Menzies vs Chalmers

Robert Menzies boldly boasted of £120,000,000 budget deficits in August 1962, as emphasised in Gareth Hutchens’ article in the ABC during the Pandemic, headed “Unlike today’s Liberals, Robert Menzies boasted of delivering large budget deficits“. In contrast, Labour Treasurer Jim Chalmers boasted of delivering consecutive budget surpluses in September 2024. This radical shift in perspective occurred in the late twentieth century, due to the transition from Keynesian economics to Friedman’s monetarism and neoliberalism, which Thatcher and Reagan endorsed. The Thatcherite-originated misinformation that fills the media and public discourse suggests that the Government is like a household and must balance its books. The household analogy as a perspective on federal monetary systems lacks any correlation with national accounting book records. It fails to appreciate the two-tiered monetary system, which no business emulates. The closest parallel I can imagine to a two-tiered system is a company keeping two sets of books: one for the tax authorities and one for the investors. Even then, it is not even a decent approximation.  The press and public were not always so uninformed about why it matters or who has the proper perspective: Menzies or Chalmers? The contemporary view primarily focuses on the significance of public debt, while private debt is considered a matter of individual concern, not national.

Understanding money flows requires understanding the distinction between the nature of Central Bank reserves, which are exclusive to banking, and deposit money in private banks (and cash) circulating in the economy for the private equity/credit of firms, states, municipalities, and citizens. The essential distinction is to which institution the liability for “money” is due. Bank reserves are the Central Bank’s liabilities, while deposits from corporations, states, municipalities, and citizens (both foreign and domestic) are the liabilities of private banks. Economists often confuse the two-tiered monetary system, in which only Banks can hold reserves, with the economy’s money supply. They rarely discuss money in terms of liabilities because accounting is not an orthodox economist’s discipline. Despite this shortcoming, the  Bank of England has made efforts to educate economists, the media and the public.

Framing the question of who held the valid perspective, after a historic Labour victory, creates a challenging choice between a conservative leader and a progressive Treasurer. Many an article or social commentary uses Chalmers’ surplus as proof of Labor’s economic competence, but conveniently forgets that the Liberal’s John Howard government also generated public surpluses. This is an emotional challenge for progressives and conservatives alike, who contend Margaret Thatcher’s assertion that the government has no money of its own is correct, and it all belongs to the Taxpayer.

The Two-tiered Monetary System

Today, there is a lot of talk about “balancing the budget” and “fiscal responsibility,” and despite the Hudson Institute’s argument that it is a myth, even their claim misunderstands. Typically, comparisons are made between the federal budget and household or business budgets. While often repeated, this analogy is flawed even though endorsed by most orthodox economists. Herein lies the reason for recognising that modern economies are two-tiered, as accounting reality establishes that reserves are distinct from privately banked money supply.

Wall Street primary dealers, mandated to buy government bonds to underpin US Treasury auctions, know that central banks can manufacture reserves at “whim”. Reserves are the Central Bank’s liabilities and are only distributed via accounts at the central bank to the registered private banking system. These banks all hold accounts at the Central Bank containing what is referred to as “M0” money or “vertical money”. This is independent from the rest of the economy that hold deposit accounts at private banks that is known as “M1” money or “horizontal money”, in the finance industry.  The Australian Central Bank’s computer (the RITS system) stores reserves as computer entries. Vertical money moves between bank accounts with the central bank, and deposits can be moved amongst private accounts within the Private banks.  But reserves and private deposits do not mix. Banks use reserves to pay for movements of money in the second tier of the monetary system (i.e. deposits in private banks).  Governments use reserves to pay banks to deposit money into a person’s account for — say for example, a welfare cheque.  Banks, pay other banks with reserves but they can not utilise reserve “money” to buy goods and services or earn interest outside the banking system. If you take out a loan from a bank that creates a deposit account with your bank but it needs to “travel” to another bank to pay for a house, for example, then the “travel” is done via the reserves, not the deposit. The Federal reserve’s function is to facilitate the transfer of account balances between banks which then are reflected in deposit balances of households and firms. To illustrate this two-tiered system as accounting records for the entities concerned.

