On May 17, 2011, the US Social Security Trustees Report and the US Medicare Trustees Report were released. The releases set the conservative deficit terrorists into a tail spin. They would have been better making a nice cup of tea, relaxing with a book and generally chilling out. In fact, the most interesting part of the US government’s Social Security Administration Home Page seems to be its Popular Baby Names search engine which allows you to plug in a name and find out how popular it has been over x years and its ranking by the year. My parents chose a name for me that remains popular. I don’t know whether that is good or bad. But playing around with that little toy is much better fun than reading the Trustees’ Report and the resulting hysteria in the media. The point is that these Trust Funds are just elaborate accounting smokescreens that ultimately mean nothing if one comprehends the financial capacity of the US government. They represent a case of a government creating a farcical structure to administer some program and then elevating the structure to a false level of importance that actually leads them to introduce policies which undermine the initial purpose of the program – and all without any basis. The time has come to tell the American people the truth.

I have been travelling the last few days and while sitting at the airport on my way home I have been catching up on all the snippets of text and links I accumulate each day. While the current generations are living through the “digital revolution” we should not forget that 50 odd years ago humans went to the Moon – which at the time was an ingenious demonstration of our capacity for technological marvel. The motives for this feat which were tied up in the Cold War paranoia were clearly suspect but I recall at the time as a young high school student, as all the classrooms were mustered in a TV viewing room to watch the landing, that we are a clever lot. I no longer think that.

Several readers have written to me asking me to comment on a recent paper that the New York Federal Reserve released as a Staff Report (May 2011) – A Note on Bank Lending in Times of Large Bank Reserves. Apparently, there is an impression that the federal reserve economists might be seeing the light a bit about the banking system and the way economists think about it. The reason that some readers have concluded that is because the substantive conclusion of the paper is that credit expansion is independent of the level of banking reserves held at the central bank. This conclusion is totally consistent with Modern Monetary Theory (MMT) but is at odds with the standard mainstream macroeconomic view (as taught in textbooks) that relies on the money multiplier to draw a (spurious) connection between bank reserves and the money supply. As you will see – my advice is to be very careful when reading such papers – they are not what they seem. The FRNY paper reaches the correct conclusion using erroneous theory which they partition as a special case arising from the extreme circumstances surrounding the crisis. Even in defining their “model” as a special case, they employ flawed logic. It is a case of being beware of the wolf in sheep’s clothing.

Some years ago – I did not have sexual relations with that woman – were the famous words that seemed to redefine everything we had come to think of sexual relations between two consenting partners. Suddenly we could have sexual relations without having them. The same person has come up with a new conclusion – the US never ran “permanent structural deficits of any size before 1981”. Hmm, you mean that for 84 per cent of those years from 1930 when the US federal government ran deficits they were just cyclical events indicating deteriorating economic conditions? Maybe the former president might say a structural deficit equivalent to 3 per cent of GDP was not of “any size”. My conclusion is different – that this statement like the previous one was another case of a former US president making things up.