If there are two big economics ideas that have fired up the popular imagination during the Covid-19 epidemic they are
the universal basic income and modern monetary theory. And with the primary criticism of the first being the cost, the
second - which claims countries with their own currency can never run out of money - would seem to provide the answer.
But the Australian economist who coined the term MMT, Bill Mitchell, isn’t a fan of the UBI - a proposal he dismisses as
an unnecessary surrender to neoliberalism.
I spoke to Bill last month and the The Spinoff have published an article
I wrote based on the interview. But there’s a lot that didn’t make it into that story so here’s a full transcript
(edited slightly for sense ).
Can you start by telling me how you became interested in the issue of full employment?
If you think back to post war period, we had full employment in Australia and New Zealand. In Australia for example if
unemployment went above two percent the government would run the danger of losing office - such was the social
consensus. This Saturday [31 May] is a very interesting day because it’s the 77th anniversary of of the release on May
30, 1935 of the famous white paper on full employment
issued by the Australian government.
Most of the countries after the Second World War issued similar documents. These were the great mission statements of
the post war consensus. They had understood that the Great Depression had only really ended when governments started
prosecuting the war and bombing the hell out of each other. And the challenge for the peace time after the war was how
are we going to maintain the full employment that we’ve created and got rid of the Depression. What they realised was
that they could do that through the use of fiscal deficits and appropriate infrastructure programmes and employment
programmes. So these white papers - and they were called various things in different countries - but they laid the
blueprint for government taking responsibility for full employment: a job for all. And governments all around the world
signed up to various treaties - like the UN Human Rights Declaration and the International Labour Organisation’s
declarations and we saw this period where everyone could get a job. There was no under-employment …
There is a caveat on that isn’t there? It was white men who could get a job?
Yeah, I’m not talking about Nirvana here. I’m talking about an approach and a consensus that was for the times, relative
to social attitudes. And clearly we had a change in social attitudes in the early ‘70s and that brought women into the
workforce and gave them new freedoms. So I’m not saying that the 1950s, for example, was a utopian stage in our western
world - far from it. We had racist attitudes, we had xenophobia….
But there would have been the capacity to employ everyone who wanted a job?
My view is, of course. The only reason that full employment consensus delivered operationally - in other words
sufficient jobs for those who were lining up for them was that the public sector basically ran an implicit buffer stock.
Now in Australia - and I’m pretty sure the same sort of structure operated in New Zealand - you could always get a job
in some public sector area. Like the transport system, the railways, the local governments, housing, roads and
maintenance. All of the big infrastructure that were in the public sector in those days, telecommunications all were
able to to provide jobs fairly quickly. So the railways were a great example.
Where I grew up in Melbourne you could always go down to the railway yards and get a job on any day you wanted. This
buffer stock. There were always jobs there. Those jobs were low skilled. They were accessible to everybody. Whether you
had a mental illness, whether you were unskilled, whether you had a criminal past. Anyone could get jobs on the rail in
This was how we maintained full employment. We maintained it by strong spending in the private sector. We maintained it
by career orientated public sector jobs but we also maintained it by having this buffer stock of jobs. And if you look
around the world; Switzerland, Japan …. those who resisted the rise in unemployment in the mid 70s after the OPEC oil
crises - the ones that separated from those that had very high unemployment were the ones that maintained that buffer
So would the railways, for example, do extra maintenance or lay new tracks at times of rising unemployment?
In some cases there were jobs like that. That ebbed and flowed with the state of the private economy. But in the case of
other jobs they were more or less permanent.
As a young musician, who used to have a need for income occasionally, outside of the music, those jobs were loading
goods trucks down at the old Melbourne terminals. They were just wheeling boxes and crates on barrows. That was it. Very
unskilled work. But it was very inclusive work because everyone knew they could get a job if they were down and out on
That led me thinking about the fact nowhere in our history has the private sector ever supplied enough jobs relative to
those who wanted them and the only way we could maintain was the state playing a central role. That was when I started
going to university that was my thinking.