Central Bank reserves are their exclusive liabilities, and deposits are the exclusive liabilities of private banks. Never the two will overlap, except for the exception of printed money.  Every banknotes – foreign and domestic – in your possession tells you which central bank hold it as as its exclusive liability.  To issue notes at a private bank, that bank must surrender its equivalent value of reserve balances to be issued that cash by the Central Bank. None of it says it is the property of or liability of the Taxpayer, no matter what any media, or neoliberal politician says otherwise.  To be the printed creation of or property of the taxpayer and to be passed off as the liability of the Central Bank is a criminal offense in every country on Earth.

Reserves are utilised to facilitate all financial transactions between banks, including government expenditures, and taxation, as well as the circulation of physical currency notes and coins. To illustrate the relationsip by way of a Ven diagram:

The real source of Currency.

Allow me to use a personal anecdote using my father’s wallet to explain monetary origins. I remember his wallet filled with Australian pounds, shillings, and pence. However, my father began using Australian decimal currency in 1966. As a child, I loved collecting obsolete coins, but I don’t know what happened to my collection across multiple house moves. No decimal currency was printed or supplied by the taxpayer. The government has to issue it from scratch (irrespective of what exchange they provided for one’s pounds, shillings, and pence), like any other currency in the globe. Every Australian note you carry reminds you it is the liability of the RBA. In Australia counterfeiting is a federal violation punishable by up to 14 years in prison for individuals and fines for corporations, it is and never has been “taxpayer money”. Perhaps we should lose the “taxpayer’s money” narrative.

The Reserve Bank issues Australian currency, not domestic taxpayers, not China,n not the US, or any other trading partners. All currencies today are issued by governments through the Central Bank they created as an act of legislation that is the bank of Government no matter what legislative illusions of independence each maintain.

First premise: The citizens of a monetary sovereign country are the primary users of the currency, and the Government is the issuer of the currency. That status is the primary distinction that matters most when understanding the fundamentals of money.

Exchange Settlement

“Reserves” as Central Bank liabilities are what modern banks need operate and are managed in the “Exchange Settlement system” (ESA) in Australia. The ESA runs on the RITS system. In 2001,  my colleagues and I in the RBA’s technical computer department rebuilt the ESA monetary system’s on an Alpha VAX/VMS OS computer system to reverse the Reserve Bank’s outsourcing of management of the RITS system. Besides providing operating system experience as a former Digital Equipment (which initially made VMS systems) employee, I personally redesigned the RITS system’s operations and inhouse user security Interfaces in 2001.

Bonds: Long-term Deposits with the Government

Government deficits are the difference between spending and taxes.  It is a difference not a debt but that difference is covered by the sale of Government Treasury securities/bonds one reason of which is reminiscent of the era before 1971 when monetary systems were backed by the value of precious metals (i.e. gold). Not as necessary to do in the era of fiat currencies.  Nevertheless, we sell bonds and incur an interest debt.  Government security sales are an asset swap of money for an interest-bearing “note”. The Australian Treasury issues these, essentially, promissory notes for sale, and the Reserve Bank pays the interest debt (coupon rate) when due. Treasury securities are like savings accounts with the Government. Operationally, Bonds are similar to lending cash to a bank for a long-term deposit to secure interest payments, except that investors lend their money to the Treasury for a bond that bears interest. Investing in bonds tends to be more profitable than long-term deposits in banks. That interest expense is what we refer to as the “government debt”.

Bonds like Taxes, absorb money from the economy and dampen demand for goods and services.  Bonds are although assumed “to pay for” government deficits created by government spending.  That spending creates a private sector surplus whether it is for infrastructure, education health care, subsidies, transfer payments of wages for public servants.  The accounting flow for spending is as illustrated:

Second premise: The government’s deficit creates a private sector’s surplus or increased the net worth of recipients. It isn’t a loan, it is a payment, and it is not expected to be returned except where taxes are applicable.

