Latest data – largest quarterly output decline in recorded US history – but Europe is worse

The US Bureau of Economic Analysis (BEA) released the – Gross Domestic Product, Second Quarter 2020 (Advance Estimate) – data last week (July 30, 2020). It shows that the US economy has declined by 9.49 per cent between the March- and June-quarters. On an annual basis the decline was 9.54 per cent. This is the largest quarterly contraction in recorded history. Consumption expenditure declined by 10.1 per cent in real terms and business investment by 17.4 per cent. The collapse in consumer expenditure was mostly concentrated in services (-22.6%), which reflected lockdowns and the unwillingness of consumers to continue normal practices. Personal saving as a percentage of disposable personal income jumped dramatically from 9.5 per cent in the March-quarter to 25.7 percent in the second quarter. That is a testament to the endemic uncertainty that the pandemic has created. The contribution of net exports actually rose, not because exports rose (their individual contribution was -9.38 points), but because of the slump in imports – a smaller leakage from the expenditure system (adding 10.1 points t growth!). Overall, there is no trend – just a massive mess. How the second wave of the virus impacts is anybody’s guess but lots more deaths and more disruption is certain.

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An old central banker trying to come to terms with MMT – not quite getting there

Last week (July 14, 2020), a former deputy governor of the Reserve Bank of Australia (RBA), Stephen Grenville wrote an article – Modern Monetary Theory and mainstream economics converging. The title suggests a gathering of minds between two paradigms – the degenerative mainstream macroeconomics and the emerging Modern Monetary Theory (MMT). I wouldn’t represent what is happening in that way. Convergence implies a harmonious process. The reality is that some of the mainstream economists have realised that their approach is deeply flawed and events over many years have demonstrated those flaws, while ratifying the empirical content of central MMT propositions. Our position has been consistent over 25 years. Now, the mainstream is fracturing and economists are trying to save face and remain relevant by suggesting, in various ways, that they knew all of the MMT insights all along, or variants on that theme. They didn’t. They were deeply opposed and hostile to key MMT insights that are now becoming widely acknowledged as correct. In trying to maintain this image of convergence, Stephen Grenville’s article, while quite insightful in many ways, misleads his readership and mispresents key MMT elements.

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Governments are now in an ideological bind

Today’s blog post is a draft for another deadline I have this week, this time writing for a European publication on the state of affairs in the Eurozone. I have four major pieces of work to finalise this week so, as in yesterday, I am using this time to progress those goals. For many regular readers it will be nothing new. But, putting the arguments together in this way might just provide some different angles for people who haven’t thought about things in this way before. Regular transmission will resume on Thursday (probably).

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Making better investment decisions using MMT as a knowledge base (long)

This is a draft I am working on for a leading US publication. For many regular readers it will be nothing new. But while there are several things I am probing at the moment which I would normally use my blog space to tease out, time is short this week (really) and so I have to combine things. In other words, the blog space and time today is being used to fulfill commitments with very tight deadlines. But, putting the arguments together in this way might just provide some different angles for people who haven’t thought about things in this way before.

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We can have full employment again in a green world

Last Saturday, the Weekend Australian, Rupert Murdoch’s daily national newspaper, had a relative Modern Monetary Theory (MMT) avalanche, with two core MMT-style articles published and two that were supportive rather than hostile. That tells you something about the way the world is shifting. I have received a bit of flack for publishing an Op-Ed piece in that newspaper from those who style themselves as Leftists. It is the same old argument – dealing with the devil. And the same old reply – if you want to influence policy then you have to talk to those who make policy. It is easy plotting revolutions over lunch. There has been a lot of groundwork laid over the last several months to bring people into the conversation. It is quiet stuff. Discreet. And as things unfold I will make some of the developments public. At present, all I can say is that I have a document before the Prime Minister today and there is a lot of behind-the-scenes workshops/briefings going on at state-level. And, while activists spend a lot of time ‘pressuring’ this person and that person on social media, the big shifts that are going on at present, including the publication of Noel Pearson’s piece and my article, are not being helped by aggressive social media confrontations. Sometimes it is better to work in a subtle way and exploit networks where they are available. That is not to say that activism to promote MMT is not appreciated and helpful. But we do need to pick our path. Anyway, a number of people asked me to publish my article here because they cannot get behind The Australian’s paywall. So here is the penultimate version which is a few hundred words longer than the actual article, which I cannot provide due to copyright restrictions. I also cannot provide Noel Pearson’s accompanying and complementary article but it was magnificent.

