English translation

Translated from a Swedish-language report relating to the 27 June 2026 Stockholm event. Translation facilitated using AI.

The report was published by the MMT group in Sweden, which is affiliated with MML-EU, and can be found here: https://www.mmtforsverige.se/post/fr%C3%A5n-%C3%A5tstramningar-till-motst%C3%A5ndskraft-s%C3%A5-bygger-vi-en-b%C3%A4ttre-samh%C3%A4llsekonomi-1

Stockholm and Sweden recently welcomed Steven Hail, a leading British-Australian sustainability economist, who came to the conference facilities at Moderna Museet on 27 June to give a presentation. He brought with him an economics of possibility and confidence in the future. We can afford to create a safe and decent society. Money is not the problem. What we can do, we can afford to do, and we can do a great deal. But this requires us to understand what money is and how it works. Only then can we design economic policy in the right way. This is a very different economics from the kind we usually encounter.

Steven Hail was also supported by a local expert, Max Jerneck, chief economist at the trade-union think tank Katalys, who towards the end of the day offered his comments on how a new economic policy for Sweden might be designed.

This report attempts to summarise the messages of Steven Hail and Max Jerneck.

Contents

1. A visitor from far away with something important to say

2. Modern Monetary Theory as a framework for economic policy

2.1 Money is not a scarce resource, but our planet is

2.2 What are the goals of economic policy, and what are the means?

2.3 Money is neither a goal nor a means

2.4 Money has always come from the state - from ancient Mesopotamia to contemporary Sweden

2.5 Banks create money too - but they cannot manage without state money

2.6 Currency sovereignty - a state’s capacity to obtain what it needs using its own currency

2.7 Sectoral balances - for every surplus there is a deficit, and vice versa

2.8 Public-sector surpluses leave the private sector indebted and vulnerable

2.9 Sweden has weathered public-sector surpluses thanks to the rest of the world’s deficit

3. Inflation, then - how should we deal with it?

3.1 Inflation is central to Modern Monetary Theory

3.2 Today inflation is fought by the central bank creating unemployment

3.3 The effects of interest-rate increases are unclear - and in any case delayed

3.4 Understanding of inflation has improved, albeit from a low base

3.5 Central banks are not well suited to managing inflation

3.6 Inflation arises as a result of disruptions in the primary sector

3.7 To understand inflation, we have to understand how prices are set

3.8 Every arm of economic policy must be used to control inflation, especially fiscal policy

3.9 A Job Guarantee can, among many other things, dampen demand in a boom

3.10 Fighting inflation requires a full and diverse toolbox

3.11 Fiscal policy should be governed by rules - the right kind of rules

4. Government securities - what are they for?

4.1 The government does not borrow money when it issues government securities

4.2 Government securities have a face value, an interest rate and a maturity

4.3 If the price of a government security rises, its yield and interest rate fall, and vice versa

4.4 Government securities in a state’s own currency are quite different from securities in a foreign currency

4.5 There are many misconceptions about government securities

4.6 The size of the public debt does not determine interest rates on government securities

4.7 Differences in currency risk and credit risk affect interest rates on government securities

4.8 Expectations about what the central bank will do determine interest rates on government securities

4.9 Government securities used to be issued because the state had to conserve its gold and silver

4.10 Raising or lowering interest rates is no longer a reason to issue government securities

4.11 Government securities can now be seen as a service to the private sector

4.12 Issuing government securities can be used to frighten the public and discipline governments

4.13 Financial markets are not as powerful as people think - the story of Liz Truss

4.14 In practice, the Bank of England brought down Liz Truss because her party colleagues did not support her

4.15 Government securities - an institution whose time has passed

5. Sweden’s path to austerity, and the way out

5.1 Sweden functions despite austerity, but its potential is being wasted

5.2 Sweden’s deeply ingrained view that money is a scarce resource for the state

5.3 Money is liquid and inexhaustible; real resources are illiquid and limited

5.4 Failing to use real resources makes us poorer

5.5 Three and a half decades of austerity - how did we get here?

5.6 A depression sweeps in

5.7 The lesson Ernst Wigforss had taught us was forgotten

5.8 Here we are - still pursuing the same policy as more than 30 years ago

5.9 How do we move forward, and how do we talk about the way forward in terms people can understand?

5.10 Borrow some of your opponents’ language, and do not sneer at small steps in the right direction

6. Knowledge that can move us forward - and a responsibility to spread it

1. A VISITOR FROM FAR AWAY WITH SOMETHING IMPORTANT TO SAY

Steven Hail, the day’s keynote speaker, had travelled a very long way to stand in Moderna Museet’s pleasant conference room. Or rather, a studio, with aprons hanging on the walls of the kind children (and perhaps adults too) wear when they try their hand at modern art while visiting the museum. Steven Hail normally lives and works in Adelaide, Australia, around 15,000 kilometres from Stockholm as the crow flies.

There he is an Associate Professor at Torrens University and Director of the research institute Modern Money Lab. The institute offers what may be the world’s only master’s degree in economics based on Modern Monetary Theory (MMT), a school of economics that begins with questions about what money is and where it comes from. The subject of the master’s degree is the economics of sustainability.

This was Steven Hail’s first visit to Sweden. He has, however, repeatedly visited other parts of Europe. On this occasion he came most recently from Brighton in England, the country of his birth, and after the Stockholm event continued on to Brussels. The previous year he had, among other things, lectured in London, and a report from one of those events can be found here. So it was both a far-travelled and distinguished guest who took his place at Moderna Museet. No equally prominent advocate of Modern Monetary Theory had visited Sweden since Professor Stephanie Kelton took part in the tenth-anniversary celebration of the trade-union think tank Katalys in 2023.

Through the large windows of Moderna Museet’s premises, one could look out towards Djurgården, the Vasa Museum and Gröna Lund. A glorious summer Saturday beckoned outside, but Steven Hail had a great deal of importance to say, and the room was full.

Sweden needs to be careful, he argued. Your country is moving in the wrong direction, away from a healthy and resilient economy and towards a condition in which increasing numbers of people find it harder and harder to have their basic needs met.

But there is another path, Steven Hail argued. What you can do, you can afford to do. If only you acquire an understanding of what money is and how it works, you can design economic policy in a completely different way from the way you do today.

What Steven Hail had to offer was nothing less than an economics of possibility and confidence in the future. And that is an economics we genuinely cannot do without. Those of us who were there were listening not only for our own sake, but also for the sake of the children who usually put on the aprons hanging on the wall.

Economics as a discipline provides the foundation for economic policy. And economic policy is about what kind of school those children will attend, what housing will be available to them when they leave home, whether they will find jobs when they finish school, and what kind of natural environment they will live in. Economic policy reaches into every part of our lives, which is why it is so crucial that it is conducted properly.

What Steven Hail had to say was therefore of great importance to all of us, and this report attempts to pass on some of it. The report does not, however, claim to be complete or exact, and it does not always reproduce what Steven Hail and Max Jerneck said in the same order in which they said it.

2. MODERN MONETARY THEORY AS A FRAMEWORK FOR ECONOMIC POLICY

2.1 Money is not a scarce resource, but our planet is

During the first session of the day, Steven Hail wanted to establish Modern Monetary Theory as a framework for thinking about economic policy. That is difficult, because we carry with us a great many ingrained assumptions about how economic policy can be conducted. Steven Hail began by quoting Keynes, who once said that the difficulty lies not so much in developing new ideas as in escaping from old ones.

And those old ideas are all around us every day. Economists and other commentators discussing fiscal policy, monetary policy and the economy in general speak with great certainty. But scratch the surface and that certainty is often poorly founded, Steven Hail argued. Often all it takes is a few simple questions for the certainty to disappear.

Steven Hail showed an example of this from the award-winning documentary Finding the Money, in which Modern Monetary Theory and some of its leading advocates can be said to play the starring roles.

In the clip Steven Hail showed, Jared Bernstein, who at the time chaired US President Joe Biden’s Council of Economic Advisers, is completely stumped by the question of why the government needs to borrow money of the very kind that it itself issues. He searches for an answer, telling himself and the reporter that the government “clearly” issues the currency and “obviously” borrows it, but cannot take the argument any further. In the end he gives up and sighs that he does not understand.

Steven Hail used the clip to suggest that many of the senior people we see on television speaking solemnly about public finances may genuinely not know what they are talking about. They do not know how our monetary system works. Nor are they aware that they do not know how our monetary system works. Steven Hail would later return to the question that Jared Bernstein found so difficult to answer (see Sections 4.1 and 4.5).

Mainstream economics - often described as neoclassical economics - starts from the wrong premise in its view of the economy, Steven Hail continued, because it is shaped by ignorance of how our monetary system works. It treats nature and natural resources as if they were inexhaustible: both nature’s capacity to absorb and break down our waste, and its capacity to supply us with renewable and non-renewable resources. This is, of course, wrong.

Neoclassical economics, on the other hand, treats public funds - the state’s money - as an exhaustible, limited resource. It assumes that the state must first receive money - kronor in Sweden’s case - before it can spend.

That too is wrong. The money that the state itself issues is an unlimited resource for the state. This is a fundamental insight of Modern Monetary Theory.

2.2 What are the goals of economic policy, and what are the means?

With this insight in mind, Steven Hail moved on to perhaps the biggest and most important question: what would a better and more resilient economy look like?

In a better and more resilient economy, everyone would enjoy guaranteed economic security in the form of protection against poverty, unemployment, illness, homelessness and other forms of economic exclusion. Strong democratic institutions would exist at every level, supported by independent supplies of energy and food that relied as little as possible on long and fragile global supply chains. A better and more resilient economy would be based on ensuring that, over time, we have enough of what we need, rather than on endless growth and the maximisation of resource use.

Sweden is a wonderful country, Steven Hail said approvingly, and it does a great deal right when it comes to creating a better and more resilient economy - more than most other countries. But it is moving in the wrong direction. Unemployment is high. Sweden is becoming less and less equal, even though it remains more equal than the Anglo-Saxon countries, for example.

Could Sweden not do better? Steven Hail asked.

To answer that question, he posed several more. What is the purpose of economic activity? What means do Swedish policymakers have at their disposal to achieve those goals?

The ultimate goals, Steven Hail argued - and he believed the audience would agree - are human wellbeing, social justice within Sweden’s borders and around the world, ecological sustainability, and a resilient society. To achieve these goals, we have the ultimate means: people, their knowledge and skills, our productive facilities, our technology, renewable and non-renewable resources, and our social institutions.

Between the ultimate goals and the ultimate means, Steven Hail’s model places intermediate goals and intermediate means. The intermediate means are the goods and services we produce using the ultimate means, in both the private and public sectors, whether they are supplied through markets or directly by public bodies. They include everything from four-year-old health checks and mathematics lessons to pulp and software.

But what should the intermediate goals be? Growth in GDP - economic growth?

No, Steven Hail argued. Measuring GDP is not a particularly effective way to assess whether we are moving towards the ultimate goals or away from them.

There are various other models. One is the Doughnut framework developed by the British sustainability economist Kate Raworth. Steven Hail himself was inclined to say that we should assess whether or not we are making progress over time towards utopia. By utopia he meant the ultimate goals: human wellbeing - what the American sustainability economist Herman Daly called eutopia, the good place.

2.3 Money is neither a goal nor a means

Something is missing from the list of means and goals, Steven Hail pointed out, and it appears neither among the ultimate nor the intermediate ones: money. Money is not a real resource, something that we can use to achieve either the intermediate or the ultimate goals.

Money therefore does not belong in the framework we should use to measure the health of our economy. Yet it probably stands in the way of creating such a framework.

Perhaps you have politicians who offer us a vision of the country they want to create in ten or twenty years, Steven Hail said, without sounding as though he believed it, but we do not have that in Australia. Instead, everything in the economic-policy debate is about money.

“Every krona that is spent must first be earned.” Steven Hail had tracked down this statement by Sweden’s former finance minister Anders Borg to illustrate what he meant. Margaret Thatcher said something very similar about British pounds in the 1980s, he added.

Politicians around the world talk about the state and money in this way. The state has no money of its own. It can spend only if it can take money from us: either by taxing us and discouraging us from working hard, or by borrowing money from us. In the latter case, however, a burden is created for us in the future, because somehow we must finance the repayments to ourselves. It is also said that those who buy government securities - the state’s IOUs - lend money to the government.

Imagine, Steven Hail urged, that all these confident and constantly repeated claims about the state and money are not merely wrong but misleading.

Imagine that they have helped turn political decision-making in a neoliberal direction. Worse still, imagine that belief in these claims prevents otherwise well-intentioned politicians and economists - Steven Hail mentioned Jared Bernstein from the film - from advocating policies that would move us towards resilience and genuine wellbeing.

2.4 Money has always come from the state - from ancient Mesopotamia to contemporary Sweden

In this context Steven Hail highlighted a quotation from the leading MMT economist Stephanie Kelton in the film Finding the Money:

“I think one of the things that stops us from taking bolder action is myths and misunderstandings about how our monetary system works.”

So the myths and misunderstandings have to go. Steven Hail immediately set about that task by tackling the question of where money comes from.

A common myth is that money emerged from barter. Barter was inefficient, the myth goes, so participants needed to use a particular commodity as a unit of account and means of payment in order to reduce transaction costs. This myth is repeated, among other places, on the Riksbank’s website.

This myth is nothing more than a myth, Steven Hail insisted. There is no evidence that money has ever, anywhere, emerged from a pre-existing barter system. As far as we know, it has never happened.

Money instead emerged in ancient Mesopotamia around 5,000 years ago, at the same time as the first tax systems began to develop there in the earliest states. Money was invented by the world’s first governments in order to organise and mobilise real resources. From the very beginning, it has been the state’s money, not taxpayers’ money - contrary to what Margaret Thatcher, and Anders Borg, claimed.

The state therefore does not first need to obtain money from somewhere before it can act, because it creates the money itself. If the state wants to expand the education system, it does not need to ask whether it can find the money. It needs to ask whether the teachers, buildings and other real resources required are available. If they are not available, the question becomes how they can be made available.

Steven Hail then turned his attention from ancient Mesopotamia to contemporary Sweden. At the top of Sweden’s monetary system sits the Swedish state together with the Riksbank, which claims to be the world’s oldest central bank and which Steven Hail described as the state’s financial agent. Every day the Swedish state spends billions of kronor through its account at the Riksbank. Every krona that is spent is new, whether the government is paying interest to people who previously bought government securities or meeting any of the many other kinds of expenditure it has. Through its payments, the state fills the monetary system with kronor. The digital money held in banks’ accounts at the central bank is called reserves, or central-bank money.

What, then, happens to the taxes paid to the state? Taxes delete kronor. It is literally true, Steven Hail emphasised, that the money supply increases by one krona every time the Swedish state spends one krona and falls by one krona when one krona is paid in tax.

Logically, of course, no one can pay tax to the state using the state’s own money before they have access to enough of that money to meet their tax liability. In contemporary Sweden taxes are paid electronically: households and firms instruct their banks to pay the tax, after which the banks transfer electronic kronor - often called reserves - to the state on our behalf.

The same logic applies to government securities. They can be bought from the state only with the state’s digital kronor - reserves - which the state itself has created, and only after the buyer has obtained access to enough of the state’s money to pay for the securities.

So the state’s payments to the private sector come first. Only afterwards, and only if and when those payments have taken place, can the state take back the money it has created through taxation and the sale of government securities. The mechanisms are the same, Steven Hail said, across the world: in the United States, the United Kingdom, New Zealand and Australia. The institutional details differ, but the basic description applies everywhere.

2.5 Banks create money too - but they cannot manage without state money

What about the banks, Steven Hail asked next - do they not create money as well? Yes, they do, on a large scale. But they do not create reserves, the state’s digital money, or notes and coins, the state’s physical money. Instead they create bank money - deposits in bank accounts - and they do so when banks approve and advance loans.

How can bank money be worth anything? After all, it is created out of nothing. Steven Hail recalled a remark by the famous American economist Hyman Minsky, who once said that anyone can create money; the problem is getting it accepted in payment. Banks solve this problem by having access to the state’s money through the state payments system - in Sweden, the Riksbank’s RIX payment system. Unlike households and non-bank businesses, banks have access to state money: reserves.

Banks therefore make payments on our behalf using state money. Banks also promise, Steven Hail added, to exchange bank money for the state’s physical money - notes and coins - if we want them to.

Steven Hail also highlighted a special feature of bank money: when it is created, it always brings debt with it, both for the bank and for the bank’s customer. When a loan is advanced, the bank credits money to the customer’s account. A deposit at the bank is therefore created.

The deposit is a liability of the bank, because the bank has an obligation, at the customer’s request and up to the amount of the customer’s deposit, to use the state money it holds to make payments on the customer’s behalf. The customer, for their part, receives a new deposit - an asset - but it is matched by a debt, because the loan has to be repaid.

Bank money therefore has value because, through the state payments system, banks have access to state money. But where does the value of state money come from? That was Steven Hail’s next question.

Some people claim that its value comes from nothing more than pure belief in the currency, Steven Hail continued. But that is not correct. There will always be a demand for Swedish kronor as long as the Swedish state can put you in prison for failing to pay taxes to the state in kronor. Taxes give the krona its value.

Some people sometimes claim, Steven Hail continued, that cryptocurrencies are an exception to this rule, and that their value comes from some vague “belief” in them. But cryptocurrencies are not currencies at all; they are speculative assets. Even if someone switched their personal finances entirely to crypto and conducted all their transactions in cryptocurrencies, they would still have to obtain kronor to pay their tax, because there is no other way to pay tax to the Swedish state.

2.6 Currency sovereignty - a state’s capacity to obtain what it needs using its own currency

A state such as Sweden, which issues its own currency, enjoys what is usually called currency sovereignty, and this was the concept Steven Hail addressed next.

Many states in the world issue their own currencies - at least 150 of them - but not all enjoy the same degree of currency sovereignty, Steven Hail stressed. Very few states on Earth have the same freedom of action as Australia, New Zealand, the United Kingdom, the United States or, indeed, Sweden.

Sweden and the Swedish currency meet to a high degree, Steven Hail argued, the criteria for enjoying currency sovereignty:

a) Sweden has a floating exchange rate. The krona is not convertible into gold, silver, another currency or anything else. In other words, the Riksbank does not promise to exchange the kronor it issues for something it could ever run out of. Things were different in the past. From the 1870s until 1931 Sweden operated a gold standard. The Swedish state then guaranteed that every krona corresponded to a certain quantity of gold. The floating exchange rate would once again come to an end if Sweden joined the euro, Steven Hail added - something he would not recommend. In Steven Hail’s view, Margaret Thatcher’s only good deed as a politician was to ensure that the pound retained a floating exchange rate.

b) The Swedish state does not have significant debts denominated in foreign currency. Many other countries do. Countries with fixed exchange rates often have foreign-currency debt, particularly when they try to maintain what may be an excessively high fixed exchange rate against another currency. Argentina is an example of a country with large debts in a foreign currency, the US dollar, which it therefore depends on obtaining. Steven Hail was asked from the audience about Chile, another country that enjoys a lower degree of currency sovereignty than Sweden and is forced to borrow US dollars. Steven Hail argued that currency sovereignty is difficult to build, particularly for countries in the Global South. But it can be done. One can, for example, listen to the MMT economist Fadhel Kaboub, who often discusses this issue.

c) The Swedish krona is traded extensively on international foreign-exchange markets, especially in relation to the size of the Swedish economy. Currency traders with globally diversified portfolios are willing to hold kronor.

d) The Swedish economy is quite resilient to fluctuations in the krona’s exchange rate. During the pandemic the krona weakened considerably. This meant that Sweden experienced somewhat higher inflation than some other high-income countries, but overall the effects of the krona’s depreciation were small.

