The ECB cannot go broke – get over it

CNBC’s Head of News, one Patrick Allen produced this article (May 10, 2012) – European Central Bank Leveraged Like Lehman – which several readers E-mailed to me suggesting that there was a problem that had to be addressed and would prevent the ECB funding member state deficit increases in pursuit of growth. The only problem I am afraid to say is the “author” doesn’t know much about the subject that he is writing about. This, sadly, in a general problem out there in commentary land. The article was in fact reporting the views of one Satyajit Das who gets a lot of airtime on national radio in Australia and elsewhere but perpetuates many of the mainstream myths about the way the monetary system operates and its limits and propensities. Das mixes factual statements (which I agree with) with causalities and reasoning (which I do not agree with). The journalists then build their stories based on an uncritical precising of so-called experts like Das and the myths then spread. Let us be absolutely clear. There is no meaningful comparison between the ECB and Lehman or any central bank and any private bank. Further, the ECB cannot go broke.

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The myths that abound in Federal Budget Papers

Last night’s Federal Budget in Australia proved once again how dominant the macroeconomic myths are in policy development. You can read my pre-Budget comments – Budget 2012: a recipe for disaster – and apart from the 2011-12 deficit being larger than the Government planned as a result of the slowing economy undermining its estimated tax revenue (in other words, the Government was overly optimistic in its forecasts last year) I would not have written much different after seeing all the Budget documents. It remains the largest fiscal consolidation attempted in one fiscal year (equivalent to 3 per cent of GDP) at a time that GDP is growing around 2.5 per cent.and I cannot see private spending growth picking up to fill the gap. Outcome – a movement towards recession. Conclusion – poor fiscal management. But the Budget Papers that the Government releases are always interesting reading and one day I plan to trace the evolution of the shifts in macroeconomic ideology through the way the papers are presented (format, tables, and narratives). There you learn what the economists in Treasury think and the ideas espoused are generally applicable to the international debate given that the tentacles of the dominant paradigm of the day spread widely. In Budget Paper No 1, Statement 4 – Building Resilience Through National Saving we are provided with a demonstration lesson of how a fiat monetary system does not work and a classic depiction of the way the mainstream narrative deceives the citizens.

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Australian government about to deliver a 5000-odd word suicide note

Today has been a busy pre-Budget night day (the Treasurer delivers the 2012-13 Budget tomorrow night). I was invited to write an Op Ed for the ABC’s The Drum – a site which explores news and analysis in more detail than the usual 750 word newspaper column. The Drum column is reproduced below. I have also been wondering about the implications for Europe and beyond of the election outcomes in France and Greece. I suspect the latter will be more interesting given Hollande will be unlikely to rock the boat too much. But I need to read more of the French literature that has emerged in the last 24 hours to really get a feel for what is likely to happen there. I will have more to say about the Australian federal budget when it is actually unveiled tomorrow night but it looks like being the case that Australian government is about to deliver a 5000-odd word suicide note.

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Saturday quiz – May 5, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Oh Ireland, if only you were growing

I regularly check the data for Ireland to see how she is going, given that the Irish government was the first to impose the austerity solution in early 2009 – that is, three years ago. I read yesterday that “of the countries that were in trouble, I would say Ireland looks as if it’s the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again”. That created some cognitive dissonance for me. Was I dreaming when I last looked at the Irish national accounts data? Surely, I hadn’t made a mistake when I concluded that the last two quarters of 2011 recorded negative growth as Irish exports slowed in the wake of the emerging double-dip recession in Britian? When I reviewed the data today, it seems that Ireland is still going backwards and people are becoming poorer. Claims that Ireland’s austerity approach provides a model for other nations to follow because it produces growth cannot be sustained from the data. But if only it were true … Oh Ireland, if only you were growing.

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Debunking myths

My friend Sean Carmody, sometime commentator and always obstinately objective, introduced me to this work – The Debunking Handbook – written by a physicist and psychologist. It serves to focus thoughts because it considers the pitfalls that arise in an exercise aimed at debunking myths and strategies that might be deployed to effectively achieve this aim. The authors appear to be motivated by the climate change debate but the discussion is equally effective in the context that I work within – how to convince people that mainstream macroeoconomics is largely devoid of meaningful content and predictive capacity.

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Fiscal austerity obsession – that’s a dud policy!

