A modern monetary theory lullaby

In recent comments on my blog concern was expressed about continuous deficits. I consider these concerns reflect a misunderstanding of the role deficits play in a modern monetary system. Specifically, it still appears that the absolute size of the deficit is some indicator of good and bad and that bigger is worse than smaller. Then at some size (unspecified) the deficit becomes unsustainable. There was interesting discussion about this topic in relation to the simple model presented in the blog – Some neighbours arrive. In today’s blog I continue addressing some of these concerns so that those who are uncertain will have a clear basis on which to differentiate hysteria from reality. We might all sleep a bit better tonight as a consequence – hence the title of today’s blog!

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Europe – bailout or exit?

First, devise a monetary union that is based on flawed notions of how the monetary system operates. Second, within that union invent nonsensical rules that give the system in general or member nations in particular the no capacity to deal with a damaging economic crisis. Third, allow countries within the union to game it to their own advantage at the expense of other member nations (for example, Germany – although the advantage was at the expense of German workers). Fourth, when a crisis hits elevate the nonsensical rules to the level of the sacrosanct and commit innocent citizens to years of unnecessary economic hardship. That is the level of sophistication that Europe has reached in 2010.

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Some neighbours arrive

The other day I introduced a simple model of how a monetary economy works. The model was centred on the payments of my personal calling cards to elicit labour from the kids that live in my house. All the basic national accounting results that apply in a real economy were present. The simplicity extended to considering only two sectors – the kids (private) and the “house” (public). In terms of modern monetary theory (MMT) we start by examining the broad relationships between the government and non-government sector, where the latter comprises the private domestic and foreign sector. Some readers have suggested that the results obtained would not apply if I had have explicitly modelled the cross-border flows (that is, the external sector). Well today, I have some news … some neighbours have arrived next door to my place and the kids from each house are jumping fences.

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We are sorry

On Friday (February 12, 2010) as Eurostats released the flash estimates of fourth quarter GDP for the EU (see below), the IMF released a new staff position note entitled – Rethinking Macroeconomic Policy. The bad news is the Europe is looking more like a region that is heading for a double dip recession. The even worse news is that that cretins at the IMF are claiming they know why they messed up in the past and how to address their failure. Stay tuned for a modified version of the same. The fact is that the IMF Report reveals they are as ignorant as ever of the workings of the modern monetary economy. So this revisionist exercise doesn’t signal a major paradigm stage.

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Why history matters

In this recent blog – Who is in charge? – I outlined the case that all the so-called “financing” arrangements that government deploy which are held out to us as being required to allow them to spend are in fact voluntary and reflect deep-seated ideological anti-government positions. I wanted to make the point that it is governments not amorphous “bond markets” that ultimately in command of the destiny of their nations and that citizens are being grossly mislead by lies and half-truths into believing that governments have to introduce harsh austerity packages to appease the markets because if they do not the latter will “close them down”. I continue with that theme today and address some issues raised in the comments that accompanied that blog.

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Coming down the face

Today the ABS released the Labour Force data for January 2010 and there was quite a strong growth in employment reveals, albeit it was dominated by part-time growth. The employment boost confounded the “markets”, some of the so-called experts had “factored in” contraction (so I guess their clients are dudded by their incompetence again!). With participation constant, the net jobs growth translates into solid reductions in unemployment. Unfortunately, total hours worked plummetted so I suspect it will be a grinding part-time led recovery. But the good news is that unless something bad happens elsewhere in the World we are now well over the aggregate unemployment rate peak and surfing down the face!

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Doomed from the start

Today I have been studying data from the EMU economies where the individual member states surrendered their currency sovereignty and comparing it to other nations which have sovereign currencies (Australia, Denmark, Japan, the UK and the US). This is part of a larger project I am involved in. While the glare of the spotlight is currently on Greece and how the EMU handles the issue, most commentators conveniently forget that this problem has been many years in the making and is both a product of initial design folly and subsequent behaviour by some member states.

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Barnaby, better to walk before we run

Today I have been thinking about the macroeconomics textbook that Randy Wray and I are writing at present. We hope to complete it in the coming year. I also get many E-mails from readers expressing confusion with some of the basic national income concepts that underpin modern monetary theory (MMT). In recent days in the comments area, we have seen elaborate examples from utopia/dystopia which while interesting fail the basic national income tests of stock-flow consistency. Most of the logic used by deficit terrorists to underscore their demands for fiscal austerity are also based on a failure to understand these fundamental principles. So once again I provide a simple model to help us organise our thoughts and to delve into the elemental concepts. It is clear that in order to come to terms with more complicated aspects of MMT, one has to “walk before they can run”. So its back home today.

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