Taken together, Steven Hail concluded - particularly points a and b - all of this means that the Swedish state faces no purely financial constraint on its expenditure. The Swedish state will never run out of kronor as long as the Riksdag authorises it to spend them. The limit on Swedish government spending is instead the economy’s productive capacity: what is available to buy with kronor.

2.7 Sectoral balances - for every surplus there is a deficit, and vice versa

From currency sovereignty, Steven Hail moved on to the concept of sectoral balances. One way to begin understanding the idea is to recognise that in a monetary economy there must be a surplus for every deficit and a deficit for every surplus. This is true for individual people, companies and other institutions, and it is also true in aggregate when the economy is viewed as a whole.

At the aggregate level, the economy can be divided into three sectors: a) the domestic public sector, dominated by the central government but also including regional and local bodies; b) the private sector, meaning households, businesses - both financial and non-financial - and non-profit organisations; and c) the foreign sector, the rest of the world outside the country itself.

If the foreign sector records a surplus relative to a country - in other words, if the country pays more to the rest of the world than the rest of the world pays back - the country has what is normally called a current-account deficit. Conversely, if the foreign sector records a deficit relative to a country - the country pays less to the rest of the world than the rest of the world pays back - the country has a current-account surplus.

If we look at the whole world, for every Sweden with a current-account surplus there must be a United Kingdom with a current-account deficit. For every surplus there has to be a deficit, and vice versa.

Because this is so, the sum of the surpluses and deficits of the three sectors in any given country must always equal zero. Steven Hail showed a chart of sectoral balances for an average of industrialised countries. The symmetry in the chart is both clear and beautiful, he said. It looks like trees reflected in water. The bars below the zero line are the same size as the bars above it.

The fact that every surplus requires a deficit is particularly worth emphasising in Sweden, Steven Hail argued, a country that until relatively recently had a fiscal framework requiring the public sector to run surpluses over time. Setting such a target demonstrates a failure to understand how a monetary economy works, in his view.

2.8 Public-sector surpluses leave the private sector indebted and vulnerable

In the chart of average sectoral balances in industrialised countries that Steven Hail showed, the public sector had most often run deficits. Those deficits allowed the private sector to run a surplus. Public-sector deficits, Steven Hail argued, have been necessary to prevent the private sector from becoming excessively indebted - something that has repeatedly been shown to lead to financial crises.

The chart also clearly showed the private sector’s vulnerability. Immediately before the global financial crisis of 2008, private-sector surpluses in industrialised countries were close to zero. Another chart Steven Hail showed, of Sweden’s sectoral balances over time, displayed the same pattern. When the public sector ran surpluses in the late 1980s, the private sector ran deficits. This led to a deep financial crisis with fateful consequences for Sweden - a crisis that was therefore not caused by public-sector profligacy, as has often been claimed (see Section 5.6).

The small private-sector surpluses in the charts corresponded to small public-sector deficits or even - in Sweden’s case in the late 1980s - public-sector surpluses.

No wonder crises occurred, Steven Hail explained. You cannot save kronor, dollars or pounds that do not exist. They have to be created by the public sector before the private sector can save them. Government deficits create private surpluses. If the private sector runs surpluses that are too small, or even deficits, it soon becomes dangerously over-indebted. The public deficits that were too small in the run-up to both Sweden’s 1990s crisis and the 2008 financial crisis soon turned into large deficits when the economy crashed, tax revenues collapsed and the cost of public support rose sharply.

Such public deficits should be regarded as bad deficits, Steven Hail argued, while public deficits that allow the private sector to save enough should be regarded as good deficits.

Suppose I am the government, Steven Hail continued, and I first put one million kronor into private bank accounts and then tax 900,000 kronor back out of those accounts. What has happened to the other 100,000 kronor? They are, of course, still sitting in someone’s bank account. And if I - the government - then issue government securities worth 100,000 kronor and sell them in exchange for the remaining 100,000 kronor? In that case I have arranged an asset swap. Someone now holds a government security worth 100,000 kronor instead of 100,000 kronor in an account.

When I - the government - issue government securities, I do not take away private-sector saving that is therefore no longer available to the private sector. Issuing the securities is not about enabling me, the government, to finance anything. The idea that the government borrows money when it issues government bonds is one of the widespread myths and misunderstandings about how the monetary system works. Steven Hail returned later to government securities and their function (see Section 4.1).

2.9 Sweden has weathered public-sector surpluses thanks to the rest of the world’s deficit

How, then, has Sweden managed to perform relatively well despite a fiscal framework that required the public sector to run surpluses, which tend to push the private sector into deficit? The answer lies in the sectoral balances, Steven Hail argued. Sweden as a nation has chosen not to consume everything produced domestically, but instead to sell part of it abroad - for example at IKEA beside the airport in his home city of Adelaide. The foreign sector, the rest of the world, has therefore run a deficit: it has paid more to Sweden than Sweden has paid to it. This has enabled Sweden’s domestic private sector to avoid becoming even more indebted than it has.

Steven Hail then highlighted something else that unfortunately characterises the Swedish economy today: high unemployment. Why do you tolerate it? he asked. There are no financial barriers to restoring full employment, because the Swedish state cannot run out of kronor. Sweden could abolish unemployment at a stroke.

Sweden used to have full employment, Steven Hail stressed. So, for that matter, did Australia, where unemployment rose to two per cent only once between 1945 and 1975. That was in 1962, and it was regarded as a national crisis. But a completely different economic policy was pursued then, both in Australia and in Sweden.

3. INFLATION, THEN - HOW SHOULD WE DEAL WITH IT?

3.1 Inflation is central to Modern Monetary Theory

During the second session of the day, Steven Hail addressed inflation and how it should be managed. A false accusation often levelled at MMT, he said, is that MMT claims the government can keep printing money indefinitely without having to worry about inflation - that the government can spend as much as it likes without consequences.

Steven Hail played a clip from Finding the Money in which Scott Fullwiler, an MMT economist and former professor of economics at the University of Missouri-Kansas City, dismisses such claims as absurd and completely at odds with what MMT actually says. Inflation is the real constraint on economic policy, Fullwiler says in the clip, and MMT advocates acknowledge this. The real limits on government spending are the resources available: people, land, water, agriculture, factories, infrastructure and transport, technology and health care.

Government spending has to be planned in advance, Fullwiler argues in the clip. Before voting to spend two billion dollars on something, policymakers need to ask which real resources the expenditure will require. Where, for example, will the contractors, architects, engineers, steel, concrete and machinery come from for an infrastructure project costing that much?

Fullwiler also stresses that the state of the economy must be analysed before decisions are made about government spending. If the economy is in recession, many people are unemployed and factories are idle, the government can spend a great deal before inflation emerges. If, by contrast, the economy is booming and already close to full capacity, the government needs to be much more cautious about how much it spends and what it spends on.

The MMT position is that the best defence against inflation is a good offence, Fullwiler says in the clip: head off the inflationary threat in advance through good planning.

3.2 Today inflation is fought by the central bank creating unemployment

Steven Hail then briefly described the prevailing arrangements - in Sweden and throughout the Western world - for dealing with inflation, or in other words maintaining price stability.

For roughly the past 35 years this has been treated as a task for monetary policy and the central bank. Elected politicians cannot be entrusted with the job because, it is said, they cannot resist the temptation to allow government spending to become too large for price stability to be maintained.

If inflation is above the central bank’s target, or is expected to rise above it, the prevailing economic-policy framework treats this as evidence that unemployment is too low. Workers are not sufficiently afraid of losing their jobs and therefore demand wage increases that are too large. Under the prevailing model of inflation control, the central bank must in such circumstances make more people unemployed.

Steven Hail said he had personally heard well-known economists say this, sometimes while he was in the same room. On such occasions he made himself unpopular by asking the economist advocating higher unemployment whether they were prepared to volunteer. Would you like to be one of the unemployed? The answer was rarely yes.

In any case, Steven Hail continued, the policy interest rate is the mechanism the central bank uses to increase unemployment. If a central bank expects inflation to be one percentage point above its target, it will raise the policy rate by more than one percentage point. The real interest rate - the nominal interest rate minus inflation - then rises. This is assumed to depress demand. Enough people then become unemployed, or at least expectations are created that enough people will become unemployed, and price increases are thereby moderated. Higher unemployment is the price paid to defend or restore price stability. Some employment is sacrificed in order to bring inflation down when it is too high.

Under the prevailing view, a government can make matters worse by allowing its budget to run a deficit. If deficits are “inappropriately large” - Steven Hail used the quotation marks ironically - the central bank must raise its policy rate still further to prevent deficit-financed public spending from pushing inflation up and making it even harder to control in the future. A higher policy rate means that firms invest less. Mainstream economics therefore imagines that government deficits, by forcing interest rates higher, crowd out private and supposedly more productive investment.

3.3 The effects of interest-rate increases are unclear - and in any case delayed

The first thing to understand, Steven Hail emphasised, is that interest-rate increases by the central bank do not necessarily slow the economy. Sometimes the opposite may be true: higher interest rates can stimulate the economy. One of the founders of Modern Monetary Theory, Warren Mosler, pointed out a few years ago that this was happening in the United States because of its large public debt and because American mortgage rates are usually fixed. When the Federal Reserve raised interest rates, interest payments to holders of government bonds increased, while mortgage borrowers did not have to pay higher rates on their loans. Taken together, this increased demand in the economy rather than reducing it.

In countries with lower public debt than the United States and where a larger share of mortgages carry variable interest rates, the effect Mosler identified may be smaller. But even that is not certain. Interest-rate increases involve a transfer of income from borrowers to savers. If you have a variable-rate mortgage, the policy rate rises and banks raise their mortgage rates, your disposable income obviously falls and you are likely to spend less. But older people who have repaid their loans receive more income as a result of higher interest rates, not less.

Interest-rate increases can also cause financial crises, Steven Hail stressed. If rates are raised sharply when private-sector debt is high, defaults on interest and principal payments can cause the value of banks’ claims on borrowers to collapse and can ultimately trigger falls in the value of other assets as well. The result is what the American economist Hyman Minsky called a fragile financial system.

A higher interest rate may cause a currency to appreciate against other currencies. Imports then become cheaper, which tends to reduce inflation. There is, however, no guarantee that this effect will occur. The well-known neoclassical economist Kenneth Rogoff and his colleague Richard A. Meese published a research paper in 1983 arguing that changes in interest rates over time cannot be used to predict exchange-rate movements in advance. The Meese-Rogoff proposition has never been overturned. Thus, over recent decades, anyone trying to predict how the krona would move against the US dollar after a rise in Swedish interest rates would, on average, have done better simply guessing that the exchange rate would not move at all than guessing that the krona would strengthen because Swedish rates had risen.

Interest-rate increases can also increase inflation through higher borrowing costs. Rising rates raise firms’ cost of debt finance. Because firms often set prices by adding a margin or mark-up to their costs (see Section 3.7), higher credit costs can feed through into higher prices more generally across the economy.

It is also important to recognise, Steven Hail continued, that interest-rate increases operate with a delay. It takes a long time before higher rates have their full effect on the decisions made by households and firms in the private sector.

The effect of central-bank interest-rate increases therefore depends on the particular circumstances of a particular country at a particular time. The idea that the central bank’s interest-rate instrument works like the accelerator or brake in a car, and can be skilfully used to control the speed of the vehicle - that is, the rate of inflation - is simply wrong, Steven Hail concluded.

3.4 Understanding of inflation has improved, albeit from a low base

It is true that inflation was at times low during the period from the early 1990s onwards, when independent central banks became the norm. But low inflation had causes other than the monetary policies of those independent central banks. India and China entered the world economy, bringing with them around two billion low-paid workers. Trade unions were weaker than before - which Steven Hail was careful to point out was not a good thing. Employment protections were eroded in many countries. Unemployment was high in many places. Oil and electricity were cheap. Under those conditions, it was actually difficult for an industrialised country not to have low inflation.

Yet people such as former Federal Reserve Chair Ben Bernanke spoke in the early 2000s of the “Great Moderation”. Inflation was low everywhere. Bernanke and others were convinced that this reflected the wisdom of central bankers. Only a few years later, however, everything collapsed in the global financial crisis of 2008. And that crisis was to a large extent the result of financial-sector deregulation of the kind Bernanke and others had advocated and welcomed.

Steven Hail said that he has asked central-bank economists around the world for empirical evidence that the policy interest rate is an effective instrument for managing inflation over time. Most simply ignored him and did not reply. One, from the US Federal Reserve, tried to answer. What he sent, however, was a mathematical paper built on the assumption that the policy rate is an effective instrument for controlling inflation over time. In other words, what the analysis was supposed to demonstrate had been assumed from the outset.

The debate has changed in recent years, Steven Hail thought. Even the US Federal Reserve and the investment bank Goldman Sachs acknowledged after the pandemic and Russia’s invasion of Ukraine that by far the most important drivers of inflation were supply-chain disruptions and price increases in the primary sector, especially oil and food.

Thanks to improved statistical tools, we are also much better equipped today to identify linkages within the economy, bottlenecks in production and distribution, and strategically important prices that are likely to move when some kind of disruption occurs on the supply side of the economy.

3.5 Central banks are not well suited to managing inflation

Steven Hail then stated his view plainly: central banks are not well suited to managing inflation. If a country genuinely wants a central bank that sets interest rates independently, he said, he would not deny anyone the right to choose that arrangement. But it is profoundly undemocratic, he added. A central bank that imagines it controls the economy by raising and lowering interest rates is like a child sitting in a car seat with a toy steering wheel, believing that it is driving the car. It may look as though the child is steering when the child turns the wheel in the same direction as the car. Similarly, it may look as though the central bank is steering the economy when inflation moves in the direction the bank wants after it changes interest rates. But inflation moves up and down for reasons quite different from the central bank’s monetary policy.

The inability of central banks to control inflation was also demonstrated, Steven Hail argued, by their attempts to raise inflation during the 2010s. After the global financial crisis, central banks failed to lift inflation to the targets they had set, usually two per cent. This was despite trying almost everything they could: cutting rates to zero or even below zero, using negative policy rates, and making large-scale purchases of government bonds and other securities. What we learned between 2010 and 2020, therefore, was that central banks cannot create inflation on their own.

Instead of constantly raising and lowering interest rates in a futile attempt to manage inflation, Steven Hail argued, the central bank should keep the interest rate low and stable. That would give households and firms a dependable basis for the financial decisions they have to make. A low and stable interest rate is not historically unprecedented. Between 1750 and 1850 the Bank of England did not change its policy rate once, and that did not prevent Britain from being the world’s dominant great power during that era. Warren Mosler advocates a zero interest rate, but Steven Hail said the important thing is for the rate to be low and stable, not necessarily zero.

The most likely route to a zero interest rate, Steven Hail reasoned, would probably be for rates to be cut to zero during a financial crisis and for the leading office-holders - the finance minister, prime minister and central-bank governor - then to decide to leave them there. Steven Hail believed that we will move towards zero rates soon in any event, because the world is in a multiple crisis, a polycrisis. Zero interest rates will come, though for entirely the wrong reasons.

3.6 Inflation arises as a result of disruptions in the primary sector

What, then, determines whether inflation is high or low? Steven Hail argued that, at least in peacetime, demand has rarely been the force that drives inflation. One could argue that demand drove inflation in Sweden in the late 1980s. But in that case demand was driven by private money creation - a credit bubble following the deregulation of financial markets - rather than by public spending. As noted in Section 2.8, the government budget was in surplus during those years.

Steven Hail went out on a limb and said he did not believe public spending had ever, at least in peacetime, generated inflation in Sweden to any significant extent. During the pandemic, for example, the Swedish government provided the smallest pandemic support package, yet Swedish inflation was still among the highest. It is therefore clear, he argued, that there is no simple relationship between the size of public expenditure and inflation.

Far more often, Steven Hail argued, inflation is set off by supply disruptions in the primary sector - the part of the economy directly dependent on natural resources and international commodity markets, such as agriculture, energy, forestry and mining. This is so even though the primary sector accounts for only around ten per cent of a modern economy.

Examples of inflation peaks driven by supply disruptions in the primary sector include the oil-price increases of 1974 and 1979-80, the smaller energy-price rise in the late 1980s, and the steep rise in oil prices shortly before the 2008 financial crisis. The last of these prompted central banks to raise interest rates, which in turn contributed to a financial crisis because the financial system was fragile as a result of high private-sector indebtedness.

Another example is the rise in energy prices in the 2020s and the inflation that followed. During the pandemic, the supply disruption took the form of supply chains seizing up or stopping altogether. The next supply shock, Steven Hail predicted, will in one way or another be connected to climate change.

Price increases move from the primary sector into the secondary sector, which accounts for roughly 30 per cent of the economy. This is where raw materials are transformed into products - manufacturing, construction and food production. Finally, the price increases reach the tertiary sector, which accounts for around 60 per cent of the economy and includes public and private services, wholesale and retail trade, and hospitality and tourism.

Trade unions were strong in the 1970s, and workers could respond to rising prices with industrial action and force through higher wages. This is why the period of higher inflation after the oil-price increases became so prolonged. But workers and trade unions cannot be blamed for having caused the inflation, Steven Hail emphasised. Using charts, he showed that wage increases accelerated after prices had risen. Wage growth was therefore a response to higher prices rather than their cause.

3.7 To understand inflation, we have to understand how prices are set

How should we think if we want to find a way of bringing inflation under control? Steven Hail asked. A starting point, he answered, is to take account of all the knowledge accumulated over the past hundred years about how firms actually set prices. Strangely enough, this is something mainstream economics neglects. It was not until the 1930s that economists had the idea of actually talking to firms about the matter and asking them directly. By then economists had been discussing prices for at least 150 years without taking this apparently obvious step.

When firms were asked how they set prices, researchers discovered that the conventional explanatory model, in which prices are determined by supply and demand, has relatively little value in the secondary and tertiary sectors.

In the secondary and tertiary sectors - by far the largest part of a developed economy - firms set prices by charging enough to cover the costs they expect to incur and then adding a margin. If a firm faces stronger competition, that margin will be smaller. If it has higher start-up costs, higher fixed costs or higher financing costs, the required margin will be larger.

In general, however, firms do not change their prices every time demand changes, as mainstream economic models imagine, Steven Hail emphasised. Prices are set on the basis of costs and margins.

