Don’t let neo-liberal (idiots) loose with a spreadsheet!

I was in the airport lounge yesterday and as one does I picked up the right-wing Australian Financial Review (which purports to present financial news and comment but is in reality a propaganda machine) and read an Opinion piece, which would serve as a classic demonstration for statistical students of how to confuse causation with correlation. It would also serve as a classic piece for macroeconomics students on how to completely misunderstand the role of fiscal policy and the dynamics that are associated with it. All round an excellent learning piece – in the right hands. But in the hands of the normal reader, not versed in these matters, the Opinion piece is a trashy piece of dangerous propaganda, which serves to indoctrinate the readership into believing that the correct policy path is, in fact, exactly the opposite of the responsible policy path for governments. It still amazes me how this sort of rubbish can parade as serious public offerings to the economic debate. It was an appallingly ignorant article. One of the worst you might read.

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Growth outlook deteriorating – and don’t blame the Brexit vote

Last week, National Accounts data for the June-quarter 2016 was published for the US and the Eurozone and we learned that the next slowdown is happening now, even though neither economy has yet fully recovered from the last downturn (the GFC). Data from the UK is similarly poor, which suggests to me that the Brexit hoopla (where everything bad is blamed on the Exit vote success) is misplaced. In the case of the US, there is now a marked slowdown underway and the growth rate has been in decline since the March-quarter 2015. Private consumption expenditure remained strong and there was a substantial decline in the personal saving ratio as households spent a much higher proportion of their disposable incomes to fund their growing consumption. The other standout result was the decline in Private capital formation (investment), for the third consecutive quarter and the fact that its rate of decline is accelerating signals a lack of confidence in the medium-term outlook by business firms. The government sector also undermined growth in the June-quarter 2016. With inflation still well below the implicit central bank target rate (2 per cent) and growth is faltering the outlook suggests that the federal government will need to increase its discretionary fiscal deficit to stimulate confidence among business firms and get growth back on track.

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The Weekend Quiz – July 30-31, 2016 – answers and discussion

Here are the answers with discussion for this Weekend’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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Overt Monetary Financing would flush out the ideological disdain for fiscal policy

There was an article (May 24, 2016) – Helicopter money: The illusion of a free lunch – written by three institutional bank economists (two from the BIS, the other from the central bank of Thailand), which concluded that Overt Monetary Financing (OMF), where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector, was “too good to be true”, in the sense that it “comes with a heavy price” – summarised as “giving up on monetary policy forever“. The argument they make is very consistent with the work that Modern Monetary Theory (MMT) proponents have published for more 20 years now, which is now starting to penetrate the mainstream banking analysis. However, the conclusion they draw is not supported by the original MMT proponents who would characterise OMF as a highly desirable policy development, more closely representative of the intrinsic monetary capacity of the government. The article also raises questions of what we mean by a “free lunch”, a term which was popularised (but not invented) by Monetarist Milton Friedman. Its use in economics is always loaded towards the mainstream view that government interventions are costly. But if we really appraise what the term “no such thing as a free lunch” really means then, once again, we are more closely operating in the MMT realm which stresses real resource constraints and exposes the fallacies of financial constraints that are meant to apply to currency-issuing governments.

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Australian inflation rate – trending down and reflecting a weak economy

The newly-elected conservative Australian government has resumed office with further calls for public spending cuts. Today’s Australian Bureau of Statistics inflation data should disabuse them of this idea. The Australian Bureau of Statistics released the Consumer Price Index, Australia – data for the June-quarter 2016 today and showed that the June-quarter inflation rate was 0.4 per cent (-0.2 per cent) with an annual inflation rate of 1.0 per cent (down from 1.3 per cent last quarter). The headline inflation rate has been below the Reserve Bank of Australia’s lower target bound of 2 per cent for nearly two years now. Clearly, within their own logic where an inflation rate within the 2 to 3 per cent band reflects successful monetary policy, the RBA is failing. The RBA’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are also now below the lower target bound and are trending sharply downwards. Various measures of inflationary expectations are also falling quite sharply, including the longer-term, market-based forecasts. With the labour market data demonstrating weakness and the economy stuck in this low inflation malaise, it is clearly time for a change in policy direction. I won’t hold my breath!

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The Bank of Japan needs to introduce Overt Monetary Financing next

The latest survey data from the Bank of Japan is interesting and supports a growing awareness among policy makers that monetary policy has run its course and will have to work more closely with active fiscal policy to stimulate economic growth. These insights have been a hallmark of ideas advanced for many years now by Modern Monetary Theory (MMT) proponents (including myself). The data shows that the negative interest rate and large-scale quantitative easing programs that the Bank of Japan has been pursuing have not had their desired effect. It was clear when they were announced that they would fail to achieve their goals. I wrote about that in 2009 and 2010. But it seems that the mainstream policy debate has to be dragged kicking and screaming through a series of policy failures before any progress is made towards actual solutions that will work. The Bank of Japan Board meets later this week and I am hoping they announce their intention to work closely with the Ministry of Finance (fiscal policy) to introduce Overt Monetary Financing (OMF) where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector. That would finally put policy on track to do something effective and productive. It would also provide some policy leadership to guide other nations towards a more prosperous future (like Britain).

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Brainbelts – only a part of a progressive future

Last week, the US Republican Party held an extraordinary convention in Cleveland, an old rustbelt manufacturing town. I say extraordinary because I guess you have to be American to understand how grown adults can systematically humiliate themselves for several days with the rest of the world looking on wondering WTF was going on! Anyway, just down the road from Cleveland is Akron, Ohio, which is being held out as a model for the new era of prosperity in advanced nations. I caution against believing that hypothesis. It was proposed in a book I have just finished – The Smartest Places on Earth – written by two Dutch writers (published 2016). It carried the subtitle “Why Rustbelts are the Emerging Hotspots of Global Innovation”. I do not recommend anyone purchase it even though it is getting rave reviews around the place. I see it as a sort of replay of the 1990s ‘New Regionalism’ mania that emerged as part of the Third Way movement, which the now discredited Tony Blair promoted as the entrepreneurial solution to turn regions into sub-national export centres to replace the ‘nation state’, that had been (according to the narrative) rendered powerless and irrelevant by globalisation. The book introduces the notion of the “Brainbelt”, which the authors claim are revitalising the “former rustbelt areas” and “bringing new competitiveness to the United States and Europe” – a sort of counter-strategy to foil the jobs lost to the low-cost nations such as China and the Asian economies in general. The problem is that the growth strategy seems to leave the worker behind!

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The Weekend Quiz – July 23-24, 2016 – answers and discussion

Here are the answers with discussion for this Weekend’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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