People like to think that the world around them is rational, logical and intuitive, so they create narratives for themselves to make sense of things. Because money/economics is something that mystifies people, they create a narrative in order to make it seem more comprehensible to themselves.
(In Fiona’s opinion, people don’t create a narrative – they just make an assumption: They understand household budgeting and they assume that a national economy works the same way.)
What are the narratives that people use to make sense of money/economics?
1. The national economy is like a household economy.
2. The pocket-money narrative – Your kids do work for you, so you pay them pocket-money. They use this money to fund what they want to buy. People pay taxes to the Government, and they consider this as paying “pockety money” to the Government, that the government can then use to buy things.
State government economies DO work according to the household economy and pocket-money narratives, however, some national governments don’t have to work from these principles. National governments whose economies do not work like a house-hold budget are called “Sovreign Currency Nations”. Australia is one of these. Since we switched from the British pound to the Australian dollar… at first we were a modified Soverign Currency Nation, and then, while Bob Hawke was PM, Australia became a completely SCN.
THis is where it gets complex…
As a SCN, there are three sectors in the Australian economy:
1. Public sector – national (& state) governments
2. Private sector – banks, companies, firms, small businesses and households
3. Foregin sector – the rest of the world
All three sectors are interlinked.
Imagine a triangle… the Public sector sits at the top and controls the “money tap”. They can turn it on and off. How money gets into the triangle is through government spending.
Since Bob Hawke committed us to be a total SCN, the spending of the Australian government has not been constrained by tax revenue. A SCN has the power to spend money that does not exist. With the setting up of the Treasury and the RBA,
* The Treasury is about assets –
* The RBA (The Reserve Bank of Australia) is about liabilities – Glen Stephens, the head of the RBA was asked in a Senate Inquiry, “What happens to our taxes?” He replied, “People think there is a big account at the RBA where all the taxes are collected. This is incorrect. Once you show that you have paid your taxes, your liability to state is zeroed. No money lies in the RBA account as a result of us paying taxes.
Allan Greenspan, the head of the Federal Reserve in the USA (equivalent to Australia’s RBA), has said the same thing. (source link).
Because banks don’t like liabilities, with the money they have “borrowed” from the RBA, they buy “bonds” from the Treasury, which are interest-earning assets. They use the interest they earn from the bonds to pay back the liabilities they owe to the RBA. This arrangement of having a private banks set up as a middle-man between the RBA and the Treasury was invented in the 1800s (?) so that the government couldn’t just go to the Treasury and get money…. Why did they want to do that? (This occurred when taxes WERE used to fund things.) Taxes, however, are no longer used to fund things. This set up of having Central bank – private banks – Treasury is a residue of the old national economic system.
* Taxes drain excess money from the private sector. This results in a stabilisation of inflation.