Bank of England Groupthink exposed

I am travelling a lot today so do not have much time. Apart from my usual projects that are on-going, I started reading the – Court of Directors’ Minutes 2007 – 2009 – that were released yesterday (January 7, 2015) by the Bank of England, after the UK Treasury Select Committee (House of Commons) demanded the Bank act in a more transparent manner in its November 8, 2011 Report – Accountability of the Bank of England. The minutes and accompanying data demonstrate that the Bank and the supporting financial oversight bodies were caught up in the myth of the Great Moderation and the governance of the Bank was captive to a destructive neo-liberal Groupthink. The Bank helped cement the pre-conditions to the crisis, didn’t see it coming, and delayed on essential action, thus ensuring the crisis was deeper and more prolonged than was necessary.

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Germany should be careful what it ‘allows’

The German Magazine Der Spiegel ran a story over the weekend (January 3, 2015) – Austritt aus der Währungsunion: Bundesregierung hält Ausscheiden Griechenlands aus dem Euro für verkraftbar (Exit from the Monetary Union: Federal government considers Greece’s exit from the euro is manageable). This so-called “radical change of position” is presumably designed to impart external pressure on the Greek democratic process, which is about to elect a new national government presumably on January 25, 2015. The claim is that the German government is prepared to make Greece expendable because it thinks it has shored up the rest of the Eurozone so that what happens to Greece is immaterial. I think Germany should be careful what it ‘allows’.

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Declining employment opportunities for graduates – a future disaster

Another day of light blogging. It used to be the case that if you secured a University degree then you were nearly immune from unemployment and enjoyed a fairly quickly growing wage gap on those of the same age who were not so fortunate to attend university. It was always the case that the unskilled are at the back of the jobless queue. This cohort is traditionally forced to endure low wages when they are lucky enough to find work and when they are not so lucky, they have to tolerate the opprobrium that neo-liberal attack dogs impose on them for daring to try to live on the pittances handed out as unemployment benefits. Any time the economy takes a nosedive this group finds itself out of work. But, even in recessions, the possession of a University degree was a fairly good insurance policy against such misfortune. The GFC changed that and in some nations the austerity that has been enforced by mindless and unaccountable bureaucrats has not only had devastating effects on the unskilled but has also undermined the prospects of the higher skilled workers. There is no cost-benefit analysis available that could justify such an arrant waste of productive resources, quite independent of the massive personal cost that the unemployed face upon their exclusion from mainstream society. Those pushing for austerity have a lot to answer for. But most of them will be long retired on their fat superannuation pensions before the full scale of the disaster they have created is revealed.

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The top 10 progressive issues for 2015! Did I say progressive?

I am away most of this week and have limited time for blogs and I am also concentrating on the Modern Monetary Theory (MMT) book I am working on that will be published later in 2015. I also do not want to use the blog space exclusively for that book writing like I did for a portion of this year when I wrote the book on the Eurozone (which will come out in May 2015). I can also say that an Italian version of the book is now going to be a reality and we hope to get it out as soon as possible in 2015 – more later on that topic – it tells a story in itself about the Italian left! So for the rest of the week we will be in Blog Light’ territory although only marginally. Today – a sad story of how progressives seem to lose their way. I would have thought the first progressive imperative would be to counter the neo-liberal myths about economics in order to liberate a range of other social and environment initiatives that will improve society and the world in general from the yoke of neo-liberal lies about fiscal deficits and the way the monetary system operates. I was wrong. After considering the material for this blog, I think I will file it under my – Friend’s like this … – series.

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News from Europe continues to deteriorate

I am travelling for most of today and so have very little time to write. But I do comment on the latest French unemployment data released the day before Xmas which signals that things are getting worse in France as the European Commission bolts down the austerity clamps even tighter. While I thought that Italy might be the jewel in the crown and be the ones to exit the unworkable Eurozone first, I am now thinking that France might be the straw that breaks the back. Things are certainly going to get worse there and their political system is veering towards an anti Euro sentiment. Not before time, although the parties promoting the anti-euro feeling are not very nice at all. Where are the Socialists? Oh, I forgot, they are in power – spearheading the austerity. What a mess. In addition, as a sort of stocking filler, I also thought I would post the Q&A section of the presentation I made in Rome on November 24, 2014 – Framing Modern Monetary Theory.

