A sad place – a $58 billion deficit and soaring unemployment!

I must have just woken from a bad dream. Did I read this week that the Australian Government will record a deficit of $A58 billion or 4.9 per cent of GDP but are forecasting unemployment will rise from its present parlous level of 5.4 per cent to 8.5 per cent by the middle of 2012? It must be a joke. If it is serious then this lot deserve to be a one-term government not that I have any hope that the alternative (conservative or green) would do any better. They are all caught up in this neo-liberal straitjacket which has been increasingly tightened over the last 30 years and now ensures that our national government will not use its economic policy capacity responsibly. Our current Federal Government not only continues to abandon full employment but is also abandoning the unemployed. What a place!

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Structural deficits – the great con job!

There has been a lot of talk lately about the need for the Government to plot a course over the coming years back into fiscal surplus. Our perceptions of fiscal responsibility are being conditioned by the relentless media campaign that this is the best thing for the Government to do. We are being told that cyclical deficits are unavoidable at this time but the “structure of the budget” should point us back to surplus as soon as possible. This campaign is being supported by official looking documents that are produced by Treasury (notably the Budget papers) which have all sorts of technical terms in them that only the cognoscenti understand. The term structural deficit is being touted around in these documents and appearing in the opinion columns. But the way this concept is being represented is very misleading and is deliberately being used to obfuscate the lack of intention by this Government to seriously pursue full employment. Well lucky for me I am part of the cognoscenti and cannot be so easily fooled. Here is the truth.

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The deficit and debt debate

The ABC News Online business reporter Michael Janda ran this Opinion piece – Economists tackle the deficit and debt debate today. He interviews three economists – myself, Steve Keen (University of Western Sydney) and Stephen Kirchner (Centre of Independent Studies). The discussion is interesting because it demonstrates how the journalists modify what you say to mean something slightly different (no accusation here that it was designed to skew meaning though) and generates the statistic that two out of three economists do not understand how the modern monetary economy works.

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US Congress to consider a vote on condemning MMT – signals progress

On March 25, 2021, a member of the US House of Represenatives “introduced a resolution in the House of Representatives this week condemning Modern Monetary Theory, recognizing that its implementation would lead to higher deficits and inflation”, while a “companion bill” was introduced into the US Senate (Source). The full text of the proposed legislation is available – HERE. The Bill is full of factual errors. But I thought the most significant aspect is the ‘authorities’ they call upon for justification. A parade of mainstream economists and progressive economists are quoted to give support for the Bill. And I haven’t seen one disclaimer from those mentioned disassociating themselves from some of the wild inferences that the Bill makes. They have allowed themselves to be co-opted by their silence in this rather tawdry and dishonest exercise. That is not surprising at all.

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Tracing the roots of progressive views on the duty to work – Part 7

This is Part 7 of my on-going examination of the concept of ‘duty to work’ and how it was associated with the related idea of a ‘right to work’. Today, I go back in history (again) to discuss a literature that influenced the evolution of my own early advocacy of a Job Guarantee. We see how I considered developments in the early C19th which established very clearly the responsibility of the government to act as an ’employer of last resort’ could be integrated with the buffer stock literature (which analysed the use of commodity buffer systems) in C20th to provide a coherent buffer stock full employment capacity in our modern economies. In Part, this establishes where the Job Guarantee idea, that is now central to Modern Monetary Theory (MMT) came from – at least, in terms of my early contribution to that body of work.

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In a few minutes you do not learn much

There was an article in the New York Times at the weekend – Warren Mosler, a Deficit Lover With a Following – which seems to have attracted some attention. The attention has spanned from the vituperative personal attacks on the article’s subject, all of which would seem to be factually in error, to claims that proponents of Modern Monetary Theory (MMT) are “just nuts”. The latter assessment apparently was drawn after a few minutes consideration by a US economist. I don’t think one learns very much in a few minutes. But the output over the years of the particular economist quoted by the NYTs tells me he hasn’t learned much after presumably many hours of study. I suppose that if you are mindlessly locked into the mainstream macroeconomics textbook models then that is to be expected.