I have been reading the latest report from the International Labour Organization (ILO) – World of Work Report 2012 – which documents the disastrous trends in employment that are expected as fiscal austerity grinds economies into the ground. The ILOs Social Unrest Index has risen in 57 out of 106 nations and negatively related to employment fortunes. The ILO also found that “deregulation policies … fail to boost growth and employment” and “there is no clear link between labour market reforms and employment levels”. They conclude that the “austerity trap” is destroying jobs and that concerted effort is needed to ensure that “wages grow in line with productivity” and that there should be a “coordinated increase in the minimum wage”. I will analyse this report in more detail another day because it is schizophrenic in approach reflecting the struggle within the ILO between the neo-liberal influences that have grown over the last few decades and the more balanced labour market understandings that come from a thorough understanding of the importance of labour market institutions and government oversight and a keen appreciation of the empirical dimensions. But today I am going to briefly reflect on an extraordinary interview – Former Reserve Bank Governor bemoans state of politics and inequity – on the ABC current affairs program – 7.30 – last night, where the former RBA governor let fly at budget surplus obsessions and demanded more expansionary fiscal and monetary policy interventions at a time when demand is faltering and growth falling. And some other snippets appear afterwards.

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Cancer is bad but budget deficits are generally good

The US Bureau of Economic Analysis released the first-quarter 2012 National Accounts data for the US last week (April 27, 2012) – see the News Release which showed that the US economy has slowed in the last three months, largely due to a decline in the government contribution. Annualised Real GDP growth was 2.2 per cent down from 3 per cent in the December 2011 quarter. The economy is now growing under trend and the signs are not good. If the politicians actually get around to imposing austerity then the US economy will join the UK in its race to the bottom with the other competitor being the Eurozone. The latest news from the Eurozone is that Spain will become the epicentre of the crisis in the coming weeks/months. Greece is yesterday’s news and the continuing deterioration of the Spanish economy – one considerably larger in importance than Greece – is focusing minds. The problem is that the reaction of the Euro elites is to inflict more austerity onto Spain which will – as night follows day – cause the situation to worsen. But still we read from leading US government officials that budget deficits are like cancer and will destroy countries “from within”. The only thing I can say about that astounding demonstration of ignorance is that I cannot think of a situation where cancer is good. But generally, budget deficits generate benefits to the nation that is enjoying them.

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Are the Euro bosses going all growth on us?

I am still in Darwin today and have limited time to write. It seems, however, that the Euro bosses have gone all growth on us. For non-English speakers – going all growth on us – is terrible slang meaning are they becoming enamoured with the idea that growth is important. Apparently, austerity is “so yesterday”, if not “last week” and the mantra is now about “growth compacts”. Forget the fiscal compact which most of the EU states have signed up for which if realised will drive their economies into the ground so harsh are the proposed rules on budgets and public debt. Now there is a growth compact proposal – which Mario has suggested Europe follows. Angie is right in behind him – has Madame Austerity – has gone all growth on us too?. It has been a bad week for the Troika (IMF, ECB, EU) – what with the UK now officially in a double-dip due to the deliberate strategy of its government (emulating the EMU) and across the Channel, the impending success of François Hollande is now becoming obvious. Merkoz will now have to morph into Mollande. And while on “olland”, the Dutch government also collapsed as a direct result of the backlash over the fiscal austerity. Apparently, the likely new French president is not particularly keen to join the fiscal austerity conga line although all his public statements to date would suggest he is committed to the SGP principles. So what is this all about? Are the Euro bosses going “all growth on us”? Answer: there will be no “growth compact” other than in the title of some EU Summit paper. The growth spin is mounting but the EU elites remain firmly wedded to doing everything they can to undermine growth.

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When does the experiment end?

It is a public holiday in Australia today remembering our First-World War soldiers who died during the ill-fated invasion of the Gallipoli peninsular in Turkey. Anzac Day is part of the Australian legend about heroism and the ideals of mateship that are (dubiously) prominent in our culture. However, this part of our history (and legend) is now being scrutinised by historians and more documentary evidence emerges and it is clear that the conventional history of the campaign that Australia was fighting a heroic struggle in service of the British Empire is not supportable (for example, see this Op Ed for one of the alternative viewpoints that make the Gallipoli story rather mirky). I also have a lot of travel coming up later today and so my blog will be relatively short. I have been rounding up the latest data – surveys, national statistical office releases, bank statistics – from Europe and the UK, to see how the fiscal austerity experiment is actually going. The neo-liberal proponents of austerity all promised us that the private sector was ready and willing to fill any spending gap left by government net spending cuts (and then some) so that the austerity would actually increase growth. Any reasonable person disputed that promise pointing out that spending equals income and private spending was going no-where fast. The evidence is increasingly supporting the latter view. The question is – given the massive damage the austerity policies are having is – when does the experiment end?