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Greece – two alternative views

When I was in Europe recently, I had interesting discussions about the future of Italy, Greece and Spain with various people, particularly in relation to trying to understand the apparent dissonance between the strong support for the euro and the devastation that membership of the common currency has created in these countries. It is, of course, a very complex issue that goes well beyond economics (as most things do). I formed two alternative views from what I was heard from those on the so-called progressive side of the debate. Either they are kidding themselves or that they have crafted a plan to force Germany (mainly) to break up the currency union. The alternative scenarios was also quite distinct along national lines with Italians more likely to be in the former group and Greeks in the latter group, although my sample sizes were relatively small.

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The sham of central bank independence

Let it be noted that the Japanese government 10-year bond yield hit 0.33 per cent overnight. That tells you that all the scaremongering that has been going on over the last twenty years about hyperinflation, the Japanese government running out of money, the bond markets dumping the yen, and the rest of it were self-serving lies designed to advance a particular ideological position at the expense of the broader social well-being. A year ago, the yields were 0.88 per cent – so they are going in the opposite direction to that predicted by many mainstream economists, blinded by their irrelevant textbook theories about how markets work. In that neo-liberal textbook fairyland, the yields should be sky high now, inflation accelerating out of control and the government forced to admit it had run out of money. Get over it, it won’t happen because the real world doesn’t operate like that. Students of macroeconomics are continually being taught a myth, which is detrimental to their education and life experiences. Many turn into the future doomsayers and sociopaths in organisations such as the IMF, the European Commission and other like policy making institutions. They always rave on about the need for more central bank independence to insulate monetary policy from political decision-making as if that will foster the well-being of the population. The idea of central bank independence is a sham and in the last week there has been stark evidence to support that view.

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Friday lay day – public spending is not necessarily matched by tax revenue in the long-run

It is my Friday lay day and that means brevity, even if that is a relative concept. I have received several E-mails lately about claims that Modern Monetary Theory (MMT) economists are zealots who overstate their case and are nothing much more than Keynesians with some fancy jargon. It is lovely how complete strangers feel it is their place to write abusive E-mails to you as if you are some sort of inanimate object. But that is not the point here. Several of these E-mails noted that a prominent Australian economist had largely dismissed MMT, despite his progressive leanings, because “it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes”. Apparently, this criticism was made in the context of the Russian problems at present, which I may or may not deal with in another blog, depending on whether I get time to research a few things. The Russian situation is not central to my research at present and I do not have a lot of time to really delve into it. But what about this “long run” failing of MMT?

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Central banks can sometimes generate higher inflation

I haven’t much time today with travel commitments coming up at later. But I filed this story away earlier in the week in my ‘nonsense’ list but with a note that it contained a lesson, which would help people understand Modern Monetary Theory (MMT). The demonstration piece was written by the UK Daily Telegraph journalist Ambrose Evans-Pritchard (December 15, 2014) – Why Paul Krugman is wrong – which asserts a number of things about the effectiveness of fiscal policy (or the lack of it this case) and the overwhelming effectiveness of monetary policy. Indeed, apart from trying to one-up Paul Krugman, the substantive claim of the article is that the difference between the poor performance of the Eurozone and the recoveries in the US and to a lesser extent the UK is not because of the fiscal policy choices each nation/bloc made. This is articulated in a haze of confusion and misconceived discussion. So here is the lesson.

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Alleged Greek growth could be an illusion

It seems that Greece is still in trouble with the Athens Stock Exchange share prices tumbling rather abruptly in recent weeks. In the last 6 days or so the Athens Stock Exchange Composite Index has plunged by around 19 per cent on the back of growing political tension and the strong likelihood that the pro-austerity, Troika surrender monkeys in power at present will be tossed out and a new dialogue with Europe will begin. The snap election call has spooked the markets it seems. But I have also been puzzling about (read: been deeply suspicious of) the growth narrative that is being peddled about Greece by the European Commission and the IMF. There remain unsolved puzzles about the third-quarter 2014 Greek national accounts data, which is another way of saying they don’t quite add up. It may be that the alleged real GDP growth of 0.7 per cent was a statistical artifact – the case of incomes falling less slowly than prices. The evidence certainly suggests that is the case. That is what this blog is about.

