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Modern Monetary Theory (MMT) (Read 90685 times)
thegreatdivide
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Re: Modern Monetary Theory (MMT)
Reply #975 - Sep 27th, 2024 at 11:25am
 
At least some people, though educated in mainstream economics, are learning how to think for themselves:

https://www.abc.net.au/news/2024-09-24/rba-relying-on-outdated-theory-about-infl...

RBA should stop relying on outdated theory about inflation and employment

By chief business correspondent Ian Verrender.
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Re: Modern Monetary Theory (MMT)
Reply #976 - Sep 28th, 2024 at 12:12pm
 
Steve Keen explains why Rachel Reeves'  policies will achieve the opposite to what she wants.

Britain Can’t Afford Rachel Reeves (1)

[the title is a play on Reeves' assertion "if you can't afford it, you can't do it" - which is the opposite of what Keynes (correctly) asserted: "if you can build it, you can afford it". Reeves is making the mistake of  equating a currency-issuer (the government) with a currency-user (households, businesses, you and me)].

Why the decision to abolish the winter fuel payment is not just bad politics and ethics, but also bad economics.

Rachel Reeves, the UK’s new Chancellor of the Exchequer has already coined two phrases that will define her legacy:

1.“If we cannot afford it, we cannot do it” to describe what she thinks Labour cannot do in office; and

2. “The money was not there. A 22-billion-pound Black Hole…” to describe what she asserts the Conservative Party left as a legacy for the Labour Party.

Reeves believes that the Labour Government must scrap many of the spending plans of their predecessors—and even cancel a universal benefit previously paid to pensioners to help them meet their winter fuel bills—to avoid economic catastrophe for Britain. According to Robert Peston, she explained to the Parliamentary Labour Party that these policies were needed to ensure that economic growth occurred instead:

If we show, as I believe we will, that economic stability is the hallmark of Labour Governments, there is no limit to what we can achieve, because with that stability comes investment. With investment comes growth. With growth comes prosperity.

You may be wondering how freezing 4,000 pensioners to death this winter could bring about economic growth.

The explanation can be found in the pages of any economics textbook—and Rachel Reeves has made much of her qualifications in economics: an undergraduate PPE degree from Oxford, a Master of Science in Economics from LSE, and six years working experience at the Bank of England.

Reeves is making this ethical mistake because she is applying what she learnt in her economics training. It is also an economic mistake, because the analysis in economics textbooks is simply wrong.

The bad economics of cutting government spending


The argument that cutting government spending will lead to a rise in private investment is made in the very first mathematical model in the influential  textbook Macroeconomics, by Gregory Mankiw (Mankiw 2016). This is the model of “the market for Loanable Funds”, which is how mainstream economists model money. The model is shown as a pair of intersecting supply and demand curves; as Mankiw notes, “saving and investment can be interpreted in terms of supply and demand. In this case, the ‘good’ is loanable funds, and its ‘price’ is the interest rate. (p. 72)

In this model, the supply of savings is shown as fixed. Mankiw also assumes that the output of goods and services is fixed. He then asks what happens if there is an increase in government spending. The answer is that an increase in government spending causes an identical fall in the level of investment, by taking some of savings away from the private sector. This leads to less investment, and a higher interest rate.


Mankiw’s explanation asserts that increased government spending reduces investment:

Consider first the effects of an increase in government purchases… The immediate impact is to increase the demand for goods and services… But because total output is fixed by the factors of production, the increase in government purchases must be met by a decrease in some other category of demand. Disposable income … is unchanged, so consumption …  is unchanged as well. Therefore, the increase in government purchases must be met by an equal decrease in investment. To induce investment to fall, the interest rate must rise. Hence, the increase in government purchases causes the interest rate to increase and investment to decrease. Government purchases are said to crowd out investment.  (p. 73. Italics emphasis added, All I have omitted from this quote are some mathematical symbols)

Reeves is simply reversing this argument, to assert that a fall in government spending will lead to a rise in investment.

There’s just one problem with this argument: it’s utter bollocks, because “the market for loanable funds” doesn’t exist. And you don’t have to take my word for it: you can take the word of Michael Kumhof, who is the Senior Research Advisor to Reeves’ ex-employer, the Bank of England.

