I watched the US President speaking live today from the White House. I wish I hadn’t. The local media (here) characterised him as talking tough. What I heard was a leader who doesn’t know what he is talking about. But he isn’t alone out there in the “debt ceiling” debate land. I have noted before that when the crisis really hit I thought it would spell the end of the stranglehold that mainstream macroeconomics had on public policy. That body of theory had led the world into the crisis by endorsing policies that set the financial system up to collapse. As it was becoming obvious (as far back as 15 years ago) that a major crisis was approaching mainstream economists were in denial and claimed that the “business cycle” was dead. I was wrong in assuming (more hoping) that the mainstream paradigm would be wiped out by the travesty. And as the months pass, their erroneous theories seem to be getting more credibility not less. The debt ceiling debate has reached proportions of madness that I didn’t think were possible in a broadly educated country (at least to primary school level). What must the Martians be thinking of us now. Anyway, certain practical matters not counted on by the ideologues suggest that 3 million Americans or so may find out the truth.

I have noticed some discussions abroad that criticise Modern Monetary Theory (MMT) on the basis that none of the main proponents have ever actually worked on the operations desk of a central bank. This sort of criticism is in the realm of “you cannot know anything unless you do it” which if true would mean almost all of the knowledge base shared by humanity would be deemed meaningless jabber. It is clearly possible to form a very accurate view of the way the monetary system operates (including the way central banks and the commercial banks) interact without ever having worked in either. However, today, I review a publication from the Bank of International Settlements which dovetails perfectly with the understandings that MMT has provided. It provides a case for why we should abandon mainstream monetary textbooks from the perspective of those who work inside the central banking system.

With all eyes on the US wondering what would happen if the debt ceiling is not lifted you would think that bond markets would be losing interest in US government debt. If we trawled back through the debate over the last few years we could find many instances of commentators claiming interest rates would soar once bond markets ran out of patience with the rising US government debt. It was either that prediction or the other one – that all the “money” swishing around the system would cause inflation. Like some cult leader there was one self-styled US financial expert claiming that the Endgame was nigh. As the world didn’t slide into a void nor the debt-burdened US economy hyperinflate the date was shifted. Once, twice, thrice. Further, trying to overlay what is happening in the EMU at present onto US, UK, Japan or other sovereign nations is invalid. The monetary systems in place, in say the US, is vastly different to the system the ECB oversees when we focus on the member state level of the Eurozone. So it serves to remind people that none of the predictions the deficit terrorists have made have come true. The ideologues respond that it is only a matter of time. My reply, when might that be?

I am sitting at Melbourne airport today reading IMF working papers and typing this blog. You might speculate on what sort of life that is. Par for the course. The IMF recently released a new working paper – Is Fiscal Policy Procyclical in Developing Oil-Producing Countries? – which though reasonable in the context of the paradigm that the IMF works within (that is, that governments are revenue-constrained and bond markets are crucial to their functioning) – provides a classic example of why most of mainstream macroeconomics needs to be abandoned and replaced by an understanding of Modern Monetary Theory (MMT). The errors of logic and assumption that the paper makes permeates through the entire public debate and if the public only knew the real story the politics would change instantly and dramatically.

I have very little blog time today (less than usual). I had a major piece to finish today and an Op Ed to write and some PhD drafts to read and I am floating around outside my office. But the Internet has allowed most nearly anyone (in the advanced employed world) to become a publisher and an owner of a site. It is not a very discriminating vehicle for quality control and in some sense that is probably a good thing because quality is often just an ideological construct. But there are some truly bizarre sites that breathe life courtesy of the Internet. One of the most bizarre is the Cut Cap and Balance Act home page with if I didn’t know otherwise I would assume was a parody on everything that is nonsensical about conservative free market economic thinking. The problem is that the site is deadly serious and that is truly scary. Cut, Cap and Balance is the new catch-cry. It is high farce but the proposers are actual legislators and they are dealing with real people. They should just retire and watch the Thunderbirds or something. Because all I can see in the CCB is Cut, cap and demolish – where prosperity and peoples’ life chances are the demolition target.

My time is short today so an early post. I am catching up on my reading and had time to study the evidence given by Simon Johnson to the Joint Economic Committee of the US Senate on June 21, 2011. There are many such committees within any national government and at present they are being bombarded with analysis from so-called experts who assume a non-problem, call it THE problem, then propose various solutions to the problem (that is, non-problem) which all in various ways would make the real problem even worse. That is the state of the public debate.