Grandchildren’s debts.

Popular economic folklore asserts that government deficits are disadvantageous for households, and to add emotional weight, they are nefariously framed as a debt your grandchildren will owe. That framing is perfect for fostering debt fears in parents. in reality the Government’s deficit increases the net worth of the household, as demonstrated by following the accounting transaction between institutions.

 Buying a bond, creates a deficit in the buyer’s accounts and a surplus in the Treasury’s reserve accounts. Banks, individuals or businesses give their money to the Government in exchange for bonds. These bonds earn interest, which is the debt the Central Bank pays. When the bond matures, the Reserve Bank reverses the asset swap and the money originally paid for the bond is returned like a banks does for a long-term deposit.  Because Bonds are transferable, the whom, that is paid might not be the original person/bank/corporation, but that entity will have paid for the value of that transfer.

Your grandchildren will never have to pay the interest debt of a bond; only the Reserve Bank is responsible for that. The same bank that issues the State’s currency. The Reserve Bank creates reserve “money” using keystrokes in a computer system called RITS and pays the interest on the bonds.  In fact, as an investor, you can leave bonds to your grandchildren as Government Securities are transferable, which would be a bonus, not a debt. So, not a burden to your grandchildren, so perhaps we can also lose that narrative.

Third premise: The “borrowing” of the Government to cover deficits in spending is an asset swap with the private sector that drains money from the private economy and “lends” it to the Government for its central bank (which issues money) to pay the interest on bond maturity later. Every central banker involved in monetary operations understands that it is their job to generate the money the Government spends first into the bank accounts of its citizens or firms.

Cash, Loans & Spending

When government spend it involves creating the reserves it needs to transfer to the balances of private banks. The bank that receives the reserve balance, and credits the allocated recipient’s account with the private bank. The accounting transaction is the same if it is welfare cheque, a bond interest payment, or a subsidy to a fossil fuel company or to pay for excessively expensive AUKUS submarines. When these funds aren’t available because the government decides to spend less than it taxes (known as a government surplus),the money supply shrinks. The citizens in an economy may decide it wants a greater money supply, in which case  consumers borrow from banks. Private banks, not the Reserve Bank of Australia, are liable for “M1 money” which they supply as deposits in customer’s accounts when they take out loans. The only role the Reserve Bank’s reserves play, is to transfer these loans between banks, only where that is required.  Again, it is encumbent on the Reserve Bank to ensure there are enough reserves available to banks, to facilitate these transfers, in which case the reserve balances are added or subtracted from, as is required. As an example of such substractions, taxes paid reduce the balance of reserves held by banks as it reduces money in the economy but adds to the Official Public Account (OPA) of Treasury. It is no longer part of the private sector. In essence, it’s deleted from the economy.

Accounting summary

So, if one might summerise the transactional movements that affect the accounting balances of the two-tiered economy of public and private monetary systems, with particular reference to how these transactions affects the Government reserve accounting balances, it would appear as follows:

(1) Taxes drain money from the economy but add to the reserves in the OPA account.  

(2) Government spending drains money from the Reserves but creates a surplus in the private economy.

(3) Treasury’s bonds add money to the reserves but drain money from the private economy.

(4) Debt servicing (interest on bonds) drains money from the reserves but adds to the private sector.

(5) Printing hard currency reduces banks’ reserve accounts and the Central Bank reserves. It supplies hard currency to the citizens of the economy via the private banks.

And finally – and this is where Menzies understood what Chalmers seems oblivious of:

(6) Surpluses mean taxes (drains from the private economy) are larger than spending (creating money for the private sector), and so they drain money from the private sector and add to the Central Bank reserves. The net movement of accounting funds is a reduction of money in the private economy.

So, where do citizens turn when the Government restricts the money supply by running a surplus? They go to the Banks and loan money!