Steven Hail could see one exception to this rule: prices in the primary sector, such as the prices of agricultural products, minerals, oil and other commodities. Here the traditional supply-and-demand diagram gives a reasonably plausible picture of reality. In primary-sector markets, individual participants have little influence over price, and demand is fairly insensitive to price. Buyers simply pay higher prices if they have to. Disruptions to the supply of primary-sector goods therefore tend to be inflationary.

The most systemically important prices - the prices that need to be targeted if inflation is to be controlled - are therefore prices in the primary sector, or prices close to the primary sector, Steven Hail argued. Isabella Weber, who has researched inflation in the US economy, found that prices in sectors including oil and gas extraction, agriculture, chemicals, housing, water and electricity were among the most systemically important for the development of US inflation. They had the greatest effect on prices in other industries and on the consumer price index. These are the prices policymakers should focus on if they want to build resilience in advance against inflationary supply disruptions. Steven Hail recommended a research paper in which Weber and several colleagues address this issue.

One positive development Steven Hail highlighted in this context was that today’s economy is much less dependent on oil and other fossil fuels than it was in the 1970s. The further we move towards renewable energy, the more that dependence declines. The transition is therefore not only an environmental necessity but also a blessing from the point of view of inflation control.

To understand how prices are set, Steven Hail also recommended reading the work of the Post-Keynesian economist Frederic S. Lee on price theory.

3.8 Every arm of economic policy must be used to control inflation, especially fiscal policy

Who, then, should focus on the systemically important prices in order to control inflation, and what should they do? Central banks are not suited to the task, Steven Hail had already argued.

The answer, in Steven Hail’s view, is that the state must take responsibility for inflation and use every arm of economic policy in doing so. The central bank is part of the state and can be a member of the team, but it cannot fight inflation on its own.

To manage inflation, the state can help society free itself from dependence on fossil fuels. If there are raw materials on which the country knows it will continue to depend, the state can ensure that they can be obtained from different sources so that the economy does not become dependent on a single supply chain. Where possible, the state should also work to make the country more self-sufficient. It can ensure that buffers and strategic stockpiles of important commodities are created. In the United Kingdom, Steven Hail said, there is currently a discussion about whether to establish a huge natural-gas storage facility for a commodity without which the British economy cannot function.

Inflation management needs to be built into the government budget, Steven Hail insisted - in other words, into fiscal policy, the part of economic policy concerned with government revenue and expenditure. Economists in finance ministries around the world already spend a great deal of time calculating what the government budget balance will be under different policy decisions. Instead of, or in addition to, doing that, finance-ministry economists should calculate and forecast the inflationary effects of the different policy measures under consideration. Steven Hail cited as an example work by the British economist Patricia Pino examining how public investment may affect inflation.

In a government budget designed with inflation in mind, investment in strategic capabilities is particularly important. The state should ensure that productive capacity expands in strategic industries, that bottlenecks are removed and that vulnerability to supply disruption is reduced. This includes investing in education and training for the strategic sectors policymakers want to develop. Without skilled workers, for example, it will not be possible to launch a major public house-building programme, Steven Hail observed.

Another example Steven Hail discussed was agriculture and food production. Through strategic investment, the state should ensure that food supply is as diversified and as local as possible. It should also establish buffer stocks of important foods. Different countries of course have different capacities to do this. Sweden is well placed, Steven Hail argued. Australia, which is more exposed to climate change, faces greater difficulties. The greatest problems, however, confront poor countries in Africa.

The world’s poorest people are likely to suffer climate-driven famines long before those of us in rich, developed countries do.

The state and the rest of the public sector also exercise enormous direct influence over prices in their role as purchasers. In many markets the public sector is itself a price setter. In addition, the state commonly regulates pricing in sectors characterised by natural monopolies. It can use the influence created by these roles to help manage inflation.

3.9 A Job Guarantee can, among many other things, dampen demand in a boom

Another very important measure the state can take to help manage inflation, Steven Hail argued, is to establish a government Job Guarantee. Under such a system, the state offers a full-time job at a fair wage to everyone who wants one. The guarantee would create a wage floor. Sweden has no statutory minimum wage, Steven Hail noted, and probably would not need one, at least if a Job Guarantee were introduced. Even unemployed people, who today have no minimum wage apart from unemployment benefits, would effectively receive one through the Job Guarantee.

A Job Guarantee means that everyone always has a job available if, for whatever reason, they lose their existing employment. Instead of being unemployed, they would work under the Job Guarantee in support of the non-profit sector, improving their local environment or performing other useful work. There is no shortage of ideas for work that could be done under a Job Guarantee, Steven Hail argued.

An important feature of the Job Guarantee, Steven Hail emphasised, is that it would be countercyclical and therefore stabilise the business cycle. In a recession, when the economy needs more demand, it would generate more public spending in the form of wages paid to Job Guarantee workers. In a boom, when the economy needs less demand, public spending on the programme would fall because more people would have regular jobs and fewer would need to turn to the Job Guarantee in order to receive a wage each month. By reducing demand during a boom, the Job Guarantee would therefore also reduce inflationary pressure.

3.10 Fighting inflation requires a full and diverse toolbox

The state can also, Steven Hail continued, use regulation of banks and the rest of the financial sector to fight inflation. One fairly radical proposal advanced by Warren Mosler is to prohibit lending secured against financial assets such as shares, bonds and other securities. The state could also use credit regulation to direct lending towards sectors of the economy in which it wants investment to take place. Such policies were widely accepted in Australia in the late 1940s.

Managing inflation in an economy characterised by equality and full employment would of course be complicated and messy, Steven Hail acknowledged. Many different tools would have to be used, not just one. But there are numerous ways of doing this that do not involve sharply increasing the price of money - the interest rate - and thereby forcing people into involuntary unemployment. Ultimately it is a political question. Voters have to elect politicians who understand how inflation can and should be controlled.

What about the exchange rate? Steven Hail then asked. If Sweden were to increase government spending as part of an ambitious programme of public investment, the Swedish krona might weaken against other currencies. A weaker krona could make imports more expensive and thereby contribute to higher inflation. If that happened, the politicians who introduced the investment programme might become unpopular and be voted out at the next election.

Looking at the statistics, however, there is no need to be too alarmed, Steven Hail said reassuringly. The historical relationship between Swedish inflation and the krona exchange rate suggests that a ten per cent fall in the krona over a couple of years might increase inflation by around one percentage point, perhaps a little more. In other words, even a decline of that magnitude in the krona does not produce a large increase in inflation. In the charts, only one major depreciation of the krona is associated with a large rise in inflation: the episode in the early 2020s during the pandemic and around Russia’s invasion of Ukraine. Even then the exchange-rate effect was not large, and probably reflected the tendency of foreign-exchange traders to seek the safety of the US dollar in troubled times and move away from a small currency such as the krona.

3.11 Fiscal policy should be governed by rules - the right kind of rules

The state should therefore pay close attention to price stability when conducting fiscal policy. But what principles should guide that policy?

Steven Hail argued that it is not a good idea to adopt the kind of fiscal rules contained in Sweden’s fiscal framework: rules for the government’s budget balance - the surplus target, now replaced by a balanced-budget target - and for public debt - the so-called debt anchor, which sets a limit on the size of public debt relative to gross domestic product, GDP.

That does not mean there should be no rules for fiscal policy, Steven Hail emphasised. The rules should, however, be designed correctly and should have a laser-like focus on inflation risk. In the government budget, the government should discuss the risk of inflation and explain why its plans for the coming year and the following five years are not expected to generate additional inflation (see Section 3.8).

The state must accept that the private sector wants to run a surplus - that is, to save on a net basis. It must also accept that it cannot control its financial relationship with the rest of the world. A government can certainly pursue policies that encourage exports and discourage imports, but the rest of the world has a say as well. The state cannot determine the current-account balance by itself. Once this is recognised, the state must accept that in many circumstances it will run a deficit. The deficit is an outcome; it should not be a target. Fiscal rules should not, as Sweden’s current rules do, focus on financial measures. The goals should instead be sustainable wellbeing and full employment that is not inflationary.

From a strategic political perspective, Steven Hail argued, the existing system has to be stabilised before we can think seriously about what should come next. People need economic security before a discussion about changing lifestyles can take place. A Job Guarantee is an excellent tool for achieving this. It would both provide economic security here and now and help move society towards more far-reaching change. Within the Job Guarantee, working hours could be reduced rather than real wages continually increased, encouraging shorter working time rather than higher consumption across society more generally.

In any event, Steven Hail concluded, we do not need to rely on public austerity, involuntary unemployment, insecure employment and inequality in order to manage inflation.

4. GOVERNMENT SECURITIES - WHAT ARE THEY FOR?

4.1 The government does not borrow money when it issues government securities

Steven Hail devoted the third session of the day to government bonds and other government securities - bonds, in the English terminology - the financial instruments that make up what is called the public debt.

In this report, the term government securities is used as an umbrella term for all of the state’s debt instruments. In the Swedish institutional setting, government bonds are one particular type of government security.

Steven Hail began the session by revealing a secret about government securities: there is no longer any reason for the state to issue them. There were once reasons for doing so, but those reasons no longer apply. He would explain what he meant later.

He then went on to argue that the state cannot really be said to borrow money when it issues government securities.

The state creates kronor - in Sweden’s case - by making payments and thereby increasing the balances in accounts within the monetary system, at the central bank and at private banks. When, after supplying banks with reserves, the state auctions government securities, it allows the banks to exchange one asset - reserves - for another - government securities. The state offers a higher interest rate on government securities than on reserves, which gives banks an incentive to exchange reserves for securities. It is an exchange of apples for something very much like apples, Steven Hail said.

The answer to the question Jared Bernstein found so difficult in Finding the Money (see Section 2.1), therefore, is that the government is not in fact borrowing the money it itself issues. It is not so surprising that Bernstein struggled to find a reason why the government would need to do such a thing.

Money creation itself - the issuance of reserves - can, by contrast with the issuance of government securities, be viewed as a kind of borrowing, Steven Hail reasoned. The state gives out something - the currency, kronor in Sweden’s case - that can later be used to discharge a liability to the state. Once the state has made a payment, there are more digital kronor, or reserves, in banks’ accounts at the central bank. The kronor that have been created appear as a liability of the state.

Issuing government securities is therefore not about financing government expenditure. That expenditure has already been paid for by the time the securities are issued. Through government payments, private-sector actors have acquired units of the state’s money - kronor in Sweden. The private sector can then use those units of state money to pay for government securities.

On rare occasions, even people responsible for managing public debt acknowledge that government securities are not issued to finance government expenditure. A former head of the agency responsible for managing Australia’s public debt once wrote in a PowerPoint presentation published on the agency’s website that the issuance of government securities was not undertaken to finance Australian government spending. Steven Hail showed the slide at a public lecture in 2013 that was filmed, uploaded to YouTube and viewed quite widely. The presentation then suddenly disappeared - for some reason - from the agency’s website.

Steven Hail also played a film featuring the so-called Bond March, a Swedish song from the wartime preparedness years that encouraged the public to save by buying government bonds. The lyrics, written by Alf Henrikson, say that bond buyers should “rattle together many millions” so that the Swedish state can “cast cannon” and “load cartridges”. To put it mildly, Steven Hail pointed out, Henrikson’s lyrics did not reflect the real reasons for issuing government securities.

4.2 Government securities have a face value, an interest rate and a maturity

Government securities used to be issued literally on paper. Steven Hail showed an image of an Australian government bond from the 1960s, a debt instrument that matured in November 1987. As the image showed, a number of coupons were attached to it, entitling the holder to interest payments over the life of the bond. The holder therefore received interest along the way and did not have to wait until the bond matured in 1987 before receiving any payments from the Australian government. Government bonds looked similar in most countries.

Today government securities are issued digitally. There are therefore no physical securities and no physical coupons entitling the holder to interest payments. The language surrounding government securities still preserves traces of the old paper form, Steven Hail pointed out, which is why we continue to speak of the coupon rate when referring to interest payments made during the life of a security.

Government securities are fundamentally quite simple in their construction. They are nominal securities with a face value - the amount the holder receives when the security reaches the end of its term, on the maturity date. The old Australian government bond Steven Hail displayed had a face value of 20 Australian dollars, which the holder was entitled to receive when it matured in November 1987. The maturity - the period between the issue of a government security and its maturity date - can vary. Government securities are often issued with maturities of five, ten or fifteen years, although Sweden has issued government bonds with maturities as long as fifty years.

Interest is paid on the face value. Most government securities carry a coupon rate, usually paid every six months during the life of the security, Steven Hail explained. If the holder keeps the security until its maturity date - “holds it to maturity”, as the expression goes - the holder of course also receives the face value back.

4.3 If the price of a government security rises, its yield and interest rate fall, and vice versa

Although the interest rate on a government security is fixed in the sense that it is specified when the security is issued, the price of the security and the return on the money invested in buying it can vary over time. The yield falls when the price rises, Steven Hail explained. The price of the security rises when the buyer has to pay more for it relative to the payments received from holding it. The return on the funds invested therefore falls because the payments generated by the security become smaller relative to the price paid to acquire it.

The prices and yields of government securities are driven by what happens to market interest rates during the life of the security, Steven Hail explained. If, after a security has been issued, market interest rates fall below the coupon rate specified on the security, it becomes more attractive to investors. Its price rises, often above face value. If market interest rates instead rise above the coupon rate after the security has been issued, it becomes less attractive and its price falls.

Steven Hail illustrated this with a British government bond. The bond had been issued in 2007 with an original maturity of 22.5 years. By late June 2026, 4.5 years remained until its maturity date of 7 December 2030. It carried a fixed coupon rate of 4.75 per cent, paid every six months. As is customary in Britain, the bond’s price was quoted for each £100 of face value.

At the original auction, the British government sold bonds with a total face value of £4 billion, at an auction price of £100.78 for each £100 of face value. The price was therefore above face value because investors on the day of the auction were willing to accept a yield slightly below the coupon rate. The yield consequently came in below the coupon rate, at 4.69 per cent.

As in this case, Steven Hail said, when a government security is first issued the yield is often close to the coupon rate and the price close to face value. As time passes, however, larger differences can arise. He noted that by early June 2026 the price of this particular bond had risen to £101.54. Its yield had therefore fallen further below the coupon rate. This was, of course, related to the fact that British market interest rates were lower than they had been in 2007 at the original auction.

One thing that cannot be seen in either the bond’s price or its yield, Steven Hail emphasised, is the size of British public debt. The debt is much larger now than it was in 2007, yet interest rates on British government securities are lower.

4.4 Government securities in a state’s own currency are quite different from securities in a foreign currency

There are more complicated varieties of government securities, Steven Hail also explained. Around forty years ago, when inflation was high, index-linked bonds became popular, for example - securities in which the principal and interest payments were adjusted in line with inflation. But the most common government securities, he repeated, are relatively straightforward, with a face value, a maturity and an interest rate.

A common way of making government securities more complicated is to issue them in a foreign currency. This occurs, Steven Hail noted, when a country other than the United States issues securities promising payment of principal and interest in US dollars. This is particularly common among developing countries that enjoy only a lower degree of currency sovereignty (see Section 2.6) and have difficulty finding buyers for securities issued in their own currencies.

A buyer of, for example, an Argentine government security denominated in US dollars obviously faces less exchange-rate risk. The buyer is paid in dollars and does not have to worry about fluctuations in the Argentine peso. On the other hand, the buyer faces greater credit risk because the Argentine state does not issue the US dollar and may be unable to obtain the dollars it has promised to pay.

Steven Hail illustrated this with what happened to Greek government bonds during the euro crisis in 2012. Many financial-market investors believed that the Greek state would default on its debts - in other words, that credit risk was high. Two things happened. The prices of Greek government bonds collapsed because nobody wanted to buy them and everybody wanted to sell them. At the same time, their yields rose because the interest payments they promised became large relative to the much lower price investors had to pay for the bonds.

By contrast, someone buying a government security denominated in the currency issued by the state selling the security never needs to worry that the issuing government will be unable to pay the principal and interest - that is, about credit risk in the same sense. The Swedish state, for example, can never be forced to default on obligations denominated in kronor, its own currency.

The fact that a currency-issuing state never needs to default on payments in its own currency does not mean that it cannot choose to default. This has happened occasionally. Russia under Boris Yeltsin, for example, defaulted in 1998 on bonds denominated in roubles. Such cases are unusual, however, and are comparable to someone choosing not to pay their bills despite having money in the bank.

4.5 There are many misconceptions about government securities

There are many misconceptions, Steven Hail continued, about what government securities are, how they work and how their interest rates are determined. These misconceptions seriously distort political debate and push it towards austerity and spending cuts. We are constantly told that government budget policy or the condition of the economy will cause problems in financial markets; that financial markets will go on strike; that we depend on financial-market investors - sometimes foreign investors - to lend us money so that we can pay for public expenditure.

All such claims are nonsense, Steven Hail said. Provided government securities are issued in the state’s own currency, there is no reason for the state to issue them at all. A government does not need to borrow the currency that it itself issues. Remember how confused Jared Bernstein became when he tried to explain why the government borrowed its own money (see Section 2.1), Steven Hail reminded the audience.

During the pandemic, Steven Hail continued, the system in practice came close to one in which government securities were not issued at all. Governments sold securities in the usual way, initially to banks in the so-called primary market. But afterwards, in the so-called secondary market, governments bought the securities back through their central banks - the Riksbank in Sweden. Looking at the balance between the private and public sectors after those repurchases, the effect was almost as if the securities had never been issued in the first place.

4.6 The size of the public debt does not determine interest rates on government securities

How, then, should we explain the way interest rates on government securities - and therefore on public debt - move? Steven Hail asked. Could it have something to do with the size of the public debt?

In recent years, after the pandemic, interest rates on government securities have risen in Sweden, Britain, Japan, the United States and other developed countries. Good heavens, people think, this must have something to do with the large budget deficits and the large public debt.

But enormous public debts have accumulated in almost every country, Steven Hail objected, with Sweden an exception. Germany has much more public debt than Sweden, and Italy in turn has much more than Germany. Yet the curve in a chart of Swedish government borrowing rates looks much the same as the curve for government borrowing rates in other countries. Swedish government rates have certainly trended downwards for a long time, and someone might want to attribute that to responsible Swedish fiscal policy. But that argument does not hold, because government borrowing rates in other countries have followed the same broad path.

So the size of the public debt cannot explain why interest rates on government securities move in a particular way. What can?

4.7 Differences in currency risk and credit risk affect interest rates on government securities

Steven Hail continued his search for what determines interest rates on government securities by comparing the evolution of German and Italian government borrowing rates. Before 1999, Italy and Germany had different currencies, the lira and the Deutsche Mark. Italian government rates were higher than German rates. This reflected investors’ view that the Italian lira was riskier and less stable in value than the German mark. In other words, the difference between the two interest-rate curves reflected different levels of currency risk.

Then the common currency, the euro, was introduced. Investors - except Warren Mosler and others who understood Modern Monetary Theory - initially believed that Italian government securities were just as low-risk as German ones. Steven Hail pointed to a chart showing that German and Italian government borrowing rates were approximately equal from around 1999, when the euro was introduced.

