I am often sent E-mails asking me to explain succinctly (what my other explanations are not!) how public deficits finance saving. What does it mean? How does it work in a macroeconomic system? What is the difference between automatic stabilisers and discretionary budget dynamics? What would have happened if the government had not have increased the growth in spending? All these sorts of questions. So this short blog – to make up for yesterday’s ridiculously long blog – will cover those issues. It should clear up any outstanding issues about why deficits are important to underwriting growth.

A regular reader sent me a recent financial market report written by Tokyo-based economist Richard Koo which raises some interesting issues about the association between prolonged recessions and democracy. Koo has achieved some notoriety in the last decade or more by coining the term “balance sheet recession” to describe what happened to Japan during its so-called “lost decade”. He also applies the analysis to the present global economic crisis. While he is not a modern monetary theorist, he recognises the need for considerable fiscal intervention and the futility of quantitative easing. So this blog is about all of that.

I received a document today from one of the largest international investment banks in the world. One of its major offices is not far from where I am typing this right now in New York City. The document is a subscribers-only publication and so I cannot make it accessible here. But this blog discusses some of the contents of the document which might help readers who keep worrying about whether anyone important out there believes in the stuff that I write about. There is a constant undercurrent in the comments and private E-mails I receive that says that the treasurer, the central bank, the mainstream journalists and a host of other seemingly important people do not share my views on how the fiat monetary system operates. The issue then is one of credibility.

I am now in New York on business for the next few days then off south to the capital Washington. In this blog I want to outline the horrible scenario that everyone has been predicting would happen – the increasing fiscal deficits will increase taxation. I know that has been on our minds. I have reached the ineluctable conclusion that future taxation will increase as a direct consequence of the current deficits. The tax revenue gained by the government will also reduce future deficits. Wouldn’t it be preferable that we didn’t push future taxation up and instead controlled net government spending? If you believed that you would have rocks in your head. In this blog I will be also be discussing debt, inflation, and other nasties.

The euphoria over a 0.4 quarterly growth figure which translate into annualised GDP growth being at least 2.5 per cent less than would be required to keep the unemployment rate from rising should be attenuated by the fact that National Accounts data is very slow to come out. The picture it paints which conditions our current expectations and debates is old – at least 3 months old by definition. And it is sobering when amidst all the self-congratulation and applause for our strong export performance that newer data has come out today which suggests that GDP growth is probably now negative although we won’t find that out for three more months. Meanwhile the debt and deficits argument continues in the public debate. Here is an update.

Some readers have written in and asked about whether Norway behaves like a modern monetary economy after they read the New York Times article titled Thriving Norway Provides an Economics Lesson. The short answer is yes but this is a case that raises interesting issues about the way the government and non-government sectors interact and how sustained economic growth and high employment can be accompanied by a budget surplus. Yes, it is possible but atypical. In this blog I provide the explanation. We also encounter some very dodgy manipulation of data to push an ideological line! Not good.

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!

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.

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.

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.