Japan will (yet) run out of money. Never!

A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.

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Bonnie Scotland – ignorance or denial – either way it is fraught

There was an article in the UK Guardian (October 29, 2013) – Mainstream economics is in denial: the world has changed, which reported that the economics profession had been “stupidly cocky before the crash” and “had learned no lesson since”. It followed a – report – last week (October 25, 2013) that students at Manchester University had proposed an overhaul of orthodox teachings and economics. The latest Guardian article concludes that the economics profession is in “denial”, that is, “the high priests of economics refuse to recognise the world has changed”. I will come back to that in a moment, but evidence of this denial is swamping the debate about the upcoming Scottish decision on whether to break from Britain. So-called informed policy briefing papers have started to emerge, which will distort the choice available to the Scottish people by perpetuating basic myths about the way monetary systems operate and the choices particular currency arrangements provide government. As I’ve said before, if the medical profession offered the sort of analysis and professional opinion that my own profession offers, then they would be very few practising medics because they would have all been sent broke through malpractice lawsuits.

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Currency sovereignty is what matters

There is a literature emerging that suggests that a Eurozone nation would be no better off with its own currency then and is within the monetary union. The claim is that these nations have not performed any worse than nations outside the Eurozone during the current crisis. A recent paper by an American economist (Andrew Rose) – Surprising Similarities: Recent Monetary Regimes of Small Economies – is being used as the authority to support this claim. The intent is clear – to deny that the Eurozone as a monetary system is inferior to systems where the nation issues its own currency and sets its own interest rates. However, these studies skate over the currency sovereignty issue and cast the differences between nations in terms of exchange rate arrangements or whether their central bank targets inflation or not. The real issue is whether the monetary system is characterised by the government facing a financial constraint or not in its spending – that is, whether it issues its own currency, sets its own interest rates and resists issuing debt in a foreign currency. Once you consider those basic aspects of the monetary system then it becomes obvious that the Eurozone nations as a whole have performed worse than other advanced Non-Eurozone nations which have enjoyed more fiscal flexibility.

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Close the borders – gangs of benefit cheats are coming!

So the American conservatives wimped out again after a month or so of mindless bluster and hot air. The only problem is that their posturing, in itself, causes damage to the economy. It’s interesting that the conservative economists keep harping on about their belief that the existence of a budget deficit causes uncertainty among private firms who are then reluctant to invest because they fear higher tax rates to pay back the deficit. While this flawed narrative is not theoretically robust, defies history, and is empirically bereft, uncertainty is a problem for firms and the ridiculous behaviour of the American conservatives in the Congress in recent times has dramatically increased it. The world is moving now into a second phase of the retrenchment of the state. The first phase required the neo-liberals to redefine the crisis, which was clearly an issue of excessive private debt, as crisis of sovereign debt. They have been successful in achieving this step. Our ignorance and obsequiousness has allowed this mindless narrative to dominate the public debate. The second phase is now well underway way where the victims of the austerity become the focus of attention for the Conservative politicians. The unemployed are vilified as lazy and welfare cheats (their benefits are targeted – for example, in Ireland now); single mothers are accused of strategic pregnancies; and the old furphy – benefit migration – is wheeled out into the public debate to engender an increasing resentment of the presence of ethnic minorities who is simply trying to do what all of us want – to improve the lives of their families and themselves. All of these campaigns are designed to divide and conquer the populace, segment this into conflictual factions (“them and us” mentality), and justify further unwarranted cuts to government spending.

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Careful before you leap!

The triumphalism of British Chancellor George Osborne in recent weeks, as a modicum of positive economic news seeps out of the – Old Dart – or should I say Britain (given the Old Dart strictly refers to England), is almost too much to bear. Moreover, stand ready for a phalanx of I-told-you-so-mainstream-economists coming out in force lecturing all and sundry about the benefits of fiscal austerity. These characters have been hanging tough for any sign of growth (they have been waiting some years) so they could all chime in that austerity has created the conditions for the growth. They choose to misunderstand any evidence that might cast doubt on that (spurious) correlation. The reality is very different. Austerity has undermined growth and retarded the economies where it has been imposed. All economies eventually resume growth. But the legacy of the policy failure will remain for years to come. All I can say to these triumphal ones is – Careful before you leap!