And what happened when Howard had a surplus? The same thing happened when Chalmers had a surplus.

What happens to private debt in the economy? It usually increases.  

Did that happen under Howard and Chalmers’ surplus regime? Yes.

Final Premise: Deficits put money into the private economy, and Surpluses take it out. However, private banking for the public is a separate set of financing, distinct from the Bank’s reserve account provision.

So, Menzies boasted about deficits because he supplied more money to citizens. On the other hand, Chalmers’s boasting about surpluses means he is pushing citizens into higher private debt who do not have sufficient savings to weather the financial depletion brought on the inflated costs of living, because he is draining the private economy of economic resources.

References

This is a continuation of my October 2022 submissions in accordance with the review of the RBA announced by Treasurer Jim Chalmers in July. The continuation of my letter to the RBA addresses some of the public’s misperceptions concerning money, banking and the Reserve Bank of Australia. The first part of the letter appeared in the previous issue of Auswakeup, listed as part 1.

Misperceptions.

The issues of monetary approaches to affecting Unemployment and Fiat economies I have previously addressed are among many common public and media misrepresentations of the banking system. In these areas, it should be incumbent upon the government to educate the public through public broadcasting so that the expectations of the Reserve Bank are properly evaluated. These myths include:

• Banks can only lend out money they have from depositors.
• Credit is an extension of a money multiplier based on deposit reserves.
• Quantitative Easing is printing free finance into the money supply.
• Federal Treasury deficits are a liability to taxpayers.

At a Keystroke.

Money in Australia’s economy has two sources. First, that which the Government Treasury supplies through its fiscal agent, the Reserve Bank. In short, that money is spent into existence by the Federal Government. This money is called “Vertical” money, which exists within exchange settlement accounts between the Reserve Bank and the Private banks. As the public is not a joint holder of accounts of this type, such money is not available for lending to the public. Its only purpose is for interbank transactions, as well as the provision of hard currency (coins and banknotes) to banks for servicing the needs of their depositors. Secondly, a larger pool of credit via lending is generated “ex nihilo” in the economy through private banking, referred to as “horizontal” money. The Bank of England has explained this in detail. https://www.youtube.com/watch?v=CvRAqR2pAgw] When a bank lends, a deposit IOU is created within that bank using digital keystrokes. A customer’s deposit is both the bank’s liability and the customer’s asset. Deposits are fundamentally an IOUs from the bank. Similarly, when a bank makes a loan, the loan contract becomes a liability for the borrower and an asset for the bank. The banks create money for borrowers and also receive profit (in the form of interest) for themselves. There is a common banking franchise myth, that depositors provide deposits to participate in the funding of lending for which depositors receive interest payments for allowing the redirection of their funds.  In this misunderstood perspective, the “franchiser” is the Bank assigned the right to market and distribute money on behalf of the depositor. The perpetuation of this myth in public debate and political pronouncements does a disservice to the public good.

Deposits/Reserves relevancy

Credit creation is simply about a bank finding a credit-worthy customer with whom it can create a digital deposit as an account with that bank with the expectation of future interest payments. The loan to the borrower becomes a bank asset, with an accompanying liability created by a computer entry, which generates the deposit for the borrower. None of the aforementioned Bank reserves is touched, and neither are deposits. The exchange settlement Account reserves are used only when the borrower spends that deposit in another bank. The reserves of the lending bank held at the central bank are transferred to the account of the payee in the other bank. This is how all bank transfers work; by using the central bank’s reserve accounts. Instead of describing this process in high schools and economics courses more generally, educational institutions have failed to adequately explain how the monetary system works. The government and a properly educated Board of the Reserve Bank need to address these realities. In regard to my familiarity with this, I worked at the Reserve Bank between September 2001 and October 2002, where I was involved in operations and technical security teams.  I aided the reversal of the RITS system’s previous outsourcing of AlphaServers operating Open VMS previously managed by Austra Clear/SFE. At that time the money that churned between banks via their reserve accounts varied between $9b and $16b daily.

