FROM AUSTERITY TO RESILIENCE - HOW WE CAN BUILD A BETTER ECONOMY
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.