Then I did this course in agricultural economics in 4th year at Melbourne University and we went through the wool price
stabilisation scheme. Now this was a scheme - unsure whether it was in NZ - but the Australian federal government ran a
scheme to stabilise prices for farmers because the farmers had been lobbying the federal government to stabilise their
incomes because they were sick of the fluctuations up and down. A bounty one year, a drought the next year. And the
government agreed that when the wool clip was very strong and there was an excess supply into the market - relative to
the demand that was being produced - the government would buy that excess supply and therefore keep the price stable.
Match private demand with supply.
Is that a bit like the butter mountains we used to hear so much about in Europe?
That was European common agricultural policy and that was a different scheme really. The Germans were desperate to
re-invent themselves as citizens of Europe rather than plunderers and the French wanted German growing industrial
strength to subsidise French farmers so that’s how it the common agricultural policy really became the first major
European unity policy but the point why it’s different is that it worked on subsidies, and subsidies just encourage over
production. If you’ve got a per kilogram subsidy of course you’re going to produce as much as you can to get the
The wool price stabilisation was different. We had these big warehouses all around Australia called wool stores. So the
government would buy excess wool and store it and if there was a bad clip one year and there was an excess demand for
wool - which had driven the price up - the government sold the wool out of their wool stores to meet that excess demand
without forcing the price up.
This was late ‘70s I was doing this study and this was just after unemployment started to rise and neoliberalism started
to become the dominant way of thinking about the role of government and it was the precursor to the privatisation and
all of the deregulation. Unemployment had risen and that was due to the dislocation of the OPEC oil crises and the fact
the government responded to those with austerity to stop the inflation and that pushed unemployment up.
So I was doing this course and I was studying this scheme and I wasn’t that interested in wool - I can tell you - but I
was very concerned about unemployment which was one of the motivations for studying economics. I wanted to do something
useful. So while I was doing that course I had this idea that if if the government can do that for wool and stabilise
the price and effectively stop the farmers from losing income, why can’t they do it for labour? Why can’t they when
there’s excess supply of labour - which is unemployment - and there’s no bid for labour in the private market, why can’t
the government make the bid buy those labour services, put that labour to productive work - rather than wasted in
unemployment and of course when the private market improved because the plan I came up with was to buy that labour at
the bottom of the wage structure - so you weren’t competing for the private sector labour at private sector bids you’d
just be putting in a bid at the bottom of the bid structure - the wage structure - and a result the private sector when
it was improving again could just buy that labour back out again.
And the government in doing that wouldn’t be contributing to any inflationary spiral because it wouldn’t be trying to
bid for resources at market prices and that would help solve any inflationary episodes.The job guarantee
So are you saying it that it would be at the current minimum wage?
Not necessarily current … it would become the minimum wage … but at the time I thought the minimum wage was too low and
that we would want to use this as an industrial policy as well.
It’s what I now call the social inclusive minimum wage. A minimum wage that allows a person to participate fully in
society with dignity. Go to sporting events, go to musical events, go out to dinner occasionally, have a holiday and it
would push the minimum wage structure up.
Let’s talk about right now. There’s never been a greater need in my lifetime, anyway, for what you’re suggesting. We’ve
got a private sector that simply isn’t going to be able to do anything about the on coming wave of unemployment.
What are you proposing? Who would decide what the jobs should be? Is there a limit to how many jobs will be created?
No. The idea of a job guarantee is that it’s an unconditional job offer. At a socially inclusive minimum wage to anyone
who to take that job. There’s no time limits…. It’s not a budgeted allocation and once that’s exhausted you finish. It
has no job period. In normal times the pool of job guarantee workers would be very small and in bad times like now the
pool would be very large.
And who decides what a valuable job is?
In the Australian context because of the federal system the federal government would pay for it because they have the
currency issuing monopoly and the capacity and the operation details would be down the bottom at the local government
We did a large research programme - a three year research programme - where we surveyed all the Australian local
governments and we asked them how many jobs could you design and oversee to meet unmet need in community services,
environmental services and basic infrastructure services and we asked them to cost it and all the rest of it.
We got multiples above the current unemployment at the time. And so the way in which these things have to work is for
local communities to identify unmet needs in their regions. You don’t want top down type imposition of what’s good and
what’s bad for a community. So it’s funded at the top and driven at the bottom.
