The extraordinary events in world financial markets which have undermined the basis of capitalism have led to equally amazing Government responses – massive injections of public spending, nationalisations of banks and bailouts of huge financial institutions with little regard for the relevant shareholder interests.

A major paradigm shift is occurring in economic thinking away from the free market deregulation era that has dominated since the 1970s. All the logic that justified government cut backs; the run down of public infrastructure; the harsh treatment of welfare recipients; the wasteful privatisations, and the rest of the neo-liberal litany that served to transfer wealth from poor to rich and create an disadvantaged underclass has been destroyed by these events.

How bad is it when the Treasurer of the nation fails a test in basic national accounts (the material that is covered in Macroeconomics 101)? And how bad is it when he also reveals a fundamental ignorance of the basic operations of the monetary system? When the Senate moved to block the luxury car tax yesterday, the Treasurer Wayne Swan was quoted (see http://www.abc.net.au/news/stories/2008/09/04/2354836.htm) as follows: “If the surplus is raided to a significant extent that will be on the head of Mr Turnbull and the Liberal Party, who are clearly saying that into the future, they prefer a higher level of interest rates than we otherwise might have”. In fact, if he had even the remotest understanding of the way the modern monetary economy works he would know that surpluses put upward pressure on interest rates, other thing equal, while deficits put downward pressure.

On January 1, 2005, the ABC carried the headline Business welcomes trade deal, which officially came into force as the new year unfolded. The Australian-US free trade deal was touted by the current government as a major breakthrough. Well from where I sit it is neither a free trade agreement or one that we will look favourably on in the years to come. The fact that the ALP tried to convince us that they were capable of showing leadership (not!) by passing it with some irrelevant amendments is even more frightening.

Foreign minister Downer displayed his fundamental macroeconomic ignorance yesterday when he was trying to explain to reporters the accounting behind the relief payments the Australian Government is proposing to aid the tsunami victims. Reported on the ABC he said that “the Government will need to dip in to the Budget surplus to provide relief money to areas affected by the tsunami disaster. The amounts proposed are beyond the government’s current disaster relief fund. For reasons I explain below this fund can be nothing more than a notional accounting allocation that the Government considers it will spend each year on disaster assistance. It does not exist in the same way as you and me (as households) might have saving accounts with actual dollars in them in a building society (or bank) each year.