Quantitative Easing

In a financial crisis – such as what occurred during the pandemic – it became evident that excessive exchange settlement reserves were needed. The overused strategy of Central banks globally during the Pandemic was Quantitative Easing. The often-encountered talk of “printing money” is a red herring. Printing money depends on the demand for cash in the private sector – which is normally around 3% of the money supply – and never approaches more than a small portion of the digital money supply. Hard currency demand during the pandemic reached 17%. Digital money is the characteristic form of currency used in operations between the Reserve Bank and the private banking system. Quantitative Easing affects the money supply by increasing the banks’ ESA reserves at the Reserve Bank. This occurs when the Reserve Bank purchases Treasury bonds from the private non-bank sector (e.g. bond dealers, pension funds, asset managers) as well as from the private banks, and these purchases increase the volume of ESA reserves. This also means that more money is circulating in the private sector, which money may be used to pay off bank loans, thereby reducing the likelihood of further borrowings. Technically, increased reserves, while facilitating extensions of interbank transactions, have no direct impact on any credit creation expansion. Precisely what area of the economy Quantitative Easing serves is also of concern, as “employment growth” wasn’t one of them. The inequality of protecting financialised assets amongst the wealthy ruling class financial markets rather than the working class who lost jobs in the millions. As Adam Tooze, in his recent publication, “Shutdown”, observes:

“For the central bank, that meant holding interest rates down. Once again, it came down to financial markets. As far as anyone could figure out, QE worked by driving government bond prices up and yields down. Lower interest rates helped to encourage borrowing for investment and consumption. Lower yields also prompted asset managers to reallocate funds from Treasury markets, where prices were driven up by central bank buying, to riskier assets, like equity and corporate bonds. This boosted corporate borrowing and the stock market. It increased financial net worth and boosted demand. The supportive cooperation between central banks and treasuries in the common struggle against the coronavirus was thus, the central bankers adamantly insisted, no more than an incidental side effect of their frantic and clumsy efforts to manage the economy by way of financial markets. Despite the relentless accumulation of government debt on their balance sheets, the central bankers insisted that this had nothing to do with financing public spending. Their priorities were to manage interest rates and ensure financial stability, which in practice meant underwriting the high-risk investment strategies of hedge funds and other similar investment vehicles. Rather remarkably, they insisted that tending to financial markets was a more legitimate social mission than openly acknowledging the highly functional, indeed essential role they played in backstopping the government budget at a time of crisis.” [pg 149] [1]

When Financial markets become more important to the Reserve Bank than the well-being of the vast majority of Australians, then the bank’s philosophy is served and managed by too many businessmen/women who have a neo-liberal ideology to serve the interests of the few above that of the whole economy. As Curtin espoused, the Reserve bank’s original social mission is to “pursue a policy of low inflation, sustainable output and employment growth”. [2] This mission has evidently fallen away, as a consequence of the type of people chosen to run the Board of the Reserve Bank.

Taxpayer’s money?

Finally, It can be demonstrated simply by viewing the balance sheets (irrespective of the accuracy of dollar amounts) of the entities

• the Federal Treasury,
• Reserve Bank,
• the collective private banks and
• the collective non-bank private sector

that the deficit of the Federal Treasury is the combined surplus of the Australian economy’s private sector and foreign sector. Deficits are just the government’s way of provisioning the private sector. If a government wishes to pull the spending of an economy back and throttle the growth of an economy, it pursues a surplus for the Treasury, depriving the private sector of funds. John Howard, for example, achieved that when he throttled back the economy to provide the Treasury with a surplus. Consequently, the private sector, desperate for money, borrowed heavily from the Banks. Private debt expanded considerably under John Howard. [See here: The Howard impact or here: Debt, home repossessions portent for Australia poll]. But of course, Treasurer Jim Chalmers should already know this. Taxpayers are not on the hook for a federal government’s treasury deficit because that deficit just boosts taxpayers’ finances. The government’s debt is its problem, not ours, since the Treasury and Reserve Bank issue the dollar (which taxpayers don’t because that is a crime called “counterfeiting” for which it can prosecute us). The currency-issuing government can pay their debts at any time it chooses by simply issuing the appropriate quantity of currency to cover the debts. Admittedly, the wedging by political opponents and the Murdoch media would require of this government political courage, not financial inability.