In a paper entitled “Banks are not intermediaries of loanable funds — and why this matters” (Kumhof and Jakab 2015), Kumhof and Jacab explain that this model is a myth. In fact, the whole mainstream theory of banking is wrong.

Since she’s following a false theory, Reeves’ policies will  have the opposite effect to what she intends: cutting government spending will reduce the supply of money, and reduce investment, rather than increase it.

To understand why this is so, you have to understand how banks work—and economics textbooks are simply wrong about this, as another paper by Reeves’ ex-employer confirms. Entitled “Money creation in the modern economy”, it states that:

The reality of how money is created today differs from the description found in some economics textbooks.
(McLeay, Radia, and Thomas 2014)


(cont.)

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Re: Modern Monetary Theory (MMT)
Reply #977 - Sep 28th, 2024 at 12:15pm
 
(cont).

Therefore, if you’ve uncritically accepted what you’ve been taught in economics textbooks about how money is created, you have been misled. That is the situation for Reeves, and it’s why she’s doing bad things with the best of intentions.

In subsequent posts, I’ll explain why Reeves’s policies will backfire, and actually reduce rather than increase economic growth.
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Re: Modern Monetary Theory (MMT)
Reply #978 - Sep 30th, 2024 at 12:18pm
 
Britain Can’t Afford Rachel Reeves (3)
Why private debt is the problem, not government debt


Steve Keen
Sep 30, 2024

My explanation in the previous post that government spending in excess of taxation actually creates money doesn’t address the issue that most occupies Reeves: the level of government debt.

Reeves and Starmer find the level of government debt terrifying, so much so that they’re willing to risk the premature deaths of 4,000 pensioners—according to the Labour Party’s own research—to reduce it. So, government debt must be huge, right? And the main threat to economic stability? And it must also dwarf private debt, since Reeves didn’t even comment on the level of private debt?

As it happens, the truth is the opposite of these conjectures. Yes, the UK currently has a government debt ratio of 101%. But while government debt is higher than GDP, it is substantially smaller than private debt, which is currently equivalent to 142% of GDP. This is actually an improvement on the situation before the Global Financial Crisis (GFC), when private debt peaked at more than 4 times the level of public debt.

Private debt wasn’t always bigger than government debt, however. The growth in private debt only began with the election of Thatcher: before then, private debt was roughly constant at about 50% of GDP.

But shortly after Thatcher came to power—and deregulated the financial sector to make the economy “more efficient” —private debt quadrupled, from under 50% to over 180% of GDP.

The growth of debt ended in the GFC—which Neoclassical economists completely failed to see coming, as The Queen once famously pointed out—and government debt only rose in its aftermath. This was largely as a means to prevent the crisis turning into a full-blown Depression, as happened in the 1930s. For one thing, government spending in excess of tax revenues gave workers unemployment benefits that kept them from the breadline, and they in turn gave businesses a cash flow that kept them from bankruptcy.

In fact, private debt, and not government debt, is the cause of financial crises. Private debt, and not government debt, is the main threat to economic stability. Government debt actually helps stabilise the economy, and Reeves’ attempts to reduce it will lead to less, rather than more, economic stability.

But Reeves doesn’t realise this, because the mainstream economics she learnt in her PPE and Master’s degrees completely ignores private debt, while wrongly obsessing about government debt—as I illustrated in my first post.

As someone who did warn that the Global Financial Crisis was coming, it’s extremely galling to see that Neoclassical economics is still taken seriously today, let alone that it’s being used by a once social-democratic party to set government policy.

We need a scientific revolution in economics. But I’ve given up on it happening inside economics departments at Universities. That’s one reason why I invented Ravel: so that people outside Universities could work out for themselves how the monetary system actually works.

I used to think that the modelling side of Ravel—its capacity to show how the monetary system worked—would only be of interest to academics and students of economics. But the fact that mainstream economics is now being employed by the Labour Party to undermine social welfare—in the false belief that it will improve the economy—means that Labour Party members need to learn what Ravel can teach them, if they are to save Labour from social and economic policies that will ultimately lead to the Party’s destruction.

I’ll use Ravel to explain why government debt is not a problem in the next post in this series. Ravel is available at https://www.patreon.com/Ravelation/.


