Fiscal stimulus effects …

Opposition leader Turnbull has decided to go to the wall in opposing the $42 billion package. In particular, they want tax cuts rather than the $12.7 billion in cash handouts. He said they will not be provide economic stimulus and that December’s $10.4 billion in handouts had not worked. Soon after Turnbull provided these conclusions the ABS released the latest retail trade figures which showed that consumer spending shot up by 3.8 per cent in December, the highest monthly increase since August 2000 (since the GST came in).

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The paradigm shift in economic policy

The extraordinary events in world financial markets which have undermined the basis of capitalism have led to equally amazing Government responses – massive injections of public spending, nationalisations of banks and bailouts of huge financial institutions with little regard for the relevant shareholder interests.

A major paradigm shift is occurring in economic thinking away from the free market deregulation era that has dominated since the 1970s. All the logic that justified government cut backs; the run down of public infrastructure; the harsh treatment of welfare recipients; the wasteful privatisations, and the rest of the neo-liberal litany that served to transfer wealth from poor to rich and create an disadvantaged underclass has been destroyed by these events.

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Australia – the inflation spike was transitory but central bankers hiked rates with only partial information

The Australian Bureau of Statistics (ABS) released the latest CPI data yesterday (June 26, 2025) – Monthly Consumer Price Index Indicator – for May 2025, which showed that the annual underlying inflation rate, which excludes volatile items continues to fall – from 2.4 per cent to 2.1 per cent. The trimmed mean rate (which the RBA monitors as part of the monetary policy deliberations) fell from 2.8 per cent to 2.4 per cent. All the measures that the ABS publish (including or excluding volatile items) are now well within the ABS’s inflation targetting range which is currently 2 to 3 per cent. What is now clear is that this inflationary episode was a transitory phenomenon and did not justify the heavy-handed way the central banks responded to it. On June 8, 2021, the UK Guardian published an Op Ed I wrote about inflation – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman. In that article, and in several other forums since – written, TV, radio, presentations at events – I articulated the narrative that the inflationary pressures were transitory and would abate without the need for interest rate increases or cut backs in net government spending. In the subsequent months, I received a lot of flack from fellow economists and those out in the Twitter-verse etc who sent me quotes from the likes of Larry Summers and other prominent main stream economists who claimed that interest rates would have to rise and government net spending cut to push up unemployment towards some conception they had of the NAIRU, where inflation would stabilise. I was also told that the emergence of the inflationary pressures signalled the death knell for Modern Monetary Theory (MMT) – the critics apparently had some idea that the pressures were caused by excessive government spending and slack monetary settings which demonstrated in their mind that this was proof that MMT policies were dangerous. The evidence is that this episode was nothing like the 1970s inflation.

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The US dollar is losing importance in the global economy – but there is really nothing to see in that fact

Since we began the Modern Monetary Theory (MMT) project in the mid-1990s, many people have asserted (wrongly) that the analysis we developed only applies to the US because it is considered to be the reserve currency. That status, the story goes, means that it can run fiscal deficits with relative impunity because the rest of the world clamours for the currency, which means it can always, in the language of the story, ‘fund’ its deficits. The corollary is that other countries cannot enjoy this fiscal freedom because the bond markets will eventually stop funding the government deficits if they get ‘out of hand’. All of this is, of course, fiction. Recently, though, the US exchange rate has fallen to its lowest level in three years following the Trump chaos and there are various commentators predicting that the reserve status is under threat. Unlike previous periods of global uncertainty when investors increase their demand for US government debt instruments, the current period has been marked by a significant US Treasury bond liquidation (particularly longer-term assets) as the ‘Trump’ effect leads to irrational beliefs that the US government might default. This has also led to claims that the dominance of the US dollar in global trade and financial transactions is under threat. There are also claims the US government will find it increasingly difficult to ‘fund’ itself. The reality is different on all counts.

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The arms race again – Part 2

This is the second part of my thoughts on the current acceleration in military spending around the world. The first part – The arms race again – Part 1 (June 11, 2025) – focused on background and discussed the concept of ‘military Keynesianism’. In this Part 2, I am focusing more specifically on the recent proposals by the European Commission to increase military spending and compromise its social spending. The motivation came from an invitation I received from the Chair of the Finance Committee in the Irish Parliament to make a submission to inform a – Scrutiny process of EU legislative proposals – specifically to discuss proposals put forward by the European Council to increase spending on defence. The two-part blog post series will form the basis of my submission which will go to the Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation on Friday. In this Part, I focus specifically on the European dilemma.