Currency Issuing

Many members of the public believe that the issuance of Australian currency is the domain of the taxpayer. Aside from this being the description of the crime of counterfeiting (for which the Australian government would jail any offender), the Reserve Bank definitively sees the issuance of currency as its role. Despite the widely accepted myth about the existence of “taxpayer’s money“, the taxpayer is not an issuer of money, but rather is a user of it. The distinction between a money issuer and a money user is critical to the public understanding of monetary reality. The issuer of a sovereign currency is not operationally constrained and cannot be forced into default in its own currency. However, non-sovereign monetary currency issued or pegged to a foreign-issued currency such as we find within the Eurozone or for the example of Sri Lanka’s debts held in a foreign currency can, of course, lead to default. Australia, like Japan, the U.S., New Zealand and many others, are monetarily sovereign economies with no significant foreign debt and only face the constraints inherent in resource depletion and inflation. Users of Currency are everyone else, including taxpayers, municipalities, and the States and they certainly face monetary constraints. They must earn, budget and use the limited money they can acquire through business, taxation and exchange. Monetary issuers are not so constrained.

Knowledge is power

The problem is, if submissions for a public review of the functions of the Reserve Bank are to be effective, it is incumbent on the reviewers to have a realistic appreciation of how the banking system operates and the Reserve Bank’s role and function in Australia’s financial system. Holding to the public franchise myth, the NAIRU myth, and the Taxpayer funds myth, as many in the media (and possibly members of the Bank Board), will limit the usefulness of any submissions. Providing faulty recommendations to politicians who frequently use the analogy of a household budget to describe how fiat economies work is a recipe for disaster and subsequent legislative policies that will hamper the workings of the Reserve Bank to aid post-pandemic financial recovery. So we need governors and heads of departments within the RBA who know and understand inflationary causes, recognise the differences between supply vs demand causation and know that raising interest rates is an over-zealous intervention that cures symptoms by killing the patient.

Footnotes:

[1] Tooze, A. (2021). “Shutdown: How Covid Shook the World’s Economy.” Penguin Books Ltd. [pg 149]
[2] Edwards, J. K. (2011). Curtin’s Gift: Reinterpreting Australia’s greatest prime minister. Allen & Unwin [pg 142]

In September 2022, the Reserve Bank of Australia was opened to public assessment.  The submissions were to be part of a review announced by Treasurer Jim Chalmers in July. What follows is largely verbatim from my submission at the end of October.  This will be published along with other reviews on the RBA review website in the week of December 5th. The Review Panel – comprising Renée Fry‑McKibbin, Carolyn Wilkins and Gordon de Brouwer- assesses those submissions. Certain aspects of my original review used in-house vernacular, presuming a specific internal bank knowledge. I have added further explanations of those concepts to facilitate a better understanding of this two-part series. Beyond these additional explanations, this is essentially the content of my submission. There are more embedded links than initially provided to the RBA to aid your further exploration.

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Dear Minister Chalmers,

Thank you for the opportunity to contribute to this review of the Reserve Bank of Australia.

Themes

This submission covers Monetary policy frameworks such as adherence to the NAIRU and neoclassical “gold standard” mentality over that of monetary sovereign fiat economies. It covers RBA and Government communications about the Finance Franchise myths on Banking, in general. It is critical of the Board composition based on bias in inappropriate neoclassical education and the selection of business representatives instead of economists trained in the issues of fiat economies. Finally, it reviews the Interaction of monetary and fiscal policy with respect to RBA’s performance in applying monetary policy where fiscal policy is more appropriate. As a former employee of the Reserve Bank, I have some knowledge of the inner workings of the Reserve Bank. I understand the review of the Reserve Bank of Australia is underway to improve monetary policy and its success at realising its goals, governance by the Board, culture, leadership, and recruitment practices. Such a broad range of objectives has yet to be approached since the smaller incidental 1981 Campbell inquiry and before that, presumably at its inception in 1960.

