I am sick of reading or hearing how brilliant such and such economist is and how they should be regarded as oracles because of this “brilliance”. In all these cases, the reality is usually that these characters have left a trail of destruction as a result of applying their brilliant minds. The terminology is always invoked by financial commentators and the like to elicit some authority in the ideas of the person. Apparently, if someone is deemed brilliant we should take heed of their words and judgements. How could we ever question them? In this neo-liberal era, many such “brilliant” minds have been placed in positions of authority and their influence has shaped the lives of millions of people. The financial and then economic crisis has shown categorically that their mainstream macroeconomic insights are not knowledge at all but religious beliefs that bear no relation to real world monetary systems. But still these characters strut the policy stages – shameless – and, in doing so, continue to destroy the prospects for many. It would be good it they were truly brilliant and could see the destructive consequences of their religious zealotry. Oh to be truly brilliant.

I don’t run a blog on demand service. But today a specific request – almost a desperate plea – from one commentator to provide some analysis of a specific article coincided with many requests I have had for clarification about when a government is revenue constrained. The specific article in question apart from being one of the worst examples of uniformed economics journalism covers the ground about levels of government perfectly. So I decided to behave like a blog on demand service today despite wanting to write about how the US is a failed state. That will wait until Monday though and by then even more Americans will have slipped into poverty driven there by failed US government policy and a sclerotic system of government dominated by two main parties that are now incapable of governing in the public interest.

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.

Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!

There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

Next Saturday (August 21, 2010) Australia gets to choose a new federal government which will govern for the next three years. These are crucial years because the economy is still mired in the uncertainty that accompanied the financial crisis and private spending is still very subdued. Growth around the world is still being supported by fiscal stimulus and without it economic activity will decline again. The majority of the economic indicators in Australia and elsewhere are pointing to a new slowdown as the fiscal stimulus wanes. So it is absolutely essential for the next Australian government to maintain strong fiscal support. The only problem is that both the major parties are having a battle to win votes on the platform of who can get the biggest budget surplus in the shortest period of time. It doesn’t bear thinking about. The conclusion is that none of the main parties are worthy of a vote. And the third party in contention (at least for the balance of power) – The Greens – are similarly blighted when it comes to macroeconomic policy. How did we get into this mess?

Remember back last year when the predictions were coming in daily that Japan was heading for insolvency and the thirst for Japanese government bonds would soon disappear as the public debt to GDP ratio headed towards 200 per cent? Remember the likes of David Einhorn – see my earlier blog – On writing fiction – who was predicting that Japan was about to collapse – having probably gone past the point of no return. This has been a common theme wheeled out by the deficit terrorists intent on bullying governments into cutting net spending in the name of fiscal responsibility. Well once again the empirical world is moving against the deficit terrorists as it does with every macroeconomic data release that comes out each day. I haven’t seen one piece of evidence that supports their view that austerity will improve things. I see daily evidence to support the position represented by Modern Monetary Theory (MMT). Anyway, there was more evidence overnight that I thought should be mentioned and relates to the idea that “the government is the last borrower left standing”.

The US economy is showing signs of slowing as the fiscal stimulus is withdrawn and the spending contractions of the state and local government increasingly undermine the injections from the federal sphere. The recent US National Accounts demonstrate that things are looking very gloomy there at present. In the last week some notable former and current policy makers have come out in favour of austerity though. Some of these notables contributed to the problem in the first place through their criminal neglect of the economy. Others remain in positions of power and help design the policy response. A common thread can be found in their positions though. A blind faith in the market which links them intellectually to the erroneous views espoused by Milton Friedman. His influence remains a dominant presence in the policy debate. That is nothing short of a tragedy.

I know I said I was not going to write a blog today but I changed my mind. It will be a short blog only. I was considering the continued dogmatic assertions that mainstream economists make that the central bank still controls the money supply and that money multiplier is alive and well but has just disappeared for a while. This recent mainstream post is typical of these on-going erroneous assertions by mainstream macroeconomists about the way the monetary system and the institutions within it operate. The fact is that the monetary multiplier is not dead – I can say that confidently because I know it was never alive!

As governments around the world are setting about to scorch their economies with austerity programs very little opposition is coming from my profession. It is quite astounding to me that the more extreme elements (the Ricardian Equivalence theories) are holding sway at present. These notions have been discredited often (see my blog – Pushing the fantasy barrow for a discussion). Generally, the austerity push is not being supported by any credible economic theory which enjoys empirical support. I get the impression that policy makers are now altering settings in an ad hoc manner without any real understanding of how the economy works. It is a triumph of neo-liberal dogman. However, in terms of evidence-based critiques of the austerity push, Bloomberg Opinion published an interesting article (July 13, 2010) – U.K. Bust Needs Big Spender – written by UK academic Vicki Chick and author/debt activist Ann Pettifor (thanks BM). The Op Ed summarises a more detailed research paper which demonstrates that key assumptions of the austerity proponents do not hold over a long historical period. The short message is that things are going to get worse.