There is a mystery phenomenon and it appears to be spreading. The dangerous phenomenon is well understood by experts but the contagion is proving difficult to contain. Fortunately there are built-in checks and balances that will arrest the contagion … the only question is will the inflicted show any signs of life once the arrest is made. On Friday, we learned that the US government was running out of money. Overnight, the nasty syndrome has jumped across the Atlantic and the sovereign UK government is signalling that they are short. I suspect the contagion will spread more widely and inflict most sovereign governments before too long. Anyway, all I could do about it was to break into song …

The government of the largest economy in the World has run short of money. At least that is what the US President was trying to tell his Jobs and Economic Growth Forum yesterday. Fancy that. This is a national government which issues its own sovereign currency trying to tell the world it is broke. This is a sovereign government that is responsible for capacity utilisation rates at 70 per cent and 15.7 million unemployed saying that is is running out of capacity to deal with the problem. My conclusion is that the only capacity they lack is sound economic advice. They should sack their existing advisors and hire some people who actually understand how the monetary system operates.

Today is the first day of the 11th Path to Full Employment Conference/16th National Unemployment Conference in Newcastle, hosted by my research centre. As host I am of-course tied up in the event but I thought it would be of interest to visitors to my blog to provide some feel for what has transpired today. I only focus on the plenary talks. The other presentations in the parallel sessions have all been very interesting.

Over the course of this economic crisis, I have seen a lot of erroneous analysis based on the conflation of things that are not commensurate. It is getting worse as the debt hysteria mounts. These conflations are examples of category errors, which are common in monetary and macroeconomic analysis. Most of the theoretical development in macroeconomics text books used by universities fall foul of this type of error. The one thing that follows is that when you detect this type of error you should be deeply suspicious of the arguments being presented.

Several readers have written to me asking about the Ricardian equivalence theorem, which is increasingly getting mentioned in the media and public policy reports. As I will explain, the theorem is used by anti-government proponents to argue that fiscal deficits are counterproductive and that cutting deficits in the middle of a recession will actually be good for the economy. They never really give up, do they? The theorem is a good example of the general mainstream approach where stark policy conclusions are derived which capture the popular debate but the underlying assumptions that are required to generate those conclusions are rarely widely known or mentioned in the popular press. Of-course, if the public understood these underlying assumptions then they would not take the conclusions seriously.

In the coming period and probably years you should expect to hear, read and be submerged with mainstream economists coming out and assessing the structural budget deficit. Across most economies, these so-called “experts” will be arguing that the structural deficit in the nation is too high and deep cuts are needed to bring it into surplus. The importance of this debate is that they use the structural deficit estimates as an indicator of the fiscal stance being taken by the government and thus separate out the effect of the automatic stabilisers. The problem is that it is an inexact science. The mainstream approach is highly dependent on the NAIRU concept (see below) and thus will err on the side of concluding that the deficit is “too big” and “likely to cause inflation”, whereas it is probable that the deficit will be too small to underpin private savings and high levels of employment.

The Australian financial press today pushed the message “Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001”. Last time I knew, Dubai was an emirate and Argentina a sovereign nation. While the current crisis in Dubai is clearly an issue it is not an instance of sovereign default. Some research is required.