So could indigenous communities and schools, for example, be the ones allocating the jobs?
It’s an incredibly flexible structure if you think about it. In Argentina in 2001 when there was the big meltdown and
they defaulted on a lot of debt and they had the bank runs and all the rest of it. They brought in sort of job guarantee
programme - called the head of household programme
. And what they did there was offered a guaranteed number of hours of work a month to one member of each household as a
sort of way to resolve the crises domestically. To sure up domestic demand and spending when their international economy
had collapsed. They allowed just local communities. Streets to get together. Householders in streets to form little
cooperatives to determine how the jobs would be created and what were valuable. And you got really creative solutions
turning up. The big national job guarantee in India does a very similar thing. They allow local community. It’s a very
You could allow parents and teachers association at a school to say we want some work done and we can sustain jobs that
aren’t going to be competing with existing jobs. So it’s not a structure that would undermine exisiting jobs and just
replace jobs. There’s so much creativity can come out of this.
You can really push the agenda and I tease audiences by saying that - I live on the coast near some of the best surfing
beaches in the world - I would offer job guarantee jobs to the surfers. Everyone says ‘What the hell has this guy gone
They’ll say ‘What will they do? And I’ll say well they can going surfing - but yeah the other thing they can do - the
big problem in our summers is drowning on our beaches. And who knows the water better than anybody? Who goes into the
most dangerous parts of the water to get out quicker to the waves? It’s the surfers. So what could the surfers for a job
guarantee which would be incredibly productive - they could offer water safety training to school children. And build an
understanding of our beaches and our water and the way in which that works. That would be incredibly productive because
it would reduce the strain on the emergency services, it would reduce the deaths during our summers. Who would oversee
that? The surf lifesaving clubs could do that.
There was a Dutch scheme
that provided a minimum wage for painters - and it ended up with warehouses full of unwanted paintings. A lot of
artists are convinced they should be paid whether it’s for writing poems or painting canvases. How does a community
decide who should be able to paint all day?
That sounds to me as though it’s a design problem that you don’t actually get productive output. For example I play in a
band and a lot of people who play in bands in Australia are typically unemployed and they’re all low paid because of the
nature of the industry. And at the moment the arts community is in crises because of the shutdowns. So I would hire all
of the musicians and sculptors and artists and painters on the job guarantee if they wanted to have a job. Now what
would they do? They would play their guitar and they would paint. But what else would they do? Well, here’s the design
issue. The musicians could go into school and conduct their rehearsals in schools halls and children could sit around
and watch the way in which music is put together. Doesn’t matter what sort of music whether it’s classical or jazz or
Children could ask musicians about their instruments and how they got motivation to do it. And all sorts of mentoring
could go on which would create a new knowledge set and a new way of thinking. And increasingly what we’re going to have
to do in our societies is broaden our concept of productivity.
Because we’re going to have to reduce our carbon footprint and we’re going to have to create low carbon industries to
create jobs and income. The arts is a great way of doing that.
And all of these projects would end up stimulating the private economy because people would have money to spend?
Our government has said it will spend $10 million locally in the search for a Covid 19 vaccine. Is putting a price tag
on it simply looking at it the wrong way from an MMT point of view? Is it a capacity issue rather than a dollar issue?
Well the general principle is that you should spend within your constraints. The way in which that general principle is
understood and expressed in the mainstream way is they think it’s a financial constraint. So they penny pinch. And they
start going “oh god ten million that’s going to stretch this… blah, blah.”
But the New Zealand government issues its own currency. The NZ dollar. That’s their monopoly. And it’s like saying that
two minutes into the second half of a rugby game the scoreboard sends out a message the game has to stop we’ve run out
And the crowd would say, that’s ridiculous you can type as many points into the scoreboard - these days with electronics
- as you want. The points are only limited by how many balls people can run over the scoreline.
And it’s the same with the NZ government spending capacity. It can put as many zeros and and ones into bank accounts as
it chooses, that’s not the issue.
The constraint are the real resources that are available. The specific problem that you’ve got is are there scientists
who can do that. And if you divert those scientists into that use from where they are from where they are now what does
that do for general resource usage and would the income produced by that resource usage drive the spending of the
economy of what the economy can produce.
