IMF reform proposals for the Eurozone are just weak band aids that cannot fix the dysfunctional mess

The Eurozone is currently in a period of ‘temporary’ hiatus – by which I mean that to deal with the obvious system-ending implications of the pandemic (increasing fiscal deficits etc) the European Commission invoked the special clauses to suspend the application of the fiscal rules outlined in the Stability and Growth Pact (SGP) and related Excessive Deficit Mechanism procedures and the European Central Bank introduced an even larger bond-buying program to ensure the resulting deficits would be funded without bond yields rising. Result: fiscal deficits rose well beyond the SGP limit of 3 per cent in 2020 and have remained at elevated levels relative to the rules in 2021. The overall Eurozone deficit is 4.7 per cent of GDP and 11 of the 19 Member States remain in ‘violation’ of the Excessive Deficit Mechansim should that be reinvoked. It is clear that unless the ECB continues funding the deficits across the union (even though it claims otherwise), then the European Commission will tempt disaster if it tries to reassert the Excessive Deficit Mechansim. Already so-called ‘reform’ proposals are emerging and many more will come in the months ahead. The first major effort from the IMF is really just more of the same and fails to deal with the dysfunction at the design level of the monetary union. The proposals so far are just advocating putting band-aids over the mess – and they are weak bandages at best. But how this dilemma is resolved will be interesting for sure.

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Radical change is needed and mainstream economics will not be part of the solution

I wrote about what I am terming a ‘poly crisis’ in this recent blog post – The global poly crisis is the culmination of the absurdity of neoliberalism (July 18, 2022). I am working on material for my next book to follow up – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017). The German word ‘Zeitenwende’ means turning point. A fork in the road. It carries with it, from one interpretation, a recognition that the path that has been traversed to date is not the path that should be followed in the future. Something has to give. Whether Albert Einstein actually said “Insanity is doing the same thing over and over and expecting different results” is an interesting literary issue but the essence of the quote (correctly attributed to him or not) is sound. The idea of a ‘poly crisis’ is that big shifts in thinking and behaviour are required. We simply cannot continue to act in the same way as before whether it be on an individual level (us making our own choices) or at a societal level. The organisation of economic activity, our patterns of consumption and conduct of economic policy must all change – radically – for the planet to survive. Tinkering around the edges will be insufficient. Identifying a ‘poly crisis’ is tantamount to declaring the neoliberal experiment has failed dramatically and taken us all to the brink. It cannot form a basis for the future. But there is massive resistance to change and in Australia in the last week we have seen that in spades.

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Corporate profit greed is driving inflationary pressures

Despite all the hysteria about the current inflationary pressures and the reversion of central bank policy committees to the New Keynesian norm – interest rates have to rise to kill off inflation otherwise it becomes a self-fulfilling process where wage demands are made in ‘expectation’ of more inflation and firms (passively in their view) have to pass on the higher unit costs, I remain of the view that this period is transitory. That doesn’t win me any friends (other than my true friends). It also leads to another hysterical line of Twitter-type statements that the Modern Monetary Theory (MMT) have gone silent because they were wrong about fiscal deficits not causing inflation and are too ashamed to admit it. I haven’t gone silent. I have been continuous in my advocacy both privately and publicly. The rise in fiscal deficits during the pandemic and the central bank bond purchases have had little to do with this inflationary episode. Covid, sickness of workers, War, natural disasters (floods, fires) and noncompetitive cartels and energy markets are the reason for the inflation (variously in different countries) and interest rate increases won’t do much at all to target changes in those driving factors. New ECB research (released August 3, 2022) in their Economic Bulletin (Issue 5, 2022) – Wage share dynamics and second-round effects on inflation after energy price surges in the 1970s and today – reinforces my assessment of the situation.

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British Tory MP spills the beans on government debt

It’s Wednesday and I have a few items of interest (to me at least) to warm us up for the music feature, which is beautiful though sad. First up we learn how a senior Tory MP has made admissions to the media that completely contradict mainstream macroeconomics and validate what Modern Monetary Theory (MMT) tells us. Second, we learn from the latest ECB data just how ‘flexible’ (read: anything goes) it can be in its government funding. Italy and Spain are being rescued at present. As I said anything goes. And third, the vandalism of the Reserve Bank of Australia continues. Then we can rest and listen to some glorious singing.

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Low US unemployment does not negate the conclusion that the US economy is now in recession

The US Bureau of Economic Analysis published the latest US National Accounts data last week (July 28, 2022) – Gross Domestic Product, Second Quarter 2022 (Advance Estimate) – which showed that the US economy is now in technical recession – two consecutive quarters of negative GDP growth. After recording a contraction of 1.6 per cent in the March quarter in real GDP, the advance estimates for the June quarter show a further contraction of 0.9 per cent. Many commentators are, however, denying the recession narrative because they are pointing to the low unemployment rate (of 3.6 per cent). It is true, that the GDP figures are often revised and when the final, second-quarter estimates are available, they might record positive growth. But there is a puzzle emerging. We have long held the view (based on Okun’s Law – see below), that when GDP growth declines, the unemployment rate rises. This is a long-held stylised fact that has until Covid stood the test of time. But Covid has changed things and at present the US (and other nations) are experiencing a major slowdown in the growth of their working age population as a result of quite alarming rises in long-term disability as a result of the enduring impacts of Covid infections (and repeated infections). That has meant that unemployment rates are lower than they otherwise would have been as a result of worker shortages. On the one hand that is good for the employed. But, on the other hand, it is disastrous for workers who are now disabled. So the meagre fact that unemployment is low does not negate the conclusion that the US economy is now in recession, which has been deliberately created first by a massive fiscal contraction, and then, by the irresponsible conduct of the Federal Reserve Bank.