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Is Labor to blame for the rise in the Australian unemployment rate? – Of-course it is!

There was an article in the UK Guardian (Australian) edition last week (September 27, 2013) which carried the title – Can Labor be blamed for rising unemployment?. The Labor government, which was tossed out of office in Australia on September 14, had been in power since late 2007. They inherited an unemployment rate of 4.4 per cent (which dropped 3 months later to 4 per cent on the tail end of the growth phase), an underemployment rate of 6.2 per cent (total labour underutilisation rate of 10.7 per cent), a participation rate of 65.6 per cent and an employment-population rate of 62.7 per cent. By the time we got sick of them, the unemployment rate was 5.8 per cent and rising, the underemployment rate was 7.8 per cent and rising (total wastage was 13.7 per cent and rising), the participation rate had dropped to 65 per cent (some 114 thousand workers exiting the labour force because of the lack of jobs), and the employment-population ratio had dropped to 61.2 per cent (a loss of 285 thousand relative jobs). The labour force increased by 1147 thousand over this time but employment only rose by 934 thousand, which meant that unemployment rose by 161 thousand more than if the relative scales had been maintained from November 2007. So is Labor to blame for this? Of-course it is – it was the currency-issuing government for 6 years or so. Any rise in the unemployment rate is the fault of the national government because it alone as the complete capacity to offset any reductions in employment arising from other sources such as global financial crisis, the slowdown in the Chinese economy, an appreciated Australian dollar and whatever else. The author of the Guardian article, while mounting a reasonable fight against the conservative view of the changing labour market, feels unable to admit that basic truth. So the Labor Party is obviously to blame because it was in government and could have prevented the rise in the unemployment rate.

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Saturday Quiz – September 28, 2013 – 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 confidence tricksters in the economics profession

There was an extraordinary report in the Wall Street Journal last week (September 19, 2013) – Austerity Seen Easing With Change to EU Budget Policy – which considered the political machinations in Europe that may lead to the EU relaxing some of the harsh austerity measures that have deliberately pushed millions of Europeans onto the jobless queues. I say extraordinary because it shows how flaky the mainstream of my profession is and how they seem to think everyone else is stupid and as long as they dress up their so-called “analysis” in the opaque language of the cogniscenti, the general public will believe anything. This includes the proposition that underpins the on-going and harsh austerity programs in Europe that a reasonable definition of full employment in Spain, for example, is consistent with an unemployment rate of 23 per cent (and near to 60 per cent youth unemployment). They are trying to keep a straight face when they report that their estimates of full employment have moved from around 8 per cent unemployment to 23 per cent unemployment in a few years. It beggars belief and these confidence tricksters should be called to account.

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More public infrastructure means higher taxes – False, go to bottom of the class

Metaphors! They are more than a fancy way of emphasising some point – that is, their power goes beyond meagre linguistic construction. The research suggests they are part of our deep mental or neural capacity, which we draw on to sort out facts and ideas. They are conceptual devices intrinsically linked to the way we think abstractly. Metaphorical language reinforces our ideology (worldview) and so it is no surprise that political parties have become very interested in framing their messages using simple and common metaphors which resonate with the way we feel about things. George Lakoff, a cognitive linguist, considers we do not make our political choices on the basis of rational dissection of competing facts and arguments but rather respond to central (or grand) metaphors with reinforce our worldview. We thus consider facts or argument within that framework of thought. I am doing a bit of work in this area as a way of understanding why central Modern Monetary Theory (MMT) propositions (which are so patently obvious and have strong explanatory capacity) evade acceptance among people, even those who express liberal perspectives (in this context meaning – are open to new ideas).