The problem with the euro, however, was that there was no unconditional guarantee from the European Central Bank that it would provide financial support to euro-area states - ultimately, that it would buy their government securities. A new credit risk therefore appeared: the risk that individual governments would be unable to honour their debt obligations without assistance from the ECB.

Nor was the credit risk the same for every country; it could be higher or lower.

This became clear to everyone during the euro crisis from 2010 onwards. Steven Hail again pointed to the chart of Italian and German government borrowing rates. From 2008 the two curves diverged again. This time the difference could no longer be attributed to currency risk, since both countries used the same currency. Instead, the difference reflected varying credit risk in Italian and German government securities - a risk of which financial markets had now become aware.

The gap between German and Italian government bond yields was at its largest around 2012, after which the rates began to converge again. What happened then, Steven Hail noted, was that European Central Bank President Mario Draghi declared that he would do whatever it took to keep the euro area together. Investors concluded that the credit risk on Italian government securities had fallen relative to German securities, and Italian government borrowing rates fell relative to German rates as well. But some uncertainty remained. Investors understood that they could not be one hundred per cent certain that the ECB would support the Italian state in a crisis. Italian government securities are still regarded as riskier today, which is why Italian government borrowing rates remain higher than German rates.

Steven Hail regarded uncertainty over whether the European Central Bank would ultimately support individual euro-area states as a major flaw in the design of the euro. A central bank should always provide an unconditional guarantee that, as buyer of last resort if no other buyers are available, it will purchase the government securities issued by the country the central bank is meant to serve.

4.8 Expectations about what the central bank will do determine interest rates on government securities

Steven Hail was now getting close to an answer to the question of what determines movements in government borrowing rates. The same cannot be said, he argued, of economists committed to established neoclassical economics.

In Finding the Money, Olivier Blanchard, regarded as one of the world’s leading neoclassical economists, is asked why interest rates on public debt around the world fell so much between the 1980s and 2020. Blanchard’s answer is essentially that we have no idea. This means, Steven Hail argued, that neoclassical economists do not know what they are talking about.

L. Randall Wray, an economist associated with Modern Monetary Theory, is asked the same question in the film. His answer is that interest rates on public debt are fundamentally set by central banks.

Investors decide whether to place funds in government securities on the basis of what they expect the central bank to do with the policy interest rate over the life of the investment. Investors can always choose to keep their money in cash or in a bank account, where the return is influenced by the policy rate, and they have a reason to buy government securities only if those securities are expected to offer a higher return than the alternative. All economists agree on this, including neoclassical economists.

The interest rate on government securities, and therefore on public debt, has nothing to do with the size of the public debt, Steven Hail argued. There is only one member of what is commonly called the “bond vigilantes”: the central bank. Financial-market investors cannot dictate terms to a state that acts in concert with its own central bank and issues its own currency. Instead, investors must choose among the investment options the state provides: physical cash, reserves - digital cash - or government securities.

Market expectations of future inflation are also reflected in the interest rates, prices and yields of government securities. But this too can be linked to expectations about how the central bank will act, Steven Hail argued, because investors expect the central bank to raise the policy interest rate if inflation rises.

Nor is the policy rate the central bank’s only tool for influencing interest rates on government securities. The central bank can enter the secondary market directly - the market in already-issued securities - and buy government bonds. When it does so, bond prices rise and yields, or interest rates, fall. Many central banks did this both during the 2010s and during the pandemic. It is known as quantitative easing.

Japan went a step further and used yield curve control (YCC), meaning that it directly controlled government borrowing rates across different maturities. The Bank of Japan bought Japanese government securities on such a scale that it came to own almost half of Japan’s public debt. The Japanese state, in turn, owns its central bank. No wonder so many people become confused by discussions of public debt, Steven Hail remarked.

4.9 Government securities used to be issued because the state had to conserve its gold and silver

Remember how the process works, Steven Hail urged (see Section 2.4). The state must spend first, increasing the balances in banks’ accounts at the central bank - the reserves - while households and firms receive higher balances in their accounts at commercial banks. Private-sector actors can then use reserves to buy newly auctioned government securities, unless the reserves are paid back to the state in taxes and thereby deleted.

From the private sector’s point of view, buying government securities is therefore an asset swap. Reserves are exchanged for government securities.

Once upon a time there were good reasons for making this asset swap, Steven Hail continued. During the long period when gold and silver were used as money, from antiquity almost to the present day, the value of currencies was tied in one way or another to gold or silver. Coins were often themselves made of gold or silver. The state did not have access to unlimited quantities of these metals and therefore had reason to conserve its stocks of gold and silver.

In England and many other European countries - though not Sweden - the state therefore began issuing wooden tally sticks. These sticks were used as means of payment instead of gold or silver coins, conserving stocks of precious metals. Tally sticks could be used to pay taxes, and for that reason they had value in people’s hands. They were used mainly within the country as a domestic means of payment, while gold and silver coins were conserved for international transactions, where they were most indispensable.

The tally sticks collected by the English, and later British, state were stored beneath the Houses of Parliament in London, Steven Hail said. Eventually, in the early nineteenth century, it was decided to burn them. Unfortunately, the fire got out of control and the entire parliament building burned down. The parliamentary building standing in London today was constructed as its replacement.

In the eighteenth century, towards the end of the tally-stick era, Britain began using a new way of conserving the state’s gold reserves: the issue of government securities resembling those used today. The state persuaded private lenders to hand over their money. The value of the money was tied to gold because Britain had by then adopted the gold standard, promising to exchange each pound for a specified quantity of gold. Anyone who handed over money received a security in return - a government bond - promising repayment at a later date together with interest. The transaction gave the state greater access to gold and made it easier to maintain its promise to exchange pounds for a fixed quantity of gold.

Conserving gold remained a reason for issuing government securities under the Bretton Woods system, which lasted from the end of the Second World War until 1971. The value of the US dollar was tied to gold, while other participating countries fixed the values of their currencies to the US dollar.

Bretton Woods collapsed in 1971, and with it disappeared the need to conserve gold as a reason for issuing government securities. No state - Sweden, the United States, Britain or any other - any longer promised to exchange a unit of its currency for a specified amount of gold.

4.10 Raising or lowering interest rates is no longer a reason to issue government securities

After Bretton Woods collapsed, one reason for issuing government securities remained, Steven Hail said: controlling the interest rate. When the state runs a deficit - as it usually does, see Section 2.8 - the quantity of reserves in banks’ accounts at the central bank increases. Other things equal, an increased supply of reserves causes the price of reserves - the interest rate - to fall.

If the interest rate fell below the central bank’s target, the central bank needed some way of reducing the supply of reserves so that their price - the interest rate - would rise again. The available method was to issue government securities, persuading the private sector to surrender reserves in exchange for securities. This reduced the quantity of reserves and allowed their price, the interest rate, to rise. This was known as a scarce-reserves system.

But this reason for issuing government securities has also lost its importance, Steven Hail argued. From the 1990s up to the 2008 financial crisis, central banks around the world began paying interest on the funds - reserves - held by banks in their accounts at the central bank. Central banks could therefore control interest rates directly by administrative decision, without having to limit the total quantity of reserves. The scarce-reserves system had ceased to be necessary.

Central banks have instead created systems characterised by abundant reserves rather than scarce reserves. Today central banks will lend reserves to a private bank that wants to borrow them, at least so long as the bank can provide adequate collateral.

4.11 Government securities can now be seen as a service to the private sector

So why, Steven Hail asked again, do governments still sell securities? It is no longer about conserving a limited supply of gold or silver, nor about controlling interest rates. Why continue?

Governments continue to issue securities because private investors want them, Steven Hail answered. It is not the state that needs government securities; it is private-sector asset managers who need them.

This became very clear in Australia in the early 2000s, Steven Hail said. The government then in office delivered budget surpluses in eight years out of ten. This was, in his view, disastrous policy because it contributed to household debt tripling - in accordance with the inexorable logic of sectoral balances (see Section 2.8). In any event, the surpluses reduced the amount of government securities that needed to be issued, and the Australian government considered ending issuance altogether.

Asset managers protested. They needed government securities as safe, interest-bearing investments, among other reasons to meet obligations to retirees within Australia’s recently privatised pension system. The government gave way and continued issuing securities.

Government securities therefore perform useful functions for the private sector, Steven Hail concluded. But those functions could be provided by the central bank without issuing government securities. If policymakers want to provide private asset managers with safe, interest-bearing assets, they could simply offer term deposits at the central bank from which funds cannot be withdrawn before maturity. If desired, these deposits could be called central-bank bonds instead of government bonds. Fixed-rate term deposits at the central bank could also provide risk-free benchmark interest rates at all relevant maturities, a function that government securities perform for the private sector today.

4.12 Issuing government securities can be used to frighten the public and discipline governments

There is one function that government bonds perform that term deposits at the central bank could not perform: they can be used to frighten people and discipline governments’ fiscal policy, Steven Hail argued. But this is not really a desirable function.

In this context Steven Hail described the system for issuing government securities that was used until it was gradually abandoned from the 1980s onwards, known as the tap system. Under this system it was clearer that issuing government securities did not finance government expenditure. The system did not, however, guarantee that the total quantity of reserves would fall, nor was it based on market mechanisms, and for those reasons it was abandoned.

Under the tap system, the central bank announced that it would issue government securities and stated the interest rate it would pay. If an investor wanted to buy the securities, the investor did so - metaphorically turning on the tap. If there were no willing buyers, the central bank retained the unsold securities on its own balance sheet and credited the interest to the government’s own account. In other words, the state paid interest to itself.

The tap system naturally gave the bond market much less power, Steven Hail observed. It could not frighten governments in the way it can today because the system did not force the state to sell securities to the private sector at all.

We could return to a tap system at any time, Steven Hail argued, particularly because we no longer operate with scarce reserves. The state could simply tell financial markets: yes, we will continue to issue government securities, but this is the interest rate you will receive. You do not want them? We do not care. We will keep them at the central bank, on the central bank’s balance sheet. If this generates a surplus, it accrues to the central bank - an institution that is either part of the state, in some countries, or controlled by the state, in others.

4.13 Financial markets are not as powerful as people think - the story of Liz Truss

One conclusion from Steven Hail’s argument was that financial markets are portrayed in public debate as much more powerful than they really are. He illustrated this with the story of Liz Truss, who in the autumn of 2022 was Conservative prime minister of Britain for, as Steven Hail put it, less time than it takes a lettuce to go bad in the refrigerator.

Many people have attributed the brevity of her premiership to financial markets. That is wrong, Steven Hail argued. Her downfall was caused not by financial markets but by the Bank of England and by the fact that she did not have sufficient support among Conservative Members of Parliament.

To understand what happened to Liz Truss, Steven Hail argued, one needs to understand what determines the interest rate and yield on government securities. It is, as discussed in Section 4.3, the expected path of the policy interest rate over the period until the security matures.

Shortly after becoming prime minister, Liz Truss presented a fiscal package that became known as the mini-budget, Steven Hail recounted. If implemented, it would have produced deficits in the British public finances. Financial-market investors believed that the Truss budget would increase inflation, which in turn would lead the Bank of England to raise its policy interest rate. Those expectations of higher policy rates made investors willing to pay less for British government securities, because the interest rates on existing securities were below the rates investors expected to be able to obtain once the Bank of England raised its policy rate. British government bond prices fell and yields rose (see Section 4.3).

This had serious consequences for some British pension funds. The Bank of England, which supervised the pension funds, had allowed them to borrow short-term and invest the borrowed funds in long-term British government securities. This had been profitable because the short-term interest rate they paid was zero or close to zero, while the interest received on the government securities they bought was higher. In this way the pension funds earned money and were able to meet their obligations to pay pensions to those whose savings were invested with them.

But the pension funds’ strategy was very risky. If British interest rates rose, the prices of the government securities held by the funds would fall, weakening their financial position. With a weaker financial position, the funds would be required to provide additional collateral for their borrowing. To obtain that collateral they would have to sell some of their British government securities.

That is exactly the chain of events triggered by Liz Truss’s mini-budget. Pension funds began selling British government securities, adding to the fall in prices that had begun when the mini-budget was announced. Government bond prices fell further, while yields and interest rates rose.

4.14 In practice, the Bank of England brought down Liz Truss because her party colleagues did not support her

Public debate presented the episode as though Liz Truss’s deficit budget itself had driven up government borrowing rates. But that was not what had happened, Steven Hail emphasised. After a short period, the Bank of England announced that it would not allow the pension funds to collapse and that, if the adverse developments continued, it would begin buying government securities in order to push their prices back up. The announcement duly caused bond prices to rise. The crisis was over.

But it had already brought down Liz Truss, who resigned as prime minister shortly afterwards. The Bank of England could have intervened and lowered government borrowing rates at any point, but it did not do so until late in the episode, when Truss’s political fate had effectively been sealed. In practice, Steven Hail argued, it was the Bank of England and its governor who removed her. The central bank, he reminded the audience, is the only genuine bond vigilante (see Section 4.8).

Had Liz Truss enjoyed sufficient support among her own Conservative MPs, she could have overridden the central bank’s decision. Perhaps she did not understand this; in any event she did not have that support. So events took the course they did. The prime minister, the leading representative of the British state, was removed by another part of the British state: the central bank.

4.15 Government securities - an institution whose time has passed

Steven Hail did not say this explicitly, but the story of Liz Truss and her budget has helped reinforce the belief that the state exists at the mercy of financial markets - that financial markets can bankrupt the government if they refuse to lend it money. In the wake of the Truss episode, the issuance of government securities has become even more effective at performing the function discussed in Section 4.12: frightening people and disciplining governments’ fiscal policy.

The sound reasons that once existed for issuing government securities - reasons other than frightening people and forcing elected politicians into obedience - no longer exist, Steven Hail concluded. Their time has passed, just as the time of tally sticks and the gold standard once passed. Perhaps the end point, therefore, is not to issue government securities at all. The political path to that point, however, may be anything but straight.

The most important thing for you in Sweden to understand, Steven Hail concluded, is that financial markets do not have the power to frighten a Swedish government into submission, provided that the government understands how its own monetary system works.

5. SWEDEN’S ROAD TO AUSTERITY - AND THE ROAD AWAY FROM IT

5.1 Sweden works despite austerity, but its potential is being squandered

For the final session of the day, Steven Hail handed over to Max Jerneck, chief economist at the trade-union think tank Katalys and a sociologist by academic training, with a doctorate in the field. The aim of Katalys, Max Jerneck said, is to push for a more expansionary fiscal policy, full employment, an active industrial policy and the climate transition.

If those are your political objectives, Modern Monetary Theory provides a useful framework for thinking, Max Jerneck argued. It is not, however, something he often advertises explicitly. He prefers to keep MMT somewhat in the background and to use arguments that can be made as sensible, everyday and easy to understand as possible. Nevertheless, the perspective he uses is the MMT perspective, he said.

Max Jerneck began with a question he has occasionally been asked, including during a break at the day’s event. How can the world continue to function if only a select few understand how the monetary system works? Why does it not simply collapse?

The answer, Max Jerneck continued, is that the world does function, but an enormous amount of society’s potential is left unused. We do not make full use of our resources. In Sweden, this is currently reflected in an unemployment rate of nine and a half per cent. And that is only the tip of the iceberg - open unemployment. On top of that are all those who work part-time but want full-time jobs.

Then there is the issue Max Jerneck said he feels most strongly about: the climate transition. We should have started on it much, much earlier. We could also have done so if we had not been constrained by the idea that we first had to collect tax revenue in order to afford it. Instead, we could have looked at the resources that really matter - the real resources, people and their labour.

Now that route is blocked, Max Jerneck observed. The fiscal framework stands in the way. We can, admittedly, spend modest sums stimulating private investment in order to accelerate the climate transition. We can, admittedly, raise taxes - which will be painful for many people - in order to satisfy the framework while also making room for climate investment. But beyond that, we hit a wall.

5.2 Sweden’s deeply entrenched view that money is a scarce resource for the state

The belief that the state faces strict financial constraints is deeply institutionalised in Sweden, Max Jerneck argued. This was evident, among other things, when ESO - the Expert Group for Studies in Public Economics, an inquiry body under the Ministry of Finance - recently published the report A Balancing Act in Need of Support - An ESO Report on Green Industrial Policy (Balansakt i behov av stöd - En ESO-rapport om grön industripolitik, ESO 2026:5).

It is a very good report, Max Jerneck thought, although a very cautious one. Its authors - Åsa Löfgren and Patrik Söderholm - write that Sweden needs a more active industrial policy to accelerate the climate transition. A little more state financial support is required. We need to spend a little more.

At the seminar held when the report was released, another economist immediately objected. Yes, the economist said, we could use taxpayers’ money to stimulate green investment, but why should taxpayers have to bear those costs? Ultimately, the dissenting economist continued, we have to choose: either we build a battery factory or we keep the hospital open. We cannot do both. The battery factory and the hospital compete for resources, so we have to choose one or the other.

Nobody at the seminar objected to this way of thinking, Max Jerneck recounted. Certainly, people at the seminar had said, the state can take a somewhat longer-term view than the private sector, so we need state involvement in order to bring about some investments.

But nobody addressed the fundamental point: the battery factory and the hospital do not compete for the same resources. We can have a battery factory - and indeed we do, Max Jerneck pointed out, although Northvolt’s factory in Skellefteå is unfortunately a failed example of Swedish industrial policy. We can also have hospitals. Contrary to what was said at the ESO seminar, these two activities do not compete for the same resources. The battery factory primarily employs engineers, many of them immigrants from other countries, while the hospital mainly employs people who speak Swedish, have different training from the engineers at the battery factory, and work in entirely different occupations.

The workers at the battery factory and the hospital staff are therefore not interchangeable, Max Jerneck emphasised. You cannot simply move hospital staff to the battery factory and hope that it will work. And the hospital already exists. It has already been built. You do not need steel and concrete to build the hospital again. Building a battery factory, on the other hand, does require steel and concrete. The question to ask, therefore, is whether we have enough steel and concrete, or whether they are becoming scarce. And if they are becoming scarce, how can we produce more, assuming we believe this can be done without excessively harmful consequences for nature and the climate?

These were the thoughts running through Max Jerneck’s mind, he said, as he listened to the discussion at the ESO seminar. What was striking was that the economist who did not want taxpayers to bear the cost of a battery factory viewed the state in exactly the same way as he viewed a business. He considered only, in purely monetary terms, whether building the battery factory would be worthwhile. All resources, every form of human expertise, were flattened in his analysis into a figure in kronor and öre. He then asked what else could be bought for that amount if the battery factory were not built. The battery factory would be built only if, over time, it generated a financial return for taxpayers.

5.3 Money is a liquid and inexhaustible resource; real resources are illiquid and limited

The economist at the ESO seminar simply started from the same mistaken premise Steven Hail had described earlier in the day (see Section 2.1). The economist treated money as a finite and limited resource. Completely wrong, Max Jerneck also argued. Money, by contrast, is an unlimited resource. We - meaning the state - can spend as much as we choose. Moreover, money is completely liquid: it is immediately available when we need it.