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The Far Right opposition to the euro in Germany has nothing to do with MMT

Edward Elgar, my sometime publisher, is interested in me updating my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015). I have held them off for a few years because there have been notable developments such as Brexit, COVID-19, and more since I finished that work, which are still playing out and difficult to disentangle in such a way that definitive analysis can be made. One of the striking things about Europe, from my perspective, is that voters appear to have separated the growing economic stagnation and the insecurity it brings from their view of the euro as a currency. The most recent – Standard Eurobarometer Survey 102 (conducted in November 2024) – conducted by the EU itself, “has registered the highest support ever for the common currency, both in the EU as a whole (74%) and in the euro area (81%)”. (85 per cent support in Germany and 76 per cent in France). Given the circumstances that is a pretty stunning result. And more respondents thought the EU economy was ‘good’ than those who thought it was ‘bad’, although in Germany and France, the outlook in that regard is highly pessimistic (40 per cent good Germany, 29 per cent France). Yet, the Far Right party in Germany – Alternative für Deutschland (AfD) – which as a result of the national election on February 25, 2025 gained the second highest number of votes (20.8 per cent of total) and improved its voting outcome by a staggering 10.4 per cent. Interestingly, from my perspective, AfD is now the leading voice in Europe against the euro, while other Far Rights voices are no longer (Rassemblement National) or never have (Fratelli) advocated abandoning the euro in favour of a return to national currency sovereignty. So while most Germans like the euro, more are voting for AfD who want it scrapped. That tension is what I am researching at the moment among other things.

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ECB should take over and repay all the joint debt held by the European Commission after the pandemic

There are repeating episodes in world macroeconomics that demonstrate the absurdity of the mainstream way of thinking. One, obviously is the recurring debt ceiling charade in the US, where over a period of months, the various parties make threats and pretend they will close the government down by failing to pass the bill. Others think up what they think are ingenious solutions (like the so-called trillion dollar coin), which just gives the stupidity oxygen. Another example is the European Union ‘budget’ deliberations which involve excruciating, drawn out negotiations, which are now in train in Europe. One of the controversial bargaining aspects as the Member States negotiate a new 7-year deal is the rather significant quantity of joint EU debt that was issued during the pandemic to help nations through the crisis. How that is repaid is causing grief and leading to rather ridiculous suggestions of further austerity cuts and more. My suggestion to cut through all this nonsense is that the ECB takes over the debt and insulates the Member States from repayment. After all, the debt wasn’t issued because the Member States were pursuing irresponsible and profligate fiscal strategies.

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Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

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The decline of economics education at our universities

Economics courses at university in Australia have been under threat for several decades now and many specialist degrees have been abandoned by universities as student enrolments declined. When the federal government merged the vocational higher education institutions (Colleges of Advanced Education) with the universities in the late 1980s, traditional economics faculties were swamped with half-baked ‘business’ courses in management, HRM, marketing and whatever which then attracted the aspiring ‘entrepreneurs’ who were told by the marketing literature that they would be fast-tracking into management careers in the corporate sector. The reality was that these programs did not equip the students to do very much at all (perhaps erect marketing displays in supermarkets!) but the impact on economics programs was devastating. The most recent Reserve Bank of Australia (RBA) Bulletin published on January 30, 2025 contained an article which bears on this issue – Where Have All the Economics Students Gone?. I discuss some of the implications of the decline in student numbers in economics and the lack of diversity that existing programs have for societal well-being.

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The Case of the Missing Report – Part 2

Today, we solve the ‘Case of the Missing Report’. Recall from – The Case of the Missing Report – Part 1 – that the Asian Development Bank published a report I had written (with Randy Wray and Jesus Felipe) – A Reinterpretation of Pakistan’s ‘economic crisis’ and options for policymakers (draft version) – in June 2009 as part of work I was undertaking for the Bank at the time on economic development in Central Asia. The report was published on June 1, 2009 as an official ADB Economics Working Paper No. 163 after our presentations were enthusiastically received at the Bank during seminars we gave. The Report was indexed by the major bibliographic and indexing services and evidence of that report still exists today. For example, the Asian Regional Integration Center provides a link to some 30 records covering – Pakistan – including our ADB paper with the official publication date. The ‘official’ link to the publication – https://www.adb.org/Documents/Working-Papers/2009/Economics-WP163.pdf – however, now returns a ‘Page not Found’ error. Then, if you search for ADB Economics Working Paper No. 163 on the ADB WWW Site you will find another paper – The Optimal Structure of Technology Adoption and Creation: Basic Research vs. Development in the Presence of Distance to Frontier – which somehow became Working Paper No 163 and was also published in June 2009. So what gives? How did our ADB Economics Working Paper No. 163 disappear from the face of the Earth to be replaced by another ADB Working Paper No. 163, all in the space of a day or so? In this Part 2 of the ‘Case of the Missing Report’, I provide the solution to the mystery.

