Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following six questions. Your results are only known to you and no records are retained.
I will finish this week with a painstaking, dot-point summary of some key elements of Modern Monetary Theory (MMT) to show clearly why bond-issuance which might accompany a budget deficit doesn’t lower the inflation risk of the deficit spending – not now, not tomorrow, nor at some mythical “long-run” point in time. All the inflation risk is on the spending (aggregate demand) side. The monetary arrangements that might or might not accompany the spending decisions of government do not add or subtract from the inflation risk. Mainstream theory thinks they do. That theory is demonstrably false. I will also cover several related myths that seem to have cropped up over the last week – both in the international media and among the comments made on this blog. It seems that we need some baby steps. So with my fire-suit (always) on I hope you all enjoy it. Some of the critics might like to read this news item before they start.
In the last few days, while MMT has been debating with Paul Krugman, several key data releases have come out which confirm that the underlying assumptions that have been driving the imposition of fiscal austerity do not hold. Ireland led the way in early 2009 cheered on by the majority of my profession who tried to sell the world the idea of the “fiscal contraction expansion”. Apparently, there were millions of private sector spenders (firms and consumers) out there poised to resurrect their spending patterns once the government started to reduce its discretionary net spending. Apparently, these spenders were on strike – and saving like mad – because they feared the public deficits would have to be paid back via higher future taxes and so the savings were to ensure they could pay these higher taxes. It is the stuff that would make a sensible child laugh at and think you were kidding them. Now, the disease has spread and the data is telling us what we already knew. The economists lied to everyone. None of them will be losing their jobs but millions of other will. And the worse part is that the political support seems to be coming from those who will be damaged the most. Talk about working class tories! This is a self-inflicted catastrophe.
Textbooks get out of date and need revision in the light of recent data or events. Some textbooks are exposed as being just plain wrong and should be re-written completely. Obviously authors in the latter category are reluctant to admit that their textbook is not an adequate description of the way – for example, the economy works – and so they not only resist updating their offering but they also defend it against all the evidence. Anyway, after reading Paul Krugman’s most recent attempt to come to grips with Modern Monetary Theory (MMT) I concluded that it was way past the date that he should be rewriting his macroeconomics textbook. Otherwise he is misleading the students who are forced to use it in their studies. So Paul, its time to update your textbook.
We have been working on a map to relate the local area unemployment in Britain with the incidence of riots in August 2011. I discussed why the incidence of unemployment might be a key driving factor for the riots in this blog – I blame the British government for the riots. The map we have now produced provides a stark representation of the geographic coincidence of labour market failure and the rioting.
Today is rather historic because it is the 40th anniversary of the collapse of the Bretton Woods system. On August 15, 1971, the then US President Nixon gave an address to the nation – The Challenge of Peace – where he announced the “temporary” suspension of the dollar’s convertibility into gold – and by closing the “gold window” the fixed exchange rate system was over. The demise of the fixed exchange rate system – and by implication the introduction of the fiat monetary system – provided governments with the scope to pursue domestic policies without tying monetary policy to defending the parity. It gave fiscal policy the capacity to sustain full employment no matter what else occurred. It is a pity that since then governments have been steadily white-anted by conservatives who have aimed to undermine the capacity to ensure there are enough well-paid jobs available at all times. The 2008 crisis that is now reverberating again is a direct result of the conservative political success since that time – not only directly but also indirectly, by pushing the political spectrum so far to the right that the “left” are not “right”. The result of all this is that the “system in deep trouble and it is waiting to blow”.
Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following six questions. Your results are only known to you and no records are retained.
I haven’t much time today. I note that the British Chancellor has made an emergency speech to the House of Commons last night (August 11, 2011) – Statement on the global economy. He claimed that the fiscal austerity had made the UK a “safe haven” for investors. The reason that demand for gilts is high at present is because the bond markets know the UK has no default risk. I also noted Paul Krugman’s wrote a blog in the New York Times yesterday (August 11, 2011) – Franc Thoughts on Long-Run Fiscal Issues – where he challenges Modern Monetary Theory (MMT) directly. To challenge something you have to represent it correctly.