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Apparently the government has no money but then has plenty

Things are obviously getting desperate out there in financial media commentary land. If one could express written text in graphical terms then there are a number of financial journalists out there that look – like a rabbit caught in the headlights – that is in a state “of paralyzing surprise, fear, or bewilderment.” A good example of this increasingly observed syndrome is an article in The Australian newspaper today (June 30, 2020) by Adam Creighton – Never forget that governments have no money – it is always ours (subscription required). This sort of journalism is becoming an almost daily occurrence as it becomes obvious that capitalism is now on state life support systems and the extremities of government intervention are demonstrating very clearly what Modern Monetary Theory (MMT) economists have been saying – and the only ones that have been saying it – for 25 years or so. I often note that Japan has already pushed the fiscal and monetary policy parameters beyond the limits most countries have explored in peacetime and mainstream economists have systematically predicted various scales of disaster and have always been wrong. Now all countries are at extremes and still no fiscal disaster. But the mainstream mouthpieces – these financial journalists who seem to think the stuff they read in first-year text books from mainstream economics programs are in same way the basis for expertise and knowledge – are in advanced states of dissonance. Drivel follows.

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Governments should do everything possible to avoid recessions – yet they don’t

In May 2020, the IMF published a new Working Paper (No 20/73) – Hysteresis and Business Cycles – which provides some insights into what happens during an economic cycle. The IMF are somewhat late to the party as they usually are. We have known about the concept and relevance of hysteresis since the 1980s. In terms of the academic work, I was one of the earliest contributors to the hysteresis literature in the world. I published several articles on the topic in the 1980s that came out of my PhD research as I was searching for solutions to the dominant view in the profession that the Phillips curve constraint prevented full employment from being sustained (the inflation impacts!). The lesson from this literature in part – especially in current times – is that governments should do everything possible to avoid recessions. The hysteresis notion tells us clearly that the future is path dependent. The longer and deeper the recession, the more damaging the consequences and the longer it takes to recover while enduring these elevated levels of misery. Organisations like the IMF have never embraced that sort of reasoning, until now it seems. They certainly didn’t act in this way during the Greek disaster. But, better late than never.

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The British government did not approach insolvency in March 2020

Insolvency is a corporate term which refers to a situation where a company is unable to pay contractual liabilities when they become due. From a balance sheet perspective, it means that the assets are valued below the liabilities. The term cannot be applied to a national government that does not issue liabilities in foreign currencies. Such a government can always meet its nominal liabilities irrespective of institutional arrangements it might have put in place to create contingent flows of numbers from one ‘box’ (account) to another ‘box’. Those arrangements do not override the intrinsic capacity of the legislator. So when the British press went crazy the other day reporting comments made by the Bank of England governor that the British government was on the cusp of insolvency, they did the British public a disservice. Donald Trump would have been finally justified in accusing the media of pushing out ‘fake’ news.

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The French inferiority complex

The – Battle of Sedan – in September 1870, was a decisive turning point in the relationship between France and Germany, which still resonates to this day and has influences many subsequent historical developments. When I was researching my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – I read a book by the French linguist and historian – Claude Digeon – which was a published form of his PhD Thesis. He analysed the impact of the loss at Sedan to the Germans on the French intellectual culture. He conjectured that between the loss in 1871 and the start of the First World War, France suffered from a “‘hantise chronique'”, une obsession pour l’Allemagne ou, tout du moins, pour une représentation de l’Allemagne (a ‘chronic obsession’, an obsession about Germany or, at least, about a representation of Germany). The same sense of inferiority continues to drive French behaviour, particularly in relation to Germany. It has created two negative dynamics: (a) it has increasingly divided the French population and opened the door to the Far Right to influence policy; and (b) led to France trying forever to command the world stage which has led to the Eurozone disaster.