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The left – entranced by the fiscal austerity mantra sold to them by the conservatives

There is increasing evidence that the manic obsession with fiscal austerity instead of employment-generating growth is not only further de-stabilising the EU economy and foreshadowed the next chapter in the crisis but is also undermining the political accords that were the rationale in the first place for political and economic “integration”. The news from France yesterday that Marine Le Pen received close to 20 per cent of the first-round vote in the Presidential election and the impending collapse of the Dutch coalition government as Geert Wilders torpedoed the fiscal austerity negotiations – outrightly refusing to agree to the cuts, tells me that the political scene is polarising and extreme right candidates are coming to the fore. The mainstream left parties stand indicted for embracing the neo-liberal economic myths and then trying to sell a softer vision for Europe. The reality is that Europe will only be able to implement and sustain progressive social agendas if the neo-liberal malaise is abandoned. That will mean that nations abandon the Euro and use fiscal policy to promote employment growth. However, the various political outcomes that we are witnessing in Europe indicate that we can expect no leadership from the mainstream left on any of these issues. They are entranced by the fiscal austerity mantra sold to them by the conservatives. Which gives credibility for the incredulous demands of Le Pen and Wilders!

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Australian PM should take up frisbee

The ABC News today reported that – Newcastle hosts frisbee championships – which means the national frisbee championships will be in my town this week and I will be around. Apparently the championships involve “flinging a frisbee between players on a pitch similar to a football or soccer field” and then “catching the disc in the endzone”. I suggest the Australian Prime Minister take up the sport. It seems an innocuous pastime and she surely couldn’t be any less skilled at it than she is at managing the economy. Her speech yesterday in Perth certainly established she has no understanding of macroeconomics or if she does, then she is deliberately misleading us. Her Finance Minister was also fully engaged in the misinformation exercise about the state of the budget. But then she is in solid company. The German Bundesbank has made public statements telling nations crippled by self-imposed fiscal austerity to forget about growth and balance their budgets. The ugly German stereotype is unfortunately reinforced by these sort of public interventions. And, finally, we have the genius who yesterday was advocating widespread cuts in welfare entitlements today out in the Op Ed pages suggesting that countries who exert their sovereign rights over multinationals are committing suicide despite the particular country in focus having real GDP growth rates that most other nations envy. Its all in a day of neo-liberal madness.

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They are all in the same mindless club

The Australian Bureau of Statistics (ABS) released the latest – Building Activity data today (April 18, 2012) which shows that in the December 2011 quarter real activity continued to contract. This is the most recent data release that reinforces the conclusion that the Australian economy is starting to slow down and is now well below the pre-crisis trend growth rates of somewhere between 3 and 3.5 per cent. Within this environment we would expect the federal government as the currency-issuer to be showing leadership and providing fiscal stimulus to support higher growth and allow the private sector to continue deleveraging given their excessive debt levels. The problem is that governments these days do not seem to know what good economics is. Our government thinks responsible fiscal management is to deliberately undermine spending growth (when inflation is falling) and push unemployment up. The only thing that we can say about that is that they are in good company. The governments that are imposing damaging fiscal austerity on their economies are in the same mindless club.

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Deny the facts when they contradict the theory

I was reading a working paper from the Bank of International Settlements the other day – The “Austerity Myth”: Gain Without Pain? (published November 2011) and written by Roberto Perotti. The author can hardly be described as non-mainstream and has collaborated with leading mainstream authors in the past. His work with Harvard’s Alberto Alesina in the 1990s has been used by conservatives to justify imposing fiscal austerity under the guise that it would provide the basis for growth. In this current paper, Roberto Perotti tells a different story – one that has been ignored by the commentators who still wheel out his earlier work with Alesina as being the end statement on matters pertaining to fiscal austerity. In his current work, we learn that the conditions that allowed some individual nations in isolation to grow are not present now and that his current research casts “doubt on … the “expansionary fiscal consolidations” hypothesis, and on its applicability to many countries in the present circumstances”. Why don’t the conservatives quote from that paper?