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Saturday Quiz – December 13, 2014 – 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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A lost decade for Australia – only if we allow fools to continue governing

It is almost unbelievable what some journalists think passes for quality writing. Today (December 9, 2014) Australians were trying to deal with the vicious new scheme designed by the Federal government to herd unemployed indigenous people in remote communities into below legal wage work-for-the-dole schemes because the government refuses to use its fiscal capacity to generate jobs where there are none, and then, just after lunch we were confronted with an article in the Fairfax press – Australia adrift: Lost decade beckons as good fortune wanes – that beggars belief. Australia will have a lost decade if it continues to elect governments, which work against the national interest. There is nothing predetermined about it. The rise and fall of the mining sector is an historical given – we have been through these cycles before. It all depends on how the Federal government deploys its fiscal policy tools. If it continues to run pro-cyclical policy (cutting when private spending is weak) then things will get worse. It we break out of the austerity trap, then the Government can easily redirect growth back to domestic spending. A major public sector job creation program and a large-scale public infrastructure redevelopment would be ideal ways to begin this policy shift.

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“There is plenty of stimulus” – but I am struggling to see it

“The economy is not weak enough that there needs to be more fiscal stimulus … there’s plenty of stimulus from the Reserve bank with record low interest rates” (Source). That comment came from an Australian private sector investment bank economist. It is an extraordinary comment to make and still claim status as a professional economist. What is the measure of a weak economy? Rising unemployment and underemployment, now well above 15 per cent? Negative real net national disposable income for two consecutive quarters? Real GDP growth barely a 1/3 of it previous trend rate? Because that is the reality in Australia right now and it is getting worse. Further, the RBA has cut the short-term interest rate 14 times since October 2011 and has held the rate at 2.5 per cent (a record low) since September 2013. The unemployment rate has risen by 1.1 per cent since October 2011 and 0.5 per cent since September 2013. When will these clowns in the financial markets finally realise that monetary policy is an ineffective tool for increasing aggregate demand?

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The Cyprus confiscation becomes the model for bank insolvency

I am still sifting through the documents from the recent G20 Summit in Brisbane to see what our esteemed leaders (not!) have planned as their next brilliant move to reinforce neo-liberal principles. One of the least talked about outcomes from the recently concluded G20 Summit in Brisbane were the agreed changes to the banking systems operating in the G20 nations. The dialogue started in the G20 Finance Ministers’ and Central Bank Governors’ Meeting in Washington in April 2014. Clause 8 in the official Communiqué covered the aim of the G20 “to end the problem of too-big-to-fail” and signalled the “development of proposals by the Brisbane Summit on the adequacy of gone-concern loss absorbing capacity of global systemically important banks (G-SIBs) if they fail.” The Brisbane Summit would consider these proposals. The aim was to “give homeand host authorities and markets confidence that an orderly resolution of a G-SIB without exposing taxpayers to loss can be implemented”. You won’t believe what they came up with.

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The inexact science of calibrating fiscal policy

In the showdown between France and the European Commission last week, France clearly is the winner on points, which is not surprising given the impossibility of the task the Commission had set it in meeting the Excessive Deficit Procedure (EDP) rules and the danger to the latter if France was to openly defy it. We have a sort of stand-off between the surrender monkeys – France is going along with the rules sort of and the Commission is bending the rules to save face. It is 2003 all over again. The public might actually think this EDP process is based on a fairly definite science with respect to measuring fiscal policy positions which provide unambiguous statements of deficits. The public would be very wrong if they did adopt that conclusion. In general, the applied work associated with informing the EDP process is very inexact. But, moreover, it is ideologically tainted which makes the process very damaging for any notion of prosperity. All applied work has measurement and other technical issues, which means it is always just an approximation. But when those errors are overlaid by a systematic bias against government net spending and therefore full employment, then the exercise becomes a scandal.

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Friday lay day – real resources are available but not used, why?

