Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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.
According to the popular legend Nero, Roman Emperor from 54 to 68 and the last in the Julio-Claudian dynasty allegedly “fiddled while Rome burned” (played his lyre and singing) during the fire in 64 which destroyed most of Rome. His rule (and dynasty) ended 4 years later. The imagery of this out-of-touch and cruel leader strumming/plucking his stringed instrument (rumour notwithstanding) while his city and, soon after, his dynasty collapsed is powerful. Last Friday, Eurostat released the latest unemployment data for November 2011. The results were shocking with unemployment rates in Spain now close to 23 per cent (as at November 2011 and rising) and Greece 18.8 per cent (as at September 2011) and rising. Greece’s unemployment rate rose 4.8 per cent in the first 9 months of last year. Meanwhile, the European Commission is occupying itself with other concerns. Its Economic and Monetary Affairs Commissioner and Vice President, Olli Rehn has been sending letters out to member states indicating that he is disappointed they are falling behind their budget deficit reduction targets under the Excessive Deficit Procedure (embedded in the Stability and Growth Pact) and that the EC would be considering fines.
The current Eurozone crisis is getting worse and has concentrated our minds on the most recent period of European history. As in all these situations where focus is very immediate our memories get a little blurred and we are inclined to accept propositions that closer analysis of the data suggest do not hold water. January 1 was the tenth anniversary of the date when Euro notes and coins began to circulate. It had of-course been operating since January 1, 1999 but only in a non-physical form (electronic transfers etc). If you believe the rhetoric from the Euro bosses in the first several years of the Euro history and didn’t know anything else you would be excused for thinking that it was a spectacular success. The Celtic Tiger, the Spanish miracle, the unprecedented price stability and all the rest of it. But the reality is a little different to the hype. The fact is that the common currency did not deliver the dividends that were expected or touted by the leaders leading up to the crisis. All the so-called gains that the pro-Euro lobby claim were in actual fact a sign of the failure of the design of the union although it took the crisis to expose these terminal weaknesses for all to see. My view is that the Euro was failing from day one and it would be better to disband it as a failed experiment that has caused untold damage to the human dimension.
Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.
Since I published Wednesday’s blog – MMT is biased towards anti-crony – there seems to have been a fair bit of commentary on other sites some bordering on personal attacks (against me). I’ll steer clear of that level of discussion. I also note that John Carney over at CNBC responded with this article – Can the Government Guarantee Everyone a Job? – saying that if the notion of employment buffers is a central aspect of Modern Monetary Theory (MMT) then “it would mean that MMT is wrong”. I found his response interesting but essentially a rehearsal of the mainstream errors that arise when you haven’t really come to terms with what MMT is adding to macroeconomic theory. So today’s blog is a supplement to the Wednesday’s blog (and many others) and aims to provide some more context especially to those interested in the evolution of ideas and schools of thought. The point is that whatever else happens we are left with a choice – employment or unemployment buffer stocks. MMT provides the theoretical insights to show that employment buffers are superior whether you like them or not.
Japanese economist Richard Koo recently published his latest paper – The world in balance sheet recession: causes, cure, and politics – which reminds us that patience is the virtue that is required right now and that the major political responses to the crisis are exactly the opposite to what is required to safely steer the World economy back into health. The insights he provides, mostly consistent with Modern Monetary Theory (MMT), demonstrate how the current political cycle (and the imperatives that are being imposed) is so far out of kilter with what responsible macroeconomic management requires. The world economy will require continuous and historically large budget deficits in most advanced nations for many years to come. The demands for fiscal consolidation talk about this year and next year and surpluses in a few years. The reality is that deficits will be required to support growth while the private sector reconstructs its unsustainable balance sheet for more than a decade. We have to get use to that or suffer the consequences. To repeat: Historically high budget deficits will be required for the next decade – at least.
Some new research has given me hope that the politicians will soon be in a position to use the fiscal tools at their disposable to solve the economic crisis. We might call it the pigeon recovery. The ABC News reports that Pigeons can count and so I propose we round up a bunch of them from some of those nice European buildings ship them (humanely) to Brussels and the Eurotower and let them count up the unemployment numbers (well they might have to go to Eurostat in Luxembourg). Then they could calculate the real GDP and income losses and by way of a new Google Pigeon-to-English translator convey to the politicians the urgency of the situation and that jobs are created when people or governments spend and that income is created as a consequence and people become more prosperous. Then some homing pigeons could fly some Modern Monetary Theory (MMT) material to the offices of the politicians to give them something to read instead of the latest nonsense from the IMF or some other institutions that have forgotten that unemployment matters and financial ratios are of limited relevance. Once the pigeons have done their work – the Euro leaders will sit down and realise that an orderly break-up of the monetary union is the best long-term strategy for all of them. Speaking of which here are some “hard truths” for 2012.