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OECD – all smoke and mirrors

I am taking a brief rest from the Eurozone crisis – which will probably blow up again in the coming weeks as the Spanish austerity drives the bond markets in the opposite direction than was intended by the Troika – and the latter call for even harsher cuts to unemployment benefits at the same time as their austerity policies force unemployment to continue its inexorable rise upwards. Today, I have been reading the latest OECD Report (April 12, 2012) which is attracting attention – Fiscal Consolidation: How much, how fast and by what means?, which is part of their Economic Outlook series. It is really a disgraceful piece of work but will give succour to those politicians who are intent of vandalising their economies and making the disadvantaged pay more and more for the folly of the elites. It is an amazing situation at present. I am also reading a book – Pity the Billionaire – which I will review in the coming week. It examines how it is that the the popular response to the crisis which was caused by an excess of “free markets” is to attack government regulation and intervention and demand even freer markets. The OECD are part of the battery of institutions that fuel this crazy right-wing conservative response (the “unlikely comeback” in Pity the Billionaire terms) to the crisis through their highly tainted publications.

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Saturday quiz – April 14, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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A fiscal collapse is imminent – when? – sometime!

Sometimes I wonder how it is that a bright person can stick to a story for so long when the evidential record is so contrary to the predictions that their story keeps forcing them to make. Then again the predictions are often couched in terms of “might” and “We don’t know what will trigger such a wave of selling” (don’t know!) and “interest rates would shoot up” (would!) and “if the number of people trying to sell them surges” (if) and “inflation would erode” (would! again). So nothing concrete – just a series of assertions. So such a person is never really confronted with the reality that they know “shite” (a word I read in a book by an Irish author I have just finished – In the Woods by Tana French – recommended). This sort of denial is an overwhelming characteristic of the mainstream of my profession. I would love to be proved wrong if private households and firms do turn out to be Ricardian and fiscal austerity leads to a boom with full employment. I would abandon my MMT leanings within a flash and get on the prosperity bandwagon. Why is it that the mainstream, which has the dominant influence on policy makers – and therefore get to see their theories applied in the real world – not adopt a similar position. The predictive capacity of their paradigm is next to zero!

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IMF struggling with facts that confront its ideology

I haven’t a lot of time today (travel) but I thought the latest offering of the IMF was interesting. In their latest World Economic Outlook (April 2012 – which will be released in full next week) they provided two advance chapters – one – Chapter 3 – Dealing with Household Debt – demonstrates just how schizoid this organisation has become. They are clearly realising that their economic model is deeply flawed and has failed to predict or explain what has been going on over the last five years. That tension has led to research which starts to get to the nub of the problem – in this case that large build-ups of debt in the private domestic sector (especially households) is unsustainable and leads to “significantly larger contractions in economic activity” when the bust comes. They also acknowledge that sustained fiscal support is required to allow the process of private deleveraging to occur in a growth environment. But then their ideological blinkers prevent them from seeing the obvious – that sustained fiscal deficits are typically required and that in fiat monetary systems this is entirely appropriate when . Which then leads to the next conclusion that they cannot bring themselves to make – the Eurozone is a deeply flawed monetary system that prevents such fiscal support and should not be considered an example of what happens in fiat monetary systems. Some progress though!

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Governments should not worry about deficits

Another relatively short blog coming up today – it is still holidays here and very sunny. There was an interesting Bloomberg article the other day (April 5, 2011) – Don’t Worry About Deficit That Will Heal Itself – which although containing some conceptual flaws arrives at the correct conclusion. That governments would be far better pursuing real goals – such as ensuring there is adequate infrastructure investment, putting into place appropriate climate change initiatives and maintaining high levels of bio-security – that becoming obsessed with fiscal horizons that they have very little control over. Further, in attempting to control these horizons, governments tend to err on too much austerity (for example, the UK and the Eurozone), which not only undermines growth but also thwarts their deficit reduction goals (via the automatic stabilisers). The lesson to be drawn from all of this is that – Governments should not worry about deficits.

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Sociopaths, closed minds and a bit of Mayan cosmology

Yes, and more. There was an article in the EU Observer this week (April 3, 2012) – EU ‘surprised’ by Portugal’s unemployment rate – which I had to re-read a few times to check that I was actually reading the words correctly. The dialogue presented was so shocking that it raises fundamental questions about how one is interact with the economics debate. Then I read some more articles this week which investigated why mainstream economics retains its dominance in the face of its catastrophic failure to explain anything of importance to humanity. Closed minds are very resistant to change especially when socio-pathological dimensions are present. Which led me to investigate Mayan cosmology after being accused of being a practitioner of the art! Overall, another week in the life of a Modern Monetary Theorist (MMTist) – par for the course really.

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