Exactly the opposite is true of real resources - labour, factories, hospitals and roads - Max Jerneck argued, in agreement with Steven Hail. Those resources are limited and they are not liquid. You cannot simply dismantle a battery factory and turn it into a hospital, or vice versa. At every point in time we live in a world in which we have inherited real resources of particular kinds and in particular quantities from the past. Those resources were created for particular purposes and can only be used for those purposes, at least without substantial transformation.

The same discussion, based on the same mistaken assumption that money is a finite resource, occurred when the government recently decided to halve the price of monthly public-transport passes. Max Jerneck regarded this as one of the few good decisions taken by the current government. Objections immediately appeared, however, saying that the measure would cost SEK 7 billion and that the money could have been used for nurses and doctors instead.

This way of thinking - treating money as a finite resource while treating real resources as though they were infinite and perfectly liquid - is a major problem, Max Jerneck concluded.

When the state makes investments, it must of course weigh benefits against costs. The crucial question, Max Jerneck emphasised, is how those costs are calculated. The calculation has to be broadened so that it includes more than merely the state’s financial outlays.

5.4 Failing to use real resources makes us poorer

Railway construction provides another example, Max Jerneck argued. Many economists have calculated what it would cost to build high-speed railways in Sweden. Their conclusion has been that it is too expensive and not worthwhile. The money - the financial resources - could be put to better use elsewhere.

But if we look at the Swedish economy in terms of the real resources available to us, the picture is different, Max Jerneck continued. We have steel and concrete production. We have trained people working in those industries. The owners of the facilities in which steel and concrete are produced want to increase their sales.

State funding of railway construction would be good news for these industries and for the people who work in them. The wheels of the economy would turn faster. More people would find work in the activities needed to build the railways. Some might leave their existing jobs to work on railway projects, and the vacancies they left behind might then go to some of those who are currently unemployed. If that happened, total resource utilisation would rise as a result of state railway investment. In that case, viewed in terms of real resources, the investment would not really represent a cost to the economy at all.

We are nowhere near using the economy’s full capacity today. Historically, it has often taken wars or comparable emergencies to make that happen, Max Jerneck said. If we are to move from today’s low level of resource utilisation towards a higher one, we need a different way of looking at the economy. It consists of real resources that we can use - resources we must use if we are to improve and expand them rather than allowing them to lie fallow and deteriorate. Unemployment is a good example of resources being allowed to deteriorate: people who remain unemployed gradually lose their occupational skills.

5.5 Three and a half decades of austerity - how did Sweden get here?

Imagine if Sweden had drawn more inspiration from Modern Monetary Theory in managing its economy over recent decades, Max Jerneck continued. Things could have looked very different.

The crisis of the early 1990s was, of course, the great historical turning point at which insights associated with MMT could have led Sweden in a very different direction from the one it actually took. But the severe crisis Sweden experienced in the early 1990s did not arise from nowhere. It was the result of imbalances that had accumulated over several decades, Max Jerneck stressed.

Until 1992 Sweden operated a fixed exchange rate. The value of the krona was tied to the value of other currencies. The major problem was that the krona’s exchange rate was too high to keep Swedish industry competitive, Max Jerneck argued. From the beginning of the 1970s onwards, Sweden therefore repeatedly decided to devalue the krona - to reduce its value relative to the currencies to which it was pegged. In this way Swedish exports became relatively cheaper.

This policy did not work, however. All Sweden achieved was lower wages. In practice, there was no real-wage growth between 1975 and 1995 because the currency kept being devalued.

Those responsible for Swedish fiscal, monetary and exchange-rate policy were nevertheless completely fixated on preserving the fixed exchange rate and preventing the government budget from going into deficit. Everything was geared towards increasing exports, including by reducing real wages, at a time when the world economy was contracting after the 1979 oil shock. It was a mercantilist policy.

Swedish economic policy as a whole was genuinely dysfunctional throughout the 1970s and 1980s, Max Jerneck concluded. One alternative that nobody considered was allowing the exchange rate to float and letting the Swedish economy be driven by domestic demand rather than demand from abroad.

Towards the end of this period, in 1985, the credit market was deregulated, leading to an explosive increase in private debt. In the early 1990s the fixed exchange rate then came under ever greater pressure, Max Jerneck pointed out. The Riksbank pushed its interest rate up, at one point to 500 per cent, in an attempt to defend the fixed exchange rate, but ultimately had to give up. In 1992 Sweden therefore moved to a floating exchange rate, the system that remains in place today. Hardly anyone has since been heard calling for a return to the fixed exchange rate that had previously been regarded as self-evidently necessary.

5.6 A depression sweeps in

More serious, of course, was that Sweden had been dragged into a depression at the beginning of the 1990s - the worst economic crisis Sweden had experienced since the Depression of the 1930s, Max Jerneck observed. Unemployment rose to almost 12 per cent.

Had sensible conclusions been drawn from Sweden’s economic crisis in the early 1990s, they would have started from the fact that a speculative bubble had developed as a result of the build-up of private-sector debt, Max Jerneck argued. The bubble had been made possible by the deregulation of the credit market. This could be seen clearly in Steven Hail’s chart of Sweden’s sectoral balances, Max Jerneck pointed out (see Section 2.8). The private sector ran large deficits in the late 1980s while the state and the rest of the public sector ran surpluses.

Everything changed almost overnight when interest rates rose and tax changes were introduced that made construction much less profitable, Max Jerneck said. The private sector moved from borrowing and spending to retrenching and repaying its debts. Sweden experienced what the economist Richard Koo would call a balance-sheet recession.

The appropriate response to the loss of private-sector demand should obviously have been an increase in public-sector demand - in other words, higher public spending, Max Jerneck explained. If the private sector is no longer spending enough to keep the wheels of the economy turning, the public sector has to spend more.

That response did occur, although involuntarily and on an insufficient scale. The budget deficit increased because tax revenues fell and expenditure on unemployment insurance rose. The budget deficit helped moderate the downturn, Max Jerneck argued.

Then events took another unfortunate turn when the Social Democrats came to power in 1994. The conclusion drawn by the new government - with a certain Göran Persson as finance minister - was that the state had to cut its spending. The enormous public debt had to be reduced. The entire economic-policy debate came to revolve around this, even though Swedish public debt was no higher than about 70 per cent of GDP. Everyone agreed that this should be the direction of economic policy, Max Jerneck recounted, even though inflation was zero or even below zero - that is, there was deflation, falling prices - and private-sector demand was very weak. Some wanted to raise taxes a little more; others wanted to cut spending a little more. But the public debt had to come down.

An observer familiar with Modern Monetary Theory would have thought that everyone involved had taken leave of their senses, Max Jerneck argued. How do you imagine you can save your way out of a recession? Why should the state not spend when everyone else is retrenching? Those are the questions such an observer would have asked.

5.7 The lesson Ernst Wigforss had taught Sweden was forgotten

We have known how this works since the 1930s, Max Jerneck continued. Ernst Wigforss, the Social Democratic finance minister from 1932 onwards, asked in an election pamphlet published that year whether we can afford to work. We have factories standing idle; we have workers who are not working - can we bring the two together, or is that a luxury we cannot afford? That was how Wigforss spoke, and one might have thought people had learned the lesson.

But Wigforss’s lesson had been forgotten. In the 1990s people were afraid of the public debt and of the interest payments on it.

In one sense this is understandable, Max Jerneck conceded, if you imagine the government budget as a household budget. From that starting point it is frightening to think of having large debts, being unable to pay the interest on those debts, and having your creditors demand an even higher interest rate before they will lend you more. That is about the worst position in which a household or a business can find itself.

But the Swedish state is not a household or a business. It can always make payments on debts denominated in its own currency. If it thinks the interest rate is too high, it can simply tell the Riksbank to lower it, Max Jerneck explained: buy government bonds so that the interest rate falls (see Section 4.8).

In the early 1990s there would not even have been a legal problem with the government giving such instructions to the Riksbank, because the Riksbank had not yet been made independent of the government. Some people at the Riksbank understood this, Max Jerneck said, and were afraid that the Social Democrats would order bond purchases if they came to power. Riksbank officials regarded such political direction as unsound and therefore wanted to make the Riksbank independent as quickly as possible, so that it could refuse to lower interest rates on political instructions. There are memoranda written at the Riksbank during this period showing this, Max Jerneck said.

But the Riksbank officials’ fears proved unfounded. When the Social Democrats came to power, they chose austerity rather than telling the Riksbank to lower interest rates.

5.8 Here we are - still pursuing essentially the same policy more than 30 years later

Austerity then characterised the 1990s. Unemployment did fall somewhat, but it never returned to the levels that had prevailed before the crisis of the early 1990s. In Max Jerneck’s view, the Social Democratic government - in which Göran Persson soon became prime minister rather than finance minister - had good intentions in many respects. Among other things, Göran Persson proposed a programme of green investment worth SEK 50 billion a year, a very large amount of money at the time.

But it remained only a proposal. The investment programme was abandoned because it was considered too expensive. It did not fit within the new, strict fiscal framework (see Section 3.11) that had just been introduced.

The unemployment that stubbornly remained eventually contributed to the fall of the Social Democratic government. The right blamed unemployment on the unemployed themselves, and blamed the Social Democrats for simply handing out benefits so that people could stay at home without working. That was enough to produce a major victory for the right in the 2006 election, after which the Moderate Party’s Fredrik Reinfeldt became the new prime minister.

Since then - now for 20 years - there has been no left-wing majority in the Riksdag. Max Jerneck believed that by abandoning the issue that had been absolutely central since the days of Ernst Wigforss in the 1930s - full employment - the Social Democrats gave up their sharpest political weapon. They began to be perceived as a party for benefit recipients and people living off the welfare state rather than as a workers’ party capable of delivering economic growth and prosperity. For the Social Democrats, the political price of austerity has been enormous.

For Sweden as a country and a nation, the price has been even higher. The fiscal framework has prevented full use of resources, almost produced deflation during the 2010s, kept unemployment high, and meant that every proposal for investment in a green transition has run aground on the question of how it is to be financed. Max Jerneck’s verdict on austerity was severe.

5.9 How do we move forward - and how do we explain the way forward in terms people can understand?

Max Jerneck then asked whether anyone in the room at Moderna Museet had ideas about how the public conversation might be changed without necessarily going straight into Modern Monetary Theory, which can be difficult for many people to digest.

One suggestion from the audience was to try to banish the expression “taxpayers’ money” from the debate and replace it with “public funds” or “public resources”. Not only is the expression “taxpayers’ money” inaccurate; it also signals that people who do not pay tax do not contribute, and that those who pay less tax contribute less.

The discussion turned to taxation and to how, from an MMT perspective, the function of taxes should be explained. What happens if people understand that taxes are not needed to pay for government expenditure? Print the money, then - do not take mine, people might say.

Max Jerneck thought that inflation and inequality should be central to the answer to such questions. We need taxes so that government expenditure does not cause inflation - something people genuinely dislike. Equality, reducing income disparities, should also be a persuasive argument, as should equality in the further sense that taxation takes away some of the political power of the rich.

Inflation itself is also a strong card for Modern Monetary Theory compared with mainstream economics. Max Jerneck said he had read a 1990s economics textbook written by Klas Eklund, one of Sweden’s most highly regarded economists. In the book, Eklund wrote that economists had once tried to determine where inflation came from - the demand side or the supply side - and then decide which measures should be taken against it. We should not bother with that, Eklund wrote. You can never really know anyway. Instead, simply raise interest rates; it is straightforward. An independent body should be given the authority to do so, because interest-rate increases can be painful for many people and elected politicians can be expected to shrink from imposing them.

That is the dividing line, Max Jerneck explained. Should we have a diverse and well-stocked toolbox for dealing with inflation, as Modern Monetary Theory argues, or should we rely only on the policy interest rate, as Klas Eklund advocated and as the current economic-policy regime does?

5.10 Borrow the opponent’s language, and do not sneer at small steps in the right direction

Max Jerneck also agreed with a participant that it may be tactically clever to borrow some of the language of the current fiscal framework. Even someone starting from Modern Monetary Theory will probably want rules and guidelines for fiscal policy, as Steven Hail had emphasised earlier (see Section 3.11). But sound fiscal rules will focus on real resources and the management of inflation, not on achieving one particular budget balance or another. An advocate of Modern Monetary Theory is therefore quite conventional in this respect: like everyone else, they want fiscal policy to be governed by rules and principles.

Similarly, Max Jerneck argued, every possible move forward should be made, both within today’s fiscal framework and through adjustments to it.

One measure within the existing framework that Max Jerneck mentioned - and on which Katalys is currently working - is to make the calculation of the business cycle more generous. The balanced-budget target in today’s fiscal framework applies over the course of a business cycle. If, Max Jerneck reasoned, we make a more realistic assessment of how far the economy is from full resource utilisation, we will find that it is further from the top of the cycle. In that case, even the current fiscal framework permits larger deficits.

One adjustment to the framework that Max Jerneck could envisage would be the introduction of a separate investment budget - in other words, excluding certain government investment expenditures from the calculation of the public sector’s budget balance.

Another line of reasoning that could be used and turned on its head, Max Jerneck said in response to a question from the audience, is what is usually called Baumol’s cost disease. This is an economic phenomenon in which wages rise in labour-intensive service sectors such as healthcare, education and social care even though productivity does not rise there at the same rate. To retain staff, wages nevertheless have to rise in line with those in other, more productive sectors of the economy, such as manufacturing, which is said to make welfare services increasingly expensive over time.

This is not a disease, Max Jerneck argued; it is a blessing. Because we have manufacturing and other sectors in which productivity continually rises, people working elsewhere can also earn a decent wage. A person can drive a bus and enjoy a decent standard of living because of those productivity gains.

The increase in productivity itself means that we can afford this, because fewer and fewer people are needed to manufacture things. That frees resources that can be used to expand welfare services. The costs of those sectors can continue to rise without causing additional inflation because productivity is increasing elsewhere in the economy. We no longer need to employ 80 per cent of the population in agriculture. Three per cent is enough, and we can still put food on the table for the whole of Sweden.

Max Jerneck also commented on Steve Keen’s thoughts about a Job Guarantee (see Section 3.9). Even with a proposal like this, one has to think about framing, language and tactics, he argued. Objections may be raised that jobs provided under the Job Guarantee would be make-work. The crucial thing is to be very concrete and explain what kinds of jobs are envisaged. There is a great deal of work that needs to be done but does not happen because of, for example, budget constraints on municipalities and regions. The important thing is to say exactly what work is meant. As a matter of tactics, one might begin by guaranteeing summer jobs for everyone aged 16 to 25 and then gradually expand the Job Guarantee from there.

Finally, Max Jerneck issued a request for someone who is good with numbers. We need to find out how much of the government’s interest payments go to the state pension funds - that is, how much of the interest paid by one government agency, the Swedish National Debt Office, goes to other state bodies, the Second, Third, Fourth and Seventh AP Funds. That would be an interesting fact to establish, Max Jerneck thought. If someone objects that a higher public debt leads to larger interest payments, one could probably reply, among other things, that a substantial share of those interest payments goes back to the state itself. Anyone who thought they could produce such figures was invited to contact Max Jerneck.

6. KNOWLEDGE THAT CAN MOVE US FORWARD - AND A RESPONSIBILITY TO SPREAD IT

After Max Jerneck’s presentation, the event drew towards its close. Over the course of a morning and an afternoon, Steven Hail and Max Jerneck had covered enormous ground and shared a great deal of knowledge from an economics of possibility and confidence in the future.

Without such knowledge, it will probably not be possible to break the stranglehold that austerity has over Sweden and much of the rest of the world. And if that stranglehold cannot be broken, the climb will unfortunately be steep when it comes to creating jobs and security for the majority, or finding the resources for a green transition.

But if knowledge of how our monetary system works spreads, then understanding of what can be achieved through economic policy will spread as well. That would represent major steps on the road from austerity to resilience.

Those of us who took part in the event - and anyone who has read this report all the way to the end - can help those steps to be taken. That is something to be glad about, but it is also a responsibility.

2) Fremantle Dockers AFL player, Bailey Banfield.

3) Professional footballer, Ciaran McKenna.

4) Opera singer, Jarno Lehtola.

5) Comedian and musician, Christian Reilly.

6) Best-selling author and public speaker, Janine Rogan.

7) Jazz musician, Buddy Wells.

They are all current students on or graduates of the Modern Money Lab/Torrens University Australia online graduate programme in the Economics of Sustainability.

They all have expertise in modern monetary theory and ecological economics, among much else.

You don’t have to be a sportsperson, musician or author to join them, but you will meet a wide range of interesting, talented and highly motivated people if you do.

I sometimes mention the Meese-Rogoff result from 1983, where two prominent (now, if not then, later) neoclassical economists reluctantly admitted that no neoclassical exchange rate theory was of any use at all in forecasting movements in exchange rates, and that this had nothing to do with the market being informationally efficient.

Even 40+ years later, this result has never convincingly been overturned.

Among other things, it means that changes in relative interest rates are not a useful method of forecasting later changes in exchange rates.

Here is the original paper.

Empirical exchange rate models of the seventies (you may as well say of the 2000s) - do they fit out of sample?

Answer - no, or not obviously.

Next time you recommend a low (or even zero) policy interest rate, and somebody asks you about collapsing exchange rates, show them this.

Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: Do they fit out of sample? Journal of International Economics, 14(1–2), 3–24. https://doi.org/10.1016/0022-1996(83)90017-X

In private conversations, economists from the dominant New Keynesian branch of the neoclassical school will often accept that they have no reliable model of inflation.

Their discussions and the dynamic stochastic general equilibrium models they use to give mathematical credibility to those discussions are dominated by the notions that inflation is generally a problem of excess demand and that the management of inflation depends vitally not only on limiting demand today, but on ensuring that businesses and households expect demand and therefore inflationary pressures to remain limited in the future.

Increases in current or expected future inflation need to be met with larger increases in policy interest rates, so that downward pressure is placed on excess demand, to ensure that unemployment does not fall below its non-accelerating inflation rate (NAIRU), and it may even be necessary to have a period of higher unemployment to place downward pressure on inflationary expectations. Failure to do this early enough might require bigger and longer-lasting job losses later on to restore price stability.

There will be a variable in their mathematical models to represent increases in costs driven by shocks to supply, and they might occasionally discuss the impact of distributional conflict on NAIRU, but that is about it where inflation is concerned.

An implication of this is that the management of inflation is something best left to skilled central bankers and their economics team and that the best governments can do is to avoid putting upward pressure on demand and inflationary expectations by avoiding structural fiscal deficits, because otherwise central banks will be forced to raise interest rates higher and crowd out productive private-sector investment to make room for unproductive government spending.

