There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

The Australian federal election campaign is in full swing and last night the federal opposition in Australia staged their policy launch for the federal election to be held on August 21, 2010. This is a campaign where both sides of politics are running on their respective claims to be better at implementing fiscal austerity measures. It has become a matter of who is promising the biggest budget cuts the earliest. It has made the parties barely distinguishable in terms of their overall policy appeal and has rendered both unfit to govern this country. It used to be said that procyclical fiscal policy was destabilising. This was typically in the context of neo-liberals claiming that expansionary policy always came too late and added to private spending that was already on the rebound and thus increased the inflation risk. But the reverse doesn’t appear to apply for the mainstreamers. Cutting public spending when private spending is weak is being held out as virtuous and the only way to engender growth. This inconsistency exposes the ideological nature of the austerity measures, which reflect as one UK commentator said recently – a desire to complete the neo-liberal demolition of the welfare state started 30 years ago but still incomplete or a reflection that the deficit hawks are total lunatics.

Remember back last year when the predictions were coming in daily that Japan was heading for insolvency and the thirst for Japanese government bonds would soon disappear as the public debt to GDP ratio headed towards 200 per cent? Remember the likes of David Einhorn – see my earlier blog – On writing fiction – who was predicting that Japan was about to collapse – having probably gone past the point of no return. This has been a common theme wheeled out by the deficit terrorists intent on bullying governments into cutting net spending in the name of fiscal responsibility. Well once again the empirical world is moving against the deficit terrorists as it does with every macroeconomic data release that comes out each day. I haven’t seen one piece of evidence that supports their view that austerity will improve things. I see daily evidence to support the position represented by Modern Monetary Theory (MMT). Anyway, there was more evidence overnight that I thought should be mentioned and relates to the idea that “the government is the last borrower left standing”.

Last year it was Reinhart and Rogoff being rammed down our throats as the deficit terrorists were claiming that governments in the advanced nations were on the cusp of defaulting on their sovereign debt. Their book was relentlessly misused by commentators and academics (like Niall Ferguson and others) and even the authors themselves left things ambiguous in interviews. The fact is that their research (if we dare call it that) is applicable to only a narrow set of situations none of them relevant in the contemporary setting. More recently, the deficit terrorists have been holding up a new effigy – a new hero. Another Harvard economist – Alberto Alesina. What is it about that place? Alesina has allegedly provided a solid theoretical case to support the absurd claims by the austerity proponents that cutting the very thing that is supporting growth at present will not damage that growth. He is now the new hero. Well it is another scam job! He chooses to use flawed orthodox textbook models to assert his case without mind to the situational context and other realities. He is no hero but just another mainstream economist seeking celebrity with zero substance to offer and very little else to sell other than a headline.

The OECD is held out by policy makers and commentators as an “independent” authority on economic modelling. The journalists love to report the latest OECD paper or report as if it means something. Most of these commentators only mimic the accompanying OECD press release and bring no independent scrutiny of their own to their writing. Government officials and politicians also quote OECD findings as if they are an authority. The reality is that the OECD is an ideological unit in the neo-liberal war on public policy and full employment. They employ all sorts of so-called sophisticated models that only the cogniscenti can understand to justify outrageous claims about how policy should be conducted. In an earlier blog – The OECD is at it again! – I explained how the OECD had bullied governments around the world into abandoning full employment. Now they are providing the “authority” to justify the claims being made by the austerity proponents that cutting public deficits at a time when private spending is still very weak will be beneficial. The report I discuss in this blog is just another addition to the litany of lying, deceptive reports that the OECD publish. These reports have no authority – they are just GIGO – garbage in, garbage out!

The increasingly alarmist commentator Niall Ferguson was at it again the Financial Times (July 20, 2010) in his article – Have Keynesians learnt nothing?. The article has a simple presumption – we are getting scared of deficits and as a result inflation is inevitable. What? We are scared because we expect there will be inflation and so we will act accordingly and start pushing up wages and prices to defend ourselves in real terms. The result will be inflation. This is a playback of the so-called rational expectations literature which Ferguson proudly cites as his authority. The problem is that the theory is defunct – it never was valid and only a butt of depressed cultists still hang on to it as their religion because they learned it when they were young and in doing so lost their capacity to experience the joys of wider education. We really must feel sorry for them.

As governments around the world are setting about to scorch their economies with austerity programs very little opposition is coming from my profession. It is quite astounding to me that the more extreme elements (the Ricardian Equivalence theories) are holding sway at present. These notions have been discredited often (see my blog – Pushing the fantasy barrow for a discussion). Generally, the austerity push is not being supported by any credible economic theory which enjoys empirical support. I get the impression that policy makers are now altering settings in an ad hoc manner without any real understanding of how the economy works. It is a triumph of neo-liberal dogman. However, in terms of evidence-based critiques of the austerity push, Bloomberg Opinion published an interesting article (July 13, 2010) – U.K. Bust Needs Big Spender – written by UK academic Vicki Chick and author/debt activist Ann Pettifor (thanks BM). The Op Ed summarises a more detailed research paper which demonstrates that key assumptions of the austerity proponents do not hold over a long historical period. The short message is that things are going to get worse.

Tonight (Tuesday Boston time as I write) my very kind and gracious host took me to an early evening Ringo Starr and his All Starrs concert down on the waterfront. I never knew so many Beatles fans from the 1960s had survived the boredom. They were out in force tonight as he sang Yellow Submarine and other pop relics. The highlight of the evening was Edgar Winter (who is one of his all starrs) featuring on Frankenstein which he made a hit in 1972. But where do all these Beatles fans go during the day! Scary. And by the way, Rick Derringer who was in the original Edgar Winter Band was also in Ringo’s band tonight playing some nice guitar (if you like Gibson-motivated pop – I don’t). My host decided to call it an early night and I left with him – while Warren and his partner bopped on. A neat exit you might say! But Ringo at least provided some leadership – poppy and pretty soppy at that. But much better than our leaders of government are providing if the recent G20 declaration is anything to go by. They have just ceded leadership to the IMF – that unelected rabble. Stay tuned for things to get worse.

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.

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.