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Re: Modern Monetary Theory (MMT)
Reply #979 - Oct 2nd, 2024 at 10:36am
 
(Cont.)

Britain Can’t Afford Rachel Reeves (4)
How Rachel Reeves probably thinks about government debt
 

by Steve Keen.

Since Reeves’s obsession with reducing government debt comes from a false theory of money—something that economists at the Bank of England acknowledge—it follows that, to know what she should really do as Chancellor, you need a correct theory of money. That’s why I invented Minsky. It was the first program to enable money to be modelled using the principles of double-entry bookkeeping. In its extended version (now called Ravel, which also does data analysis), it is still the only program to enable the monetary system to be modelled properly.

In this and the next few posts, I’ll use Ravel to explain why Reeves is wrong that reducing government debt is more important than enabling pensioners to pay their winter fuel bills.

I am under no illusion that I can change Reeves’s mind via these blog posts. My target here is rank-and-file Labour Party members. If you want to reverse the Neoliberal takeover of the Labour Party, you need to be able to counter the false theories that Reeves and Starmer are following. Ravel is the only program that will enable you to do that.

In this and the next few posts, I’ll show how you can use Ravel to blow these false Neoliberal ideas out of the water. If you do the same in time with your fellow Labour Party members, then hopefully you can change the government’s policies, and prevent 4,000 or more pensioners from experiencing lonely, painful and pointlesss deaths.

Banks, money, and double-entry bookkeeping
To understand how banks work, you have to understand double-entry bookkeeping. This was invented 500 years ago by Italian merchants to ensure that financial transactions were recorded correctly. Its two basic rules are:

1. All financial claims must be classified as either Assets or Liabilities. An Asset is your claim on someone else; a Liability is someone else’s claim on you. The difference between your Assets and your Liabilities is your net worth, or “Equity”; and

2. Every transaction must be entered twice, once as a Debit (DR) and once as a Credit (CR)


Conventional economic thinkers like Reeves don’t analyse the economy in terms of double-entry bookkeeping. But Reeves thinks about the government’s finances as if they’re household finances, and we can use Ravel’s double-entry bookkeeping capabilities to show what this picture looks like, and why it’s so scary.

How Reeves (probably) thinks about government finances
Firstly, we need to pretend that the government spends out of a bank account at private banks, just as households and firms do. Call this “Government Deposit”. Call household and corporate bank accounts “Private Deposits”.

Taxation takes money out of Private Deposits, and puts this “Taxpayer Money” into the Government Deposit account. The government can then spend: hire public servants, buy goods and services from the private sector, give pensioners subsidies to buy heating fuel during winter, etc.

If the government spends more than it takes back in taxation, then it has a Deficit—and to finance that, it has to borrow from the banks. Government debt increases each year by the amount of the Deficit.

The government also has to pay interest on the outstanding level of government debt. The table below, generated by Ravel, shows this vision of how government spending works.

This is a very scary picture:

If the government continues to spend more than it takes back in taxation, then its debt to the banks continues to rise.

It has to pay interest on this debt, and ultimately, these interest payments might mean that all tax revenue goes to pay the interest—leaving nothing for government spending.

Banks might even refuse to give the government any more money—they might even take out bankruptcy proceedings against the government!

The only way out of this dilemma is to make sure that spending is equal to taxation, so that the deficit is zero—or even spend less than taxation, so that the deficit turns into a surplus. This will enable the government debt to be reduced, in turn reducing interest payments. It’s arguably worth sacrificing a few thousand pensioners to make this disastrous fate less likely.

There’s just one problem with this picture: though the government does have some accounts at private banks, the government’s main bank account is with the Bank of England. THIS. CHANGES. EVERYTHING. I’ll explain how in the next post.


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thegreatdivide
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Re: Modern Monetary Theory (MMT)
Reply #980 - Oct 4th, 2024 at 11:23am
 
Steve Keen

Britain Can’t Afford Rachel Reeves (6)

(excerpt)

There’s just one problem with the model of Loanable Funds: its underlying assumptions—that banks don’t create money (but are mere “financial intermediaries” between Households who save and Firms who borrow), and that Governments also borrow from households in order to spend—are complete bollocks.