Curtin

Over the last century, Australia’s Central Bank and economy have undergone many changes. In the previous World War, the Curtin Government asserted Commonwealth power over banking, which led to Ben Chifley’s later decision to legislate to nationalise the banks, effectively asserting Commonwealth control over money and credit as per the Commonwealth Bank Act of 1945. However, such nationalisation was later defeated in 1949, as the book “Curtin’s Gift” by John Edwards says on Pg 141. “Though the postwar Menzies Government amended Chifley’s central banking legislation to reintroduce a board, the Commonwealth’s last-resort power to direct the bank was retained in the legislation and remains today. The Commonwealth Treasurer has conferred on the bank an independent authority to make monetary policy, but it is a conditional independence to pursue a policy of low inflation, sustainable output and employment growth.” Curtin had also argued for two other changes,

1. Commit to a full employment policy to improve living standards and raise national development.
2. a floating exchange rate to free Australia from the fixed exchange rate with the British pound

Ben Chifley implemented the Full employment policy following Curtin’s full employment paper being submitted to Cabinet in March 1945. Until the rise of Neoliberalism in the 1970s, unemployment would remain dominantly at 2% (notably without substantial inflation).

Unemployment rate and NAIRU

This leads to the Reserve Bank’s first failure, which is its commitment to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The RBA’s adherence to the economic self-deception espoused by the Phillips Curve model falsely supposes a trade-offbetween inflation and unemployment exists. That trade-off was initially set at 6% unemployment, then later 5%, then for some 4% despite the evidence of Australian history. The NAIRU is a systematically flawed perspective on inflation generated by a nation’s economy approaching full employment that should have died in Australia in the 1950s. Specifically, after Ben Chifley’s success with the Full Employment policy in Australia demonstrated for 25 years, full employment did not accompany rampaging inflation. Menzies nearly lost an election when unemployment, rose to 53,000 people or 3% at the end of 1960. It did, although, settle back to 2%. Australia abandoned Full Employment policies in the early 1970s.  This led to increased unemployment and significantly growing inflation over the next decade. Supposedly this use of the Phillips curve fell out of favour after the great stagflation of the 1970s. Instead, this zombie economic perspective has been raised from the dead, evidenced in 2022 with the prospect of the RBA using that justification for raising interest rates. All purportedly to manage a disquiet of ABS’s unemployment measure at 3.5%. Notably for a working labour force over three times larger than that experienced by Menzies in 1961. Albanese’s claim in 2022 of the Job Summit was to seek a “Full Employment Summit” but baulked at the solution of the Curtin Government. Unfortunately, the neo-liberals of the political Party and the Bank adheres to the conservative myth of the NAIRU.

Instead of NAIRU, we should consider NAIBER – as a better alternative perspective, especially as the Bank incorrectly suggests we are already “fully employed”. [See Prof Mitchell’s analysis: Never trust a NAIRU estimate] Beyond Prof Mitchell’s frequent analysis of the NAIBER, Prof Steven Hail’s book “Economics for Sustainable Prosperity” explains it on page 242.

