Fundamentalist Finance (formerly known as sound finance)
Fundamentalist finance is a doctrine, usually espoused by ill-informed politicians, for the operation of government consisting of two tenants;
- Government is just like a household and must balance its budget.
- Government debt is an immoral burden upon our children.
Unless like governments and banks whom can create money, ex nihilo (literally from nothing), your household budget is nothing like the governments. This idea that banks and governments create money from nothing is somewhat controversial. As recently as 2015, the Bank of England released working paper 529 discussing how the explanation in most (read all) economics textbooks is incorrect. The mainstream economic modelling assumption is money is exogenously created (like magic), meaning it comes from someplace else. It turns out this assumption is a big deal. If money is an external commodity say gold, you get textbook economics, loanable funds, crowding out, neoliberalism and ultimately Fundamentalist Finance. It’s all bunk.
To condense a lot of complex ideas into something simple, accept that there are two kinds of money in circulation, bank money created by loans which must be paid back and government money created by spending and uncreated by taxation. Money is a kind of debt instrument which circulates for a limited time and cancelled when it returns back to the bank or government to repay loans or pay taxes. A prime function of government is to provide currency for the economy, including our household budgeters, to use. In the system, the one we have, the government does this through deficit spending.
As a little experiment, I set up a household economy using the principles of Modern Monetary Theory just to prove to myself this works. Like many parents, I had trouble getting my children to do their chores, now the central bank of dad, pays the children in a household fiat currency, the $1 million note, the kids pay taxes at the rate of $2 million per day and currently the central bank of dad is in “debt” to the tune of $60 million which at the going exchange rate represents about $30 Australian. My children can buy ice creams and chocolates in the household currency. The central bank of dad’s liability is the children’s asset, quite literally their money. Let’s say in a moment of neoliberal orthodoxy, I decided to tax the children to “pay back the national debt”. All that would have been achieved is; robbing my kids out of the ice creams and chocolates legitimately earned by doing the chores and sending the ice cream and chocolate makers out of business due to lack of demand.
Government debt is not a problem, government debt is money. Those terrible government bonds which are allegedly a burden to our children,; are somebody’s savings which pay a little bit of interest (unlike the money in your bank cheque account or wallet which is also a kind of government debt). As with my household economy, the only claims the holders of government debt have against community are: the ability to pay their taxes with these debt instruments, the ability to pay off their bank loans, or buy goods and services within the economy. No grandchildren are harmed in this process. The absolute worst thing that can happen is an influx of money into the future economy buying the products our grandchildren are producing. Hopefully, these are fabulous new products we haven’t even thought of yet created with the amazing education, infrastructure and environment bequeathed to them by us, their grandparents.
The true danger and evil of Fundamentalist Finance becomes apparent. The real risk is that we will not use the full talent and resources available now, in this generation to solve the real problems we have, such as climate change or provide our children with the education and infrastructure they will need. Fundamentalist Finance has a logical end, Greece. The Eurozone is set up to prevent governments from taking advantage of the policy space offered by the kind of system we have operating in Australia. If Greece abandoned the euro, it could do what I have done at my house, set its children to work on the promise to turn them into productive taxpayers.The words being used by heterodox economists to describe the textbook orthodoxy include, “junk economics”, “fake knowledge” and “malpractice”. It’s not a small thing. Modern monetary theory is a little counterintuitive; however, unlike textbook economic orthodoxy, it is comprehendible because it is a coherent body of knowledge that doesn’t rely on doubtful assumptions. I would urge voters to make the effort to develop an understanding of modern monetary theory and avoid being conned by a Fundamentalist Finance politician.