A number of readers have asked me to clarify what I mean when I say that the central bank can control the yield curve at all maturities. This came up again when Marshall Auerback commented that the 1961 Operation Twist exercise in the US provides a model for central bank policy options. In 1961, the US Federal Reserve attempted to flatten the yield curve to bring down long-term rates for an economy that was mired in recession, yet at the same time, push short-term rates up to deal with a balance of payments crisis. The fixed exchange rate system meant they were losing gold reserves and desired to stop that drain. It is an interesting story though as to what happened and whether it has implications for the present. As you will see, the fact is that the central bank can control the yield curve and eliminate the influence of the bond markets if it chooses. The only reason it doesn’t do this is ideological.

Today I decided that there is another macroeconomics research unit that needs to be closed down. My decision was reached after I read the latest paper from the Bank of International Settlements – The future of public debt: prospects and implications – which confirms that the Monetary and Economic Department of that organisation is publishing deficit terrorist literature. The paper is so bad that I am sorry I read it. I may avoid BIS publications altogether in the future. But if I apply that reasoning I am going to be back to reading Stieg Larsson novels and there are only three of them and I have already read them!

I have been resisting writing about the US health care fiasco because frankly the whole debate is a fiasco and demonstrates the ability of mainstream economics to obscure a widespread understanding of how the monetary system operates and the opportunities that system provides a currency-issuing government. But I have had more E-mails on this topic over the last few weeks than most other issues (bar EMU). Most readers want some analysis from a Modern Monetary Theory (MMT) perspective and so here it is. If only to stop the E-mails.

Today I wasted 20 minutes reading about the end of the World. But before I did that I read some so-called progressive literature that was calling on the UK government in tomorrow night’s budget to seek a balanced budget. You say what? That’s right, what goes for progressive thought these days is what used to be the exemplar of fiscal conservativism not so long ago. While the current crisis exposed most of the myths that mainstream economists have promoted for years it seems that progressives are not seizing the day but trying to sound more reasonable (read: right-wing conservative) than the conservatives. The crisis has also pushed all these opinionated loonies like Niall Ferguson into prominence. Its getting pretty lonely out here …. wherever I am (and don’t say the left word)! (<= joke).

… and we are stuck in the middle. In some US states they are rationing street lighting because they have run out of “money” even though the electricity generators have spare capacity. Hospitals are cutting services even though there are plenty of bandages idle. In the US, the federal government is now crowing about its “historical” health care victory which imposes new taxes now and no new spending until 2014 – it is still enduring the impact of a deep recession – some victory. Private spending remains very weak in most economies and fiscal interventions dominate the modest growth in aggregate demand that we are witnessing in some countries. In almost all countries unemployment has risen sharply and will persist at higher levels for some years to come. So what does my profession say … the fiscal cuts need to be even bigger because growth is slower and the deficits are “worse” than expected. So clowns to the left, jokers to the right … or whatever.

My RSS feed and E-mails have brought some shockers in the last few days from the financial markets – official bulletins from banks that don’t make any sense at all (US about to default-type arguments); hysterical Austrian school logic (from a large player in the Asian markets) and news commentary from a so-called business insider magazine. The latter should immediately close its doors and declare they are not competent to comment on matters relating to banking. Coincidentally, I also received several E-mails in the last few days asking me to comment on the particular Austrian document noted above that has been circulating within financial markets recently. I deal with that later in the post. Anyway, apart from my main research and other writing activities this blog stuff is “all in a day’s work” – Friday March 19, 2010.

There is currently an international cacophony being created by economists, politicians, political commentators and any-one else that thinks they have something to say which goes like this: China’s export orientation and its “manipulation” of the renminbi to stop it appreciating is damaging World demand and plunging the Western world into unsustainable debt levels and persistent unemployment. The simple retort is: the commentators have it all backwards and are ignoring the policy options that the Western world has but which policy makers will not fully utilise. But it is an interesting debate and the institutional attachment to the debate is not necessarily predictable as you will see.

Today started out well – early good waves at nearby Nobby’s Reef which kept things interesting. After that things progressively went down hill at least in terms of the things I read from the popular press. We had the EMU-rest of the world conflation to deal with. Then the public and private debt conflation. Then the austerity is good for us hypothesis. And by then I decided to read other things that were more interesting – like mysql technical manuals. Anyway, here is a report of my descent into gloom today.

I can now safely call my blog – ibilly blog or billy iblog thanks to a court ruling preventing Apple from monopolising the i construction. But then I would have to change the logo and I don’t have time to do that so I won’t take advantage of the court ruling just yet. But on more substantive matters, today I have been thinking about how much momentum the conservative lobby has at present and that history is being continually re-written to give these characters the oxygen they need to warp public opinion. We are now in danger of an even greater shift to the right in the coming years than was represented by the “neo-liberal” era. It is an ugly thought. But the macroeconomics is clear – if these ideas really take over the policy making process – then we will be facing a lengthy period of economic malaise.

Whichever way the dice tumbles, the deficit terrorists are ready to rehearse their diatribes. In many countries, they couldn’t even wait for growth to return before they started calling for “credible exit plans” and “austerity measures” to “get the ballooning deficits and dangerous debt spirals under control”. The lexicon of doom terminology expanded over the course of 2009 and continues to grow into the new year. Cutting back a fiscal stimulus when the rest of the economy is going backwards is the advice that only a person who has no appreciation of macroeconomics would give. But they have also been at it in Australia which surfed the downturn thanks to an early and significant fiscal stimulus. Here the talk is now along the lines of the “mother of all booms coming”, “overheated housing markets”, “white hot labour markets” and pressure is mounting for a tough May budget and further rises in interest rates. Over-inflated predictions one day are continually shown to be without credibility by the data releases the next day, but by this time the so-called experts have moved on to the next impending data release predicting all manner of catastrophe unless austerity plans are implemented. They have no shame and probably were not brought up very nicely!

As the danger of a global depression recedes, the themes I am picking up regularly now from commentators, politicians etc are all pointing back to the mainstream status quo version of the way the economy works, in particular, for the purposes of this blog the labour market. I expect to increasingly hear and read the rhetoric that dominated the public debates prior to the crisis – that unemployment is essentially a supply-side phenomenon reflecting choices made by individuals in the context of government welfare policy that distorts these choices in favour of not working. In this context, the simple act of extending unemployment benefits in the US has been controversial. This takes us back to the dominant debates over the last 20 years which saw governments all around the World pursuing policies that were antithetical to full employment and pernicious in their impact on the victims of their policy failures. Stay tuned – 2011 – the mainstream will be in full attack mode again – conveniently forgetting where we have been over the last 3 or so years.

When I read the financial and economic news every day I sense a global madness has emerged. Global political processes are becoming distorted by the types of debates that the conservative media companies and the mainstream economists are driving. Every day a new whacko proposition is suggested or entertained by governments. Old hatreds are also resurfacing as our economies labour on (or not labour to be more accurate!) in the face of a major private spending collapse accompanied by inadequate government fiscal responses. The collateral damage of the deficit terrorism is increasing and spreading and still the major political parties in most countries slug it out as to which one will deliver the most fiscal austerity. Would someone please put something in the water supply so that we can refocus this debate onto what is important. That was the plan in the late 1960s to chill everyone out and distinguish the meaningful from the nonsense. Something has to restore our sense of priorities. The longer this madness goes on the worse it is going to get. There is no sensible solution that will come from following the present path.