Its Friday and I am writing a short blog only. A lot of people I meet find it hard to understand what a cost is in economics. They are too accounting oriented, in the sense that think a dollar sign on a piece of paper (such as a fiscal statement) represents a cost. In some contexts, it is sensible to think about dollars but when considering what a government should do, the only thing that really matters is the real resource cost. That may be calibrated in dollar terms but is not a monetary amount. In walking around three large Italian cities in the last week (Florence, Rome and Milan) I saw a lot of idle resources. The real costs of this idleness are massive – lost production, lost real income, lost lives. I saw many people not working and many others trying to scratch out an income selling trinkets on street corners. I also saw rubbish and urban decay everywhere such that the urban amenity was severely diminished. I didn’t see a shortage of productive jobs that could be done to improve the civic (public) parts of Italian life. But no-one was doing them. Why? The potential jobs were latent only because there was no-one willing to pay the idle workers to perform these productive tasks. That happens when there is a shortage of spending and has nothing to do with structural parameters.

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The loaded language of austerity – but all the sinners are saints!

The US National Institute of Justice tells us that – Recidivism is “is one of the most fundamental concepts in criminal justice. It refers to a person’s relapse into criminal behavior, often after the person receives sanctions or undergoes intervention for a previous crime”. You know murder, rape, theft, and the rest. According to the European Commissioner for digital economy and society and Vice-President German Günther Oettinger running a fiscal deficit above 3 per cent when you economy is mired in stagnation is a criminal act! This religious/criminal terminology is often invoked. German Finance minister Wolfgang Schäuble told the press before a two-day summit in Brussels in March 2010 on whether there should be Community support for Greece, that “an automatic system that hurts those who persistently break the rules” was needed to punish the “fiscal sinners”. This sort of language, which invokes metaphors from religion, morality and criminology is not accidental. Especially in Europe, where Roman Catholocism still for some unknown reason reigns supreme in society, tying fiscal deficits to criminal behaviour or sinning is a sure fire way of reinforcing the notion that they are bad and should be expunged through contrition and sacrifice. The benefits of fiscal deficits in circumstances where the non-government sector is saving overall are lost and the creation of the metaphorical smokescreen allows the elites to hack into the public sector and claim more real resources for themselves at the expense of the rest of us.

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The Italian left should hang their heads in shame

Today is a blog lay day only because I now have to pay the piper for being Australian but having to undertake work commitments in Europe – a very long tiring flight. At least I can read a lot of detective novels. But there was a story on Monday in the Italian media that I report on now as a conclusion to my stay here in Italy. The only conclusion is that the Italian left should hang their heads in shame for being surrender monkeys to the neo-liberal forces defined by the Troika.

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A depressing report from Florence

I am in Rome today and tomorrow. This afternoon I am giving a presentation at the Roma Tre University (Università degli Studi Roma Tre) on Modern Monetary Theory (MMT) and how we might advance the spread of the ideas. There is a very committed group of people in Italy who want to build a political presence to counter the neo-liberal dominance, which has infested all the major parties here (and everywhere). The first thing they need to do is to forget MMT as an organising vehicle and, instead, articulate a vision that advances public purpose and prosperity. MMT is a tool box or framework to understand the consequences of economic decisions (private and public) on the macroeconomic aggregates. It is not a policy agenda. I have suggested they concentrate on full employment, job security, climate change and reducing inequality and advancing opportunity for all as the organising vehicle for their political endeavours. Otherwise, there is the danger that they become an MMT cult. Anyway, I left the Florence roundtable thinking that dramatic shifts are required in the way the EU is structured before Europe can make any significant return to those sorts of policy aims. I also concluded that the elite is so entrenched in its own neo-liberal Groupthink and its own advanced sense of preservation that very little will change and mass unemployment will persist for years to come. It is a very sad state.

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Greece – return to growth demonstrates the role of substantial fiscal deficits

We had news this week that the annual rate of real GDP growth in Greece is finally positive after two quarters of positive growth. The austerity merchants are out in force congratulating themselves on a victory. Some victory. What the official data doesn’t publish are the long-term implications of the Depression that Greece has been locked in for the last six years. I look at that question in this blog (a little). Further, despite the claims by the European Commission and the lackies that it relies on to spread its distorted economic news that Greece has achieved a primary fiscal surplus, nothing is further from the truth. The fact is that the Greek fiscal deficit expanded considerably last year and despite all the austerity is still pumping public euros into the Greek economy and therefore supporting growth. The slight return to growth is not a victory for fiscal austerity but a demonstration that if large deficits are maintained for long enough growth will eventually rear its head.

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