The Toronto G-20 leaders’ meeting is being held this weekend (June 26-27, 2010) and one expects it will endorse the position taken at the recent G-20 annual Finance Ministers and Central Bank Governors Meeting in South Korea. The communiqué released from that meeting illustrates how influential the deficit terrorists have become. At the Pittsburgh meeting of the G-20 leaders in September 2009 the communiqué talked about the sufficiency and quality of jobs. Six months later they had abandoned that call and are now preaching higher unemployment and increased poverty via austerity packages imposed on fragile communities. This is in the context of dramatic increases in global poverty rates in 2009 due to income losses associated with entrenched unemployment. Then I note that the recently released 2010 World Wealth Report shows that the world’s rich got richer during the 2009 recession. The only reasonable conclusion is that something is seriously wrong in the world we have constructed.

I am increasingly reading analysis from the mainstream economists that attempts to reconstruct the current crisis as a fiscal crisis. The claim is that the crisis is about lax fiscal policy and that the solution to the on-going sluggish (if not continued negative) growth is to quickly withdraw all fiscal stimulus. The conservatives are thus in total denial as to the real causes of the crisis and the role that fiscal policy interventions have played in attenuating the damage invoked by the crisis. For a time they were silent because it was clear that the neo-liberal macroeconomics paradigm that is forced down the throats of students around the world was incapable of providing any coherent explanation for the crisis. But they are now re-appearing, larger than life itself, and have resumed their arrogant hectoring of the policy makers and the electorate. They are once again trying to impose the same policies on governments that led to the crisis in the first place. They are doing this by reconstructing history and relying on our lack of memory recall and incomplete comprehension of things economic.

I read a 2006 research paper from the New York Federal Reserve today entitled – Why Is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?. The article bears on the discussions recently here about the motive for issuing bonds and the likely consequences of not issuing them. It also brings back the memory of how the Australian government was duped by financial markets into continuing to issue debt even when they were running surpluses. That single act demonstrated beyond doubt that that public debt-issuance isn’t about funding net public spending. Rather, the continued issuance of public debt is a form of corporate welfare which makes the task of making profits through trading financial assets in private captial markets that much easier. Typically, it is the top-end-of-town who complain about welfare payments making the poor lazy. Well, the on-going issuance of public debt makes the private users of the same lazy because they do not have to create low risk products themselves. It is a total con job!

I have noticed a few commentators expressing concern about the dangers that might arise if a nation runs a persistent current account deficit. There have been suggestions that this area of analysis is the Achilles heel of Modern Monetary Theory (MMT). I beg to differ. A foundation principle of MMT is that to be able to freely focus on the domestic economy, the national government has to be freed from targetting any external goals – such as a particular exchange rate parity. The only effective way for this to happen is if the exchange rate floats freely. In this sense, the exchange rate is the adjustment mechanism for external imbalances.

The coming period will be an interesting test. I say interesting in the sense of an intellectual curiosity rather than anything that my sense of humanity might find to be acceptable. I am referring to the widespread acceptance by politicians around the world that fiscal austerity is good for growth. Governments are increasingly getting bullied into adopting austerity measures apparently thinking they will help their economies grow. My bet is that the austerity measures will undermine growth and when growth finally returns it will be tepid and as a result of other factors not related to the austerity. In the meantime there will be massive casualties among the poor and disadvantaged. So if the Flat Earth Theorists (FETs) are correct in a few months we should be seeing rapid growth and reductions in the deficits. Of the countries that have led the charge (for example, Ireland) things don’t look good for the FETs. So we will see. If they are wrong you can be sure that various ad hoc responses to anomaly will be forthcoming. For example, I lost my briefcase on the way to work which had a key to growth in it! Excuses like that. The mainstream have never and will never admit they are wrong. The task will be to show the people that this rabble of economists should be ignored.