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Disingenuous at best

In light of the – An Open Letter from Howard Schultz, ceo of Starbucks Coffee Company – which contains “a respectful request that customers no longer bring firearms into our stores or outdoor seating areas”, I felt it necessary to request that all readers of my blog leave all weapons (guns, rocket launchers and any other armaments that you carry on a regular basis) away from their side when they read my blog. Otherwise, violence might erupt as the arrogance of the neo-liberals scales new heights – five years into the crisis. To get your ire up several notches, you might read the latest article (September 16, 2013) by Greg Palast – Larry Summers: Goldman Sacked (thanks Gustavo). Remember keep your weapons out of reach! Then you might reflect (keeping as calm as you can) on the latest offering from the German Finance Minister, Wolfgang Schäuble in the Financial Times (September 16, 2013) – Ignore the doomsayers: Europe is being fixed. The triumphalism throughout the article demonstrates to me that Mr Schäuble has standards of excellence that lie well below what is conventionally considered to be (barely) reasonable. What he uses as the benchmark for defining mediocrity is beyond imagination. These are crazy times – when these economic criminals walk the streets at large, puffed up by their own arrogance and delusion, slapping themselves and their mates on the back, demanding credit for the human wreckage that their actions created, made worse and ensured will span generations. While we see youth unemployment rates of 62.5 per cent and rising suicide rates, these characters see glory and fulfillment. A most strange period of history and future generations will reflect on these apes poorly.

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The stupidity of the German ideology will come back to haunt them

There was an interesting article in the Financial Times last week (August 29, 2013) – The German miracle is now running out of road – about the myopia of policy settings in Germany. The FT author was Sebastian Dullien, who has been consistently presenting the case that Germany is not a role model for the rest of Europe to follow. For example, see – A German model for Europe?. He notes that by targetting a budget surplus in a period of fiscal austerity, the Germans are undermining the very factors which made their manufacturing sector some strong. Their public investment in education and infrastructure is now lagging so much that the costs of business are rising in Germany and the long-term consequences of this are likely to be very damaging. The stupidity of the German ideology will come back to haunt them.

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Fiscal deficits in Europe help to support growth

I read this article yesterday (published August 12, 2013) – The euro area needs a German miracle – among a group of articles that are concluding that things are on the improve in Europe. I expect a wave of articles which will be arguing that the harsh fiscal austerity has worked. I beg to differ. This article agrees that it is too early to “declare victory” because the austerity has to go further yet. My interpretation of that claim is that the author doesn’t think the ideological agenda to shift the balance of power away from workers has been completed yet. But the substantive point is that the fiscal austerity failed to promote growth and growth has only really shown its face again as the fiscal drag has been relaxed. This relaxation is much less than is required to underpin a sustained recovery at this stage but it is a step in the right direction. Governments, with ECB support, should now expand their deficits further and start eating into their massive pools of unemployment.

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Fiscal space is a real, not a financial concept

Japanese economist Richard Koo recently (July 9, 2013) published his latest report on the world economy – Japan, US, and Europe face different issues – which updates some of the latest data available from the economies listed in the title. I am sorry that I cannot link to the Report as it is a subscription service (thanks to Antoine for my copy). I discussed some of Richard Koo’s ideas and how they sat with Modern Monetary Theory (MMT) concepts in this 2009 blog – Balance sheet recessions and democracy. While the basic concept of a balance sheet recession is important to grasp and the policy prescriptions that flow from it clearly point to the need for more fiscal stimulus, once you dig a little deeper into Koo’s conceptual framework you realise that he is very mainstream – more insightful than the average mainstream economist, who typically fails to even grasp the reality of the current situation, but mainstream nonetheless. And that means there are some things in his theoretical framework that are plain wrong when applied to a modern monetary economy

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IMF still away with the pixies

