereignty and how Australia’s economic system can support social reform and public welfare.
Introduction
Australia’s economic debates often concern public debt, government spending, and fiscal responsibility. These discussions shape public beliefs regarding what is possible regarding public services and social welfare.
However, Modern Monetary Theory (MMT) offers a new perspective that challenges the conventional narrative that taxpayer funds limit public spending. Instead, it focuses on the reality that Australia, as a sovereign currency issuer, has far more options for improving public services.
This article will explain how MMT sheds light on Australia’s economic potential, addressing class struggles, inflation concerns, and the fundamental role of government spending.
By the end, you’ll see how better economic literacy can empower citizens to demand policies that help society.
1. The Basics of Modern Monetary Theory (MMT)
What Does It Mean to Have a Sovereign Currency?
Australia’s government has control over its currency, the Australian dollar. This means it can create as much money as needed for domestic spending, unlike households or businesses that need income to fund their expenses.
• Key Concept: The government can’t “run out of money.” The limit is the availability of real resources, such as skilled workers, infrastructure, and materials.
• Taxes do not directly fund government spending. Instead, taxes help regulate inflation by reducing the public’s purchasing power.
Why Comparing Government to Household Budgets Is Misleading
A common myth is that the government must “balance its budget” like a household. This is misleading because:
• Households must earn or borrow money to spend.
• The government, as a currency issuer, can create money as needed.
• Budget surpluses often mean the private sector has less money available, which can reduce economic growth.
Example: During the Global Financial Crisis (GFC), countries with sovereign currencies, such as Australia, could implement stimulus packages without “running out” of money.
2. Class and Power in Australia’s Economy
Who Holds the Power?
In Australia, economic power is unequally distributed between the capital-owning class and the working class:
• Capital-owning class: Owns businesses, investments, and resources. They earn income from profits rather than wages.
• Working class: Relies on wages to meet their basic needs and often has limited job security.
How Do Capitalists Make Profits?
• Businesses hire workers to produce goods and services.
• Workers are paid less than the value of what they produce so that employers can make a profit.
Example: In industries such as mining and agriculture, the working class generates significant value through labour but receives only a fraction of the profits.
Divide and Conquer Strategies
Employers often use strategies such as casual contracts and outsourcing to:
• Reduce wage costs.
• Prevent workers from organizing and bargaining for higher wages.
• Create worker divisions based on job roles, gender, or ethnicity.
3. The Role of Government Spending
Public Spending Shapes Our Lives
Government spending is essential for health, education, and infrastructure.
• Healthcare: Medicare relies on consistent public funding to ensure access for all Australians.
• Education: Public schools and universities depend on government investment to provide affordable, high-quality education.
Without sufficient public spending, these services deteriorate, leading to higher costs for individuals.
Spending Priorities Matter
Government spending priorities reflect political choices, not financial limitations.
Case Study: The Australian government gave billions to defence contracts while underfunding social housing projects. This choice worsened the housing crisis and increased homelessness.
4. Myths About Public Debt and Deficits
What Is Public Debt?
• Public debt refers to the money the government “owes” after spending more than it collects in taxes.
• Reality: Public debt is not like household debt.
• Example: Imagine a family that takes out a mortgage and must repay it over time. Unlike households, the government can issue its currency to meet its obligations.
• The government “borrows” by issuing bonds but can always meet its financial obligations as a currency issuer.
Example: When the government builds a new public hospital, it may issue bonds to manage the financial system, but it is not constrained like a private borrower.
Who Benefits from Public Debt?
• Wealthy individuals and corporations buy government bonds and earn interest.
• Example: Superannuation funds often include government bonds because they are considered a “safe” investment that guarantees returns.
• This system helps the financial elite while misleading the public into believing that government spending is constrained.
• Example: Instead of reinvesting in services like public housing, interest payments go to bondholders who may already have significant wealth.
Understanding a Sectoral Balance Diagram (In Simple Terms)
A sectoral balance diagram shows how money moves between different parts of the economy. In the diagram, there are usually three key sectors:
- Government Sector (Red Bar): This represents government spending and taxing. When the red bar is negative (below zero), the government is spending more than it collects in taxes – this is called a deficit. When the red bar is upbeat (above zero), the government has a surplus (collecting more taxes than spending).
