With the debate now over (more or less) I caught up on my backlog of reading today. I store articles from all over in a database and then access them when I have time. So on this very wet Sunday, I was working on two papers for an upcoming field trip to Kazakhstan on an Asian Development Bank contract, and, in-between, I read some (so-called) analysis. The basic conclusion is that none of these economics journalists portray the slightest understanding that we are no longer living in a convertible currency system (ended in 1971) and that most national governments issue their own currencies within a flexible exchange rate environment. If a car mechanic tried to apply the art that was practised before electronic ignitions and computerisation to our cars they would go out of business very quickly.

The debate seems to be slowing down which means this might be my last response although we will see. But in general the debate has raised a lot of interesting perspectives and I hope it has stimulated interested parties to read more of our work. I also think that while (as in any debate) “battle lines” appear to be drawn, I repeat my initial point some days ago. Steve and I saw this as a chance to focus on the common enemy – the mainstream (neoclassical) macroeconomics. That (failed) paradigm has nothing to say about the world we live in. The work of Steve and the modern monetary theory I work on both have lots to say and should not be seen as being mutually exclusive. Indeed, Steve operates in what we call the horizontal dimension of modern money.

Today, I offer Part 2 of my responses to the comments raised in the debate so far. I am still about 40 comments shy of the total. In general, I thank Scott, JKH, Ramanan, Sean and others who have provided excellent interventions into this debate based on their knowledge of how the monetary system actually works rather than a stylised representation of it which leaves out the government sector and is liberal with the accounting conventions applied to account for asset and liability flows and flow to stock relations. But there still appears to be major confusions which I will try to address here.

Today, we step down from the heights of the modern money-debt deflation debate and consider macroeconomic developments which demonstrate the deficit-debt hysteria is ramping up here. I may come back to the debate in later blogs but I think the issues have been well considered. While the debate has uncovered some useful issues that I often get asked about (particularly in relation to the accounting and definitional matters) it also demonstrated that very simple and unthreatening concepts get conflated into horror stories if we let the dominant neo-liberal ideology control the way we think and the language we use. Also, I know I promised a G-20-IMF blog and that will emerge but some things emerged today that need commentary.

As indicated yesterday, Steve Keen and I agreed to foster a debate about where modern monetary theory sits with his work on debt-deflation. So yesterday his blog carried the following post, which included a 1000-odd word precis written by me describing what I see as the essential characteristics of modern monetary theory. The discussion is on-going on that site and I invite you to follow it if you are interested. Rather than comment on all the comments over on Steve’s site, I decided to collate them here (in part) and help develop the understanding that way. That is what follows today.

Readers of my blog often ask me about how modern monetary theory sits with the views of the debt-deflationists (and specifically my academic colleague Steve Keen). Steve and I have collaborated in the last few days to foster some debate between us on a constructive level with the aim of demonstrating that the common enemy is mainstream macroeconomics and that progressive thinkers should target that school of thought rather than looking within.

This morning’s Sydney Morning Herald (September 27, 2009) carried the front-page story $82m ‘wasted’ in stimulus splurge. As it was written by a political correspondent you might expect little coherent economic analysis. Your expectation would be correct. But the article had the predictable response from the deficit-debt-hysteria club and the “shocking revelation” has been interpreted as a testimony against the use of fiscal policy to attenuate major cyclical downturns in aggregate demand. The under-current is that citizenship doesn’t matter and governments should only assist those who live within the geographic boundaries they are sovereign over. All these conclusions are of-course folderol.