Beyond the Budget: The Hidden Truth About Money

Have you ever considered the curious case of the household chore? Not the chore itself – that age-old struggle between parent and child, between order and chaos – but the system we often use to incentivize it. Enter: "Chore Bucks," a fictional currency an ingenious parent might create to motivate their offspring. A clean room might earn you five Chore Bucks, mowing the lawn, ten. These aren't real dollars, of course. They're slips of paper, digital tallies, maybe even colorful tokens, conjured from thin air by the parental authority. Yet, within the microcosm of the family, they hold real power. They can be traded for privileges, for treats, for those coveted curfew hours.

Now, what if I told you that this seemingly trivial system – the Chore Buck economy – holds a profound secret? A secret that unlocks a radical rethinking of how money works, not just in our homes, but in our nation, in Australia, the "Lucky Country" itself? This is the world of Modern Monetary Theory, or MMT, and it's about to turn your understanding of economics upside down.

The Curious History of Value, From Seashells to Bits and Bytes:

To understand MMT, we need to take a detour, a journey back in time. Forget the complicated formulas and jargon of modern finance for a moment. Imagine a world without money. A world of barter. You, a skilled fisherman, need a new spear crafted by the village blacksmith. You offer him a basket of fish, he crafts the spear. A simple exchange. But what if the blacksmith is allergic to seafood? What if he doesn't need anything you offer? The system stumbles.

This is where money enters the picture. Throughout history, we've used all sorts of things as currency: seashells, salt, even 4 tonne stone discs on the Yap islands. These early forms of money often had some intrinsic value. But over time, something fascinating happened. We moved to "fiat" currencies, money that has value not because it's made of precious metal, but because the government says it does. The Australian dollar, the US dollar, your child's Chore Bucks – they're all fiat currencies. They are backed not by gold, but by trust, by a collective agreement, and critically, by the government's power to levy taxes.

The Economist Who Dared to Ask "Why?":

The seeds of MMT were sown long ago, germinating in the minds of unconventional thinkers. One such thinker was Georg Friedrich Knapp, a German economist who, in the early 20th century, championed a radical idea called "Chartalism." Knapp argued that the value of money stemmed not from its material composition, but from the state's power to demand it in payment of taxes. Think of your Chore Bucks again. Why do your kids value them? Because you, the household authority, require them to pay their "room and board tax" in Chore Bucks. Suddenly, those slips of paper become essential.

Fast forward a few decades, and we encounter another iconoclast: Abba Lerner, the mid-century economist who developed the concept of "Functional Finance." Lerner, a man who wasn't afraid to challenge the status quo, argued that governments should use their fiscal powers – spending and taxation – to achieve full employment and stable prices, not to chase the phantom of a balanced budget. In the Chore Buck economy, this is akin to you creating new chores when your kids are short on Bucks, not because you "need" the work done, but because you want to keep them engaged and productive.

MMT didn't just appear out of nowhere. It was built on earlier ideas like Chartalism and Functional Finance, but it also borrowed from other less mainstream economic thinkers, like those in institutional economics and post-Keynesian economics. All these different ideas came together to create MMT as we know it today. Economists like Warren Mosler, a former Wall Street insider who saw the inner workings of the financial system firsthand, along with Bill Mitchell, Stephanie Kelton, and Randall Wray, synthesized these ideas, refined them, and brought them to the forefront of economic debate in the late 20th and early 21st centuries.

The Myth of the Household Budget: Why Your Government Isn't Like Your Family:

Now, here's where MMT throws a real curveball. It argues that a country that issues its own fiat currency, like Australia, is fundamentally different from a household. You and I can run out of money. We have to earn it, save it, or borrow it before we can spend it. But a monetarily sovereign government, one that creates its own currency, cannot become insolvent in that currency. It's a mind-bending concept, akin to realizing the banker in a game of Monopoly can never run out of Monopoly money. They can simply create more.

"Hold on," you might say, picturing a government printing money with reckless abandon. "Won't that lead to hyperinflation, to wheelbarrows of cash buying a loaf of bread?" Not necessarily. MMT recognizes that the true constraint on government spending isn't financial, but inflationary. If you flood your household with Chore Bucks without adding new chores, the value of each Buck will plummet. Similarly, if the government spends too much when the economy is already at full capacity – when everyone who wants a job has one, and factories are humming – it can drive up prices.

Taxes: The Unsung Heroes of a Well-Run Economy:

And what about taxes? We're conditioned to think of them as the way the government "funds" its spending, like a household dipping into its savings account. But if the government can create money, why does it need to take it back? MMT offers a surprising answer: taxes serve other crucial roles.