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The ECB is a major reason the Euro crisis is deepening

I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.

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Why the World hates economics

Paul Krugman (August 20, 2011) was bemoaning the loss of intellectual values in the current debate when he referred to this Wall Street Journal article (August 19, 2011) – Why Americans Hate Economics. On face value I concluded that the WSJ had stumbled onto something – that the mainstream economics profession was not worth its salt. I was wrong though. The WSJ author was making a case that we should return to the economics that dominated the world prior to the Great Depression. The problem is that it is this way of thinking that represents the dominant paradigm today. It is the paradigm which has caused all the problems. It is this mainstream paradigm that people hate. The WSJ author is very confused. But then Paul Krugman’s response is hardly meritorious. So this is why the World hates economics – by which we mean mainstream New Keynesian macroeconomics.

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The role of bank deposits in Modern Monetary Theory

I get a lot of queries from readers about how the banking system operates. One recurring theme relates to the role of deposits in the banking system. Mainstream economic theory considers banks to be institutions that take in deposits which then provides them with the funds to on-lend at a profit. Accordingly, the ability of private banks to lend is considered to be constrained by the reserves they hold. While students find it hard to think outside of this construction, the reality is very different. Banks do not operate in this way. From the perspective of Modern Monetary Theory (MMT) private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. We say that loans create deposits. So then what is the role of deposits in MMT. That is the topic for today. I am deliberately simplifying to get the essential understanding across.

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An unholy gathering is emerging

I mentioned in yesterday’s blog that there is a growing number of deficit-terrorists out there who are trying to appear reasonable to separate themselves from the more loony Austrian-school fringe. They are appearing reasonable by saying that “now we should have deficits” but soon (unspecified) “we will need surpluses” to “pay back the excesses”. That sort of spurious reasoning. Even some self-styled progressives who want us to think they are both reasonable people and knowledgeable commentators are starting to emerge within this broad camp. But in general their arguments reflect, at best, an ignorance of how the monetary system operates. This unholy gathering will prove to be very damaging to the need for a broader understanding of how these operations and how government fiscal interventions impact.

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ECB estimates suggest meeting current challenges will be impossible within fiscal rule space

In the recent issue of the ECB Economic Bulletin (issue 4/2024) there was an article – Longer-term challenges for fiscal policy in the euro area – which demonstrates why the common currency and its bevy of fiscal rules and restrictions is incapable of meeting the challenges that humanity and the natural world face in the coming years. The ECB article is very interesting because it pretty clearly articulates the important challenges facing the Member States and provides some rough estimates of what the fiscal implications will be if governments are to move quickly to deal with the threats posed. However, it is clear from the analysis and my own calculations that significant austerity will be required in areas of expenditure not related to these challenges. Given the current political environment in Europe, it is hard to see how such austerity can be imposed and maintained in areas that impact the daily lives of families. What is demonstrated is that the architecture of the EMU is ill-equipped to deal with the problems that Member States now face. The common currency and fiscal rules were never a good idea. But as the challenges mount it is obvious that Europe will have to change its monetary system approach in order to survive.

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IMF holds a religious gathering in Tokyo – to keep the troops in line

The IMF joint hosted a conference in Tokyo last week – Fiscal Policy and Sovereign Debt – and the continues its misinformation campaign on the ‘dangers’ of public debt. The conference claimed that it brought together ‘leading scholars and senior policymakers’ and upon examination of the agenda it was clear that there was very little diversity in the speakers. The organ started playing and all sessions sang from the same hymn sheet. That is how Groupthink works. Repeat and rinse, repeat and rinse, and, never confront views that are contrary to the message. Groupthink is about avoiding cognitive dissonance for fear that at least some of the ‘parishioners’ might lose the faith. The famous British economist, Joan Robinson likened mainstream economics to a branch of theology and these conferences that the IMF convene around the world are like evangelical crusades, to keep the troops in line so they can continue to keep all of us in line – for fear that we might all start seeing through the veil and discover the rotten core.

