It is always better to tell the truth

The Austrians are lying about my country. They generally lie about everything but when it comes to my own nation of which I know the data very well then something has to be done. Today I examine the claim by some Austrians out there that the Reserve Bank of Australia cannot unilaterally create $A dollar credits in the banking system (for example, add to bank reserves) without first holding American dollars (or for that matter any currency). The claim is totally nonsensical but you need to first understand how central banks operate and then form an accurate view of the historical record to understand why. But when it comes to using publicly available data that other “experts” know very well – it is always better to tell the truth. I am on a bit of a truth theme over the last week.

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When will we ever learn?

It is going to be brief today – it is a holiday in Australia. Queen’s Birthday no less. Can you believe that we are still under the yoke of our colonial masters? Anyway, a winter’s holiday – pouring rain and cold. But I read a couple of things today which I thought were worth interrupting other work to write about as they establish some general principles relevant to understanding Modern Monetary Theory (MMT). The discussion also highlights the recurrent nature of the prophecies of doom – that come from the likes of the Peter G. Peterson foundation now but others in the past. We were told in the 1930s that profligate governments would go bankrupt. They didn’t but when they cut back there economies went broke. The Japanese government was predicted to become insolvent in the 1990s along with hyperinflation and skyrocketing interest rates. Nothing happened other than the fiscal austerity that was imposed as a result of the political pressure arising from these predictions sent the economy back into recession. Same as now … fiscal austerity – imposed because allegedly budgets are unsustainable – will drive economies back towards and into recession. When will we ever learn?

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Saturday Quiz – June 11, 2011 – 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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The time has come to tell the American people the truth

On May 17, 2011, the US Social Security Trustees Report and the US Medicare Trustees Report were released. The releases set the conservative deficit terrorists into a tail spin. They would have been better making a nice cup of tea, relaxing with a book and generally chilling out. In fact, the most interesting part of the US government’s Social Security Administration Home Page seems to be its Popular Baby Names search engine which allows you to plug in a name and find out how popular it has been over x years and its ranking by the year. My parents chose a name for me that remains popular. I don’t know whether that is good or bad. But playing around with that little toy is much better fun than reading the Trustees’ Report and the resulting hysteria in the media. The point is that these Trust Funds are just elaborate accounting smokescreens that ultimately mean nothing if one comprehends the financial capacity of the US government. They represent a case of a government creating a farcical structure to administer some program and then elevating the structure to a false level of importance that actually leads them to introduce policies which undermine the initial purpose of the program – and all without any basis. The time has come to tell the American people the truth.

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Australian labour market continues to weaken

The Australian Bureau of Statistics (ABS) released the Labour Force data today for May 2011 which shows that the labour market is in a very weak state. Full-time employment collapsed further (having falling sharply last month) and part-time employment growth was very weak. Employment growth is failing to keep pace with population growth which means that no dent is being made in the very high labour underutilisation rates. Total working hours barely moved and total labour underutilisation (the sum of unemployment and underemployment) rose from 11.9 to 12.2 per cent. The teenage labour market remained in an appalling state. Even the usually optimistic bank economists (who predicted that employment growth would have been much stronger than it was) are starting to sound circumspect in media interviews today – “weakness”, “softness”, “poor result” – were descriptors that were heard today. The Australian economy is nowhere near full employment and the slack increased in May 2011.

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Americans are stupid but they are not alone

I have been travelling the last few days and while sitting at the airport on my way home I have been catching up on all the snippets of text and links I accumulate each day. While the current generations are living through the “digital revolution” we should not forget that 50 odd years ago humans went to the Moon – which at the time was an ingenious demonstration of our capacity for technological marvel. The motives for this feat which were tied up in the Cold War paranoia were clearly suspect but I recall at the time as a young high school student, as all the classrooms were mustered in a TV viewing room to watch the landing, that we are a clever lot. I no longer think that.

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Beware the wolf in sheep’s clothing

Several readers have written to me asking me to comment on a recent paper that the New York Federal Reserve released as a Staff Report (May 2011) – A Note on Bank Lending in Times of Large Bank Reserves. Apparently, there is an impression that the federal reserve economists might be seeing the light a bit about the banking system and the way economists think about it. The reason that some readers have concluded that is because the substantive conclusion of the paper is that credit expansion is independent of the level of banking reserves held at the central bank. This conclusion is totally consistent with Modern Monetary Theory (MMT) but is at odds with the standard mainstream macroeconomic view (as taught in textbooks) that relies on the money multiplier to draw a (spurious) connection between bank reserves and the money supply. As you will see – my advice is to be very careful when reading such papers – they are not what they seem. The FRNY paper reaches the correct conclusion using erroneous theory which they partition as a special case arising from the extreme circumstances surrounding the crisis. Even in defining their “model” as a special case, they employ flawed logic. It is a case of being beware of the wolf in sheep’s clothing.

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Low pay workers dudded again in Australia

On Friday (June 3, 2011) Fair Work Australia which is the body that formally sets the minimum wage in Australia handed down its Annual Wage Review 2010-11 decision. The Minimum Wage Panel of FWA released its second Annual Wage Review under the Fair Work Act 2009 and awarded minimum wage workers an additional $19.40 per week which amounted to a 3.5 per cent rise. With inflation running around the same rate or higher, the decision fails to provide for a real wage increase especially given productivity growth is running at around 1.5 per cent at present. The decision will apply over from July 1, 2011 to June 30, 2012. The decision further cements the real wage losses that low-paid workers have endured over the decade and is not sufficient to arrest the deterioration of low-pay outcomes relative to average earnings in the economy.

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Saturday Quiz – June 4, 2011 – 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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