So is this a case where according to an MMT way of think the government can create not only minimum wage jobs but high
paying skilled jobs if for some reason the private sector isn’t employing those resources?
A lot of progressives think that the job guarantee is the job panacea. But as one of the developers of that concept I
see it as being a very small part. A very important safety net. Because we know that when there are big downswings in
economies the people that disproportionately endure the burden are the low skilled. My feeling is it’s much better for
the world to have people to be able to have jobs when there’s a crises than to be unemployed.
So the job guarantee is a small but essential part of a civilised society but in general we want to aspire to much
higher than that and we want to aspire to lots of skilled work, and high knowledge and high value added and high
productivity work both in the private and the public sectors.Who will do the shit jobs ?
If you have meaningful, useful work that you’re doing for a liveable wage it seems to me that will cause major problems
for business owners when they try and attract people to work at, say, a McDonalds restaurant or deliver food. Companies
are going to have trouble competing
If you go back to the true employment era vacancies always outstripped unemployment. And that created what I’ve called a
dynamically efficient labour market because that forced the onus back on firms to produce interesting jobs, amenable
working environments, good pay… Capricious employers would find it very hard to attract labour.
It was a win win for everybody because the firms were able to achieve high productivity and we had strong productivity
growth in that era. That generated the capacity to provide high incomes and high incomes provide high profit.
Is that when the risk of inflation comes in? Because if businesses are competing for labour and need to pay more, which
is one way to make a job more attractive, that could see prices rise couldn’t it?
That’s why I said the high productivity provided the space for the high incomes. Real wages and real incomes can grow
within that productivity envelope without causing any cost pressures and in those days we had very few bouts of
inflationary pressures, we had strong growth in real incomes and we had strong growth in productivity.
In my view the movement precarious work and the gig economy is unsustainable. It’s a race to the bottom that’s going to
deliver us with ongoing chaos as we go forward. So a policy that puts the pressure back on employers - that if they want
to stay making profits they have to restructure their work places to attract labour. We’ve had this situation where
capital is not investing very much any more because they’re pushing more and more money that they used to invest in
productive capacity and productivity augmenting capital they’re pushing it into financial speculation. Now that’s
unsustainable. That’s not going to produce prosperous societies. It’s not going to deliver reduced inequality like we
had in the full employment era. We’re seeing rising inequality. And eventually that creates social instability. And
there’s a reason why in the late 19th Century trade unions were formed and governments were forced to create welfare
states it was because society had had enough of the brutality of capitalism and they were prepared to maintain
capitalism without revolution as long as the government mediated the greed and created a more equitable, more upwardly
We’ve gone through that period. Then we’ve had the emergence of neoliberalism which is retrenching a lot of those gains
made and now we’re going to turn the circle again and we’re going to pressure government to look after us better.
What was it that caused the very high inflation in the late ‘70s?
In October 1973 oil prices doubled over night. It was part of the Arab resistance to the Yom Kippur war and the
occupation and all of that stuff. The problem was that oil dependent countries - most countries - suddenly faced an
imported raw material shock. So all of us faced and what that meant for all of our countries was that our domestic real
income was now lower. So the amount of income that could be distributed to domestic claimants profits, wages were now
lower. The question was how was that loss going to be shared and of course at the time the governments didn’t have the
forethought to work through a machinery and institutional structure to solve that problem. And the trade unions were
quite powerful in those days and price setting power was concentrated in the hands of businesses and employers and they
had an almighty barney as to who was going to take the loss.
And you had a lot of real wage resistance which meant workers kept pushing up their nominal wage demand to protect their
purchasing power and firms would push up their price margins to protect their profit mark up.
There was no institutional structure to manage the conflict over who was going to share the loss the imported raw
material shock.What’s wrong with a UBI?
What is it you don’t like about the UBI?
The way I understand the monetary system tells me that the currency issuing government like New Zealand can buy what
ever resources that are available for sale in that currency - without question including all idle labour without
So once you understand that then you can immediately conclude one other thing which is that mass unemployment is a
political choice. It’s not something amorphous, it’s not out of reach, it’s not something imposed on us by Mars. It’s a
political choice and when there’s mass unemployment like there is now, government’s have deliberately chosen to allow
that to happen because they could solve it.
