Everyone is lining up to be the next Japan – the lost decade or two version that is. It has been taken for granted that Japan collapsed in the early 1990s after a spectacular property boom burst and has not really recovered since. The conservatives also claim that Japan shows that fiscal policy is ineffective because given its on-going budget deficits and record public debt to GDP ratios the place is still in shambles. I take a different view of things as you might expect and while Japan has problems it demonstrates that a fiat monetary system is stable and we should be careful comparing Ireland, the US or the UK to the experiences that unfolded in Japan in the 1990s and beyond.

I recall from my days studying law that there were express terms and implied warranties underpinning every contract. The express terms were those agreed between the parties. The implied terms were binding even if they were not discussed between the parties to the sale or deal. I recall that among the usual implied terms were things like quality of the materials used and fitness of purpose. If a product or service is not sold where the seller knows the materials to be of poor quality or will not perform the functions that are held out to the buyer then a civil claim is open in tort to negate the contract and pursue damages. Anyway there are a number of private sector organisations out there that pump out so-called expert economic and financial analysis for profits that if you actually understand the product would lead you to conclude they are fraudulent products and not fit for the purpose that is held out. The ratings agencies (which threatened Japan again this week) fall into that category. But there are others. Today I consider the so-called Fiscal Risk index put out by a British firm that claims that the austerity campaign being pursued by the British government is helping it reduce its risk of bankruptcy. That is an outright lie! I thought that selling dodgy goods and services was illegal.

The now totally discredited OECD has started a special section of their WWW site which they call – Restoring public finances. Many person-hours of labour have gone into its construction and the documents and “analysis” (so-called) that you can access there. They even have an article from ECB boss Jean-Claude Trichet which would be laughable if it wasn’t so damaging (given his influence). The OECD is another of those organisations (such as the IMF) that promoted policy agendas (deregulation etc) which not only entrenched persistently high unemployment during the growth year but also set in place the conditions that ultimately led to the crisis. But like a drunk who sneaks a drink then denies it, the OECD seems incapable of introspection and acknowledging that it is part of the problem not the solution. Its policy agenda caused the crisis. Now it is lecturing the world in aggressive tones about how its policy agenda (unchanged) should be ramped up even more vigorously. My view is that OECD should just close its doors and its staff should be redeployed into productive activities.

Yesterday I was listening to the ABC Radio National program – Counterpoint – which interviewed author David Freedman about his 2007 co-authored book A Perfect Mess. I was very interested in this book when it was published. It is about the value of mess and the costs that organisational freaks impose on us. In the case of fiscal policy – the essence of good macroeconomic management is to allow policy settings to be responsive when needed. Why? To ensure that government action supports aggregate demand and is consistent with private sector saving desires. The control freaks want to impose “organisation” on governments by legislating debt brakes and this type of organisation amounts to a fundamental denial of the need for fiscal policy to be reactive and flexible. That is, of-course, no surprise given that deterministic fiscal rules are proposed by ideologues that are fundamentally opposed to public intervention in the first place. Deterministic fiscal rules in fact undermine public responsibility.

Sometimes you read an article that clearly has a pretext but then tries to cover that pretext in some (not) smart way to make the prejudice seem reasonable. That is the impression I had when I read this Bloomberg opinion piece by William Pesek (January 31, 2011) – Pinnacle Envy Signals New Bubble Is Inflating – which I was expecting to be about real estate bubbles but which, in fact, turned out to be an erroneous blather about Japanese debt risk. Please note: there is no sovereign debt risk in Japan!

The latest data from the UK provides us with further evidence that mainstream economic theory and its policy advice is dangerous and should be disregarded. We are now some six months or more into the period of fiscal austerity in Britain even though many of the cut backs and tax hikes etc have not yet been introduced. But the British households and firms have known since the election result in May what was ahead of them and so have had time to make adjustments to their spending and saving patterns to take into account the expected future. Modern Monetary Theory (MMT) predicted that as a result of the fiscal austerity plans, the British economy would slow down again as private consumers and firms cut back on their own spending driven strongly by the fear of unemployment and flat sales conditions that accompany that situation. Mainstream theory pushed the notion of Ricardian Equivalence which claims that that private spending is weak because we are scared of the future tax implications of the rising budget deficits. But, the overwhelming evidence shows that firms will not invest while consumption is weak and households will not spend because they scared of becoming unemployed and are trying to reduce their bloated debt levels. Recent data shows that the Ricardians in UK have had a wonderful Xmas. Not!

The stories that are headlined on Page 1 of the New York Times in its on-line edition late January 21, 2011 are almost beyond belief and are like spoofs – if only. I must admit the shock factor is diminishing in this neo-liberal era where the most absurd ideas are brush-stroked up to appear normal. Some time ago I would have just laughed and concluded that some extremist or another was getting a moment of airplay – a day in the sun and would then disappear to a dark room where they would continue writing endless handwritten letters to all and sundry outlining their crackpot ideas and schemes for the renewal of humanity – which always seemed to involve some communist purge (the reds are everywhere you know) and handing over authority to citizen militia’s. But these nutty ideas are gathering pace. It seems the deficit terrorists are getting bored with their predictions of inflation (that doesn’t arrive) or rising interest rates (which do not arrive) – so they have to invent even more bizarre angles. They get so far out there that sometimes even I cannot believe they could be serious.

It is a holiday week in Australia – the cricket is on (not interested); the weather is good and it is virtually impossible to get a tradesperson to fix a new electricity connection. But who am I to complain when our fortunes are compared to the costs being endured in other nations where governments have deliberately followed policy trajectories which are designed to inflict damage on their real economies – in the mistaken belief that TINA rules. TINA (There Is No Alternative) is one of those neo-liberal ploys which hoodwinks citizens into believing that gross damage is better than really gross damage but which is really an agenda for retrenching the welfare state and freeing markets up for further private sector rape. There are alternatives to what is going on at present and it requires much stronger public sector intervention. I was thinking about this today when I was reviewing the latest data from Latvia which is now being held out as the “model” for the rest of Europe to follow. It is clear that eventually growth does return to these ravaged economies but that doesn’t validate the policy approach. It just says that business cycles cycle. The real way of assessing the alternatives is to compare how deep the policy-induced damage becomes and how long it lasts. The neo-liberal austerity line does not look good in that regard.