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Government debt fears – more fiction from the mainstream media

After all these years of trying, the insights provided by Modern Monetary Theory (MMT) still haven’t cut through. One doesn’t even need to accept the complete box of MMT knowledge to know that, at least, some of it must be factual. For example, how much brainpower does a person need to realise that a government that issues its own currency surely doesn’t need to call on the users of that currency in order to spend that currency? Even if we could get that simple truth to be more widely understood it would change things. But every day, economists and the journalists demonstrate a lack of understanding of how the monetary system actually works. Are they stupid? Some. Are they venal? Some. What other reason is there for continuing to use major media platforms to to pump out fiction masquerading as informed economic commentary? And the gullibility and wilful indifference of the readerships just extends the licence of these liars. Some days I think I should just hang out down the beach and forget all of it.

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ECB demonstrates that groupspeak is not dead in Europe – the denial continues

On February 10, 2024, a new agreement between the European Council and European Parliament was announced which proposed to reform the fiscal rules structure that has crippled the Member States of the EMU since inception. I wrote in this blog post – Latest European Union rules provide no serious reform or increased capacity to meet the actual challenges ahead (April 10, 2024) – that the changes are minimal and actually will make matters worse. Now the European Central Bank, the supposedly ‘independent’ bank that is meant to be outside the political sphere, has weighed in with its ‘two bob’s worth’ which is ‘sometimes modernised to ‘ten cents worth’) (Source), which would be overstating its value. Nothing much ever changes in the European Union. They have bound themselves up so tightly in their ‘framework’ and rules and jargon that the – Eurosclerosis – of the 1970s and 1980s looks to be a picnic relative to what besets them these days. The latest input from the ECB would be comical if it wasn’t so tragic in the way the policy makers have inflicted hardship on the people (many of them) of Europe.Today’s blog post is Part 1 of a critique of the ECB’s input into the Stability and Growth Pact reform process that is engaging European officials at present. It is really just more of the same.

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IMF now claiming that Japan has to inflict austerity when the government’s current policy settings a maintaining stability

It was only a matter of time I suppose but the IMF is now focusing its nonsensical ‘growth friendly austerity’ mantra on Japan. In a recent interview, the former Portuguese Finance Minister now in charge of the IMF’s so-called ‘Fiscal Affairs Department’, Vitor Gaspar claimed that Japan is now in a precarious position and must start to impose austerity. Recall last week that I concluded that – The IMF has outlived its usefulness – by about 50 years (April 15, 2024). The current interventions from senior officials such as Gaspar only serve to reinforce that assessment. The problem is that they are still able to command a platform and a significant number of people in policy making circles actually believe what they say. It would be a much better world if the IMF and its toxic ideology and praxis just disappeared off the face of the Earth. Then we could send all the highly educated officials to thought reassignment camps to allow their considerable intellectual capacity to search for cures to cancer or whatever.

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Why is Brussels supporting Ukraine?

It’s Wednesday, and as usual I scout around various issues that I have been thinking about rather than write a consolidated analysis on one topic. Today, I consider the question of why the EU elites are spending billions supporting the Ukraine government against Russia. They claim that Russia poses a major threat to European freedom but given the superior Russian military machine has not taken much territory after 783 days of war I conclude that such narratives are fanciful and deliberately being advanced to hide true motives. I also consider the situation in the Middle East and then offer today’s music segment to restore our peace of mind.

