Rehn fiddles, while Europe burns

According to the popular legend Nero, Roman Emperor from 54 to 68 and the last in the Julio-Claudian dynasty allegedly “fiddled while Rome burned” (played his lyre and singing) during the fire in 64 which destroyed most of Rome. His rule (and dynasty) ended 4 years later. The imagery of this out-of-touch and cruel leader strumming/plucking his stringed instrument (rumour notwithstanding) while his city and, soon after, his dynasty collapsed is powerful. Last Friday, Eurostat released the latest unemployment data for November 2011. The results were shocking with unemployment rates in Spain now close to 23 per cent (as at November 2011 and rising) and Greece 18.8 per cent (as at September 2011) and rising. Greece’s unemployment rate rose 4.8 per cent in the first 9 months of last year. Meanwhile, the European Commission is occupying itself with other concerns. Its Economic and Monetary Affairs Commissioner and Vice President, Olli Rehn has been sending letters out to member states indicating that he is disappointed they are falling behind their budget deficit reduction targets under the Excessive Deficit Procedure (embedded in the Stability and Growth Pact) and that the EC would be considering fines.

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Saturday quiz – January 7, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Hungary helps to demonstrate MMT principles

I have received a lot of E-mails overnight about developments in Hungary. The vast majority of these E-mails have suggested that these developments (sharp rise in government bond yields since November) coupled with the fact that the Hungary uses its own currency (the forint) and floats in on international markets provide problems for the Modern Monetary Theory (MMT) understanding of the monetary system. I have been digging into the data on Hungary for some months now as I learn more about the history of the nation and its political and institutional structure. I am always cautious researching foreign-language material because outside of documents published in Dutch or French my comprehension skills are weak and I know that even in English documents there are tricks in trying to come to terms with the way data is collected, compiled and disseminated. However, unlike many non-English-speaking nations, access to very detailed data for Hungary in English is reasonable. I will have more to write about their problems in the future as I accumulate and process more information. But at present what I can say is that Hungary is a very good example of what a government with its own currency should not do and the current developments reinforce the insights available from MMT rather than present us with problems. Hungary is in deep trouble exactly because it has violated some of the basic macroeconomic principles defining sound fiscal and monetary policy.

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Evidence – the antidote to dogma

Evidence is a lovely thing sometimes. Like the speck of blood on a bomber jacket that has finally convicted the racist killers in London, 19 years after the crime was committed. In a different way, economic data is continually flowing in that makes vocal elements in my profession look like idiots. The only question is how long will it take for the rest of the world to know that and for governments to stop being influenced by the opinions of these economists. Over the last few decades I have been compiling interviews and commentaries from leading economists so that I can compare their predictions with the evolving reality. Economists typically make categorical statements such as – rising budget deficits will push up interest rates and choke off private spending – and then buttress those comments with arcane models that were negated both conceptually and empirically years ago. Invariably, when the mainstream economists do make predictions or empirical statements they are invariably wrong and then it is interesting to see how they respond to the anomaly – the dance that follows to try to maintain the upper-hand in the debate. They typically respond by nuancing the issue. But there are also times when their predictions are unambiguously wrong and ad hoc responses (of the Lakatosian type) make them look even more stupid. Then they bury their head in the sand and go into denial mode and their ideology takes over. The best antidote to this sort of dogma is evidence.

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The Eurozone failed from day one

The current Eurozone crisis is getting worse and has concentrated our minds on the most recent period of European history. As in all these situations where focus is very immediate our memories get a little blurred and we are inclined to accept propositions that closer analysis of the data suggest do not hold water. January 1 was the tenth anniversary of the date when Euro notes and coins began to circulate. It had of-course been operating since January 1, 1999 but only in a non-physical form (electronic transfers etc). If you believe the rhetoric from the Euro bosses in the first several years of the Euro history and didn’t know anything else you would be excused for thinking that it was a spectacular success. The Celtic Tiger, the Spanish miracle, the unprecedented price stability and all the rest of it. But the reality is a little different to the hype. The fact is that the common currency did not deliver the dividends that were expected or touted by the leaders leading up to the crisis. All the so-called gains that the pro-Euro lobby claim were in actual fact a sign of the failure of the design of the union although it took the crisis to expose these terminal weaknesses for all to see. My view is that the Euro was failing from day one and it would be better to disband it as a failed experiment that has caused untold damage to the human dimension.

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Back to William Beveridge requires a commitment to true full employment

I have been digging back in time and re-reading Unemployment: a problem of industry by William Beveridge (published 1909). Beveridge is most known for his 1944 book – Full Employment in a Free Society and the related Social Insurance and Allied Services – (1942 aka the Beveridge Report). The point is that to understand the motivation for the Beveridge Report you also have to appreciate the earlier document and the role that it played in labour history in the UK (and elsewhere). Why am I considering this? The British Labour Party is appealing to the 1942 Report as a motivation to introduce radical reform to the British welfare system. They think that by attacking the most disadvantaged citizens in Britain at a time when unemployment is so high and poverty is rising that they will gain some traction with the electorate. The word despicable comes to mind. However, it is clear they are just remaining faithful to their earlier corrupt past.

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BIS now part of the neo-liberal propaganda apparatus

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

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Saturday quiz – December 31, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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