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Australia – inflation continues to fall and the RBA should cut interest rates

The Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the December-quarter 2024 today (January 29, 2025). The data showed that the inflation rate rose by just 0.2 points in the quarter and has fallen to 2.4 per cent on an annual basis (down from 2.8 per cent). The inflation rate has been within the RBA’s inflation targeting range for the last 6 months and with inflationary expectations falling, the RBA has no justification left for holding to its elevated interest rates. Using the RBA’s own logic, interest rates should now be cut.

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Field trip to the Philippines – Report

I have been working in Manila this week as part of a ‘knowledge sharing forum’ at the House of Representatives which was termed ‘Pathways to Progress Transforming the Philippine Economy’ that was run by the Congressional Policy and Budget Research Department, attached to the Congress (Government). I am also giving a presentation at De La Salle University on rogue monetary policy. It has been a very interesting week and I came in contact with several senior government officials and learned a lot about the way they think and do their daily jobs. I Hope the interactions (knowledge sharing) shifted their thinking a little and reorient to some extent the way they construct fiscal policy. This blog post reports (as far as I can given confidentiality) what went on at the Congress.

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ECB research shows that interest rate hikes push up rents and damage low-income families

I have been arguing throughout this latest inflationary episode that the central bank rate hikes were actually introducing inflationary pressures through a number of channels, the most notable one in the Australian context being the rental component in the Consumer Price Index. The RBA has categorically denied this perversity in their policy approach, and, instead, claimed the rapidly escalating rental inflation was the result of a tight rental market, end of story. Well the rental market is tight, mostly due to the massive cutbacks in government investment in social housing over the last few decades. But the rental hikes followed the RBA rate hikes and the simple reason is that landlords when in a tight market will always pass on the costs of their investment mortgages to the tenants. They weren’t doing that before the rate hikes. A recent ECB research report – How tightening mortgage credit raises rents and increases inequality in the housing market (published January 16, 2025) – provides some robust evidence which supports my argument. That is what this blog post is about.

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Underlying inflation in Australia continues to decline

Today (November 27, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for November 2024, which showed that the annual underlying inflation rate, which excludes volatile items continues to fall – from 3.5 per cent to 3.2 per cent. The overall CPI rate (including the volatile items) rose slightly from 2.1 per cent to 2.3 per cent, but that was mostly due to the timing of government electricity rebates between October and November. In other words, the slight rise cannot be interpreted as signalling a renewed inflationary spiral is underway. All the indicators are suggesting inflation is declining and the major drivers are abating. The overall rate has been at the lower end of the RBA’s inflation targetting range (2 to 3 per cent) for four successive months now, yet the RBA continues to claim they fear a wages breakout and that unemployment needs to increase. The RBA has gone rogue and its public statements bear little relationship with reality. It is clear that the residual inflationary drivers are not the result of excess demand but rather reflect transitory factors like weather events, institutionally-driven price adjustments (such as indexation arrangements), and abuse of anti-competitive, corporate power. The general conclusion is that the global factors that drove the inflationary pressures have largely resolved and that the outlook for inflation is for continued decline. There is also evidence that the RBA has caused some of the persistence in the inflation rate through the impact of the interest rate hikes on business costs and rental accommodation.

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Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs

Welcome to 2025. My blog recorded its 20th year of existence on December 24, 2024 which I suppose is something to celebrate. But when I look out the window and try to find optimism I fail. Who knows what the year holds and global uncertainty is dominating the narratives surrounding economic developments. We have a crazy guy about to take over the US along with his band of crazy guys. Government coalitions are failing all over the place and international cooperation is giving way to nationalism. We have Israel still slaughtering tens of thousands of innocent civilians using the equipment made available by the US and other advanced nations. Apparently opposing that slaughter makes one anti-semitic. I could go on. Those observations will clearly condition my thinking in the next year. But today, I am catching up on past work. On November 29, 2024, the Bank of Japan published a research paper – (論文)「量的・質的金融緩和」導入以降の政策効果の計測 ― マクロ経済モデルQ-JEMを用いた経済・物価への政策効果の検証 (which translates to “Measuring the effects of the “Quantitative and Qualitative Monetary Easing” policy since its introduction: Examining the effects of the policy on the economy and prices using the macroeconomic model Q-JEM” – the paper is only available in Japanese). The research uses innovative statistical techniques to assess the impact of the low interest rate, large bond-buying strategy deployed by the Bank of Japan between 2013 and 2023. The Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs.