-
Private Sector (Blue Bar): This shows how much money households and businesses have after accounting for their spending and saving. An upbeat blue bar means the private sector is saving more than it is spending. A negative blue bar means the private sector is borrowing or losing money.
-
Foreign Sector (Green Bar): This tracks Australia’s economic transactions with the rest of the world. If the green bar is upbeat, Australia is exporting more than it is importing, meaning money flows into the country. If the green bar is negative, Australia imports more than it exports, meaning money is leaving the country.
Key Insight from the Diagram
The diagram illustrates a fundamental rule:
The balances of the three sectors must add up to zero. This is called the sectoral balance equation:
(GovernmentSectorBalance)+(PrivateSectorBalance)+(ForeignSectorBalance)= 0
For example:
– If the government runs a deficit (spending more than it taxes), the private sector can save more, which is typically suitable for households and businesses.
– If the government runs a surplus (spending less), the private sector often must borrow more or reduce its savings.
Example from the Graph (2008-2010 Financial Crisis)
During the Global Financial Crisis (GFC), the red government sector bar was strongly negative, meaning the government increased its spending to support the economy. As a result:
– The private sector (blue bar) became positive, indicating that households and businesses saved more.
– The foreign sector (green bar) also remained positive because Australia continued to sell more exports than it bought imports.
Why Does This Matter?
This diagram helps explain that when the government runs a deficit, it doesn’t necessarily mean “bad management.” Instead, it means the government injects money into the economy, which can help the private sector save and recover during economic downturns.
The sectoral balance diagram shows how government deficits are linked to private sector savings and money flow between countries. It emphasizes that public spending can help stabilize the economy when households and businesses need support.
5. Inflation: What It Is and What It Isn’t
When Does Spending Cause Inflation?
Inflation occurs when demand for goods and services exceeds supply.
• If the economy is already running at full capacity, added spending can cause price increases.
• However, with unused capacity (e.g., unemployed workers), government spending can increase output without causing inflation.
The COVID-19 Example
During the pandemic:
• Supply chain disruptions led to shortages of essential goods.
• Some corporations raised prices beyond necessary levels, increasing their profit margins.
Key Point: Inflation was not caused solely by government spending but by corporate price-setting behaviour.
6. Class Struggles and Policy Decisions
Why Are Public Services Underfunded?
Corporate lobbyists influence government decisions, often pushing for tax cuts and deregulation.
• This results in less public revenue and underfunded services.
• At the same time, corporations receive subsidies and tax breaks.
The Media’s Role in Economic Myths
• The media often repeats the false narrative that Australia can’t afford to increase social spending.
• This discourages the public from demanding better healthcare, education, and housing.
7. Solutions for a Fairer Economy
What Should the Government Prioritise?
• Fully funded public healthcare and education.
• A public job guarantee to ensure everyone has meaningful employment.
Public Services, Not Privatisation
• Public pension systems can provide stable, guaranteed income in retirement.
• Private superannuation funds often charge high fees and deliver inconsistent returns.
8. Addressing Common Criticisms of MMT
“Won’t This Cause Hyperinflation?”
Hyperinflation is rare and typically occurs due to extreme events such as war or political collapse.
• Responsible spending focuses on managing real resources, not arbitrary financial limits.
“Will More Spending Devalue the Dollar?”
The value of the Australian dollar depends on international demand and economic stability, not just the amount of money in circulation.
9. Strengthening Public Awareness
Why Economic Literacy Matters
Understanding MMT helps citizens:
• Challenge harmful economic myths.
• Demand policies that improve public services and reduce inequality.
How You Can Take Action
• Attend community events that discuss public policy.
• Share articles that explain economic realities.
Conclusion
Changing the Conversation
Public spending decisions should be driven by public needs, not myths about budget constraints. Understanding Australia’s monetary sovereigntyallows citizens to demand policies that help everyone.
Q&A Section
Q1: Why can’t the Australian government run out of money?
A1: Because it issues its currency, the Australian dollar. Unlike households, it can create money to fund public services.
Q2: What causes inflation?
A2: Inflation occurs when demand exceeds supply. This can happen due to supply chain disruptions, resource shortages, or excessive corporate profit-taking.
Q3: Does public debt burden future generations?
A3: No. Public debt is money already spent on the economy. Future generations inherit the benefits of public investments, not a financial burden.
Call to Action
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