But as I said, they will sometimes admit that none of the above has overwhelming empirical support, and that they are really flying blind. They have often in recent decades overestimated inflation risk and subsequently had to chase inflation rates down with interest rate cut after interest rate cut in sluggish economies without being able to drive demand up and push inflation up into their desired target range. Subsequent to the pandemic and the break-out of war between Russia and Ukraine, the opposite happened. The original drivers of inflation were primary sector prices which are traditionally volatile and are omitted from the measures of underlying inflation most central banks use to guide policy decisions. Central bankers did not anticipate the persistent inflation which happened. On this occasion, they underestimated inflation risk.

The fact is that they lack the tools to manage inflation effectively in the first place. To understand this, we need to think about inflation more carefully. Measures of inflation are not a natural phenomenon, and there is no single and objective rate of inflation at a particular point in time in any country. In most discussions of inflation, people are talking about the annual rate of increase in a statistic called the Consumer Price Index (CPI).

The CPI measures the rate of increase over time in the cost of a sample of goods and services which is supposed to represent changes in the cost of living of a representative household. There are many technical issues and problems involved in constructing and recording such statistics, which we will not examine here. In Australia, the CPI reflects thousands of prices, collected now every month, divided up into 87 product classes, with something like 10% of the sample related to the primary sector of the economy, 30% secondary sector and 60% tertiary sector.

Dividing up the index like this into sectors reminds us that the economy is not only a monetary system, but also a material system. The ecological economist Herman Daly borrowed a term from biology, when he referred to an economy as a trophic system. The primary sector includes food, energy sources, metals and non-metallic minerals; the secondary sector includes manufactured goods; and the tertiary sector refers to services.

The secondary sector depends on the primary sector, and the tertiary sector is based on both the primary and the secondary sectors. The ultimate basis for economic activity is the natural environment of which we are all a part and on which everything depends.

Gardiner Means and Michal Kalecki, in the 1930s and subsequently, explained that it is generally only in the primary sector of the economy that prices can be described as market determined, and that the traditional demand-supply model has any validity, as an explanation of movements in prices over time. In the secondary, and especially in the tertiary sector, prices are administered by firms, estimating unit costs and adding a mark-up onto costs to determine selling prices. The mark-up needs to cover financing costs, and will be greater in industries where there is a higher degree of monopoly or less competitive pressure. In the administered price part of the economy, increases in demand which do not increase unit costs will not be inflationary, especially when firms have unused capacity which can be applied to supply additional demand in a growing market in defense of market share. Under normal circumstances, firms will be reluctant to raise prices relative to their competitors, and aware that prices charged are a form of social contract with their customers, so outside of periods when a primary sector shock has created uncertainty about inflationary pressures, will be reluctant to increase prices for any reason except an increase in production costs.

This description of the economy as a trophic system reminds us that it is generally primary sector prices which are not only the most volatile prices in the economy, driven by demand and supply and especially supply-side shocks, but also the most systematically significant. The most severe inflationary episodes in high income countries since 1945 have been driven by such primary sector shocks. Energy prices drove such events in 1974, 1979 and 2022 particularly. There are exceptions. After the COVID pandemic, for example, it was more about the release of spending power in economies where supply chains had not yet had time to recover, creating bottlenecks and consequent shortages.

These shocks have an initial impact on the economy and on inflation via the primary sector part of the CPI, but of course this greatly underestimates their significance over time. As cost increases percolate across the secondary and tertiary sector, prices rise more quickly than before there too, and there are then feedback effects, where secondary and tertiary sector prices impact costs and supply conditions in the primary sector. This can be, and was in the 1970s, prolonged and exacerbated by a social conflict between labour and capital, as workers react to an acceleration in their cost of living by seeking larger rates of increase in nominal wages to defend their real wage rates. Such wage increases are defensive however, and not generally the cause of the inflationary episode.

Firms in the administered sector with more price-setting power are able to defend their profit margins and even build them, as this process develops, because price increases are more easily co-ordinated by price leaders and their fellow oligopolists at these times, and because their customers are less able to identify whether increases in prices are justified by cost pressures. It is this effect which Isabella Weber and others termed sellers’ inflation after 2020, and which contributed to her calls for strategic price controls and windfall taxes in such industries.

There are of course also material linkages between industries within each sector, with primary sector producers relying on energy inputs; finished manufactured goods incorporating manufactured components, and service sector industries depending on other service firms to provide their finished products. The important point is that the economy is not a set of independent markets, each with its own equilibrium, where resources are allocated according to movements in relative prices, but instead an interconnected system of material and monetary flows. Shocks to one part or some parts of the system, like a pandemic freezing supply chains, a war, or disruptions due to climate change, have the potential to impact the whole system, and to generate feedback effects. The economy is in a sense a circular system, with everything depending on everything else.

This observation takes us back to the French physiocrats like Quesnay in the 18^th century, to Karl Marx, to the founder of general equilibrium economics Leon Walras (at least in a sense) and to the enigmatic Pierro Sraffa. They all saw the economy as a system of linkages. But the most useful representation of the economy as a material system that has been developed is Wassily Leontief’s Input-Output (I-O) analysis.

I-O analysis fell out of favour somewhat in the 1980s, but is enjoying a comeback, partly because economists like Weber and the MMT economist Patricia Pino and others have identified how useful it is at identifying vulnerabilities to inflation and potential mechanisms to limit such vulnerabilities, and partly because high quality data is now more widely available than was once the case because of developments in national income accounting.

One paper which is worth reading for everyone with an interest in policy making is Inflation in times of overlapping emergencies: Systemically significant prices from an input–output perspective (Weber et al. 2024). This paper repeats Leontief’s critique of the standard mainstream aggregative approach to inflation and uses I-O analysis to drill down into the economy and discover those microeconomic prices and industries which are significant drivers of inflationary episodes. I won’t list them here, but they are what you would expect based on our discussion so far, in most cases primary sector prices, like food and fuel, or secondary sector prices very close to the primary sector, like chemicals or food processing. Exceptions are wholesale trade and housing costs.

A very recent paper, which again I highly recommend, is Understanding the inflation risks of public capital investment: An input-output modelling approach (Pino-Argumedo 2026). In this paper, Patricia Pino outlines a method for assessing the potential short-run and long-run impact on prices and therefore on inflation risk of public investment projects within the Leontief framework. She incorporates a measure of the degree of excess capacity in each sector of the economy, and traces through the potential inflationary impacts of additional demands for real resources during the construction phase of the project, and then the potential disinflationary effects of the increase in productive capacity which the investment provides on its completion. This is in my opinion an important contribution to the modern monetary theory approach to public finance.

Modern monetary theory tells us that a currency-issuing monetary sovereign government is limited in the investments it should make not by purely financial concerns, but by the productive capacity of the economy and inflation risk. Aggregative fiscal rules make no sense. A better approach to public finance is to fund through currency issuance investments which make use of available real resources today to create a future economy which provides human and environmental well-being while avoiding or mitigating the risk of inflation driven by current bottlenecks and future shocks. Patricia Pino’s application of her I-O modelling exercise to the UK tidal lagoons project is an excellent example of what is possible.

Since I have mentioned MMT, you might wonder how all the above fits in with Warren Mosler’s story of what determines the price level in an economy. It won’t surprise anyone if I say Mosler is absolutely correct that in modern economies the currency issuing government has a great deal of influence over the price level, via the prices it is prepared to pay for goods and services. He recommends the introduction of a transition job, or job guarantee, scheme. The government can set the minimum wage in the economy via this program, and other wages and prices will then be set relative to this minimum wage. The government here is choosing to set an individual price to anchor the general price level and then allowing the economic system to set all relative prices.

There is nothing wrong with the logic of this in principle, and it does not contradict what economists like Weber say when they discuss price shocks in I-O frameworks. Mosler is talking about the absolute price level and Weber and others are discussing relative prices, both now and over time. However, you could criticize Mosler’s view on the grounds of political economy, which to be fair is not his primary concern, as he is more interested in economics from a technical perspective than a political one. In the event there is a shock to primary sector prices, perhaps due to a catastrophic climate event increasing food prices, it will not be possible to leave the job guarantee wage fixed in nominal terms, and indeed the government would have to increase the prices it pays for goods and services more generally, to maintain social stability. So while in principle the government sets the price level by fixing what it will pay for an hour of labour, in practice in an era of shocks and emergencies the description of inflation shocks as being mainly driven by primary sector shocks, transmitted through the economy as a trophic system of material dependencies, with strategic industries and prices which need to be addressed to limit inflation vulnerabilities is rightly where economists like Weber and Pino-Argumedo are concentrating their efforts.

And if you are one of those central bankers or other neoclassical macroeconomists who are prepared to admit your approach to modelling inflation is not reliable, may I recommend the following papers for you to read, in the order they are listed below.

Key Readings:

Weber, I. M., Lara Jauregui, J., Teixeira, L., & Nassif Pires, L. (2024). Inflation in times of overlapping emergencies: Systemically significant prices from an input–output perspective. Industrial and Corporate Change, 33(2), 297-341.

Argumedo, P. P. (2026). Understanding the Inflation Risks of Public Capital Investment: An input-output modelling approach. Working Paper 2026-05. UCL Institute for Innovation and Public Purpose, University College London.

1. Kelton v Moore.

2. Galbraith v Rogoff.

3. Mosler v Murphy.

1. Kelton v Moore (2025).

The most recent of these dates from last year, and features Professor Stephanie Kelton going into the lion’s den, in a sense, because it was organised by the conservative Steamboat Institute, with a stated mission to “promote America’s first principles and inspire active involvement in the defense of liberty”.

The question Stephanie was asked to debate was ‘Should the U.S. federal government make reducing the national debt a fiscal priority?’ It would be an unusual politically conservative institute that would not have a clear prior view on this issue, and it is unsurprising that the majority of the audience before the debate was in the ‘yes’ camp.

Stephanie’s opponent was Steve Moore, at the time senior economist at the Heritage Foundation, long time contributor to The Wall Street Journal, and advisor to the presidential campaign of the then newly inaugurated Donald J. Trump.

Moore led off the debate, using emotive language like obscene, outrageous and fraudulent in the context of federal spending. He claimed that ‘everybody knows we can’t keep doing this’. He stated, rather than argued, that the national debt would be a burden on people’s children and grandchildren and on future generations. His view was that growing the economy would be essential to reduce the debt, and that the way to grow the economy was to cut what he saw as fraudulent spending on social security, Medicaid and other programs. He was in favour of privatising social security and educational funding. Failure to reduce the national debt would be, he claimed, dangerous, catastrophic and would lead to crisis.

He never quite articulated how this would happen.

Professor Kelton responded by saying she was ‘not afraid of the red line’ (that is, of fiscal deficits and what we misname the national debt). She was not interested in the usual debate between Democrats and Republicans, where both sides agonise over the fiscal balance, and blame each other for ongoing deficits.

Kelton explained to the audience how the US government spends – Congress authorises spending, and then there is an instruction to the Federal Reserve to credit private bank accounts and the electronic reserves those banks hold at the Fed.

Government spending and all spending has an inflation constraint – indeed, an inflation or real resource constraint was consistently emphasized by the modern monetary theorists in all three debates discussed here – but there is no solvency constraint for the federal government of an economy with a monetary system like that of the USA.

Stephanie went on to explain that the government must spend reserves into the system before they can be used to pay taxes; that a government deficit is essential in a country like the USA for there to be a private sector financial surplus; that government deficits are therefore needed to provide the credits to keep the economic system afloat; and that the so-called national debt is just the savings in US dollars of everyone else.

Dollars spent into the private sector could sit in checking accounts at the Fed or be converted into treasury securities and transferred to savings accounts at the Fed. Paying down the national debt would be dangerous and had led to depressions or severe recessions every time it had happened across US history.

Why prioritise shrinking the surplus of the non-government part of the economy, she argued, when doing so was unnecessary and even dangerous.

Steve Moore essentially ignored everything Kelton had said, and instead blamed Joe Biden for the post-pandemic inflation which had happened in the USA and claimed that MMT had been tried and failed in Latin America.

He did not seem to understand that modern monetary theory is a description of the monetary systems which actually exist today, and that it is MMT economists who (arguably) more than anyone else discuss the limitations that fixed exchange rates and/or foreign currency denominated debt and poor trust in public institutions and the tax system impose on those countries with some or all of these characteristics.

This was pointed out by Stephanie Kelton, who explained that post-pandemic inflation was a global phenomenon to which both objective research and common sense have indicated that fiscal support contributed only in a marginal way.

Moore then argued that Covid shutdowns were a catastrophe; that Reagan’s spending was good and Biden’s bad, for reasons he could not fully articulate; that ‘you don’t stimulate the economy by just giving people money’; and that ‘we should cut the capital gains tax’. His supply-side policy ideas all seemed to imply making the distribution of income and wealth in the USA even less even than it had been already.

As the debate went on, to my ears Moore became increasingly inarticulate, and at one point asked whether Kelton’s 2020 New York Times bestseller The Deficit Myth had just come out.

Kelton finished off by firstly explaining the role of a job guarantee in eliminating involuntary unemployment and then describing how alarm bells regarding the national debt had been used to scare people across the entire moder history of the United States. She used the period 1980-2020, when the so-called debt had increased continually while interest rates had fallen almost the whole time, to show that the loanable funds theory that deficit spending crowds out private investment by raising interest rates is a fallacy.

She pointed out that the increase in interest rates and bond yields since 2020 was a consequence of current and expected future US monetary policy and nothing to do with bond market vigilantes.

If anything, it is the Federal Reserve which is the bond vigilante.

At the end of the debate, much to the chagrin I believe of the Steamboat Institute and Steve Moore, the overwhelming majority of the (largely conservative) audience had switched sides. About two-thirds of them now accepted that U.S. federal government should NOT make reducing the national debt a fiscal priority.

2. Galbraith v Rogoff (2020)

Five years earlier, in a very different geopolitical environment, Professor James Galbraith debated Professor Kenneth Rogoff at the Gaidar Forum in Russia. This debate was more academic in tone, which is unsurprising given the two economists involved. Galbraith is a leading Post-Keynesian economist, with experience as an economic advisor to not only US governments but also governments in a variety of other countries. He is close to the leading MMT scholars and was the keynote speaker at the first International Modern Monetary Theory Conference in Kansas City in 2017. He is perhaps the most widely respected MMT or MMT-adjacent economist among neoclassical economists.

His opponent, Kenneth Rogoff, is a leading neoclassical macro and international financial economist. Rogoff is a former chief economist at the IMF, now a professor at Harvard, one of the most prominent neoclassicals not to have received a Bank of Sweden Nobel memorial award, and a participant in a number of controversies relating to economic theory and policy over the past 45 years. To someone like me, his best contribution was one of his earliest. In 1983, he was the co-author of a paper explaining that no neoclassical model for forecasting movements in floating exchange rates between major currencies could be shown to be of any use at all. This conclusion – the Meese-Rogoff result – has held up pretty well in the decades since, and ought to help undermine your faith in neoclassical economics generally. It did not do that where Professor Rogoff is concerned.

Rogoff said something I have heard people say many times before – that modern monetary theory is not modern, not really a theory and not monetary. He also claimed it not to be empirical, in that it had been tried in Latin America with no success. This may appear familiar, as it is pretty much exactly what Steve Moore claimed five years later.

Galbraith responded by explaining ‘it is a descriptive analysis of how credit-based monetary systems actually work’. MMT has policy implications, but it is not in itself a set of policy proposals (you could argue that the job guarantee is an exception to this, as this is a policy proposal which is almost universally promoted by MMT economists). According to Professor Galbraith, ‘all competent central bankers and all competent treasury officials’ understand the basics, although they may not admit to doing so in public.

Incidentally, this is what my colleague Morgan Edward has found to be true in his recent research on the New Zealand monetary system. Competent policy economists will often admit in private things they will not say in public.

Galbraith explained that the word ‘modern’ in MMT is drawn from the first chapter of Keynes’ Treatise on Money in 1930, where Keynes claimed that money had been ‘modern’, in the sense of being based on credit and on fiat, for at least 4,000 years (Galbraith said 5,000, which is more in accord with what we know today, but not what Keynes wrote in 1930). MMT is ‘monetary’ because it is about monetary systems. MMT is a ‘theory’ because it is a simplified framework describing how such monetary systems function in practice.

Professor Rogoff complained that MMT economists do not use equations, as though something cannot exist within the discipline of economics if it is not reducible to a mathematical model. He missed the point here, because there are plenty of mathematical models which have been constructed to be consistent with the MMT framework, so it is not the case that economists whose work is consistent with MMT principles do not use equations. The Godley and Lavoie models of the macroeconomy, for example, are made up of systems of equations, and are consistent with MMT, even if Marc Lavoie does not describe himself as an MMT economist. Godley published significant work with Professor Randall Wray, who is one of the leading MMT economists, and the author of the primer to which Rogoff refers in his debate.

I found it interesting that Rogoff accepted that central banks do not genuinely have their own separate balance sheets; that they are essentially a part of government; and that they carry out functions which could otherwise be done by governments themselves. He went further here than a lot of Post-Keynesians are prepared to go.

I also found it interesting that Galbraith argued that economic growth is not the most important variable for governments to use an objective, and that what matter more are the quality of life and the sustainability of the environment. An MMT perspective means that you do not have to pursue economic growth as the only means possible of reducing the debt to GDP ratio, and that you do not rely on tax income generated by growth to allow you to fund public services. There is an echo here of the increasing overlap in recent years between modern monetary theory and ecological economics.

Galbraith explained that modern monetary theory is closely connected to Lerner’s functional finance and to Keynes’ famous statement that ‘anything we can actually do, we can afford’. It is a description of how money and credit systems actually work.

‘Taxes...are necessary, but they are not necessary to raise money for the state…but rather to give value to the money that is created.’

On watching both the Kelton-Moore and Galbraith-Rogoff debates, you cannot help being struck by how difficult the Austran-school and neoclassical economists both find it to be to escape the misconception that modern monetary theory is about advocating for inflationary money creation, when it is as both Kelton and Galbraith explain simply a description of the fiat monetary system within which we all live.

3. Mosler v Murphy (2013)

The third debate is from much further in the past at Columbia Law School between the founder of MMT, Warren Mosler, and Austrian-school economist Robert Murphy.

I have less to say about this debate, because it was taking place in an economy which was still recovering from the Global Financial Crisis and the Great Recession, which are receding into history in 2026 (not that they have no lessons for us today).

Mosler argued, among other things, for a permanent zero-interest policy from central banks like the Federal Reserve; for limiting the issuance of government securities to 3-month treasury bills, if they are to be issued at all; for a transition job or job guarantee scheme; for a different approach towards banking regulation and the provision of liquidity to the banking system; and, interestingly and presciently when we remember what happened during and after Covid, for the domestic sourcing of key strategic inputs.

Murphy explained that the Austrian framework is centred on the individual, and on certain assumptions (although he never questioned these assumptions) about individuals, what motivated them, and about what markets are as institutions and how they function. He claimed, to my mind unconvincingly, that Austrian-school economics is not ‘libertarian political theory packaged up as economics’.

His view regarding asset swaps undertaken by the Federal Reserve following the 2008 crisis was that ‘what Bernanke is doing is really bad’ and that ‘you don’t cause economic prosperity by printing money’.

