RBA decision exemplifies a deep macro policy imbalance

Today, the Reserve Bank of Australia (RBA) announced that its policy rate will rise by 0.25 per cent to 4.5 per cent. This will push mortgage rates well above 7 per cent. Every time the RBA lifts its rate by 0.25 per cent, the average mortgage holder is $A46 a month worse off. Since this tightening cycle began in October 2009 there have been 6 such rises which makes the average mortgage holder $A276 per month worse off than they were in September 2009. Most will be even worse off given that the commercial banks have been gouging larger proportional increases over this period. The decision also comes in the same week that the Final Report of the Australia’s Future Tax System Review was released. The Government has rejected certain recommendations from that Review which were aimed at providing a fiscal redress to the tightening housing market and by implication reducing the need for monetary policy tightening. What this tells me is that the neo-liberal economic policy dominance that pushed the world into the current crisis remains firmly in place. The result will be entrenched labour underutilisation, rising housing stress and ultimately another economic crisis. Maybe the next crisis will see the demise of this nonsensical approach to macroeconomic policy making.

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Fiscal sustainability and ratio fever

I have returned from the US after participating at the Fiscal Sustainability Teach-In and Counter Conference held in Washington D.C. last week. It was a good event and has stimulated a host of follow-up blogs from the activists who promoted the event. On the way home, I read the most recent report from Citi Group (who were saved from bankruptcy by public funds – they were among the first to have their hands out) which is predicting major sovereign defaults. It was clear that Citi Group was advocating very harsh fiscal austerity measures. How often have you heard the statement that the current economic crisis is evidence that “we are living beyond our means” and that the policy austerity that has to be introduced to “pay back the debt” is an inevitable consequence of our proliflacy – both individual and national?

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Saturday Quiz – May 1, 2010 – 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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Saturday Quiz – May 1, 2010

Welcome to the May Day edition of the billy blog Saturday quiz. So comrades – the quiz tests whether you have been paying attention over the last seven days. See how you go with the following five questions. Your results are only known to you and no records are retained.

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The dysfunctional logic of the Eurozone and its downward spiral

A brief blog about the Eurozone today given I am travelling later on in the morning (Thursday, US time). Events in recent days are further exposing the absurd logic inherent in the design of the monetary system arrangements that the EMU member nations signed up for. The sovereign debt crisis that has so far be confined to Greece is now spreading to other member nations (Portugal and Spain). Further, the concerns over sovereign risk are now spreading into the commerical banking system and the logical extension of that are bank runs and a closure of the entire payments system. The reluctance to provide any EMU support for the beleagured Greece and the posturing by Germany is now being overtaken by these events in recent days. The initial “bailout” offer to Greece that took so long for the EMU bosses to make – given it rendered their claims to have constructed a stable sustainable monetary system absurd – now pales into insignificance. Much more support will be required and soon. But even that will not solve the structural flaws in their system. They would be better just abandoning it and maintaining political ties to stop them invading each other. After all, it was the tensions after the Second World War that have, in no small part, driven these flawed attempts at union anyway.

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Washington Teach-In Counter Conference

The Fiscal Sustainability Teach-In and Counter-Conference was held at George Washington University in Washington D.C. today (Wednesday US time that is – April 28, 2010). It was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held today in Washington D.C. While that event will also talk about “fiscal sustainability”, the reality is that it will merely rehearse the standard and erroneous neo-liberal objections to government activity in the economy. The objections are underpinned by religious-moral constructions dressed up as economic reasoning.

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Are capital controls the answer?

Given I am currently in Washington DC, I thought a local story would be appropriate for today’s blog. In February 2010, the IMF published a Staff Paper which reversed its long-standing position on capital controls. Staring at the hard evidence that nations, which had imposed constraints on surging capital inflows to attenuate the negative economic impacts, fared better in the recent global financial crisis, the IMF has acknowledged that their previous position based on free trade back by total liberalisation of cross-border financial flows was unsustainable. They now argue that controls on capital inflows can be effective if well designed and safeguard an economy from the costs of speculative attacks. Some progressives are calling this a revolution. I am less convinced. From a Modern Monetary Theory (MMT) perspective, I would solve the problem by placing total bans on speculative flows that do not back real production (for example, that reduce foreign exchange exposure in cross-border trade). But this is another example of the zealous position that has been long-advocated and implemented by the IMF has failed to safeguard national economies from the destructive forces released by the increasing financialisation of the global economy.

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Understanding central bank operations

I have arrived in Washington now and it is late Monday. I am staying on local Newcastle time because for a short-trip it is easier to avoid jet lag that way. So I started work today at around 20:00 Washington time and will finish close to dawn. I think I will play Night Shift on You Tube to keep me company through the night … err day (Australian time). On the plane coming over, among other things, I read a paper written a couple of years ago by the Federal Reserve Bank of New York about the way in which monetary policy can be “divorced” from bank reserves. It is a useful paper at the operational level because it brings out a number of important points about bank reserves and the way central banks can manipulate them or ignore them. That is what this blog is about.

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Saturday Quiz – April 24, 2010 – 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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