I was going to write about the True Finns today to report some research I am doing at present aimed at exposing how the “left” political parties have ceded legitimate progressive issues to fringe parties who then meld reasonably sensible economic issues with offensive social and cultural stances to create a popular but highly toxic political force. The True Finns who gained 19 odd per cent of the vote in the April 2011 national election exemplify this trend. The Euro crisis is accelerating the growth of the popularist political forces in Europe who are anti-Euro (pro-nationalist) and who will not (I suspect) tolerate the Euro elites impinging on national affairs and imposing a decade or more of enforced austerity. There are political movements/parties all over Europe now (for example, Vlaams Belang, Le Pen, Lega Nord etc) which fit this mould. It would be far better for the mainstream progressive parties around Europe to take the initiative and retake control of the policy debate on what should be bread-and-butter issues for the left. Sadly, these mainstream left parties have become totally co-opted by the neo-liberal agenda and speak the same economic voice as the conservatives. The problem then is that the public debate is distorted by untruths which further reinforce the malaise. A dose of truth is required in Europe.
Imagine you had a headache and some economist tells you that you can cure the headache by bashing your head against a wall. So you duly bash your head against the nearest brick wall and not only does it hurt (perhaps drawing blood depending on the severity of the blow) but you note the headache is now worse. The economist then concludes you didn’t bash your head hard enough and instructs you to stick to the “rule” and give it another try – only this time go harder. Blood is now flowing, the head is traumatised and the headache gets even more unbearable. Welcome to Greece which is being bullied by the Troika (EU, ECB and the IMF) in a similar way. The latest IMF medium-term forecasts for Greece reveal a staggering failure by that institution to understand causality and the impacts that their austerity programs have on real economies. Without a blush, the IMF presented the world yesterday with revised forecasts for Greece which reveal their previous forecasts will be around 100 per cent wrong over just over a 6-month horizon. That sort of error is beyond any accepted professional standards. The IMF’s response – bash your head even harder.
I often wonder what outer space thinks of Earth. In recent days a new planet – named Kepler 22b – has been discovered which has Earth-like features and would probably support life. With the CofFEE conference over it was back to the Euro crisis today. Kepler 22b will be following the EU Summit as much as all of us. Laughing with us as the buffoons who parade as leaders work on the next can to kick down the road. The ECB boss gave a press conference yesterday which clarified things a bit – they won’t bail out governments but each week are bailing out governments. That sounds easy to understand. Like the rest of it. I wonder what Kepler 22b is thinking.
This week, the European Union Summit should see the leadership take the monetary union further into the mire and further away from an effective solution to their woes. The German Chancellor has vowed to create a new fiscal union across the Eurozone. She announced this plan to the German Parliament and declared she would push for a change to the treaty that established the common currency. Let me state at the outset – the plan as the press are reporting it – will not work. It is just the latest in a long line of Euro “solutions” that has fallen on its face soon after being announced as the way forward for the EMU. It won’t work because it doesn’t address the problem and will make changes that will make the actual problem worse. Europe is suffering a lack of aggregate demand and needs to address that head on by increasing public spending. Further constraining the capacity of governments to spend will make the situation worse.
I noted a proposal overnight from so-called progressive American economist Dean Baker on Al Jazeera (November 28, 2011) – Time for the Fed to take over in Europe – which suggests that the US Federal Reserve Banks should insulate the US economy from the bumbling leadership crisis and “step in if the European Central Bank fails to deal with the debt crisis”. The proposal is that the US central bank should fund EMU nation deficits. This is another one of cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions When you’ve got friends like this to see what the problem is. The simple point that far from protecting the US economy this proposal would likely cause a collapse in the currency and an inflationary surge that would divert attention of the US government away from creating employment, undermine the real standard of living of workers, and provide new ammunition for those who want to implement damaging austerity. For all that, the US government would only put the EMU nations into a holding pattern anyway.
