Mosler lays down tablets on the economy, stupid Federal Reserve Chairman Ben Bernanke. Ask US economist Warren Mosler whether the national disability insurance scheme should be paid for by a new levy or by spending cuts, and you'll get a jarring answer - neither. He'll also tell you the question shows both the government and the opposition don't really understand how public services are funded in a modern economy. "Julia Gillard's DisabilityCare does not require a tax at all," Mosler says. Despite what most of us think, no modern capitalist government ever taxes to raise money to spend. Their real motive, even if they don't know it, is to reduce aggregate demand and slow the economy. That means Tony Abbott's insistence on spending cuts to return the budget to surplus is wrong too. When the economy is at less than full employment, spending cuts can only make matters worse. What's really needed, Mosler adds, is both a simultaneous cut in taxes and an increase in spending to cover NDIS costs. That will restore what ought to be an essential fixture of Australian, and world, economies: good, healthy, productivity-enhancing deficits. Welcome to the strange world of Warren Mosler, creator of Modern Monetary Theory. Warren Mosler. The fact that Mosler - a tall, spare and super-rich Connecticut Yankee - dresses in nondescript slacks and T-shirts, and speaks in soft, matter-of-fact tones, only adds to the mind trip. He was recently in Australia to lay that trip on Northern Territory Treasury officials at a seminar organised by Charles Darwin University's Centre for Full Employment and Equity, COFFEE for short. What they made of his message that deficits, like their $867 million budget hole, should be bigger, not smaller, is anybody's guess. "Budget deficit" is still the phrase that dare not speak its name in Australian politics. Mosler, however, says this will change. The world economic crisis, which is highlighting the bankruptcy of austerity economics and our obsession with surpluses, will force a rethink on deficit financing in Australia too. "Current economic thought has it exactly backwards," he explains. Government surpluses are not an economic plus - they're a drag on performance because they always represent monetary savings withdrawn from the economy. Mosler claims that, in fact, most financial crises in the modern era were caused by a preceding run of surpluses. If that seems hard to absorb, you're not alone. The longer Mosler talks, the longer the list of big-name economists and public officials who he says are wallowing in similar economic confusion. The chairman of the US Federal Reserve, Ben Bernanke, for example "didn't understand how the Fed worked in the US economic crisis; he disrupted recovery for six months by failing to realise he could lend freely to US banks on an unsecured basis." Similarly, Paul Krugman, Nobel prizewinning economist, "still hasn't realised that regulating the economy through interest rates doesn't work because cheaper credit is inevitably cancelled out by lower interest income." Their real error, however - and one shared by RBA governor Glenn Stevens - is the exaggerated importance they place on government debt. They don't fully understand that where a government issues its own currency it doesn't matter how large its debt grows, it can always pay it. By extension, Mosler says, that guarantees future generations can pay it too, meaning our fears of passing a debt burden to our children are misplaced. "We're all still behaving as if our currency were linked to the gold standard, as it was before 1971," Mosler complains. We've yet to adjust to the government's new role as the economy's scorekeeper, with money as nothing more than the points. Yet the game, he points out, really has changed. "Not only can the government no longer run out of money, it also can't drive up interest rates through higher levels of debt because its own central bank necessarily sets those rates, not market forces," he says. Likewise, Mosler adds, there is nothing to fear from the legendary "bond vigilantes," who supposedly police rising government debt through refusal to buy it. Since the government doesn't, in reality, ever borrow to obtain funds, but rather to support interest rates, private refusal to buy securities actually results in a benefit to the treasury. No issuer of currency, Mosler insists, is ever at risk from bond vigilantes; only users of currency, such as state governments, are. These are certainly radical views - the question is should the world accept them? What separates Mosler from the myriad crackpot bloggers filling the digital airwaves with wacked-out and ruinous economics prescriptions? Well, the evidence, possibly. Some empirical support for Mosler's radical views is surfacing. The controversy over the Reinhart-Rogoff analysis of growth rates in high debt-to-GDP ratio countries, for example, has established that there is, apparently, no growth penalty for high government debt. Where there is, says Mosler, it is not from the debt itself but from the misguided contractionary measures governments take to reduce it. Then there is Mosler's 2006 prediction that the current euro crisis would be the certain result of the PIGS countries' surrender of their ability to issue currency and finance through government deficit. There is also the small matter of the multibillion-dollar Bush tax cuts and spending increases, the second tranche of which, Mosler casually reveals, were inspired by his 2003 meeting with Andy Card, White House chief of staff to then president George W. Bush. Most persuasive, however, is the man himself. If only three people actually understand global finance, Mosler might well be the only one to also understand international bond markets. He has, after all, traded in them for more than 40 years, managing billions in funds and making millions in profit. It was during his most profitable trades - on Italian government bonds in the 1990s - Mosler says, that he had his epiphany. "We made a lot of money by betting the Italian government wouldn't default even though their debt-to GDP ratio had exceeded 110 per cent," Mosler recalls. I knew no country that issued its own currency ever had defaulted, nor had they ever had to 'print money' to pay, but I didn't know why. Eventually it hit me: buying securities from a country's central bank or its treasury are both functionally the same. They're supposed to be different, Mosler points out: central banks sell securities in order to drain reserves, while treasuries supposedly do it to raise expenditure. "But the end result is exactly the same - a pile of money sitting in securities accounts at the country's central bank," he says. The inescapable conclusion is that treasury sales of government debt don't actually raise funds: they too simply drain reserves. That means that it is government spending and taxing that actually impacts the economy, not managing the debt. To paraphrase Dick Cheney, deficits do matter, says Mosler. And your persistent unemployment in Australia is telling you yours are far too small and need to be much larger. Large enough, perchance, for the NDIS, Gonski and Abbott's parental leave scheme combined? Now that would be the end of politics as we know it. Dr Peter McAllister is a journalism lecturer on the Gold Coast campus of Griffith University.