Single banking union doomed to fail

I have been travelling today a lot and so haven’t had much time to write. I have been reading early (1970s and 1980s) documents in recent days relating to the debate that preceded the establishment of the Eurozone. I have read them before, at the time they were released in many cases, but they provide a salutary reminder of how the political and economic reality in Europe diverged with catastrophic consequences for millions of people that live there. There was ample analysis and supporting evidence in the late 1970s to tell us that the creation of a common monetary union in the form that was eventually agreed in the 1990s would fail. But even now, with that failure for all to see, the same dynamics that predicate against any reforms that might create a strong federal fiscal capacity, are present in the discussions surrounding the creation of a Single Supervisory Mechanism to regulate banks and protect their depositors. The Germans, exhibiting all their irrational paranoia about inflation, are using their political weight to influence the design of the banking policy and the likely outcomes are looking decidedly deficient. They are doomed to fail if subjected to a stern test.

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The PBO – humiliation all round

In July 2013, the Australian Labor Party (the then Federal Government) humiliated itself when it created the – Parliamentary Budget Office. It was a case of “me too” “catch-up” neo-liberalism because the morons who dreamt up this plan felt left out because the US had its Congressional Budget Office and the Brits had a Office for Budget Responsibility and other advanced nations similar. The now conservative Federal government humiliated itself in September 2013 when it declined the sensible path which would have scrapped this ridiculous waste of public funds. The PBO humiliated itself yesterday when it released its first report – Australian Government spending Part 1: Historical trends from 2002-03 to 2012-13 – which contains spurious analysis, to say the least. And last not least, several leading economics journalists in Australia humiliated themselves this morning when they wrote up the PBOs press release as if it was something that mattered and refused to elicit a single critical word of the PBO report. Their creativity was to get some quotes from various “bank” economists who considered the report was tantamount to the sky falling in. What a sorry mess this all is. And it will be the poor, the unemployed and underemployed who will bear the brunt of the policy response.

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Australian national accounts – stagnation sets in

Today’s Australian Bureau of Statistics – Australian National Accounts – for the September-quarter 2013, shows that real GDP growth was 0.6 per cent, down from the (revised) 0.7 per cent for the June-quarter. The annualised growth rate of 2.3 per cent is now well below the trend rate between 2000 and 2008 of 3.3 per cent. This poor growth relative to trend is the reason the unemployment rate is rising. The stunning result is that the public sector contributed 1.5 percentage points to growth this quarter (a reversal from the June-quarter). This contribution, while welcome, will not be sustained given the current political environment. Overall, the data paints a fairly gloomy overall picture for the Australian economy. It ia hard to discern what the new Federal government is up to given that in 2 months we have already had four discrete statements about education policy, for example! But if their overall macroeconomic rhetoric is maintained and they start hacking into public spending to flex their conservative muscles then the outlook will shift very quickly from gloomy to disastrous and we will follow Europe down the sink hole.

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External economy considerations – Part 10

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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Been searching for a public debt overhang – didn’t get far

I got on a plane on Monday and flew many hours. I was in search of the public debt overhang. I read and read many articles during my journey to the other side of the planet (where these overhangs are apparently sighted on a daily basis). But in the cold (very) early (very) hours of today, I concluded my mission was a failure. The rumours of a public debt overhang, whatever that might be, remain just that – the mumbling gossip that passes for truth once the public start spreading it. In the world of facts, such an overhang eludes specification. In January 2013, at the annual American Economic Association meeting (January 4-6, 2013) in San Diego, there was a panel session with a number of allegedly “leading” economists. Their deliberations were apparently public endorsement of the claim that government debt had reached a dangerous overhang and would undermine growth prospects for the future. The policy options were limited and all involved harsh fiscal austerity – or in IMF speak “growth friendly fiscal consolidation” (which is my nomination for the joke phrase of 2013). The problem was that a few months later the IMF released a major update (October WEO) where they appeared to deny the presence of a “tipping point” – some dangerous threshold that public debt should not exceed (R&R-style). So here is how it all unfolded …

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A bad day for informed debate in Australia

The title gives the game away – Hope all that’s left as growth slows to crawl. It was written by Ross Gittins, the Sydney Morning Herald’s economics editor. Hope is all we have because this thing we call the economy is beyond us and not something we can control. That is the mainstream conceptualisation of the economy as some sort of deity which we just have to offer our sacrifices to and hope for the best. Australia is weathering a renewed burst of deficit terrorism. The media is running stories every day at present about the need to make massive cuts to federal spending and how taxes have to rise to “repair” the budget. The way the issue is being framed by the media is asinine in the extreme. Worse is the fact that the media is refusing to offer a balance to the issue. There is no debate. Mindless TV presenters and journalists are just pumping out “press releases” from partisan think-tanks without the slightest reflection about whether the underlying assumptions are correct. A bad day for informed debate.