Mosler explained that in a floating exchange rate system money and interest rates do not work they way they are described to work by Austrian school economists. In particular, given that governments normally deficit spend, the natural outcome if the government does not issue securities and if the central bank does not pay interest on reserves is for overnight interest rates to be zero. In a sense, if the Austrian school economists do not like government intervention, they should support zero interest rates, because if no action is taken to create non-zero rates, the rate of interest will move to zero.

Murphy believed that the low or zero interest rates of 2013 would inevitably lead to a boom, which would be followed by a bust. Predicting is hard, of course, especially when you are trying to predict the future, so we should not be too hard on him.

Warren Mosler, similar to Kelton and Galbraith years later, patiently explained the role of a currency issuer in a modern monetary system. You have to spend first before taxes can be paid. You cannot have a reserve drain before a reserve add, logically and in practice. Without a fixed exchange rate or a gold standard, there can never be a solvency issue for such a government.

Mosler explained the role the tax system plays in guaranteeing a demand for money using an amusing metaphor which I won’t repeat here. The point he was making is that if your taxes are denominated in a unit of account and must be paid using government currency tokens with nominal values fixed in that unit of account, then there will always be a demand for those tokens. The more difficult it is to obtain those tokens the higher the real value of a unit of the currency. If people are unable to sell their labour to obtain the tokens, they will be involuntarily unemployed. It is the existence of the tax-driven monetary system which creates the unemployment. A job guarantee would eliminate such unemployment.

The initial purpose of monetary systems was to provision governments, and the role of currency-issuing governments in modern monetary systems is to be a scorekeeper, and to ensure enough points are issued to meet the demand for the government’s financial liabilities at full employment. Government deficits fund private savings. The government as the scorekeeper can never run out of points – there can never be a nominal crisis – but of course it can run out of things to buy – there can be a real crisis.

Robert Murphy said that ‘it is not that Warren is wrong’ but that he did not like the system. There was an entertaining intervention by Mike Norman, asking Murphy what he would put in its place.

Murphy did not in my view have any coherent alternative to offer.

Of course I am biased, as is everyone else, but in my view in the case of all three of these debates one side was patiently explaining how modern monetary systems work and exploring potential implications for macroeconomic and financial policies, while the other side had either not bothered to engage with modern monetary theory, or had not been able to overcome their preconceptions when doing so, and so had not been able to counter the arguments Kelton, Galbraith and Mosler had outlined.

But judge for yourself.

Modern Money Network. 2013. MMT vs. Austrian School debate [Video]. YouTube.

Russian Presidential Academy of National Economy and Public Administration. 2020. Modern monetary theory: A new outlook / The Gaidar Forum 2020 [Video]. YouTube.

Steamboat Institute. 2025. Should the U.S. federal government make reducing the national debt a fiscal priority? [Video]. YouTube.

Over the next month or so, Modern Money Lab will be touring England, Sweden and Belgium, holding fun, interactive seminars with the title From Austerity to Resilience - How to Build a Better Economy. These seminars will include discussions of MMT as a lens for understanding economic issues and framing policy choices; an MMT-informed approach to budgeting; a discussion of the treasury bond market and how to nullify any impact that market might have on policy implementation; and finally how to make progress, in the face of indifference and even hostility across the media, politics and most of the economics profession.

There are so many things I could write about here in the context of the above, but the administrative demands of running the world’s only global online Masters degree in both modern monetary theory and ecological economics are so heavy, that I hardly have any time to myself.

Let me select one issue and calmly explain a simple truth that might shock you. There is no good reason for currency-issuing governments in fully fiat monetary systems to borrow. None whatsoever. This is such a shocking truth that many excellent MMT economists, including members of the political party I support in both the UK and Australia, would prefer me not to say it. People prefer not to scare the horses – if I can refer to newspapers like the Times, former politicians like Rory Stewart and journalists like Fiona Bruce in those terms – and to discuss instead minor reforms to the bond market. I have come to believe this is a losing strategy, and that it is better to be straightforward and to say clearly and calmly that we do not need a treasury bond market and it should be phased out.

Before you stop reading in shock, let me reassure you that I have discussed this with bond traders, central bankers and more than a few financial economists, and these conversations have always ended with them agreeing that in principle the bond market is an anachronism which we do not need, and that its valuable economic functions, such as they are could be performed by other mechanisms which would not be described as government debt.

Imagine that - an economic narrative free of the bogeyman of a government debt burden, to be bequeathed as a heavy yoke to future generations. This is the most powerful single reform you could imagine to empower those who aspire to take on board the lessons of Stephanie Kelton’s 2020 bestseller, The Deficit Myth, and to build a better, more resilient, more equitable and more sustainable future economy.

In a pure fiat economy, the tax-collecting central or federal government issues a currency which it later collects back in taxes. It is the tax liabilities of the private sector which create a demand for the currency and provide room within the productive capacity of the economy for the government to provide public services and to make public investments. If the non-government part of the economy has a desire to add to its savings and strengthen its collective balance sheet over time, then it will be necessary for the government to spend more of its currency into circulation than it deletes from circulation using taxes and other methods. The government in other words will run a deficit, in order to fund non-government surpluses.

This is normal practice for such governments. It is not at all shocking. High-income governments, on average, run deficits every single year for this reason. According to the IMF, the nearest such governments came to running a collective budget surplus was 2008, just before the Global Financial Crisis. It is not government deficits which are unsustainable – except in the special case of a country with a persistent trade surplus, if it government surpluses which are unsustainable, since they delete savings from private sector balance sheets.

So it is normal for governments to run deficits. If we define government net debt as the sum of all past deficits (net of any surpluses), then it is normal for governments to accumulate what we call government debt over time. So far, of course, treasury bonds (and other treasury securities) have not come into the story.

Once upon a time there was a good reason for issuing treasury bonds. Governments used to fix their currencies against the US dollar (until the early 1970s) and before that (at least temporarily) under the gold standard to gold. This involved a commitment to exchange the currency for something they could run out of (a foreign currency or a commodity). In those days, issuing treasury bonds to temporarily drain currency from circulation which had been put into circulation due to government deficits made sense.

Under a fully fiat system, this is no longer the case. The currency is not fixed to any foreign currency or commodity, and there is no government commitment to exchange its currency for anything which it can run out of at a fixed rate. This motivation for bond issuance disappeared many years ago, in the case of the majority of high-income country governments, including both the UK and Australia.

This is not of course the reason most people think governments need to auction treasury bonds. Most people are unaware of the distinction between currency issuers and currency users. They do not appreciate that all spending by currency issuers involves the creation of new currency (new government money) and that the currency has to be spent into the monetary system before it can be used to pay national taxes or to buy treasury bonds in the primary market (i.e. when they are first issued). Consequently, they believe that governments need to issue bonds, so that they can borrow money in order to allow them to spend or invest those funds. You and I know this is factually incorrect, and that the ‘government as household’ metaphor which lies behind this fallacy is pernicious and distorts discussions of government policies in a variety of ways.

The damage done by the fallacy was at least mitigated, in the days of regulated interest rates by the use of a ‘tap’ system for bond issuance. In those days, central banks like the Bank of England and Reserve Bank of Australia would determine the rate of interest to be offered to investors on newly issued treasury bonds, and if private investors did not wish to take up the available bonds at the selected interest rates, the central banks would hold those securities on their balance sheets, and would thereby ensure that government spending authorised by parliament would take place, whether or not banks and other investors wished to purchase the bonds.

This changed after interest rates were deregulated, which happened in most high-income countries in the 1980s. Where central banks, like the Reserve Bank of Australia, chose to conduct monetary policy in a deregulated banking system by targeting the overnight interest rate at which private banks lend to each other (in Australia, the cash rate), they needed to keep the banking system short of cash to enable them to do so. This is often called a scarce reserves system of interest-rate management. Until the late 1990s in Australia and the early 2000s in the UK, central banks did not pay interest on bank reserves (sometimes called exchange settlement reserves). In those days, because government spending creates reserves, while taxes delete them, additional reserves created by deficit spending would in the absence of bond issuance cause central banks to lose control of interest rates. It was necessary to match deficit spending with treasury bond auctions to keep banks short of reserves and allow the Bank of England, or the Federal Reserve, or the Reserve Bank of Australia, to control money market interest rates.

This was no longer true when central banks started paying interest on reserves. There was no need to keep banks short of reserves any longer. Central banks could and have controlled interest rates by simply changing the rates they pay on bank reserve balances. There is no need to auction treasury bonds to drain excess reserves from the banking system. In a sense nothing would change if no new treasury bonds were issued – instead of the government having debt in the form of interest-bearing treasury securities, the central bank would hold the debt in the form of additional interest-bearing bank reserves. The difference is of course that nobody ever argues the central bank can run out of reserves, and the government itself no longer has what people misleadingly regard as debt.

Other reasons for issuing treasury bonds include the provision of default-risk free investments to fund managers; the provision of benchmark default risk-free interest rates across the term structure, defining what finance people call the ‘pure yield curve’; the provision of collateral for financial market participants; and the role bond traders might be seen as playing in ‘disciplining’ government policy decisions.

As for the first three of the above, the best way to continue with those functions, if they are deemed to be of public value, is to have the currency-issuing central bank issue tradeable term deposits with itself. As for the so-called disciplining function, which is often more about enforcing austerity when it is inappropriate, that should be the role of government and ultimately of democratic processes.

I have already written too much, so fears you might have of impacts on the foreign exchange market, or about how you would replace the kinds of unfortunate and sometimes paralysing fiscal rules which governments that are intimidated by the bond market have seen fit to impose in countries like the United Kingdom in ways which are not inflationary, will have to wait for future posts.

What I have been trying to argue I hope is clear. Far from being intimidated by the bond market, governments could simply phase the treasury bond (or gilt) market out entirely and for ever.

To quote from something we published a while back (Hail and Joy, 2020),

They are unnecessary. There is no compelling reason to issue them. They confuse people. They bias macroeconomic discourse, policy making and outcomes. They are an anachronism. They belong, alongside tally sticks, the gold standard, the London discount houses, and neoclassical macroeconomics, in the history books.

Source: Hail, S. and D. Joy. 2020. Federal Debt and Modern Money. Policy Note No. 121. Global Institute for Sustainable Prosperity. May 2020.

https://www.global-isp.org/wp-content/uploads/PN-121.pdf

Austerity is a political choice, not an economic necessity. This event makes the case for a different approach and shows what it looks like in practice.

Four sessions. Four perspectives. One coherent argument for change:

1) MMT as a Policy Frame with Steven Hail, Associate Professor of Economics at Torrens University and founder of Modern Money Lab, Steven Hail is one of the leading teachers and communicators of MMT globally.

2) Public Investment and the Cost of Living Crisis with Patricia Pino An economist specialising in inflation and industrial policy, Patricia is Executive Director of MMTUK and co-host of the MMT Podcast. She is a PhD candidate at University College, London.

3) Taming the Bond Market with Sheridan Kates An ecological economist with a Masters degree in Economics from Torrens University, a newly elected Green Party councillor in Islington, and a co-convenor of the economic policy group in that party, Sheridan brings a focus on public money and fiscal sovereignty to the question of bond market constraints.

4) Framing a Shift from Austerity to Sufficiency with Christian Reilly Co-host of the MMT Podcast, Christian has spent years making heterodox economics accessible to non-specialist audiences across the UK and beyond. Christian holds a Graduate Certificate in the Economics of Sustainability from Torrens University.

https://events.humanitix.com/anti-austerity-economics-brighton

As you talk the audience through the operations of the public financial system in the country in which you are giving the talk, if that is the approach you choose, you will see the first group becoming interested, despite themselves. The second group will start to grip their seats or desks, as they become more frustrated, if not annoyed, because they know there must be something very wrong with what you are saying, but they can’t quite articulate what it is. They will have a lot of questions, but that won’t help them to demolish the logic of MMT or to punch holes in its factual accuracy. You will have responded to them asking whether you think the government should ‘print money’ to finance spending, by explaining that currency issuance is literally the only way the currency issuer can spend, and it happens every day. At the end of the event, they will shake your hand, as the nice people they are, and say through gritted teeth that they might watch the movie Finding the Money or read The Deficit Myth, but what worries them about MMT is inflation. If you want to annoy them further at this point, you could welcome them to MMT, because they have just stopped worrying about government insolvency, loanable funds theory and crowding out, and all the other dogmas of public finance. It might be better not to do this, but just to hope you have planted some seeds. You were once a neoclassical economist yourself perhaps, like me, and you understand how difficult escape from mistaken preconceptions can be.

It is an uncomfortable experience in some ways, and one I have been through a few times down the years. Why do it? Why not just attend MMT conferences and other places where you are speaking to the converted, or at least to those with open minds? Because these people have influence, authority very often, and sometimes power. Some of them get onto television or podcasts. Some engage with government departments. Occasionally you are talking to people who have designed part of the very monetary system which they do not themselves fully understand and which they (often innocently) misrepresent. You can’t reasonably complain about these misrepresentations if you have never tried to engage with their authors.

Economic policymaking, the world over, but especially in the Eurozone and countries like Australia, Canada, New Zealand, the United Kingdom and the United States of America, is beset by myths and misconceptions, and resulting paradoxes. The reason is very simple. It is the almost universal misrepresentation of how monetary systems work, and consequently of the appropriate role for a currency issuer to play within its monetary system, and the opportunities and constraints currency issuance provides.

Policymakers assume they need to grow their economies to generate the tax revenues to meet an almost insatiable demand for public services and to make interest payments on their growing debts. No such imperative exists, because tax revenues and bond sales don’t pre-fund public spending. Often, they can’t grow those economies anyway or can do so only temporarily and at the cost of an increasingly fragile financial system or a dependence on the complex architecture of global trade. This is because their framing of fiscal policy means growth becomes dependent on foreign demand or unsustainable private-debt fuelled spending. Myths and paradoxes indeed.

The myths constrain environmentalists too, when they argue they need to tax fossil fuel companies or technology companies or just billionaires generally to pre-finance investments in renewables and the infrastructure of a sustainable, post-growth, well-being economy. They don’t. Tax the rich, but because they are too rich and command too much political power and too many real resources. You don’t need their money. The paradox is obvious – how can you phase out fossil fuels when you need to tax them to pay for the transition we need to make?

What is frustrating is that these misconceptions have been the driving force behind what some have called the hard neoliberalism of conservatives and the soft neoliberalism of labour parties around the world for many years. Growing inequality and the underfunding of public services, justifying their privatisation, then inadequate regulation and a supporting game of mates, leading to inequities, waste and the undermining of the social fabric all stem from something very simple. Some regard it as a conspiracy, but for the great majority of people who have been sucked into the narrative, as politicians, journalists and (regrettably) professional economists it is a genuine misunderstanding of the system, buttressed by a profound reluctance to accept that what they have for so long taken for granted is plain wrong.

Today’s alpha male politicians talk of hard choices and the need for policy frameworks and more or less hard rules constraining the budget and government debt as though they have no idea how the money system operates and must fear tomorrow’s politicians, whom they worry will bankrupt the nation. To prevent this, New Zealand has its Fiscal Responsibility Act, Australia its Charter of Budget Responsibility, the EU its Fiscal Compact, the US its Debt Ceiling, and more generally governments pledge to live within fiscal targets relating to balancing the budget on average over time, having a ceiling for deficits, and/or reducing a measure of gross or net government financial liabilities over time. The institutional details differ, but the framing is essentially the same, even if in the case of the European Union the rules are imposed upon individual members rather than being determined by national governments themselves.

These rules are often honoured more in the breach than in the observance of course, because they defy the degree to which the fiscal position and the government’s debt as a share of gross domestic product are endogenously determined by private sector behaviour and the need for government to provide at least some support to economies and communities affected by economic cycles. As an economist called Michal Kalecki showed us many years ago, a shift in national income from labour to capital and an associated rise in inequality, puts downward pressure on private spending. Absent a build up in private debt or a growing trade surplus, this requires rising budget deficits to support economic activity. If you want smaller deficits, my conservative friend, shift income back to labour and reduce inequality. Yet another paradox with which to wrestle.

The logic of currency issuance has been explored many times, most coherently by modern monetary theory economists, but also to an extent in previous generations by people like Georg Friedrich Knapp in his State Theory of Money, Alfred Mitchell-Innes in his Credit Theory of Money, and the great John Maynard Keynes in chapter one of his Treatise on Money. To issue a currency, you must impose a tax liability on the private sector, where those liabilities are denominated in the unit of account you have selected. You can then spend tokens into circulation which have their value fixed in that unit of account. There will be a demand for them in the private sector as what Randall Wray has termed ‘that which is necessary to pay taxes’. Taxation and currency issuance transfers real productive resources from the community to the currency-issuer. Spending more tokens into the economy than you tax out leaves tokens for the private sector to save and provides a basis for the development of a monetary economy. The constraints on the currency-issuer and on the whole economy are defined by the availability and productivity of real resources – the people and skills, the natural resources and physical capital, the technology and institutional capacity which exist within the community or can be created. The currency-issuer is clearly not going to run out of the currency it issues. It does not need to borrow its own currency. It will normally run deficits, if the private sector normally desires to add to its collective savings. It could issue government bonds to provide savers with a safe interest-bearing asset.

You can explain the above in general, or you can talk about how it all works in the country where you are giving the talk. The specific institutional details will differ. In every case, government spending will create reserves in the private sector which taxation and government bond issuance will drain. Taxation destroys currency the government has previously spent, while bond issuance converts it from transactions balances into what are effectively transferable term deposits at the government’s central bank. When the government issues bonds, it is not competing for the savings of the private sector, which could drive up interest rates. It is supplying the very currency to the system which is then available to purchase the bonds it chooses to auction. This is true more or less everywhere – in the USA, the UK, Australia, Canada, New Zealand and in Eurozone countries too. Even within the Eurozone, government spending is via currency issuance.

In New Zealand, the above is backed up by an accounting entry at the central bank called the Crown Settlements Account, which can be negative as well as positive, and records the creation of new currency placed into the government’s account (which it chooses to hold with a private bank) at the beginning of each day, outgoings and incomings across the day, and then clears the bank account back to zero at the end of each day. It is clearly the case in New Zealand to anyone who bothers to check, that government spending each day involves the issuance of new currency and taxation deletes currency from the system.

In the United Kingdom, the system is a little more complicated, and I will avoid discussing the Consolidated Fund and the workings of the Debt Management Office here, but just as the Crown Settlements Account can and has gone into overdraft in New Zealand, so the UK Government has a Ways and Means Account which can be used to support currency creation, and was last important in that role in 2020.

Canada has something similar to New Zealand and the United Kingdom, albeit with a little less flexibility. The United States does not but has an arrangement where primary dealers in the bond market are expected to bid for new bonds and have direct access to the Federal Reserve when short of liquidity. Australia has perhaps the least flexible system of all the above, as it currently has no government overdraft facility at the central bank, although there is a mechanism for the government to override decisions made within its central bank in an emergency (a mechanism which has existed for many decades and never been used).

