Many readers have asked me to comment on the recent financial reform proposals from the Obama Administration. Some have tied their questions into more general requests to outline a specific modern monetary approach to the reform process. So I thought I would take this Sunday blog time to put some notes together in this regard. I cover the treasury and central bank in this blog. At some later point I will consider how to better regulate the commercial banks and the role of governments in deposit insurance.

Many readers keep calling for my views on Austrian economics. Apparently when pushing what we might call the Modern Monetary Theory (MMT) view they get hit with a barrage of Austrian school criticism along the lines that statism is dread and that by privatising everything you will improve the human condition. My first thought when I get E-mails like this is to wonder where my readers hang out in their spare time! I wasn’t aware that the Austrian school was anything more than a cobbled together bunch about as large as the modern monetary school (laughing). Anyway, I am taking the request seriously and as a start I present some background – some modern monetary armaments. We are going to war.

The media is increasingly reporting that the RBA will hike interest rates by the end of 2009. I consider this to be a nonsensical suggestion given that unemployment and underemployment will still be rising and it is unclear whether employment growth will be anything than near zero at that time. From a theoretical perspective, at the root of all the conjecture, whether the journalists actually realise it or not, is a concept called the “neutral rate of interest”, which is just another neo-liberal smokescreen. That is what this blog is about.

Today’s economics blog is about some reactions I have to the many pieces of correspondence I get each week about my work via E-mails, letters, telephone calls. It seems that there is a lot of misinformation out there and a reluctance by many to engage in ideas that they find contrary to their current understandings (or more likely prejudices). It always puzzles me how vehement some people get about an idea. A different idea seems to be the most threatening thing … forget about rising unemployment and poverty – just kill the idea!. So here are a few thoughts on that sort of theme.

Some economists who are pushing the so-called de-leveraging story to explain the current downturn consider that the only sustainable basis for economic recovery requires that overall debt levels in the economy decline dramatically. They rightly argue that this requires a significant reduction in private debt. But they also argue that the public debt increases associated with the net public spending (the stimulus packages) – they erroneously use the term “to fund” the net spending – is self-defeating. In other words, they claim we are just substituting public debt for private debt and creating a new form of vulnerability (public insolvency – higher inflation etc) as we eliminate the private leverage. Apart from the failure of this story to link the private debt explosion with the pursuit of budget surpluses in the past, the major error that this camp makes is of the “oranges and apples” variety. That is, debt is not debt!

In this blog I will complete my analysis of the concept of fiscal sustainability by bringing together the discussion developed in Part 1 and Part 2 into some general principles. The aim is to provide a blueprint to cut through the deceptions and smokescreens that are used to deny fiscal activism and leave economies wallowing in persistently high levels of unemployment. So read on.

This is Part 2 of my little mini-series on what we might conceive fiscal sustainability to be. In Part 1 we considered a current debate on the National Journal, which is a US discussion site where experts are invited to debate a topic over a period of days. By breaking the different perspectives that have been presented to the discussion, we can easily see where the public gets its misconceived ideas from about the workings of public deficits and the dynamics of the monetary system – its leaders. My aim in this 3-part series is to further advance an understanding of how a fiat monetary system operates so that readers of this blog (growing in numbers) can then become leaders in their own right and provide some re-education on these crucial concepts. So read on for Part 2.

Greetings from Amsterdam where I am spending the next few days talking about what drives spatial changes in unemployment at a Tinbergen Institute regional science workshop. The spatial econometric work that I am outlining tomorrow provides the conceptual framework for the construction of the Employment Vulnerability Index, which received a lot of press earlier in the year. But while I was flying over here I thought about the concept of fiscal sustainability which is now getting a lot of press. So this is the first of a multi-part series on what constitutes a sustainable fiscal policy. Its that time again. Time to debrief!

There has been a lot of E-mail traffic coming in after my blog on The Greens the other day. At the heart of the matter is the fundamental difficulty people have in appreciating that there has been a fundamental shift since the 1970s in the way our monetary system operates. This shift redefines how we should think about macroeconomics and the role of a national government which issues its own currency. The defenders of The Greens economic policy clearly misunderstand this historical shift. To really get to the heart of how a modern monetary system functions you have to appreciate the difference between a convertible and non-convertible currency and a fixed versus a flexible exchange rate system. The economics that apply to convertible currency-fixed exchange rate systems bears no relation to that which applies to the fiat currency-flexible exchange rate systems that prevail in most economies today. So before you attack my macroeconomics, make sure you understand what a government can do in a modern monetary paradigm. Otherwise, you are a dinosaur and they became extinct.