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The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process

Last week I noted in my review of the Australian government’s Mid-Year Economic and Financial Outlook (MYEFO) – Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in (December 19., 2024) – that the forward estimates were suggesting the federal government’s fiscal deficit would be 1 per cent of GDP in 2024-25, rising to 1.6 per cent in 2025-26 before falling back to 1 per cent in 2027-28. The average fiscal outcome since 1970-71 has been a deficit of 1 per cent of GDP. I noted that the media went crazy when these estimates were released – ‘deficits as long as the eye can see’ sort of headlines emerged. It was fascinating to see how far divorced from reality the understandings in Australia are of these matters. Meanwhile, the RBA keeps claiming that productivity is the problem and the reason they are maintaining ridiculously high interest rates even though inflation has fallen back to low levels. My advice to all these characters is to take a little trip to Hokkaido (Japan) and see what nation building is all about. The Japanese government has already invested ¥3.9 trillion for semiconductor industry development since 2021 (that is, 0.7 per cent of GDP) and the Ishiba government recently announced a further ¥10 trillion (1.7 per cent of GDP). Meanwhile, the overall deficit is around 4.5 per cent of GDP and no-one really blinks an eyelid. The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process.

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Australia national accounts – government expenditure saves the economy from recession

Today (December 4, 2024), the Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, June 2024 – which shows that the Australian economy grew by just 0.3 per cent in the September-quarter 2024 and by just 0.8 per cent over the 12 months (down from 1 per cent). That growth rate is well below the rate required to keep unemployment from rising. GDP per capita fell for the 7th consecutive quarter and was 1.5 per cent down over the year. This is a rough measure of how far material living standards have declined but if we factor in the unequal distribution of income, which is getting worse, then the last 12 months have been very harsh for the bottom end of the distribution. Household consumption expenditure was flat. The only source of expenditure keeping GDP growth positive came from government – both recurrent and investment. However, fiscal policy is not expansionary enough and at the current growth rate, unemployment will rise. Both fiscal and monetary policy are squeezing household expenditure and the contribution of direct government spending, while positive, will not be sufficient to fill the expanding non-government spending gap. At the current growth rate, unemployment will rise. And that will be a deliberate act from our policy makers.

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Austerity cultist Kenneth Rogoff continues to bore us with his broken record

One would reasonably think that if someone had been exposed in the past for pumping out a discredited academic paper after being at the forefront of the destructive austerity push during the Global Financial Crisis, then some circumspection might be in order. Apparently not. In 2010, Carmen Reinhart and Kenneth Rogoff published a paper in one of the leading mainstream academic journals – Growth in a Time of Debt – which became one of the most cited academic papers at the time. At the time, they even registered a WWW domain for themselves (now defunct) to promote the paper and tell us all how many journalists, media programs etc have been citing their work. While one can understand the self-promotion by Rogoff and Reinhart, it seems that none of these media outlets or journalists did much checking. It turned out that they had based their results on research that had grossly mishandled the data – deliberately or inadvertently – and that a correct use of the available data found that that nations who have public debt to GDP ratios that cross the alleged 90 per cent threshold experienced average real GDP growth of 2.2 per cent rather than -0.1 per cent as was published by Rogoff and Reinhart in their original paper. So all their boasting about finding robust “debt intolerance limits” arising from “sharply rising interest rates” – and then “painful fiscal adjustments” and “outright default” were not sustainable. Humility might have been the order of the day. But not for Rogoff. He regularly keeps popping up making predictions of doom based on faulty mainstream logic.

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Australian inflation episode well and truly over – please tell the RBA to stop trying to push unemployment up further

Today (November 27, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for October 2024, which showed that the annual inflation rate was steady at 2.1 per cent and is now at the lower end of the RBA’s inflation targetting range (2 to 3 per cent). It is clear that the residual inflationary drivers are not the result of excess demand but rather reflect transitory factors like weather events and abuse of anti-competitive, corporate power (travel fares etc). The general conclusion is that the global factors that drove the inflationary pressures have largely resolved and that the outlook for inflation is for continued decline. There is also evidence that the RBA has caused some of the persistence in the inflation rate through the impact of the interest rate hikes on business costs and rental accommodation.

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Both main candidates were unelectable but one was more in tune with the nation than the other

So from January 20, 2025, Donald Trump will inherit the on-going genocide that the US government has been party to in the Middle East. He will then have no cover and will be judged accordingly. What follows are a few thoughts that I had when I watched the unfolding disaster for the Democrats and the amazing victory that Trump has recorded. It was obviously a Hobson’s Choice facing the US voters (from an outside perspective), which also tells us something about the way the US society has evolved. Both candidates were in my view unelectable. But the voters didn’t agree with me. And, one candidate was much smarter that the other and better understood the plight the American voters are in after several decades of neoliberalism. Spare the thought.

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