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External economy considerations – Part 9

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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More worn out ideological prattle from R&R

There are seven graphs in the paper. An Excel spreadsheet was involved. Shonky stuff alert! R&R are back with another attention-seeking effort after they were disgraced when their Excel manipulation that just happened to generate ideologically-convenient results was discovered to be shonky (in the extreme). This time is not different though. As in all their so-called historical insights the pair conflate monetary regimes across time and at points of time, which means most of their conclusions are erroneous. While their insolvency threshold has zero credibility now they also still hang on it, if only by implication. And they claim that repression is when residents of free nations enjoy parking their savings in risk-free, interest-bearing government bonds, instead of taking risks with commercial paper. Sounds like free choice to me. Is suggest R&R take some R&R and let governments get on with expanding their deficits and reducing unemployment. The public debt ratios will take care of themselves.

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The CofFEE Employment Vulnerability Index V2.0

Today our research centre – Centre of Full Employment and Equity – which is known as CofFEE, released the second version of our – Employment Vulnerability Index – which is an indicator that identifies the localities (medium-sized areas) in Australia that are most vulnerable to job losses when economic activity declines. The Australian labour market has not recovered the ground it lost in the downturn associated with the Global Financial Crisis. After showing signs of recovery as a result of the fiscal stimulus in 2009-10, the fiscal austerity that the Federal government imposed as it obsessively pursued a budget surplus has caused us to lose all the gains that were made. The Government failed in its quest because it overestimated the strength of private spending (which is still very flat) and its deficit was too low anyway when it started its austerity push. The new Federal government is finding out that all its tough talk before the September election about delivering bigger surpluses than its predecessors is just hot air and the slowing economy is pushing the deficit higher not lower. In this environment, the labour market is precariously balanced and likely to continue to deteriorate. The EVI provides a guide to where the on-going job losses are likely to be across the urban and regional space.

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Nothing to sing about in Europe

The Euro crisis is over! The Euro crisis is over! I suppose if one says it loudly enough and often enough it might drown out what the data tells us. The most recent data – inflation slowing, real GDP growth slowing, no movement on unemployment – tells us that while the politicians have an incentive to talk up the situation and proclaim the crisis is over, the reality is different. The fact that the bureaucrats are now realising that Eurozone budgets in many nations are not going to come close to meeting the harsh (revised) Stability and Growth Pact requirements tells us that the policy structures in place are not delivering on their promise. When a 0.1 per cent growth rate is celebrated you know something is amiss – that is how far standards have dropped in a region that cannot deliver sustained prosperity to its citizens as long as it ties a massive anchor round its feet! The industrialists and elites talk continually of structural reform – which is code for cutting workers pay and rights and retrenching welfare systems for the disadvantaged, the major structural weakness stares them in the face – unnoticed. That structural weakness is the flawed design of the monetary union. Until that is addressed the situation will limp along, perhaps get a surge of growth here and there, until the next major negative demand shock hits from somewhere (like the US, or China) and then the whole drama begins again.

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Manufacturing employment trends in Australia

I have been looking at industry employment data today for Australia, in particular, the behaviour of the manufacturing industry, which has attracted considerable press attention in the recent period as a result of announcements of substantial job losses being linked to exchange rate movements and high interest rate spreads between Australia and the rest of the world. What follows is a discussion of various features of the change in manufacturing employment over the last few decades which is a precursor to some very detailed work I am doing on shifts in industry employment (reasons, implications etc). These shifts are not unrelated to the major macroeconomic policy settings (fiscal and monetary) which are currently stifling economic activity at present. These aggregate effects manifest in disaggregated ways through such things as the composition of employment by industry. That is what I am looking at today.

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Japan will (yet) run out of money. Never!

A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.

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Saturday Quiz – November 9, 2013 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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US government sector is keeping unemployment high

There was an article in the Atlantic yesterday (November 5, 2013) – How Washington Is Wrecking the Future, in 2 Charts – which reports in a related article in the UK Financial Times (November 3, 2013) – US public investment falls to lowest level since war. The essence of the articles is that the political landscape in the US has undermined the US President’s plans to spend more of public “infrastructure, science and education” which will undermine the future growth potential and prosperity of the US economy. A Bloomberg article (November 6, 2013) – Don’t Blame Congress for Cutbacks in Public Investment – criticised both analyses on the grounds that the cutbacks are relatively small and the culprit is state and local government in the US rather than the federal government. There is truth in both sides but neither really grasps the nettle and considers the cutbacks in government spending in the context of what is going on in the non-government sector. The cutbacks in public spending in the US over the last three years are unnecessary (financially) and the fiscal drag is keeping unemployment high and increasing the poverty rates.

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Eurozone – what do they propose as an encore?