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The global poly crisis is the culmination of the absurdity of neoliberalism

We are used to segmenting destructive episodes as crises – the Mexican debt crisis in 1982, which gave way to the Latin American debt crisis in the 1980s, the East Asian financial crisis of 1997-98, then the Global Financial Crisis in 2008 and beyond, then the pandemic crisis since 2020. Meanwhile, firefighters are dealing with major fires from Portugal, France to Crete; Britain is about to experience 40 degrees Centigrade; Australia is dealing with a sequence of massive floods; corporations are gouging profits and pushing inflation, which is provoking policy makers to take it out on the most disadvantaged in our societies, with no logical link between the policy and the perceived problem, other than deep recessions stop the gouging; nations considered to be ‘middle income and rising’ are now lining up behind Sri Lanka to see who will be the next to basically collapse into anarchy, unable to feed its population; housing shortages are causing havoc almost everywhere; the quality of employment has declined dramatically (job security, worker agency, etc) and the trade unions are a pale imitation of what they used to be; politicians are more self-serving than ever; and people are still dying in the thousands everyday from the pandemic but our leaders insist we are now ‘living’ with Covid (more like dying with it). The reality is that all these events are linked and part of what some might call a poly crisis. Capitalism has failed and the institutions we created to tame the raw-profit greed of capital – the state, trade unions, etc – have also been compromised to such a degree that they, either are no longer effective or work as agents of capital rather than mediating the labour-capital conflict. A poly crisis requires fundamental change. But, such is the dominance of the mainstream, which has created this crisis, that all we get is more of the same. That means the ultimate solutions will be more painful and destructive and lead to conflagration as this period of human civilisation collapses.

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The Ministry for the Future has some MMT lessons on fiscal policy

A close friend send me some pages from a book she is reading – Ministry for the Future – by author Kim Stanley Robinson, which was published in 2020. It is about an organisation that is chartered with defending the rights of future generations and they pursue various projects accordingly. Its major challenge is climate change, after a “deadly heat wave in India” and the narrative allows the author to entertain very interesting discussions about economics, ecology and society. It is classified as “hard science fiction” because while the work reflects the imagination of the author, he bases the narrative on “scientific accuracy and non-fiction descriptions of history and social science” to bring home the challenges we face with climate etc. The pages I received came from Chapter 73 (pages 365-366), which has a two-page discussion about Modern Monetary Theory (MMT). The author writes in his future scenario that “Enough governments were convinced by MMT to try it. That it influenced so much policy through the late thirties was regarded as a sign either of progress or of desperate fantasy solutions.” While the discussion is interesting, I want to focus on one of the ideas the author presents because they illustrate an important distinction between ‘Keynesian’ and ‘Post Keynesian’ thought on fiscal policy and MMT analysis.

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RBA aims to cut policy stimulation by adding to it

It’s Wednesday, and we have some analysis and news and then my music segment for the week. Yesterday, the Reserve Bank of Australia (RBA) stunned the nation by pushing up interest rates by 0.5 points, claiming it was the responsible thing to do given that inflation was higher than expected. They then outlined all the factors driving inflation – none of which are going to be responsive to interest rate rises. Further, when one dissects the way in which interest rate rises work through distributional effects and effects on business costs, it is not clear that increasing rates will not just add to the stimulation rather than reduce it as the RBA claims. Next, we Fact Check the Fact Checkers and after all of that we have some Tupelo Blues, to restore some sense of decorum.

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US inflation is moderating while a massive fiscal contraction is underway – recession looming

Yesterday (May 11, 2022), the US Bureau of Labor Statistics released the latest – Consumer Price Index Summary – April 2022 – which showed the monthly increase in the CPI to be 0.3 per cent, the lowest monthly increase since August 2021 and, as it happens, just about right on the average monthly growth rate from January 1947 and April 2022. The result suggests a tapering of price pressures. The Energy component fell by 2.7 per cent in April after spiking at 11 per cent in March. Further, the growth in food prices fell for the third consecutive month. All of this has nothing to do with the recent interest rises imposed on the economy by the US Federal Reserve. They were already in train and confirm the transitory nature of this period of price instability. The US Treasury Department also published its most recent fiscal statistics yesterday – Monthly Treasury Statement – for April 2022, which reports a staggering $US533,794 fiscal shift between April 2021 and April 2022 – the fiscal drag embodied in that shift is massive and calls into question the conduct of the US Federal Reserve – why did they think they needed to push the economy towards recession? Fiscal policy is already working in that direction!

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Fiscal policy shifts, not rising interest rates are required at present

Yesterday, I commented on Tuesday’s RBA interest rate rise. I wasn’t complementary. In the last two days, more data has been released since the decision, which further suggests that the RBA erred. It also suggests that part of the housing problem everyone is focused on is not due to lax monetary policy, which is the mainstream mantra, but is, rather, due to flawed tax policy. So, we have seen housing loan demand in decline and building approvals plummetting in the last month, a sign that the housing market, especially for owner-occupiers is in decline. Further, the growth in retail sales was only 1.6 per cent, and while mainstream economists are pointing to the rapid growth over the 12-month period (9.4 per cent March to March), they ignore the fact that the the March 2022 observation shows a decline on the previous month. The RBA statement yesterday did not mention housing at all, even though its decision has already pushed up mortgage rates in an already declining market. All they seem to want to do is cause massive damage to low income workers through even lower real incomes and rising unemployment and underemployment. There are fiscal options that should be pursued right now but the policy makers appear blind to them.

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