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The IMF has outlived its usefulness – by about 50 years

The IMF and the World Bank are in Washington this week for their 6 monthly meetings and the IMF are already bullying policy makers around the world with their rhetoric that continues the scaremongering about inflation. The IMF boss has told central bankers to resist pressure to drop interest rates, even though it is clear the world economy (minus the US) is slowing quickly. It is a case of the IMF repeating the errors it has made in the past. There is a plethora of evidence that shows the IMF forecasts are systematically biased – which means they keep making the same mistakes – and those mistakes are traced to the underlying deficiencies of the mainstream macroeconomic framework that they deploy. For example, when estimating the impacts of fiscal austerity they always underestimate the negative output and unemployment effects, because that framework typically claims fiscal policy is ineffective and its impacts will be offset by shifts in private sector behaviour (so-called Ricardian effects). That structure reflects the ‘free market’ ideology of the organisation and the mainstream economic theory. The problem is if the theory fails to explain reality then it is likely that the predictions will be systematically biased and poor. The problem is that the forecasts lead to policy shifts (for example, the austerity imposed on Greece) which damage human well-being when they turn out to be wrong.

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Latest European Union rules provide no serious reform or increased capacity to meet the actual challenges ahead

It’s Wednesday and we have discussion on a few topics today. The first relates to the new agreement between the European Parliament and the European Council that was announced on February 10, 2024, which purports to reform the fiscal rules structure that has crippled the Member States of the EMU since inception. The reality is that the changes are minimal and actually will make matters worse. I keep reading progressives who claim the EU fiscal rules are no longer operative. Well, sorry, they are and the temporary respite during the pandemic is now over and the new agreement makes that very clear. I also express disappointment that high profile progressives continue to misrepresent Modern Monetary Theory (MMT) as they advance their own agenda, which effectively provides support to the sound finance narratives. Then some updated health data which continues to support my perspective on Covid. And then some anti-fascist music. What’s not to like.

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Apparently the bond vigilantes are saddling up – on their ride to oblivion

When I was in London recently, I was repeatedly assailed with the idea that the Liz Truss debacle proves that the financial markets in Britain are more powerful than the government and can force the latter to comply with lower spending and lower taxes. It seems the progressives have a new historical marker which they can use to walk the plank into conservative, sound finance mediocrity. For decades it was the alleged ‘IMF bailout of the Callaghan government in 1976’ when Chancellor Dennis Healey lied to the British people about running out of money and needing IMF loans to stay afloat. They, of course, never needed any loans but Healey and Callaghan knew the people wouldn’t know that and they used the fiction as a vehicle to keep the trade unions in a subjugated position. That lie has resonated for years and has been a principle vehicle for those advocating smaller government, more privatisation, and more handouts to the top-end-of-town while at the same time cutting welfare payments to the poor, killing the national health system, degrading public utilities, transport and education and all the rest of it. Well now that gang, which now rules the Labour Party in Britain has a new fiction – the ‘Truss surrender to the markets’. And the logic is spreading elsewhere with lurid claims emerging that the so-called bond vigilantes are saddling up to force the US government broke.

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British Labour Party no longer fit for purpose

It was interesting to spend a few weeks in London recently and catch up with friends and research colleagues. It always focuses the mind on issues when one is in situ rather than gazing at data and reports from afar. My view of British Labour as being incapable of providing the British people with a progressive solution to the poly crisis the nation confronts has strengthened in the last few weeks and was emphasised once again by the decision of the leadership to backtrack on its £28 billion green investment strategy – its second U-turn on this key policy in the last few years. Touted as making Britain “A fairer, greener future” for Britain, “Labour’s Green Prosperity Plan” certainly differentiated it somewhat from the ruling Tories. Now that differentiation has been abandoned and the Labour politicians are claiming that “Labour’s fiscal rules … [are] … more important than any policy”, which is about as moronic as it gets. More of the same from the so-called political voice of the working class. I told an audience in London a few weeks ago that I considered the ‘institutions’ that had been created in the late C19 and into the C20 to give political voice to the working class had past their use-by date and were no longer fit for purpose. The British Labour Party is one such institution and it has been so captured by ‘conservatism’ of the worst type (sound finance etc) that it no longer is capable of delivering sustainable prosperity.

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