In recent comments on my blog concern was expressed about continuous deficits. I consider these concerns reflect a misunderstanding of the role deficits play in a modern monetary system. Specifically, it still appears that the absolute size of the deficit is some indicator of good and bad and that bigger is worse than smaller. Then at some size (unspecified) the deficit becomes unsustainable. There was interesting discussion about this topic in relation to the simple model presented in the blog – Some neighbours arrive. In today’s blog I continue addressing some of these concerns so that those who are uncertain will have a clear basis on which to differentiate hysteria from reality. We might all sleep a bit better tonight as a consequence – hence the title of today’s blog!

Today I was looking over some macro data from Ireland which is leading the charge among the peripheral EMU nations (the so-called PIIGS) to impoverish its citizens because: (a) the amorphous bond markets have told them too; and (b) they had previously surrendered their policy sovereignty. Their actions are all contingent on the vague belief that the private sector will fill the space left by the austerity campaign. The neo-liberals are full of these sorts of claims. More likely what will happen is a drawn out near-depression and rising social unrest and dislocation. But as long as the Irish do it to themselves then the Brussels-Frankfurt bullies will leave them to demolish their economy. It raises the question who is in charge – the investors or the government? The answer is that the government is always in charge but what they need to do to assert that authority varies depending on the currency arrangements they have in place.

Today we consider the causes of mass unemployment of the sort that most nations are enduring at present. This also involves the consideration of the relationship between wages and employment. This is an area in economics that has been hotly contested across paradigm lines for years. Mainstream economic commentators still claim that the employment situation can be improved if wages are cut. They are wrong. Modern monetary theory (MMT) is clear – mass unemployment arises when the budget deficit is too low. To reduce unemployment you have to increase aggregate demand. If private spending growth declines then net public spending has to fill the gap. In engaging this debate, we also have to be careful about using experience in one sector to make generalisations about the overall macroeconomic outcomes that might accompany a policy change.

It was a very quiet day at the office today. The day started out pretty much as normal – a bit of a surf down at Nobbys Beach in small waves with a few of the regulars out. Then as I was driving to work I wondered where everyone was. Anyway, an easy drive. Then I noticed there were no E-mails, no newspapers, no-one at the office … and only one Twitter from Sean Carmody saying he was going off-line for the day. Maybe this is my big chance to take control of economic policy and fix the current malaise? That would be good. There would be some legislative changes immediately. The first I would make (for the US) was the topic of a report in yesterday’s Wall Street Journal (December 24, 2009) which noted that the US Congress had raised the debt ceiling to allow the US Treasury to borrow through to Fedruary 2010. Hmm, get rid of that legislation as a first step. Then on we would go.

Today I am working in Dubbo, which is in the western region of NSW and getting into the remote parts of the state. There is a great beauty to enjoy in remote Australia which often passes people by. My field trip is in relation to continuing work I am doing with indigenous communities in this region. I will report on this work in due course. But today’s blog continues the theme I developed yesterday on bank reserves. In yesterday’s blog – Building bank reserves will not expand credit – I examined the dynamics of bank reserves but left a few issues on hold because I ran out of time. One issue is the possible impact of expanding bank reserves on inflation. This is in part central to the mainstream hysteria at present about the likely legacies of the monetary policy response to the crisis. The conclusion is that everyone can relax – the only problem with the monetary policy response is that it will be ineffective and more fiscal policy effort is required.

In his latest New York Times article (December 10, 2009) – Bernanke’s Unfinished Mission – Paul Krugman reveals that he doesn’t really understand much about macroeconomics. Sometimes you read a columnist and try to find extra meaning that is not in the words to give them the benefit of the doubt. At times, Krugman like other columnists sounds positively reasonable and advances arguments that are consistent with modern monetary theory (MMT). But then there is always a give-away article that appears eventually that makes it clear – this analyst really doesn’t get it. In Krugman’s case, he doesn’t seem to have learned from his disastrous foray into Japan’s “lost decade” policy debate.

Today I am continuing my recent theme of considering the flaws in the standard progressive attack on neo-liberalism. I will write sometime about manufacturing but it is Sunday and it has been a beautiful day here and I don’t feel like setting off the flamethrowers out there that clearly think manufacturing is important. It might be, but the standard arguments are based on a vertically integrated conception of the sector that we haven’t had for years anyway. But later. Today, I consider the “public debt is good” approach that progressive use to counter the manic “public debt is always bad” arguments proferred by the mainstream of my profession.

A number of readers write to me asking me about the applicability of modern monetary theory (MMT) to less developed economies and open economies generally. The issues are not entirely the same for both cases but there is a strong commonality. The aim of this blog is to advance the understanding of how MMT deals with open economy issues. They remain mysterious to most people and grossly misrepresented by those who claim to understand.

This is the first of a few blogs that I will write about asset bubbles and modern monetary theory (MMT). The point came up this week in a comment posted by Sean Carmody in response to my blog – Operational design arising from modern monetary theory. It was also raised in the current debate about MMT and debt-deflation, which I will return to on Sunday. The proposition is that if the the central bank maintains a zero target interest rate then lending rates will be so low that there will uncontrollable asset bubbles. As long as fiscal policy is used sensibly I disagree that a zero interest rate policy is destabilising.