It is Friday and in Newcastle today it feels like Winter is back although I am aware that complaining about 19 degrees centigrade is somewhat disingenuous to the Northern Hemisphere and temperate region dwellers. But still we complain – more than one person today has said “isn’t it freezing”. So I have been bunkered down reading a lot. Which isn’t that much different to any other day real – hail, rain or shine. The European laboratory is dominating the daily news though and providing us with scripts that no professional playwright could conceive. This week we have seen the European Commission release its latest gee-whiz (you-beaut) plan to save Europe from itself and like all the previous announcements lots of speeches and photos were taken but the substance is missing. The only development that these plans seem to be leading to is a suppression of national democracy. That is my assessment of the EC’s latest proposal. From an economic perspective it maintains the rule – austerity begets austerity.
Bloomberg News carried the headline today (November 23, 2011) – Germany Sees No ‘Bazooka’ in Resolving Debt Crisis as Spanish Yields Surge – which reiterated various statements in recent days from German political leaders eschewing any role for the ECB in defending the EMU from impending collapse. The Germans seem to have very selective memories. There was a time – much closer to today than their hyperinflation experience – when their citizens were cold and hungry and only a major fiscal intervention saved them from greater austerity. There was a time when they marched in the streets with placard declaring “Wir wollen Brot!”.
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.
I am sitting typing this at the airport and the TV news screen in front of me is providing a profile of the new Italian Prime Minister and claiming he is well-equipped to rescue Italy. I read a similar argument in a Bloomberg Editorial this morning (November 16, 2011) – Technocrats Step In Where Political Leaders Fear to Tread. The rise of the economic technocrats is being hailed as a model to avoid complicating factors like worrying what the voters might think or want or do. We know best so shut up and take the medicine. There are two problems with this. First, it is undemocratic. Second, even if you are not worried about that, the technology these technocrats bring to bear is the same box of tricks that created the problem in the first place. Somehow they think if they just scorch these economies into submission, the market will finally start working again. Quite apart from their flawed technology, the reality is that the private sector will not be in a position for some years to drive growth strongly again on the back of a credit binge. Public deficits will have to persist. The very anathema of these economic technocrats. That is now emerging as the problem, quite apart from whether you think the people should get a say in who they elect.
As they say in the classics – “some of my best friends are” … and in my case I might have added German. The Euro crisis – that is, the crisis that has arisen because the creation of the Euro stripped member nations of their capacity to defend their economies against negative private spending episodes – is being worsened because of the incredible resistance by Germany and the Troika (EU, ECB, IMF). The Brussels-Frankfurt consensus – which claimed the creation of the Eurozone would engender stability and growth is shattered – irretrievably humiliated one might venture to say – yet the cabal that hides behind that “consensus” maintains power and influence. The hypocrisy that the cabal engage in is staggering. Their narrative is almost totally dislocated from the reality. They regularly disregard their own rules to favour the vested interests that keep them in power. And meanwhile, they are overseeing a collapse of all the ideals they claimed their system was designed to achieve.
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.
When a democratic government fails to deliver on its promises it typically gets tossed out of office by the voters at the next election. Sometimes it takes a few elections for the rot to set in once it becomes clear that the strategy for the nation is not working. Yesterday, the European Union put out its – European Economic Forecast – Autumn 2011 – which categorically demonstrates that after 3 years of crisis and one grand plan after another the leadership is failing. Some of the leadership tokens – the Greek and Italian prime ministers have been pushed aside – but not by the people – rather by the cabal that rules Europe. The situation will worsen while this lot hold the power.
Several readers have asked me to comment on the recent New York Times Op Ed by Paul Krugman (October 30, 2011) – Bombs, Bridges and Jobs – which outlined the double standards among many conservatives who argue that “government does not create jobs” unless it engaged in military spending but still argued that such spending would be good for jobs and an increase would be welcome. It comes at a time when the new Haitian president is proposing to spend large sums of aid money on restablishing a military force in the nation despite not being able to offer basic housing, sanitation, education or health care. The appeal by the “military-industrial complex” that military spending is good for the economy is long standing and rarely refuted. After all, spending equals income and output which creates employment. But is expanding the military budget or insulating it from cuts the best way to create employment? Should we welcome, as Paul Krugman does, more military spending? The answer is that military spending has positive employment effects which are dwarfed by those pertaining to public spending on education, personal care services and other forms of public infrastructure. Haiti should build houses and schools and forget about the army.