So once you understand that through a combination of a job guarantee and higher skilled public service employment.
A lot of progressives are advocating UBI. Neoliberalism has built up this myth that governments can’t do anything about
unemployment. That if they do - this is the NARU - natural rate of unemployment doctrine that underpins neoliberalism.
And what they’ve told the public is that only the private sector creates jobs not the public sector. Well that’s a lie.
And that’s because they’ve got an ideological agenda to strip the public sector of its capacity to increase the well
being of of us and to use the capacity to create more capacity for the top end of town. That’s neoliberalism.
So when progressives promote UBI as a solution to poverty they’re really buying into the neoliberal myth that the
government can’t create work. That somehow we’re powerless to do anything about unemployment and what we should be doing
is solving the poverty problem of unemployment.
My view is that that is surrendering to the neoliberal argument. The whole of neoliberalism has been based on
individualism and the break with the old concept of collectivism and the old idea that there was such a thing as
society. And society was enriched by us working together in collective ways and understanding that occasionally the
system would fail. And the way the neoliberals have constructed unemployment is as an individual failure. It’s the
failure of people to skill themselves up or look for jobs properly. They’re lazy dole bludgers.
Now my view of unemployment is it’s a systemic failure to create enough jobs. It’s a failure of policy ultimately. Once
the non government sector has made its spending and that’s generated sales and jobs, what’s left over the public
This idea that all you have to worry about is yourself, I just want to do my art - I keep hearing that among the UBIers
- I just want to be creative …. Well that’s a surrender to this individualism. While you’re doing your art, who produces
the food? Who runs the buses? Who makes your art supplies people who have got work.
The third problem I’ve got with it. It constructs the individual really as a consumption unit. So all you’ve got to
worry about is giving an individual who we’re depriving the opportunity to work - we’ll give them a dollop of money so
they can keep consuming and keep the surplus generating process going. We don’t care about them as social beings, we’re
denying the fact that work is much more than just earning income. In all of our societies it’s a way that we measure our
self-esteem, our contribution, where we meet our future partners, where we form social groups, where we achieve entity
and whole and our self-confidence and our meaning in a way.
Now we can broaden the concept of work but if we just isolate people in unemployment, their social networks shrink and
they lose meaning, they lose self-esteem and they become really introverted.
And what the UBI is saying is we’re just going to give them an income to prop up their consumption.
They have this utopian idea that all these people are going to burst forth in creativity and find their true selves.
What unemployment does in a society that still values paid work as exemplar of contribution all you get is people
alienated and dislocated from society.
That creativity won’t emerge. It’s much better to have full employment, broaden the scope of what we mean through public
sector employment by productive work and over time shift the way we think about contribution and being and meaning in
Do that within a paid work environment you won’t be able to achieve that in a non paid environment. We as a society are
not willing to accept able body people, or people who want to work - even those with disabilities who want to work -
we’re not willing to accept them getting cash from the public sector for doing nothing.
If we ignore your philosophical and moral assumptions and just say is it possible - using an MMT understanding of the
monetary system - to pay for the UBI: what’s your answer?
No question you can pay for it. And the UBI advocates have done themselves no favours by adopting all the neoliberal
myths about whether the government can afford things.
The debates about the taxes required are irrelevant. They come up with these elaborate how to pay for schemes which
force the employers to pay taxes and all these weird schemes.
The question is then how much you’re going to pay. With a job guarantee you’ve got what I call an inflation anchor. Why?
Because if there’s inflationary pressure within the economy the government can always redistribute workers with tighter
fiscal into the job guarantee pool and because they’re buying a fixed price, the redistributing workers from an
inflating sector to a fixed price sector eventually you solve the inflation pressure.
With a UBI if there’s an inflationary pressure all the government can do is cut back the UBI or redistribute workers
back into unemployment. So in other words, the UBI has no inflation anchor and essentially adopts the neoliberal
inflation control mechanism which is using unemployment as a policy tool rather than a policy target.