“NAIBER stands for the ‘Non-Accelerating Inflation Buffer Employment Ratio’. The buffer employment ratio replaces the unemployment rate with the ratio of workers in the job guarantee scheme relative to the total available labour force. This is the replacement of our existing buffer stock of the involuntarily unemployed and underemployed with an employed buffer stock of workers within a public-sector job guarantee. The scheme would be a shock absorber for the economy— expanding to employ workers when they have been shed from the private sector during a downturn, and contracting automatically as the private sector absorbs labour from the job guarantee scheme in an upturn. Ecological modern monetary theorists have referred to an ecologically sustainable NAIBER, or ESNAIBER, in the context of a job guarantee as an element in a transition to an ecologically steady-state economy, given the ecological constraints referred to above.“

The goal of “full employment” has been achieved if you conclude ABS measures domestic unemployment, which, as you can see from the graphs and my articles covering what should have resulted from the Job Summit [my article and graphs: Stagnating Summit’s Shortfalls]. This is why “what gets measured” is essential. I will not go into detail about the shortcomings of the ABS statistics as they are probably already well known, and if not, the article aforementioned herein, should inform you. Raising interest rates as a strategy to deal with inflations is problematic at best. The link between spending and interest rates is unreliable and unpredictable. Interest rates affect both supply and demand. Economic modelling of “supply and demand” is only relevant to highly atomised markets with many participants, like the primary sector. Secondary and tertiary sectors of the economy follow different models. Changes in interest rates can have a reverse effect on inflation. Higher interest rates only affect people with variable interest rate debts. They don’t affect fixed interest rate debt and people with no immediate financial obligation. Higher interest rates increase the income of creditors and redistribute income to the wealthier, rentier class, exacerbating inequality. Fourth, higher interest rates reduce the incentive to undertake debt and may cause “distress borrowing” to service existing debt or keep businesses afloat. The resulting Ponzi balance sheets do a disservice to the economy, and all of the above, risk yet another recession. The government should be applying fiscal, not monetary, policy to these issues rather than letting the Reserve Bank’s adherence to a disproven NAIRU theory collapse the economy into greater inequality.

FIAT economy

Paul Keating’s floating of the Australian currency in 1983 meant Australia entered a new economic space. We became a monetarily sovereign, fiat economy no longer tied to another currency or a gold standard (which even America had abandoned with the collapse of the Brenton Wood decisions in 1971). The implications of which even the Bank of England acknowledges even if neither our government’s political rhetoric nor Reserve Bank acknowledge. [Bank of England video: Money in the modern economy: an introduction – Quarterly Bulletin] Instead of shifting into this new space and engaging with this new paradigm of fiat economies, the neoclassical economic conversation stayed with the decades-old “gold standard” economics model. Still, neoclassical economics guides the decisions of the Reserve Bank’s mission to “pursue a policy of low inflation, sustainable output and employment growth.” [“Curtin’s Gift” by John Edwards pg 142] Problematically, even Board members of the Reserve Bank need to understand the basics of a modern monetary system. [Prof William Mitchell: The RBA has no credibility and the governor and board should resign]. The Reserve Bank’s role as the currency issuer for the government has been misunderstood by business board appointees blinded by the tunnel vision of their experience as currency users in the business community. Most of the Board are business people (five in number), three are neoclassical economists (Dr Lowe, Michele Bullock, & Ian Harper), and Dr Steven Kennedy is economics adjacent given his Doctorate was in the Economic Determinants of Health, which is not precisely about the Banking systems. None of the Board has any formal training in the economics of fiat economies or Modern Monetary economies. However, that isn’t to say their experience on the Board has yet to give them insight. Some suggest the RBA is best served with Board members selected based on expertise in modern monetary fiat economics rather than as political appointees because of their relationships with former Prime ministers. To this day, neoclassical economics still guides the decisions of the Reserve Bank’s mission to pursue a policy of “low inflation, sustainable output and employment growth” but has universally failed to achieve what Curtin & Chifley (and even Menzies) did for nearly three decades. Banking is widely misunderstood as a heavily regulated franchise industry acting as an intermediary between scarce private capital and borrowers. Modern finance is relatively scarce, and depositors are the source of money supplied to borrowers. [Cornell Law School paper: “The Finance Franchise”].

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My letter to the RBA continued to explore more of the myths believed by the public about money and banking.   The letter reviewed the recent quantitative easing while serving the needs of the highly financed wealthy. It did sadly little for the well-being of the larger Australian public. All these are available in Rba Review part Two.