Australia’s apparent lack of flexibility did nothing whatsoever to limit the ability of its government to engage in large scale spending during the pandemic in 2020 and 2021. The Reserve Bank of Australia simply created reserves in the private banking system through secondary market purchases of treasury bonds, and other measures, to ensure that there was sufficient demand for newly-auctioned treasury bonds in the primary market at virtually zero interest rates to replenish the official public account.

In other words, the details vary from country to country, but in (almost – see Greece below) all countries there are mechanisms in place to ensure that spending authorised by parliament or congress can always take place, and this spending always involves currency issuance. We perhaps should not use terms like ‘deficit spending’ as all spending is always via currency issuance. This is even true within the Eurozone, subject to the qualification that purchases of treasury bonds in the secondary market, or any other measures to facilitate government currency issuance, are subject to the rules of the Euro system. This is what drove the Greek government towards insolvency and default in 2012. Greece’s national bank was not permitted to facilitate government spending in euros the way a national central bank could do in its own currency, and indeed the Bank of England did do for the UK government, outside the Euro system.

The following things are literally true:

1. A currency-issuing government spends via currency issuance.

2. It does not need to pre-fund spending via taxation.

3. It does not need to raise funds via bond issuance to fund spending.

4. Taxes and bond issuance have other functions within the monetary system.

5. Bond issuance itself is a choice and not a necessity.

6. Such a government can never become insolvent in liabilities denominated in its own currency.

7. If the government has no foreign currency denominated debt and the currency is on a floating exchange rate, the government faces no purely financial constraints.

8. Government deficits and non-government surpluses and the government’s debt is the net financial assets of the non-government sector of the economy.

9. The then economist at the Federal Reserve Bank of St Louis, David Andolfatto, wrote in December 2020 that “it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation”.

10. What limits non-inflationary spending within an economy is the productive capacity of the economy and not funds available to the government (which in fact has limitless additional funding available if needed, regardless of the level of the so-called national debt.

11. We are not dependent on money from rich people to fund investments in a sustainable well-being economy.

12. We are dependent on our productive resources and of course everything depends on our climate system and the health of the biosphere of which we are a part.

The implication of the above is that budgeting should be centred on planning for the development and use of those productive resources to provide essential public services and on making essential investments while managing inflation, with projections for the fiscal balance and government financial liabilities being outcomes of that process.

As for inflation, that issue, and the related issue of how central banks conduct monetary policy, and why central banks are not the right institutions to be responsible for managing the cost of living, will need to be the subject of another article.

A further article will explore the case for Richard Murphy and Zack Polanski to reconsider their in my view unjustified (and I hope able to be reversed) rejection of a national job guarantee as an insurance against involuntary underemployment and automatic cyclical stabiliser in an economy managed by people using an MMT lens.

There is no one-size-fits all approach to estimating the GPI, and it is arguable that such standardisation is not appropriate. Most studies incorporate approximately twenty-five components. This would make the construction of comparable data across many countries problematic, even if excellent data series were available, but of course they are not. This is a bigger problem for social statistics than economic ones, and even more so for ecological data. I have known people spend years attempting to create time series comparable with data published by the IMF and World Bank on GDP and other macroeconomic statistics, with very limited success despite considerable personal sacrifices.

My reaction to this is the construction of a greatly simplified proxy for full GPI statistics, which perhaps ought not to be dignified by using the term ‘Genuine Progress Indicator’. This proxy can be termed a (not the) ‘Genuine Economic Progress’ Indicator, or GEP.

While recognising the reasons GPI studies start from personal consumption data, in most cases it makes little difference to begin from Gross National Income (GNI) per capita, adjusted for inequality in a way similar to that used in GPI studies. No study of well-being can be complete without the inclusion of a valuation for domestic labour. In addition, a cost item relating to involuntary unemployment and insecure employment is essential. Ecological costs can be proxied by appropriately weighted data on carbon dioxide and other greenhouse gas emissions, where the higher of consumption-based and territorial emissions is included each year for each country, and material footprint data, not only relating to supply chains associated with domestic consumption but also including the material footprint of exports.

Using conventional and conservative approaches to these included items, it is possible to construct Genuine Economic Progress data sets in inflation-adjusted US dollars (or any other currency) for almost every country in the world, quickly and conveniently, particularly if reasonable interpolations, extrapolation and imputations are employed when gaps exist in the data.

The following chart relates to Australia

.

Both GDP and GNI per person trend upwards over the years, with the gap between the two series reflecting the net outflow of primary income from Australia each year, a consequence of many years of net investments in Australian assets by the rest of the world.

Australia’s GEP peaks in 2008 however, just prior to the economic impact of the Global Finance Crisis and has trended downwards ever since. This is partly a reflection of rising ecological costs, associated with the increasing material footprint of Australia’s exports, and the rising global social cost of emissions (not associated with land use - the LULUC data often used to justify claims of a rapid fall in our emissions is excluded here) in a rapidly overheating world. The other big contributor is a rising monetary estimate of the cost of net income inequality, which greatly increased in the 1990s, but has a greater monetary weighting in the GEP more recently, due to GNI per capita being higher.

The challenge is to maintain full employment and provide economic security, in an economy less reliant on fossil fuel exports and with a lower material footprint, with radically reduced net income and wealth inequality (and all that implies, including for access to affordable housing), and an accelerated transition towards minimising consumption-based domestic emissions of carbon dioxide (with all that implies for electrification and electricity generation). Then perhaps, rather than GEP falling despite the rise in GDP, Australians will be able to enjoy rising Genuine Economic Progress, regardless of whether the scale of economic activity is rising or falling.

It is another thing entirely to learn lessons from this and other shocks. One such lesson to learn is that inflation is in general not a monetary phenomenon. Milton Friedman and his colleagues from fifty years ago were wrong, as have been the generations of politicians, economists, journalists and other pundits who subsequently chose to give up on thinking seriously in favour of adopting his misleading and extraordinarily simplistic policy prescriptions.

It is not the case that central banks can control inflation by controlling one or other monetary aggregate, or even by setting a policy interest rate at some optimal level. It is not the case that governments should aim simply at cutting marginal tax rates to incentivize rich people while punishing the poor, starving private services until they can be privatized, while aiming to balance their budgets, or run surpluses, or avoid deficits on current spending, or to cut gross or net debt to GDP ratios, or any other simplistic one-size-fits-all fiscal target.

Markets are tools which have their uses. They are human institutions, with strengths and weaknesses. Sometimes the best way to allocate goods or other resources is to use a marketplace for that purpose, at least if you have first ensured that there is a low degree of inequality of income and wealth. But the microeconomic totem of demand and supply is only useful as a guide to how markets work in financial markets, in primary sector industries (agriculture and minerals) and in a very narrow range of other contexts. Even then, they are far from perfectly competitive, with supply chains often controlled by a small number of megacorps (Diesendorf et al., 2024).

All economies, modern and ancient, rely on energy and food (which of course allows for survival and also human energy), but in terms of contributions to national output and to the consumer price index, in modern economies it is the secondary and especially the tertiary sector which are dominant. In services and manufacturing, prices are not set by demand and supply. They are administered by organisations, large and small, which add mark-ups onto their expected unit costs with the aim of achieving target rates of profit in an uncertain environment. That uncertainty necessitates them to seek as much as possible to control that environment, and where there are opportunities for growth, it spurs them on to seek further growth and to defend or increase their market shares.

They seek and develop a social license to profit from a surplus of revenues over their direct and indirect costs, with the rate of profit determined by the degree of competition with which they are faced, customer loyalty, the threat of new competition, the need to cover funding costs and finance new investment, and that social license. There are many differences between industries and across markets, but in general they prefer to avoid price competition which eats into that surplus, and to compete in other ways. Increasing prices above the rate at which industry-level costs are rising is also usually unattractive, because of the risk of losing market share, or attracting new competition, losing customer loyalty or even attracting scrutiny, including perhaps from competition authorities. This can change during a crisis, when price rises allowing for a shift in income from labour to capital are easier to co-ordinate and less likely to erode the social license.

Where natural monopolies for basic necessities exist, which have often been created by neoliberal privatisations, competitive pressures are lacking or insufficient to control pricing power, and it has been common to rely on statutory regulators to impose limits on this power to at least pretend to defend the public interest.

A revolving door between the regulated and regulators is one among many reasons that this approach to public good provision is fatally flawed. Privatisations driven by the government as a household fallacy, where raising money has been a driving factor in privatisations; or the profit motive incentivizes efficiency fallacy, when it just incentivizes further state capture; or the markets are an optimal tool for rationing services fallacy, when for basic necessities they most certainly are not. Public goods, broadly defined, are best delivered largely via public options, even where private sector provision may still be permitted, as in education or healthcare. This even extends to banking and finance – there is a strong case for a public option in retail banking, for public investment institutions, and public insurance.

Markets are not some divinely inspired invisible hand which ensures a kind of optimal allocation of resources, now and through time, and must dominate all high living standard economies. This is true neither logically, nor empirically. Conservative economists and neoliberal political philosophers sold a crisis-shaken world a pup in about 1980 and have created an unjust and fragile global economic order in the decades since (Monbiot and Hutchinson, 2024).

Monetary economies are human creations, which have been organized around currencies as units of account and currency tokens as media of exchange and liquid stores of value for thousands of years. Those units of account have almost always been chosen by currency-issuing governments, which have spent currency tokens into existence. Those currency tokens have been needed by those outside government to discharge their tax liabilities to the authorities issuing the tokens. They have also been available to facilitate transactions within the private sector, to allow for net saving within the private sector, and to allow for the creation of financial assets and liabilities, including private money, by private sector institutions. This created and supported exchange economies, and after the European enclosure movement, the explosion of colonial extraction, repression and enslavement, and the technological revolution which followed the enlightenment, it facilitated the growth of modern capitalism (Hail, 2018).

We know where capitalism led us – eventually to the post-1945 great acceleration in economic activity, which transformed the lives of billions but pushed us beyond the limits to growth, and then after the fossil fuel driven inflations of the 1970s, to post-1980 neoliberalism and neocolonialism, and to where we are today. It took economic and political events over many years to produce two Trump presidencies and the world in 2026.

Yet young people are still learning the totemic economics of the last century in our universities – all the, for some at least, comforting fallacies and over-simplifications of Milton Friedman and his less extreme colleagues, like Paul Samuelson. All of this – ever page of the best-selling Mankiw textbook – is an excuse to avoid thinking.

And our world needs some heavy thinking. Fortunately some people are doing it, and not to list a long series of names, but two very important modern thinkers are the ecological economist Kate Raworth, with her doughnut model of sustainable and equitable development (Raworth, 2017), and Stephanie Kelton, with her popular yet scholarly explanation of the real and imaginary limits on what currency-issuing governments can achieve in the promotion of sustainable prosperity (Kelton, 2020).

I said at the beginning that it is one thing to respond appropriately to another primary sector shock in 2026, with its echoes of the 1970s. That response ought to be based on an understanding of the trophic sector of the economy, with the administered prices in the secondary and tertiary sectors depending on the largely market-driven prices in the primary sector, and especially in fossil fuels.

It is another thing to lift our eyes to the horizon and to accelerate along the path to what will eventually surely be a post-growth, well-being economy. The inner ring of Raworth’s doughnut model provided a focus on the basic human needs which must be fulfilled to give everyone the opportunity of a good quality of life. In different studies and for different purposes, the list varies somewhat, and for example the minimum level of income security needed to meet basic needs will differ between countries according to differences in the cost of living, but the needs are essentially the same – water, food, income and purpose, education, energy, housing, social equity, gender (and other forms of) equality, political freedom, peace and justice, and a supportive community. The outer ring has its focus on planetary boundaries identified by Earth-system scientists (Rockstrom et al., 2009), including most notably emissions and risks to biodiversity, but could equally well be framed with reference to our ecological footprint (Global Footprint Network, n.d.).

Part of this will be a largely post fossil-fuel economy with a shift from economic globalization and long, complex supply chains to internationalization, with a sharing of key technologies in a global commons, and the localization of production where possible, including food production. Any loss of productive efficiency in the short run, the management of which in a transition is obviously crucial, will be overwhelmed b the benefits of insulation from future primary sector supply shocks and environmental and cultural gains.

We know broadly what needs to happen, at national and global levels, to grow our well-being while degrowing our ecological footprint. Friedman, neoclassical and Austrian school economics, and neoliberal political philosophy have nothing to offer us. It is destructive and dangerous, as Steve Keen has pointed out, with reference to climate change (Keen, 2021).

We require and must achieve a cultural shift and shifts in both economics education and policy narratives towards a quest for a better future framed by something like the doughnut, and a plan to make those investments nationally and globally which, after Donald Trump, might guide us to that future space of global social justice and sustainability.

Governments everywhere, and especially the governments of high-income currency-issuing monetary sovereigns, are an essential element in this (Diesendorf and Hail, 2022). Without them, the task at the global level looks unachievable. With them, informed by the modern monetary theory of Kelton and others, it does not. This is a complex and global problem about the use of real resources and technology on the one hand, and a focus on security for all, sufficiency, well-being and justice. Fiscal deficits and consequent private surpluses will remain normal and will be essential to the task. The money to pay for transition is not a commodity in limited supply, but instead, as Mat Forstater said in the 2023 movie Finding the Money, a tool invented originally by governments to organize and mobilise real resources (Poitras, 2023).

Understanding monetary systems; understanding the real resources we have at hand and those we can create; and understanding the requirements of a good quality of life, that unless they are available to all will not be available in a sustainable way to anyone, is the challenge of this and the next generation.

It is the promotion of these ideas which lead us to establish our global online Masters degree in the economics of sustainability, and it is what drives us on - admittedly at the cost of contributing to carbon emissions - this year to New Zealand (this month) and then the England, Sweden and Belgium.

I would love to meet you online or in person, if you share a similar worldview, or perhaps if you don’t, but are open to persuasion.

References

Diesendorf, M., Davies, G., Wiedmann, T., Spangenberg, J. H., & Hail, S. (2024). Sustainability scientists’ critique of neoclassical economics. Global Sustainability, 7, e33. https://doi:10.1017/sus.2024.36

Diesendorf, M., & Hail, S. (2022). Funding of the Energy Transition by Monetary Sovereign Countries. Energies, 15(16), 5908. https://doi.org/10.3390/en15165908

Global Footprint Network. (n.d.).

https://www.footprintnetwork.org/

Hail, S. (2018). Economics for Sustainable Prosperity. Palgrave Macmillan

Keen, S. (2021). The appallingly bad neoclassical economics of climate change. Globalizations, 18(7), 1149–1177. https://doi.org/10.1080/14747731.2020.1807856

Kelton, S. (2020). The Deficit Myth: Modern Monetary Theory and the birth of the people’s economy. PublicAffairs.

Monbiot, G., & Hutchison, P. (2024). The invisible doctrine: The secret history of neoliberalism (& how it came to control your life). Penguin.

Poitras, M. (Director). (2023). Finding the Money [Film]. Atlas Films.

Raworth, K. (2017). Doughnut Economics: Seven ways to think like a 21st-century economist. Chelsea Green Publishing.

Rockström, J., Steffen, W., Noone, K. et al. A safe operating space for humanity. Nature 461, 472–475 (2009). https://doi.org/10.1038/461472a

Weber, I. M., Wasner, E., Lang, M., Braun, B., & van ’t Klooster, J. (2025). Implicit coordination in sellers’ inflation: How cost shocks facilitate price hikes. Structural Change and Economic Dynamics, 74, 690–712. https://doi.org/10.1016/j.strueco.2025.04.005

So if you are a fan of a JG, consider the administrative challenges, the possibility it might be seen as a ‘work-for-the-dole’ scheme, issues relating to competition with the private or conventional public sector, and perhaps more fundamental criticisms.

If you are attracted to a UBI, broadly the same thing applies. Do your very best to attack the concept, in your mind if not fully in writing, before you recommend going down this path. That way, your arguments - should you choose to make them - will stand up to scrutiny.

One way to learn more about a job guarantee would be to come along to Patricia Pino’s talk for us this Tuesday - https://events.humanitix.com/patricia-pino-uk-job-guarantee. If you are in the Americas, the timing probably will not suit you, but the talk will be recorded. Much better to come along if you can though, particularly if you think will will have a question for Patricia.

Jim Byrne’s recent substack article is an example of an enthusiast for a JG writing fairly about a UBI, and you might take a look at it - https://mmt101.substack.com/.../universal-basic-income...

As Jim points out, many (if not all) of the common “micro” arguments against a basic income have been contradicted if not refuted by a series of experiments. He draws on a study published by the Stanford University Basic Income Lab in 2020 - https://basicincome.stanford.edu/.../Umbrella%20Review...

I agree with Jim, but of course you don’t have to do so.

To me a Universal Basic Income has to go to everyone (or it is not ‘universal’ - so payments to artists in Ireland ought not to be labelled as a UBI), and must be enough to live on (if the word ‘basic’ means anything). Tiny payments of a social dividend which subsidise incomes but are insufficient to have a decent quality of life don’t count, if we are to use this definition.

I pointed out a potential problem with this kind of UBI a few years ago, when the Australian Greens introduced such a policy (very briefly - they very soon dropped it again). The problem is that the gross financial cost of such a policy is huge, and even when you net out savings on welfare payments and extra tax receipts, it still involves a massive fiscal stimulus to the economy. Back of an envelope calculations by me a few years ago indicated that it would have involved a similar level of deficit spending in Australia to that which might exist at the peak of a pandemic or global depression, but when no such problem existed, and this would be spending which would not be temporary or counter-cyclical. The result on the face of it would be expansionary and inflationary, and not exactly consistent with degrowth, if that was your aim. I wrote about this briefly here - https://independentaustralia.net/.../a-job-guarantee-a...

Of course, you could change your tax system to limit any inflationary consequences, by deleting enough of the extra created dollars from the private sector, or you could look to cut government spending elsewhere, but the first of these might not be possible politically and the second might be undesirable.

If a UBI is a proposed response to job losses driven by AI, then it looks a little like a surrender, and an acquiescence on the part of policy makers to a future where a privileged elite of insiders still get to have paid employment, while a large under-class are supported at some basic level as customers, but denied access to jobs.

There are problems here of course with the ecological impact of rampant AI, and there may also be problems with the framing of interpersonal relations, between the included elite and the excluded basic income group.

Where this led me was to an advocacy for a voluntary public job guarantee, available to all but compulsory for none, supporting local communities and defending and repairing the natural environment, backed up by a non-universal (so still means-tested) guaranteed minimum basic income for all. This is not enough though. A third element is essential for social cohesion and ecological sustainability, and that is the provision of universal free (or at least affordable) public services and a right for all to necessary food, shelter, energy and transport.

Jim’s article explored basic incomes more than it did job guarantees, about which there is a huge amount more to say, so you could also take a look at chapter 7 of my 2018 book, Economics for Sustainable Prosperity, if you have access to it, or better still Pavlina Tcherneva’s 2020 book, The Case for a Job Guarantee.

Both books of course reference the work of Bill Mitchell.

Just a few ideas. Of course, you don’t have to agree with any of them.