It’s simple math

Have you ever examined the Japanese yield curve? I check it on a daily basis. At present, it looks to have a normal shape (longer-maturities with slightly higher yields) than near-term assets. It is also quite low – like really low. The short-end around 0 and the long-end not much above it. It has been that way for a long time. If I assembled a group of economists – which we might call “distinguished experts” – and let them have the yield curve data and told them that inflation in this nation was low to negative and had been for two decades, and economic growth was mostly positive – and then asked them to write a story about the evolution of budget deficits and public debt ratios over the same period what do you think they would say? Alternatively, if we started with some other facts – like – increasing and relatively large budget deficits and the highest gross central government debt to GDP in the world – what would they say about inflation, growth and bond yields? The two sets of answers would be diametrically opposed to each other. The reason: because they don’t understand what drives the data. Their textbook macroeconomic models are totally wrong and have no explanatory capacity at all. It is really simple maths – a currency-issuing government can spend up to what is available for sale in that currency; can set yields and interest rates at whatever level is desires; does not need to issue debt anyway and so the notion of a financial collapse is misguided at best; and will cause inflation if it spends too much (defined as pushing the economy beyond its real capacity to produce). Simple really. Pity our “distinguished experts” didn’t see it.

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Society buckled and is damaged but has never disappeared

Remember that her own party got rid of her in the end because she even became a liability to them. She was always a liability to the prosperity of the British people and despite her obsession with incentives and individual action, she undermined both by wrecking the macroeconomy in Britain. The news today is all about the death of the former British PM. There will be a lot of revisionism going on. I don’t plan on a chapter and verse discussion of the legacy of the shopkeeper’s daughter. Apart from the cruelty that was imposed on individuals, particularly the poor, her policies hollowed out the British economy and opened up the door for the parasitic financial sector to take centre stage, with the disastrous consequences that are now for all to see. I could talk about all of that. But to me the biggest impact of her period in office was that it marked the beginning of the end of the social democratic parties. Labour and the Tories became neo-liberal lookalikes. Sure enough, the Tories spoke better and had better table manners. But when the economic policy positions were distilled to their essence, the Labour Party, like so-called progressive parties everywhere, started to sound more right-winged than the Tories themselves. That is what I think is her grim legacy for the weak and the poor of the world.

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US President engaging in economic vandalism

Last week (April 5, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation – March 2013 – which showed that in seasonally adjusted terms, total employment decreased by 206,000 in March and the labour force shrunk by a further 496,00 persons. The twin evils – falling jobs growth and declining activity. While the unemployment rate fell to 7.6 per cent (from 7.7 per cent) that is an illusory improvement. The fact is that the participation rate fell by 2 percentage points and thus hidden unemployment rose. The 290 thousand fall in official unemployment arose because the drop in employment was more than offset by the fall in the labour force. There is nothing virtuous about any of that. The facts are that it is getting harder again for Americans to get work and easier for them to lose it. The data is signalling a fairly poor outlook and hardly the time for the President to be submitting austerity budgets. But in the same week that the data came out, the President did just that. The latest budget submissions from the Administration, designed to placate the mad Republicans, is an act of economic vandalism.

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Saturday Quiz – April 6, 2013 – answers and discussion

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.

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Unemployment and Inflation – Part 12

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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Accounting regulations can change

One of the oft-heard criticisms of Modern Monetary Theory (MMT) is that the original developers (including myself) say one thing but know another. We say – there are no financial constraints on a currency issuing government but then, as if as an afterthought, admit that in the real world there are lots of constraints on government spending. On Christmas Day 2009 I wrote the following blog – On voluntary constraints that undermine public purpose. It renders such criticisms redundant. But in the light of the Cyprus schemozzle (putting it mildly), it is interesting to reflect on what could have been done to avoid the ugly consequences that will follow the “Bail-in” package. Even within the constraint of keeping Cyprus in the Eurozone, the authorities (in particular, the ECB) has the capacity to save that nation’s banking system and avoid destroying the nation’s economy. The fact they chose not to use that capacity is telling given the consequences that will now follow. They might have followed their American counterparts who in 2011 clearly knew how to reduce the damage of the crisis and operate as a central bank rather than as part of a vicious syndicate of unelected and unaccountable socio-paths (aka the Troika).

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Very unintelligent indeed

I had a long flight today and other things to catch up on after the Easter period. But the stunning news yesterday from Eurostat that the EU17 unemployment rate has now risen (in February 2013) to 12 per cent. Each month’s Labour Force data sets a new record peak for the Eurozone. Each month that unemployment rises, the real GDP losses that are being deliberately created by the existing policy regime mount. As I show in this blog, those losses are enormous and will never be regained – that income has been lost forever. The human dimensions of the crisis are also huge. And the evidence mounts that the conceptual underpinning of the policy framework doesn’t hold water. This is an extraordinary period of history where a flawed theoretical approach which doesn’t stack up when confronted with the data, is being used to create a flawed monetary system design, which has failed categorically when judged against any reasonable criteria of social purpose, and then the leaders impose even worse policy designs over that failure. Sometime in the future, humans will judge the current generation to be very unintelligent indeed.

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US problems are cyclical not structural

Last week (March 28, 2013), the – US Bureau of Economic Analysis – released the – revised (third estimate) – fourth-quarter 2012 US National Accounts data, which showed that real GDP grew by 0.4 per cent in the December quarter and 1.7 per cent for the 12 months to December 2012. The estimates were revised upwards from a quarterly growth rate of 0.1 per cent, largely due to higher estimated consumption and investment growth. In the six years to the December-quarter 2007 (the most recent real GDP peak) the average quarterly growth rate was 0.62 per cent. The US economy is still labouring with a huge cyclical output gap. That doesn’t stop a range of commentators from arguing otherwise. Other than the hysterical (and inaccurate) – David Stockman blast – there was a somewhat more measured article by Jeffrey Sachs in the New York Times (March 31, 2013) – On the Economy, Think Long-Term – which claims that the US problem is not cyclical but structural. For non-economists, that means that the policy solutions are quite different. In the absence of hysteresis, fiscal and monetary policy cannot solve a structural problem. The only problem with Professor Shock Therapy’s hypothesis is that it doesn’t stack up with the evidence. The evidence does not support the assertion that job polarisation in the US is constraining economic growth. The evidence continues, unequivocally, to support the view that the US economy is suffering from a major cyclical downturn (output gap) and needs a carefully targetted, aggregate demand stimulus.

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Cyprus – Greece or Iceland? Obvious

It is a public holiday in Australia today like everywhere. So this is a relatively short blog. In the last week, the tiny nation of Cyprus has committed itself to a path that will see it stagnate for years to come and real living standards will fall. It will lose its banking sector and will find it hard to stimulate its tourism sector given it is unable to alter its exchange rate. Domestic wages and costs will have to fall dramatically before there will be any significant stimulus to tourism. The government is unable to support domestic demand growth because the Troika will not let them increase their discretionary budget deficits. And sooner or later some German or another will start demanding they sell their island to pay their bills (remember Greece). In other words, they are following the Greek path to destructive oblivion. Apparently this is because there is no better alternative. The Euro elites have spent a lot of effort telling everyone that there is no alternative to harsh austerity and the destruction of another economy. But for anyone who keeps their eyes on the data you will know that there is an alternative. A small island state – Iceland – issues its own currency and allowed their exchange rate to move with relative currency demand has emerged damaged but not in Depression. The vital signs in Iceland are positive.

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