During the late 1980s and into the 90s when the Monetarists (mostly holed up in Britain) were boasting that the widespread privatisation and labour market deregulation strategies they had instigated were containing inflation and setting up their economies for sustained growth with reductions in unemployment my response was “what do they do they do for an encore”. It was obvious that if you scorched domestic demand and pushed up unemployment that the inflation rate would drop and the reduced imports would flatter the external balance. The question then was – what do you do next? Once growth returns in domestic demand rises on the back of increased income growth, imports start catching up and workers start demanding wage rises to make up for lost real income during the deflation and you end up with nothing much being achieved except for a extended period of lost real income, and rising inequality given the lower income groups carry the burden of the recession. The conservatives became slightly more astute in more recent years arguing that the recession provided the opportunity for nations to undergo radical restructuring so that growth could be driven by exports as a result of increased competitiveness. That’s the European model at the moment. Is it working? The IMF doesn’t think so.

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Currency sovereignty is what matters

There is a literature emerging that suggests that a Eurozone nation would be no better off with its own currency then and is within the monetary union. The claim is that these nations have not performed any worse than nations outside the Eurozone during the current crisis. A recent paper by an American economist (Andrew Rose) – Surprising Similarities: Recent Monetary Regimes of Small Economies – is being used as the authority to support this claim. The intent is clear – to deny that the Eurozone as a monetary system is inferior to systems where the nation issues its own currency and sets its own interest rates. However, these studies skate over the currency sovereignty issue and cast the differences between nations in terms of exchange rate arrangements or whether their central bank targets inflation or not. The real issue is whether the monetary system is characterised by the government facing a financial constraint or not in its spending – that is, whether it issues its own currency, sets its own interest rates and resists issuing debt in a foreign currency. Once you consider those basic aspects of the monetary system then it becomes obvious that the Eurozone nations as a whole have performed worse than other advanced Non-Eurozone nations which have enjoyed more fiscal flexibility.

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Poverty rates rise in the UK as low income households bear austerity burden

Over the weekend, I was reading the new report from the British Social Mobility and Child Poverty Commission – State of the Nation 2013: social mobility and child poverty in Great Britain – which has just been presented to the British Parliament (October, 2013). The conclusions from the Report are not good. They find that the “falls in poverty seen over the last 15 years may be be reversing” and that “(a)bsolute poverty is rising”. The UK will likely miss its “2020 target to end child poverty”. The other shocking statistic is that poverty rates among those who work are rising and “(t)wo in three poor children are now in families where someone works”. There are now “5 million adults and children in working poor households” in Britain. This puts the skiver/bludger/welfare criminal narrative that the neo-liberals in Britain have been running into a different light. It cannot be said that workers are skivers – they get up in the morning (or sometime) and sacrifice the best part of their lives working for some capitalist or another. They are increasingly getting paid such that they cannot live above the poverty line. That is a failed state if ever there was one.

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How to fail a simple macroeconomics examination

In the opening sequence of the HBO series, Newsroom, the anchor is participating in a public forum at an East coast US university (in Boston). During the Q&A, he is asked by a student (“a sorority girl”) in the audience, who is suitably bright-eyed and full of American blather, “Is America the greatest country in the world?” He initially blusters but the convener of the forum pushes him for a “human moment” and what follows is 3 classic minutes of TV, starting with “its not the greatest country in the World, Professor, that’s my answer” and concluding with “So when you ask what makes us the greatest country in the World, I don’t know what the fuck you are talking about. Yosemite?”. He then said among other things that “We used to be …”, “we stood up for what was right”, “we waged wars on poverty, not poor people”, “we aspired to intelligence, we didn’t belittle it” and more. The latest shenanigans in the US Congress where the GOP representatives have become a mindless rabble is certainly testimony to the sort of things the mythical Newsroom anchor was talking about in the series. The Sydney Morning Herald article (October 16, 2013) – US shutdown stalemate enters realm of the absurd – reports on how the GOP reps do not “agree either on tactics or strategy” and Boehner announced to the press that there had been “no decisions about what exactly we will do”. This is one day before the lunatic right-fringe of their party is intent on causing mayhem. My prediction – some ridiculous deal will be done and the US government will not default. We will see. But today I am providing a little glimpse into examination processes by using what might have been a first-year answer to an examination question to highlight some important points. I hope you enjoy the little window into life at a university.

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Saturday Quiz – October 12, 2013 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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GOP reps – if they had another brain it would be lonely

I have been watching in my spare time (yes) the 2010 first season of the HBO series – The Newsroom – which could be about events in US this week, so persistent has been the moronic behaviour that nations’ polity. There is growing evidence that the US Republicans are now an extremist party with a substantially tenuous grip on reality. They clearly do not understand that an economic depression is likely to follow their refusal to prevent the US Treasury to continue spending according to the current laws that the US Congress passed and which, together with the tax code, determine the current deficit. They clearly do not understand how deficits arise and the function they serve. The US might hold themselves out to be the world leaders in a range of areas but this debate is revealing how stupid the government representatives have become.

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