In the real world, banks lend, creating credit-based money in the process, while Governments bank with their Central Banks, and therefore create fiat-based money when they spend. I’ll model that reality in the next post.


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thegreatdivide
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Re: Modern Monetary Theory (MMT)
Reply #981 - Oct 6th, 2024 at 10:39am
 
https://theideasletter.substack.com/p/reckoning-with-growth

Reckoning with Growth

Steve Keen
Oct 04, 2024

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Re: Modern Monetary Theory (MMT)
Reply #982 - Oct 7th, 2024 at 3:58pm
 
Poor Trumpy getting a rough time from mainstream (flat earth) neoclassical economists, but he doesn't know enough about the nature of money, to defend his policies

https://www.msn.com/en-au/news/other/economists-have-blasted-trump-s-jobs-and-ta...

Economists have blasted Trump's jobs and taxes plans as dangerous. Someone better tell the public

Donald Trump’s economic policies are extremely popular with voters and often what supporters cite when asked why they support the former president in his third bid for the White House. But economists beg to differ – and they’re begging the public to differ too.

On the surface, Trump’s vague plans to lower corporate taxes, extend his 2017 Tax Cuts and Jobs Act, implement tariffs on imported goods, eliminate taxes on tips and increase domestic employment opportunities sound appealing.

But economists warn Trump’s policies could raise consumer prices, make the market less competitive, threaten the U.S.’s global standing, increase unemployment rates and slow growth.


And yet competitive markets are a double-edged sword: Musk is right when he said  Chinese EVs will wipe-out the (uncompetitive) American EV industry. 

Just as Detroit was wiped out by Japan (and the Corolla) in the 70s,  when fuel for gas-guzzling yank tanks was no longer affordable,  courtesy of the Arab oil embargo.

Mainstream economists retained their high-paid jobs of course, despite the encroachment of 'the first world rust belt'.

Trump has other policies which appeal to the casualties of the rust belt.

   








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Re: Modern Monetary Theory (MMT)
Reply #983 - Oct 8th, 2024 at 11:09am
 
https://www.msn.com/en-au/news/australia/guardian-essential-poll-voters-back-dra...


Guardian Essential poll: voters back drastic policy action on Australia’s cost-of-living crisis


...but voters are confused:

"Voters were asked if they supported a series of economic reforms. A majority supported price caps (70%); increasing taxes paid by large corporations (70%); reducing income taxes (65%); funding more social services (61%); running budget surpluses to reduce inflation (60%); and raising the level of income support for the unemployed (53%)".

There's the mainstream mythology about government surpluses reducing inflation; and unless large corporations are made to fund government spending entirely, then government can't reduce taxes, fund more social services, and increase Jobseeker payments.

...Unless the mainstream mythology about 'taxpayer money' is exposed:  government doesn't need  'taxpayer money', because government can issue the nation's currency, and control inflation with price controls and supply management.   

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Re: Modern Monetary Theory (MMT)
Reply #984 - Oct 11th, 2024 at 10:39am
 
Keen's conclusions - agreeing with Alan Kohler who says "everyone knows deficits don't matter"  (except ofcourse politicians and the general public):

https://profstevekeen.substack.com/p/britain-cant-afford-rachel-reeves-403?utm_s...

Britain Can’t Afford Rachel Reeves (Final)
Reeves's conventional economics predicts disaster from deficits, but her policies will cause disaster in the real world


"In the real world, both bank lending and government deficits create money. The mechanisms are different—banks create credit money by expanding their assets (Loans) and liabilities (Deposits) simultaneously; governments create fiat money by going into negative financial equity, which creates an identical magnitude of positive financial equity for the non-government sectors. But these fundamental aspects of the real-world financial system are ignored by Neoclassical economists, because acknowledging them would force them to abandon their equilibrium and barter-based paradigm.

This is why economics textbooks—and Neoclassical economics itself—are so dangerous. Virtually every belief taught in them is wrong.

In the realm of money, there is no market for Loanable Funds. Governments do not borrow from the non-bank public, nor do they really borrow from banks, but rather they sell banks an income-earning, tradeable asset (Bonds), which banks buy using a (historically) non-income-earning, non-tradeable asset (Reserves) that the deficit itself creates.

