#101: The Rise And Fall Of Monetary Policy — Ian Macfarlane

Ian Macfarlane was Governor of the Reserve Bank of Australia from 1996 to 2006.

Show notes

Selected links

Topics discussed

  • Monetary policy. 4:44
  • Modern Monetary Theory. 42:07
  • Secular Stagnation and Indebted Demand. 1:11:10


October 5, 2020 6:39 am

Wow Joe… that was quite a ride!
You know what particularly interests me is how Ian called Amir Sufi’s paper modern and radical because, as I understand, it dares to suggest a wealth redistribution.
What is shocking is how the moguls have totally controlled the dialogue through the media, to such an extent that the mere mention of higher tax rates, inheritance tax and other means of reducing inequality, sounds like heresy.
It appears to me that since the 80’s and the rise of the Neo-Cons… Regan, Thatcher et al, the public has been duped into believing they would ultimately benefit from such unlikely theories as trickle down economics, and they marvelled, as Ian mentioned, at magazine rich lists, never realising that this vast accumulated wealth was being taken directly from them, the spectators. The apex of this grand delusion is how nearly half of American’s who voted, many of them poor and working class, thought that Donald Trump would benefit anyone but himself and his cronies.
The idea of wealth redistribution is not heresy, nor is it radical or new. Without greater wealth equality there will ultimately be no paying customers and worse, there will be no society as we have come to know it.
History shows us that inequality in not tolerated ad infinitum, and is the stuff that feeds revolutions…

Alan Luchetti
October 7, 2020 11:24 am

(While this may be what the podcast calls “fan mail”, I really enjoyed and learned from the fairness, orderliness, precision and historic sweep)

(1) I too am amazed that concern about leakage of demand into savings of the rich struck Ian Macfarlane as “modern” economics.

(2) I would have liked to ask where the unexplained money in the govt’s account at the RBA came from. (For why, see (3))

(3) IM correctly observed that the RBA records its honouring of federal payments to the private sector as the issuing of federal debt to the private sector.
Is not the “modern” part of MMT its identification of, and insistence on, corollaries to that observation? Namely, that federal revenue is non-funding debt redemption, not asset transfer funding; and that bond issuance is non-funding debt swap, not funding by borrowing.

(4) I have too little learning to disrespect IM’s assessments of the relative merits of the tap system and the auction system for monetary policy, of policy and market rates and spreads, and of the difficulties of financial system regulation, but I’d like to hear him explain all that in a frame that did not implicitly or linguistically assert that revenue and borrowing fund federal spending.

(5) Is 5% unemployment (let alone commensurate underemployment) really only mildly disquieting? A question about the NAIRU would have been interesting.

(6) During IM’s RBA term, household debt / GDP tripled with implications for the effect of depressed demand for credit on subsequent monetary policy. Would it have been rude to ask IM for his take, then and now, on that tripling and on the fiscal surpluses that went with it, if not forced it?

(7) You’re now well primed to put academic MMTers or fellow travellers through their paces. Any chance of it?

Mark Kelleher
October 9, 2020 11:27 pm

Fascinating discussion. Some key things I took away :
1. It’s a demand problem.
2. 5% unemployment wasn’t considered to be “the alarm bells ringing”. Well it should. So many lives unfulfilled. And let alone that this measure hides at least double that number in underemployment.
3. I still don’t understand why the deficits cannot be “unfunded” without leaving loans outstanding to the banks. Why not just “print the money” (not actually of course) by the Central Bank buying up the bonds (either primary or less desirable secondary market)? And of course stop this once/should inflationary signs start to emerge (clearly not likely in current circumstances).
4. The inequality trend is a major problem that will need fixing and the tax proposals discussed would make a massive difference (but will be very difficult to bring in politically).

Mark Kelleher
October 10, 2020 12:52 am

A fascinating discussion. Key takeaways for me were:
1. It’s a demand problem and that’s where the focus needs to be re policy response.
2. It was disturbing to hear the view that 5% unemployment “doesn’t send the alarm bells ringing”. It should. So many unfulfilled lives. And of course underemployment being at least twice that number with similar outcomes.
3. I still don’t understand why deficits need to be funded by loans. Why can’t the central bank just do the equivalent of “printing the money”, or even just buy the bonds in the primary or less desirably secondary markets. In any case over decades the sum of deficits would be substantially greater than surpluses.
4. The point about growing inequality was spot on and the solution through the various tax mechanisms would make a big difference but will be difficult politically.

Graham Palmer
October 12, 2020 7:10 am

Great episode.

Good to hear a substantive critical exploration of MMT, but also interesting how much Ian’s views seemed to align with MMT proponents. Would love to hear follow ups of this episode, particularly the broader impact of interest rates of expansionary fiscal policy.

Mark Sheppard
October 20, 2020 11:55 pm

Excellent discussion. It gave me support for my attempt to dispel a friend’s adoption of MMT. One that Ian nearly said, but did not quite, is that stuffing the banks with mountains of low to zero interest reserves not only cruels their profitability advantaging shadow banks but that reserves are perpetual. What is the intrinsic value of a zero-interest perpetual instrument – obviously zero! Having piles of these on bank balance sheets sets up a major maturity mismatch as much of the bank’s deposit base is on-demand. When one redeems a deposit usually you get a deposit at another bank so reserves are preserved but what if people lose faith in the banks and prefer a strong finance company like GE Capital was? Could a bank hand back their banking licence? Would banks rush to buy new Govt bond issues? reserves are just an electronic form of paper money like the multi-million pound banknotes the BoE issues to the Scottish banks as backing for the private banknotes used in Scotland. Ultimately both are phoney assets.

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