Well last night’s Australian federal budget was a total disgrace. Which means I am either crazy or the most of the rest of the commentators are because they are all hailing it as wonderful piece of policy. Lately, I have increasingly been reading this claim that governments have to conduct “fully-funded spending” as some sort of icon of fiscal responsibility. The Australian treasurer said it repeatedly in his speech and in his following press interviews. Whenever I read or hear that idea I say quietly: What part of accounting don’t they get?

Tonight the Federal Treasurer delivered his third budget and it was a disappointing effort. The worst line in his speech was “Best of all, the unemployment rate is expected to fall further from 5.3 per cent today to 4¾ per cent by mid-2012, around the level consistent with full employment”. So their aspirations are that low. There was also nonsensical statements about the government not being able to afford to “invest in skills, infrastructure, renewable energy and hospitals” unless new tax measures were found. There is also some stupid fiscal rules introduced which will not stand scrutiny if Europe melts down and a new crisis emerges. The following is a 550-word Op Ed commentary I wrote for the local Fairfax press. The word limit and the audience constrain what I have to say and how I said it.

I followed the attacks on pro-Israeli New York Times war monger Thomas Friedman some years ago, which centred on his support for the invasion of Iraq and his repeated prognosis that it would only take 6 months to decide the fate of the conflict. The six months never really materialised and by 2007 he was arguing, just as vehemently as he argued for war, for US disengagement because the strategy had failed. He was imbued with the WMD mania that was used by the US, Australian and UK governments to “justify” the unjustifiable despite them knowing there were no such dangers. So he is a guy who obviously knows what he is talking about! In his latest column he tries his hand at economics with a similar intellectual arrogance and lack of judgement that he brought to the Iraq issue.

Yesterday, I was walking over to the library and I ran into an old colleague who has been dragooned back into teaching macroeconomics on a casual basis. The person was telling me that they were dreading taking the class next week because the topic was banking and the relationship between reserves and the money supply. Accordingly, the person said the chapter in the textbook specified by the lecturer-in-charge was about the money multiplier. The person I met is familiar and sympathetic to Modern Monetary Theory (MMT) and posed the question “how can I do it?”. My answer was that students deserved better and that the lecture should develop the multiplier from a critical perspective so that students know about it but realise how far-fetched it is as a depiction of how the banking system actually operates.

I have arrived in Washington now and it is late Monday. I am staying on local Newcastle time because for a short-trip it is easier to avoid jet lag that way. So I started work today at around 20:00 Washington time and will finish close to dawn. I think I will play Night Shift on You Tube to keep me company through the night … err day (Australian time). On the plane coming over, among other things, I read a paper written a couple of years ago by the Federal Reserve Bank of New York about the way in which monetary policy can be “divorced” from bank reserves. It is a useful paper at the operational level because it brings out a number of important points about bank reserves and the way central banks can manipulate them or ignore them. That is what this blog is about.

You realise how misguided the economic debate is in the West when you read that the British Opposition has been telling the British people that governance is about to break down and the IMF are poised to take over the country – that is, unless they vote for their austerity plans – and on the same day the UK Office for National Statistics releases the latest unemployment data which shows that unemployment has risen to a 15-year high. And while the British election debate appears to be all about who can cut public net spending the most, the IMF releases its latest World Economic Outlook (WEO), which is far from optimistic about the future and is warning against withdrawing the fiscal support for the very fragile demand conditions around the world. Then you read the Financial Times and see that former Clinton deputy treasury secretary Roger Altman is predicting a debt explosion. The general conclusion: our education systems have failed – and have been pumping out a population that mindlessly believes all this stuff while the elites run us over in their rush to bank the wealth they are harvesting.

In Washington D.C. next Wednesday (April 28, 2010) there will be two separate events where the focus will be on fiscal sustainability. The first event sponsored by a billionaire former Wall Street mogul under the aegis of the Peter G. Peterson Foundation (PGPF) promises to bring the Top leaders to Washington. It will feature a big cast well-known US entities (former central bank bosses; former treasury officials and more). It will be well-publicised and a glossy affair – full of self-importance. It will categorically fail to address any meaningful notion of fiscal sustainability. Instead it will be rehearse a mish-mash of neo-liberal and religious-moral constructions dressed up as economic reasoning. It will provide a disservice to the citizens of the US and beyond. The other event will be smaller and run on a shoe-string. The grass roots The Fiscal Sustainability Teach-In and Counter-Conference is open to all and will actually involve researchers who understand how the monetary system operates. Like all grass roots movements it requires support. I hope you can provide support commensurate with your circumstances.

Australia is becoming caught up again by the rhetoric flowing from the minerals lobby that we are about to enter the “mother of all mining booms”. Almost every day now, the politicians, business spokespersons and the media are beating up this story. The minerals lobby has achieved spectucular success over the years in inflating its importance such that people genuinely believe our prosperity comes from this sector. Somehow we believe that this sector is our vehicle to Shangri La. Corresponding to all this hype is a growing push for significant cuts in public spending to “make room” for the mining boom. The debate is interesting because, like the intergenerational (ageing population) debate, it demonstrates how erroneous understandings about the monetary system and the role of the government within it lead to spurious conclusions. And all the while – labour underutilisation rates remain high.

Today I am writing about the sectoral balances which are derived from the national accounts. A recent article in the Financial Times uses these balances to demonstrate that attempts to reduce the UK public deficit can only be successfully achieved by engineering growth in non-government spending. That is an insight that is core to Modern Monetary Theory (MMT) but typically escapes the understanding of most commentators. The article is interesting because it shows how the sectoral balances – which are accounting statements and thus true by definition – can be interpreted in different ways and influence different policy strategies. But the fundamental understanding you gain from knowledge of these balances is that at present public deficits are here to stay … and if you don’t like them … you better get used to it!