The consequence of innocent students—and that is what Rachel Reeves really is—believing this false model is catastrophic for the real world, and especially for the poor. The rich can afford private hospitals; the poor rely on public health. The rich can afford to heat their houses; the poor rely on government assistance.

Ironically the rich suffer as well, since, as Kalecki pointed out decades ago, government deficits boost profits.

These are the dangers of letting the economy be managed by a group of people who sincerely believe a pile of myths. The economic paradigm taught in schools and universities—Neoclassical economics—is an intricate set of persuasive but fundamentally false ideas. There are other such edifices in human society, but none other is given the status of a science in the way economics is, by being taught at Universities, and by being put on a similar pedestal to the hard sciences, and used as the basis for most policy advice to government.

It is unreformable as well. As in any set of mythical beliefs, no element of reality that contradicts the theory can  be admitted without the whole edifice collapsing. With apologies to those who believe in the Christian religion, accepting, for example, that firms experience constant or falling marginal costs, would be akin to Christians accepting that Jesus’s wasn’t born to a virgin. That banks create money when they lend, let alone that this has real rather than merely nominal effects, is destructive of the entire paradigm."








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thegreatdivide
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Re: Modern Monetary Theory (MMT)
Reply #985 - Oct 16th, 2024 at 10:43am
 
"Economics is NOT a science"

Essential listening for all students of economics.

Tilo Jung (German webcaster) interviews Steve Keen as he exposes the delusions of neoclassical economics:

https://www.youtube.com/watch?v=zvz8Y9hU1us


....and the idiocy of mainstreamers in the Swedish central bank deciding the recipients of the Nobel Prize in Economics.





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Re: Modern Monetary Theory (MMT)
Reply #986 - Oct 16th, 2024 at 11:01am
 
Meanwhile, Donald Trump is having a tough time defending his economic policies, as  "experts" point to a projected $7.5 trillion in increased debt, from Trump's taxation and tarriff plans.

(Raw Story)

It's simple mathematics': Trump blusters as economics expert grills him over tariff plan

Donald Trump offered simple responses to detailed questions about his economic policies as an economics expert challenged him during an appearance at a prestigious business club Tuesday.

John Micklethwait, editor-in-chief of Bloomberg News, challenged the former president to explain how his proposals would benefit the economy rather than saddle the nation with trillions of dollars in new debt, as the bipartisan Committee for a Responsible Federal Budget warned last week.

But the former president offered few details at the sitdown at the Economic Club of Chicago**.

“If you add up all the promises you have made then your plans would add $7.5 trillion to the debt," Micklethwait said. "That is more than twice the total for Vice President Harris. You're on course to push debt up to 150 percent of [gross domestic product]. This is a very business-like audience, why should they trust you with that?"

He added, "What about consumers? People out there? They're going to be the big critic. Critics say your tariffs will end up being like a national sales tax because America at the moment has $3 trillion worth of imports, you're going to add tariffs to every single one of them that is going to push up the cost for all those people who want to buy foreign goods.

"It is just simple mathematics, President Trump."

"It's not," replied Trump. "It is, but not the way you figured. I was always very good at mathematics."

The Republican presidential nominee has pushed adding tariffs to imports, which most economists agree would lead to higher inflation, but few other substantive details about his economic plans.

"We're all about growth, she's got no growth whatsoever," Trump said, referring to his opponent, Democrat Kamala Harris. "We're all about growth, and we're going to bring companies back to our country. You look, and even today as I was driving over I see these empty old, beautiful, like, steel mills and factories that are empty and falling down.

"Some have been converted to senior citizens' homes, but that's not going to do the trick. We're going to bring the companies back. We're going to lower taxes, still further for companies that are going to make their product in the U.S.A., but we're going to protect those companies when he's with strong tariffs because I'm a believer in tariffs."

"I'm not sure that you are" (a believer in tarriffs) he said to Micklethwait. "I don't think you are, but I congratulate you and your career," he added. "But, to me, the most beautiful word in the dictionary is tariff, and it's my favorite word. It needs a public relations firm to help it, but to me it's the most beautiful word in the dictionary."


** the Chicago School is the centre of neoclassical orthodoxy, which - like Micklethwait -  casually ignores the reasons for the appearance of the 'rust belt', and the enormous pain it inflicted on millions of workers. 

