How bad is it going to get? That was the question that the UK Guardian asked the head of the UK Office for Budget Responsibility in an interview last week. It was in relation to the likely fallout if Greece defaults and leaves the Eurozone. He replied that the UK would be irreparably damaged. The fact is that Greece has already defaulted. The other fact is that if they do leave the EMU (which would be the best strategy) the impact on currency-issuing nations such as Britain can be managed away by sensible fiscal policy. For those who are predicting deep gloom the culprit is not the possible actions of Greece or any Eurozone nation but rather the irresponsible pursuit of austerity among sovereign nations. The reason Britain has a double-dip recession is all down to the decisions its own government have made. Organisations like the OBR support the flawed decisions with poor forecasting. Taken together this malaise reflects a mainstream macroeconomic framework that is incapable of providing policy advice which will deliver sustained prosperity to the population. The same flawed theoretical framework spawns the ever-growing hysteria about what will happen if Greece exits. The mania is reaching proportions similar to those a few years ago when rising budget deficits were predicted to cause huge hikes in interest rates and/or hyperinflation. All these forecasts fail because they are made by those who do not understand how the system works.

I have been reading about the Great Depression lately and comparing the sort of pressures that governments were placed under during that time to cut deficits which were rising on the back of a collapse in economic activity to what is going on today. There are many interesting parallels and déjà vu experiences. That research took me into some literature on the way the governments bow to industry demands as aggregate demand collapses. In turn, that led me to the way the military-industrial complex operates. Which took me into another literature on the role of the military-industrial complex in creating wars to provide markets for their goods – the merchants of death. And so it goes. That is the nature of research – it just takes one on a journey and usually to destinations previously not imagined. But this journey also clarifies some issues that readers regularly write to me about. The relationship between Modern Monetary Theory (MMT) as a macroeconomic framework and issues that issues that lie below the aggregate level – such as distributional issues. There are links clearly (for example, income distribution affects aggregate demand) but in other ways what is “good” at the macro level may well be downright disastrous at the micro level. But in dealing with the disaster at the micro level, we always have to be mindful of the way dealing with that disaster impacts on the aggregates. This is particularly important in considering issues relating to trade. The military-industrial complex is an excellent case study of these challenges. Here are some early thoughts.

I was going to write about military expenditure today in the light of large cuts to defense spending that the Australian government made in last week’s Budget and the decision by the Obama Administration to make it easier for American firms to export military equipment (to who knows where!). The concept of the military-industrial complex is interesting and, to some extent, the issues that are being raised by the US decision were discussed during the Great Depression (I have been reading a lot of material from the 1930s lately). While some might (from a micro perspective) conclude that reducing spending on the military is a good thing (less violence etc) they also have to be mindful of the macro perspective which considers a $ spend on a tank to be equivalent in its impact on aggregate demand as a $ spent on public education – well nearly. But I will write about that tomorrow. There were two interesting interventions into the public debate in Australia yesterday from the current Treasury boss and the recently departed Treasury boss which have general application everywhere. While they are current I thought I would consider these general points today.

Today has been a busy pre-Budget night day (the Treasurer delivers the 2012-13 Budget tomorrow night). I was invited to write an Op Ed for the ABC’s The Drum – a site which explores news and analysis in more detail than the usual 750 word newspaper column. The Drum column is reproduced below. I have also been wondering about the implications for Europe and beyond of the election outcomes in France and Greece. I suspect the latter will be more interesting given Hollande will be unlikely to rock the boat too much. But I need to read more of the French literature that has emerged in the last 24 hours to really get a feel for what is likely to happen there. I will have more to say about the Australian federal budget when it is actually unveiled tomorrow night but it looks like being the case that Australian government is about to deliver a 5000-odd word suicide note.

My friend Sean Carmody, sometime commentator and always obstinately objective, introduced me to this work – The Debunking Handbook – written by a physicist and psychologist. It serves to focus thoughts because it considers the pitfalls that arise in an exercise aimed at debunking myths and strategies that might be deployed to effectively achieve this aim. The authors appear to be motivated by the climate change debate but the discussion is equally effective in the context that I work within – how to convince people that mainstream macroeoconomics is largely devoid of meaningful content and predictive capacity.

The ABC News today reported that – Newcastle hosts frisbee championships – which means the national frisbee championships will be in my town this week and I will be around. Apparently the championships involve “flinging a frisbee between players on a pitch similar to a football or soccer field” and then “catching the disc in the endzone”. I suggest the Australian Prime Minister take up the sport. It seems an innocuous pastime and she surely couldn’t be any less skilled at it than she is at managing the economy. Her speech yesterday in Perth certainly established she has no understanding of macroeconomics or if she does, then she is deliberately misleading us. Her Finance Minister was also fully engaged in the misinformation exercise about the state of the budget. But then she is in solid company. The German Bundesbank has made public statements telling nations crippled by self-imposed fiscal austerity to forget about growth and balance their budgets. The ugly German stereotype is unfortunately reinforced by these sort of public interventions. And, finally, we have the genius who yesterday was advocating widespread cuts in welfare entitlements today out in the Op Ed pages suggesting that countries who exert their sovereign rights over multinationals are committing suicide despite the particular country in focus having real GDP growth rates that most other nations envy. Its all in a day of neo-liberal madness.

The Australian Bureau of Statistics (ABS) released the latest – Building Activity data today (April 18, 2012) which shows that in the December 2011 quarter real activity continued to contract. This is the most recent data release that reinforces the conclusion that the Australian economy is starting to slow down and is now well below the pre-crisis trend growth rates of somewhere between 3 and 3.5 per cent. Within this environment we would expect the federal government as the currency-issuer to be showing leadership and providing fiscal stimulus to support higher growth and allow the private sector to continue deleveraging given their excessive debt levels. The problem is that governments these days do not seem to know what good economics is. Our government thinks responsible fiscal management is to deliberately undermine spending growth (when inflation is falling) and push unemployment up. The only thing that we can say about that is that they are in good company. The governments that are imposing damaging fiscal austerity on their economies are in the same mindless club.