To avoid that they’ve got to set the UBI very low which doesn’t solve the poverty problem.The role of tax
So the role of tax as MMT sees it is, one: to take money out of the economy if you start to reach an inflationary point;
two: to redistribute wealth, and three: to discourage activities you may not like… so carbon taxes and that sort of
thing. Is that it in a nutshell?
There are a number of reasons. One if the resource allocation reasons. That is if you don’t want people to smoke or
drink to excess put a tax on it. If you don’t carbon polluters to go wild put a tax on it. So in other words you push
the price up and reallocate resources to other things.
In MMT taxes play an extra role. Take two scenarios. Scenario A is you have lots of idle resources like you have now.
What are the constraints on government spending in that context? None.
No financial constraints no real resource constraints. And so the NZ government should be spending more and more to
bring those idle resources back into productive use. Up to the point where there are no more idle resources, then you
hit the constraint.
Scenario B is that point - you’ve got full employment. Then if the government wants to run a green transition programme
it’s going to have to increase the size of the public sector, it’s going to have to fundamentally transform production
and consumption patterns, so it’s going to want to command more real resources. So if you’re at full employment already
and the public sector wants to get more real resources into the public sector if it tries to compete for those resources
in the market by bidding them up at market prices and saying to labour we’ll pay more you’re getting currently then it
will cause inflation. So what does it have to do? It has to deprive the current users of those resources of that use.
How does it do that? Reduce the current users’ purchasing power. How does it do that - a number of ways but a really
powerful way is to impose taxes.
Do you have a favoured tax?
I favour the taxes that are most simple to implement administratively and are the hardest to evade: broad based
consumption taxes. The progressives will then say: “oh yeah but they’re regressive - regressive in the sense the tax
burden is highest on the lowest income and that’s true. But you can’t get stuck on that. What you’re concerned about is
not the individual components of the fiscal policy - remember fiscal policy is spending and taxation - what you want is
a progressive outcome over the whole mix. So just being obsessed with one component is not going to achieve a
What you want is an efficient tax system that will create the real resource space that the government can spend into
without causing inflation - that’s the role of taxes in modern monetary theory. And you want to do that in a way that is
equitable and unavoidable. Then to solve the regressive characteristics of a broad based consumption tax, for example,
you have to make sure your fiscal spending is highly progressive and that’s easy to achieve. You can target spending at
low income areas of education, health, childcare, training.
If you focus on income taxes you know they’re avoidable by the top end of town.Treasury bonds go brrrrrrr
Can you clarify the difference between QE ad the Reserve Bank buying bonds from Treasury? They both seem to get called
Look the term printing money should be expunged from the narrative. I never use it. It’s used as an ideological weapon
against people who advocate government spending on welfare and helping the poor and disadvantaged and creating
employment. And people who use the term know that it evokes images embedded into our psyche of Zimbabwe or the Weimar
Republic. Wheelbarrows going to the bakery and mad public officials in basements running printers wild with money.
What QE is is a simple asset swap. The central bank says to government debt holders we will buy that debt off you and
we’ll type some money into the bank system to facilitate that and those numbers go into bank accounts that show up as
bank reserves. Reserve accounts are the accounts commercial banks hold with the Reserve Bank of New Zealand.
A lot of the people think that QE is helping the banks get more money to lend … so by providing them with more reserves
they will loan them out and that will help fund investment and stimulate the economy. What they don’t understand is
banking doesn’t operate like that at all. Banks don’t lend out reserves. The reserve accounts are there just as part of
what we call the clearing system - the payment system So every day all sorts of transactions across banks are coming in
and they have to be resolved and they’re resolved in through these reserve accounts: debits and credits for banks and
that’s what these reserves account are. Banks don’t need reserves. In a modern banking system loans create deposits.
Banks are waiting for credit worthy borrowers to come through the door and then they’ll type a number into an accounting
system and that will create a loan and immediately a source of liquidity a deposit.
The central banks are competing for bonds in the secondary bond market where bonds are bought and sold. They’re pushing
up the demand for bonds and driving down the interest rate on them hoping that will stimulate investment in productive
investment…. The flaw is that when times are very bad not many people want to borrow no matter how low the interest
When the government is spending it spends by the Treasury Department instructing the Reserve Bank to type numbers into
bank accounts on its behalf. For procurement contracts for pensions and what have you. Numbers are just getting typed
into bank accounts. No printing going on.