Firstly, they create demand for the currency. Just as your Chore Buck "rent" compels your kids to earn those Bucks, taxes, payable only in Australian dollars, ensure that people need to earn and use AUD. Secondly, taxes act as a pressure valve on inflation. By withdrawing money from circulation, they help to prevent the economy from overheating, like siphoning off excess Chore Bucks to maintain their value. Thirdly, taxes can be a powerful tool for shaping society, for redistributing wealth, or for incentivizing certain behaviors, such as a carbon tax to combat climate change.

The "Secret" They Don't Want You to Know: Governments Create Money All the Time

Now, here's where things get particularly interesting, where the curtain is pulled back to reveal the true workings of the machine. While politicians and many economists preach the virtues of balanced budgets and fiscal austerity, governments, in practice, routinely engage in actions that are perfectly consistent with MMT principles. They just don't call it that. They often do the very things they claim are impossible or irresponsible.

Consider this: throughout history, governments have dramatically ramped up military spending during wartime or, in peacetime, to purchase wildly expensive military assets like submarine fleets. Where did the money come from? Did they simply find it lying around? Of course not! Central banks often stepped in, effectively creating new money to finance these efforts. Did the US have trillions in a vault before invading Iraq and Afghanistan? No. Did runaway inflation destroy their economy as a result? Again, no.

More recently, during the 2008 Global Financial Crisis and the COVID-19 pandemic, central banks around the world, including our own Reserve Bank of Australia, injected vast sums of newly created money into the financial system. They bought government bonds, they bailed out banks, they even supported businesses directly. Where did this money come from? Thin air, essentially. Created with a few keystrokes on a computer. Quantitative Easing (QE), they called it - a fancy term for creating money to buy assets. It was all done to prevent a catastrophic economic collapse, mind you, but done nonetheless, all by institutions who continue to deny that the government can create money.

The Chore Bucks Don't Lie:

Think back to our humble Chore Bucks. If a sudden family emergency – a burst pipe, perhaps – required urgent and costly repairs, would you throw up your hands and say, "Sorry, we can't afford it, we're out of Chore Bucks"? No! As the issuer of Chore Bucks, you'd simply create more, assign the necessary tasks, and deal with the crisis. Perhaps you'd need to add a few extra chores later to manage the "inflation" of Chore Bucks, but the immediate problem would be solved.

Governments, in their own way, do precisely this. They create money to fund wars, to bail out banks deemed "too big to fail," to respond to pandemics, all while maintaining the illusion that they're operating under the same financial constraints as a household. The hypocrisy is, shall we say, noteworthy.

Why the Charade?

So, why the reluctance to acknowledge this reality? Why cling to the outdated metaphor of the household budget? Several factors are at play:

• The Seductive Simplicity of Austerity: The idea of a balanced budget is deeply ingrained in our collective psyche. It feels intuitively responsible, even if it's economically unsound.
• The Spectre of Inflation: There's a legitimate concern that openly embracing money creation could lead to inflation if not managed carefully. But MMT proponents argue that inflation, not solvency, is the real constraint and that it can be managed through various tools, including, theoretically, a job guarantee.
• The Politics of Power: Admitting that governments can create money would undoubtedly lead to calls for increased spending on social programs, on public services, on tackling inequality. It would also undermine the perceived need for austerity measures, which often disproportionately impact the most vulnerable.

Australia's Choice: A Fair Go Powered by MMT?

For Australia, a nation with its own currency and vast resources, MMT offers a particularly compelling proposition. We have the power to invest boldly in our future: in renewable energy, in education, in a robust social safety net, and in a job guarantee that ensures everyone who wants to work can find a decent job. The tired excuse of "not having enough money" simply doesn't hold water. 

MMT challenges us to rethink the fundamental rules of our economic game. It exposes the often-hidden reality that governments, unlike households, are not financially constrained in their own currency. They have been creating money to fund wars and bailouts for decades, all while perpetuating the myth of the household budget.  

MMT invites us to stop pretending. It calls for a transparent debate about how we can harness the power of money creation for the public good.  Instead of fearing inflation, let's manage it. Instead of obsessing over arbitrary budget targets, let's focus on achieving full employment, investing in our future, and addressing pressing social needs.  The tools are there. The question is do we have the courage to use them? MMT isn't just an economic theory, it's a call to action. It's time to build an economy that works for everyone, not just the few.