The 'dismal science', indeed.   







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Re: Modern Monetary Theory (MMT)
Reply #987 - Oct 16th, 2024 at 6:34pm
 
The US had spectacular manufacturing growth with tariffs. They saved the US from stronger economies which were selling into the US.

But it's important to note that tariffs were maintained over decades. Even when the Democrats (who supported the South and farmers everywhere) wanted to cut tariffs, they didn't cut them much. It was a deeply political business, with Democrats trying to help certain sectors, and Republicans trying to help other sectors.

Trump's proposal is for a resumption of tariffs after nearly a century of low tariffs. Farmers (the strongest exporters in the US now) won't like it at all (because of retaliatory tariffs.) Successful corporations like Boeing or Microsoft, won't like it. Consumers won't like it!

This is a 20 year policy to rebuild US manufacturing (by selling to the domestic market) and it won't get Donald Trump past the midterm elections. In the short term it means inflation and recession, and there will be no "recession we had to have" excuse.
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Re: Modern Monetary Theory (MMT)
Reply #988 - Oct 17th, 2024 at 4:56pm
 
Aurora Complexus wrote on Oct 16th, 2024 at 6:34pm:
The US had spectacular manufacturing growth with tariffs. They saved the US from stronger economies which were selling into the US.

But it's important to note that tariffs were maintained over decades. Even when the Democrats (who supported the South and farmers everywhere) wanted to cut tariffs, they didn't cut them much. It was a deeply political business, with Democrats trying to help certain sectors, and Republicans trying to help other sectors.

Trump's proposal is for a resumption of tariffs after nearly a century of low tariffs. Farmers (the strongest exporters in the US now) won't like it at all (because of retaliatory tariffs.) Successful corporations like Boeing or Microsoft, won't like it. Consumers won't like it!

This is a 20 year policy to rebuild US manufacturing (by selling to the domestic market) and it won't get Donald Trump past the midterm elections. In the short term it means inflation and recession, and there will be no "recession we had to have" excuse.


Yes, Microsoft and Boeing want to keep selling around the world, especially to China, but Trump wants to decouple from China because the US can't compete in EVs and PVs.

Meanwhile, the current global financial and trade system is based on obsolete neoclassical paradigms; with a bit of luck, climate change will force the overthrow of the current dysfunctional system, as co-operation is forced on the world's governments to avoid catastrophic AGW climate change.

(I'm still actually agnostic about AGW climate science; I'm not a climate scientist, and some of them disagree,  but I hope it's real, and that we can wake up to the fact before it's too late ; sensible economic co-operation among competitve, self-interested humans (and nations)  won't come naturally......despite the fact our hard-won post-industrial, AI and IT-assisted production  is now capable of supplying the essentials  and eradicating poverty for every person on the planet.

Making the need for Trump's MAGA  tarriffs obsolete... 
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Re: Modern Monetary Theory (MMT)
Reply #989 - Oct 17th, 2024 at 5:23pm
 
Bewildered Bullock can't work out why there's a housing crisis in Oz, after denying she's responsible.

Don’t blame us for rental crisis: RBA

The RBA firmly blames a lack of housing – and not rising interest rates – for Australia’s housing woes.

RBA report authors Declan Twohig, Anirudh Yadav and Jonathan Hambur argue that while the popular notion is to blame rising interest rates, landlords are unlikely to pass the costs on to tenants, even after the RBA lifted interest rates 13 times in 18 months.

“The largest estimate suggests that direct pass-through results in rents increasing by $25 per month when interest payments increase by $850 per month (the median monthly increase in interest payments for leveraged investors between April 2022 and January 2024),” Mr Twohig writes in the report.

Instead, the RBA points the blame directly at a lack of housing supply in comparison with rising demand for rental properties."



And what is causing the lack of housing supply and rising demand for rents? 

She doesn't answer that question, being a signed-up member to the very neoliberal 'small government' orthodoxy which resulted in government abandoning  public-housing from the 80s on.

Naturally, housing is now unaffordable for median wage earners, after more and more people, aided and abetted by negative gearing and GGT, sought to become landlords to fund their retirement., while  steady immigration caused housing prices to continually rise.      

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