Now whether they match that with debt issuance or whether it reflects the expectation of tax receipts it doesn’t matter
at all. They’re just typing numbers in every day.
So when they’re issuing or buying bonds so they can pay for this stuff they’re just unnecessarily committing themselves
to paying an interest rate - it’s completely unnecessary?
The debt doesn’t fund the spending. The spending is funding by the fingers typing the numbers into the bank accounts.
So in effect are we just transferring wealth to the commercial banks and finance houses?
The practice of issuing government debt to match the deficits of spending above taxes is a legacy of the Bretton Woods
system - the fixed exchange rate, gold standard system.
It was necessary then because the governments had to be very careful about the amount of liquidity in the system because
the central banks were committed to maintaining their exchange rates at fixed parities. If there were too many NZ
dollars in the system then the exchange rate would start to fall below the agreed parity and somehow you had to withdraw
that. So they had to be very cautious when they spent dollars into the economy to make sure that that didn’t make excess
dollars. That would drive the exchange rate down. So debt was a very effective tool to drain dollars.
Now in this freely floating exchange rate that practice is unnecessary. So why do governments continue to do that? Well
because of corporate welfare. The debt is corporate welfare. It provides the speculative investment community with a
risk free asset which they can use to speculate. And that was demonstrated very clearly in Australia towards the end of
last century. The Australian government had been running surpluses and not re-issuing debt when it matured and by the
end of the century the bond markets were very thin. So what does that mean? There wasn’t many debt instruments to be
traded and speculated with. Who complained about that? The big investment banks. The Sydney investment exchange. They
said we have to have a minimum amount of debt. Why? Because we use it to price all of our other risky assets and we use
it as a vehicle to shift funds when times are uncertain.
The Australian government agreed - even though it kept running surpluses - so all the mainstream explanations for
issuing the debt were void - they agreed they would continue to issue debt to satisfy the demand for a risk free asset
to the speculative community. It’s corporate welfare.
If the money supply increased by, say, 30 percent to pay for all the jobs required wouldn’t that logically mean our
currency was worth something like 30 percent less compared to other currencies?
The value of the currency has no relation to the fiscal position that the government takes. Historically you can’t find
any robust statistical relationship and when Australia for example Australian dollar plunged to 49 cents US in the late
‘90s it was when the government was running the largest surpluses.
There is no relationship. What the foreign exchange community wants and what determines capital inflow and a demand for
a currency is rule of law. They want to know that contracts are going to be enforceable and they’re not going to be
investing money and have government take it off them, they want skilled labour and investment opportunities and they
want stable government. All of which New Zealand has and is very attractive to the global community. They don’t care
less whether your government running deficits. They prefer full employment. Recently I’ve been doing workshops for some
of the very large investment banks and pension funds and what they’re telling me is the fiscal austerity era has
undermined their business model because they’re used to being able to leverage off large scale infrastructure projects.
So if the NZ government has some very nice green infrastructure projects that create good quality employment and good
wages and provide investment opportunities for the investment community your currency won’t suffer at all.
So what determines how much foreign currency we can spend. What are the limits on that?
The ability for a country to run a trade deficit is dependent upon the desire of the rest of the world to accumulate
financial claims in your currency. So Australia has run a fairly large external deficit of 3 or 4 percent mostly and
that’s allowed us to enjoy massive material prosperity. And that’s because assets held in Australian dollars are seen as
desirable because we have a stable government, we have a highly educated workforce, we have contractual certainty and
rule of law: same as New Zealand.
So it only becomes a problem if you borrow in someone else’s currency?
A currency issuing government like New Zealand should never issue liabilities in a foreign currency. That’s what the
problem of Argentina was. There’s no need to do that. And of course the global financial community and the IMF are
always trying to push foreign currency loans on disadvantaged governments. But that’s the last thing they should ever
do. It’s tying you to chaos and future disaster because then you have to generate export revenue in that foreign
currency and soon as export markets take a diver, for whatever reason, nothing to do with your country and you run out
of currency to service those foreign currency loans you’re cooked.