The abysmal performance of the IMF in recent years has been one of the side stories of the Global Financial Crisis. They have consistently hectored nations about cutting deficits using models that were subsequently shown to be deeply flawed. They bullied nations into austerity with estimates of multipliers that showed that austerity would yield growth when subsequent analysis reveals their estimates were wrong and should have shown what we all knew anyway – that austerity kills growth. Their predictions have been consistently and systematically wrong – always understating (by significant proportions) any losses that would accompany austerity and overstating the growth gains. At times, in the face of incontrovertible evidence they have admitted their failures. But a leopard can’t change its spots. The IMF is infested with the myths of neo-liberalism and only a total change in remit and clearing out of staff could overcome that inner bias. Their latest offering – Japan: Concrete Fiscal, Growth Measures Can Help Exit Deflation – is another unbelievable reversion to form.

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If you think you know what ‘debt’ is, read on

The title is stolen from the UK Guardian article (July 29, 2013) – If you think you know what ‘debt’ is, read on – by one Alex Andreou. The title suggests he knows the real issues regarding public and private debt. We will see if he does. This is Part 10 in the theme – When you’ve got friends like this. Which should tell you that the article is full of misinformation even though the motivation is sound. This article is another example of progressive macroeconomic discourse which is essentially trapped in mainstream macroeconomics. The simple point is that a truly progressive social agenda has to be grounded in solid macroeconomic principles. Trying to carve out a progressive agenda within a mainstream macroeconomic framework undermines the credibility of the former and plays straight into the hands of the conservatives. So “If you think you know what ‘debt’ is, read on”.

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UK economy grows and so does its budget deficit

So the UK grew by 0.6 per cent in the June-quarter 2013 on a seasonally-adjusted basis. The conservatives are crowing as hard as they can that fiscal austerity has cleared the decks for a private sector recovery. We believe them of-course because the economy grew by 0.6 per cent. Right? Wrong. We don’t believe them. The fact is that the budget deficit rose in the last year and the annualised growth of the government and other services sector to growth has been positive in the last two quarters after a sharp contraction in the fourth quarter of 2012. On July 25, 2013, the British Office of National Statistics released its latest National Accounts data in the form of – Gross Domestic Product Preliminary Estimate, Q2 2013. The data release comes on the back of another ONS release – Public Sector Finances, June 2013 – which showed that budget deficit and public borrowing rose over the 12 months to June 2013. So the direction in public net spending is up and that is the opposite direction to the intended fiscal austerity.

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Saturday Quiz – July 27, 2013 – 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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Austerity fails – its in the numbers

The latest Eurostat public finance data for Europe on July 22, 2013 – Euro area government debt up to 92.2% of GDP demonstrates the failure of the Euro policy agenda on its own terms. It is clear the indecency of the policy elites is reflected in the way they use nomenclature. Massive rises in unemployment and poverty is called modernisation or labour market reform. The argument bifurcates at that point. How can you argue with someone who thinks like that? But we all know what a financial ratio is. They are without nuance. A public debt ratio is what it is. And when the leaders say they are doing everything they can to reduce them and the cost all this “modernisation” is a price worth paying to reduce the public debt ratios we can conclude that they are failing if the debt ratios continually rise as they impose harsher austerity (sorry, increase the degree of modernisation). That is what the hard numbers are shouting. And that means that someone in Europe should just blow the whistle and call time is up and get rid of the whole swathe of policy leaders.

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Case Study – British IMF loan 1976 – Part 7

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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A case for public banking

I read an interesting research paper from staff at the New York Federal Reserve Bank (published March 2013) – How Much Do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data – which reported on an innovative study of the links between problems within individual banks and the investment performance of firms that deal with those banks in the context of highly concentrated banking sectors. While the study uses Japanese data, the findings are relevant for all nations, given that banking is typically highly concentrated across all advanced nations. The interesting conclusion that I draw from the study is that short of bank nationalisation, the findings provide support for the creation of public banks which utilise the currency monopoly enjoyed by government to provide a more stable environment for business firms during times of crisis in the private banking sector.

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