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Government goes missing in the European Union

On Tuesday (June 9, 2020), Eurostat published the March-quarter national accounts data for the EU and the Eurozone – GDP down by 3.6% and employment down by 0.2% in the euro area – which revealed that the decline in GDP “were the sharpest declines observed since time series started in 1995”. Of course, Europe went into this crisis in poor shape. Eurostat noted that “In the fourth quarter of 2019, GDP had grown by 0.1% in both the euro area and the EU.” So it was barely crawling anyway due to the austerity bias that is built into the monetary system. The larger Member States such as France and Italy (-5.3 per cent) and Spain (-5.2 per cent) are in terrible shape. In the last few weeks, we have been hearing and reading a lot of hype from European politicians about ‘Hamilton moments’ as various euro figures are bandied around about government support for the European economy. Emma Clancy’s article (June 6, 2020) – Behind the Spin on the EU’s Recovery Plan – is sobering if you are drunk on all the Euro elite hype. There isn’t really a recovery plan at all nor any significant shift in attitudes towards creating a functional federation, the only structure that will see Europe break free of this austerity bias. And as I examined the Eurostat data in more detail something very stark was apparent.

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Why do currency-issuing governments issue debt? – Part 2

This is Part 2 of the two-part series which focuses on the question: If governments are not financially constrained in their spending why do they issue debt? Part 1 focused on the historical transition of the monetary system from gold standards to the modern fiat currency systems and we learned that the necessity to issue public debt disappeared as fixed exchange rates and convertibility was abandoned in the early 1970s. However, there are many justifications for continuing to issue debt that circulate. In this Part, I consider those justifications and conclude that the on-going practice of government’s issuing debt to the non-government sector is primarily an exercise in corporate welfare and should not be part of a progressive policy set.

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Why do currency-issuing governments issue debt? – Part 1

One question that continually comes up when I do interviews is this: If governments are not financially constrained in their spending why do they issue debt? Usually, the question is expressed in an incredulous tone, meaning that the person asking the question considers this to be the gotcha moment, when they pierce the impeccable logic of Modern Monetary Theory (MMT) and show it for what it is – a sham. One problem is that there is a tendency to confuse motivation with function and many people sympathetic to MMT reduce it to simple statements that belie the reality. One such statement, relevant to this topic, is that government’s issue debt to allow the central bank to maintain a specific short-term interest rate target. Central banks have traditionally used government debt as an interest-rate maintenance tool. But that is a function of the debt rather than being the motivation for issuing the debt in the first place. So we explore those differences today as a means of clarifying the questions and confusions around this issue. This is Part 1 of a two-part series, which I will finish tomorrow.

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ECB asset purchase programs are the only thing keeping Member States solvent

I haven’t had time yet to fully work through the decision by the European Commission yesterday to provide grants and loans to struggling Eurozone countries. I will comment on that when I have had time to understand the implications and be in a position to provide fair comment. It seems to be a vastly inadequately response in quantum, on top of an existing lack of fiscal support. But more on that another day. Today, I am investigating the latest data from the ECB. On May 26, 2020, the ECB released its bi-annual – Financial Stability Review, May 2020 – which seemed to excite some journalists to advance narratives that ‘sovereign debt’ investors (although none of the Eurozone nations are sovereign) will soon become spooked by the sharp rise in public debt levels in Europe, which will “threaten to undermine private-sector spending” and stall any growth prospects. The quote is from a Financial Times article (May 26, 2020) – ECB warns of challenge for eurozone from soaring public debt – which followed the release of the ECB’s Review. The elephant is, of course, the ECB assets and its ability to control all yields on public debt at will.

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The Australian government is increasingly buying up its own debt – not a taxpayer in sight

In the wake of the $A60 billion bungle, the Australian government has turned its attention to creating smokescreens. Yesterday (May 25, 2020), the Treasurer released a statement – Temporary changes to continuous disclosure provisions for companies and officers – which effectively allows corporations to withold information from the public and investors about the state of…
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Britain confounding the macroeconomic textbooks – except one!

Remember back just a few months ago. We are in Britain. All the Remainers are jumping up and down about Brexit. We hardly see anything about it now as the UK moves towards a no deal with the EU. Times have overtaken all that non-event stuff. Now the developments are confounding the mainstream economists – again. There will be all sorts of reinventing history and ad hoc reasoning going on, but the latest data demonstrates quite clearly that what students are taught in mainstream macroeconomics provides no basis for an understanding of how the monetary system operates. All the predictions that a mainstream program would generate about the likely effects of current treasury and central bank behaviour would be wrong. Only MMT provides the body of knowledge that is requisite for understanding these trends.

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MMT critiques need to get more inventive – it’s getting boring

It is getting to the stage that one gets bored reading critiques of Modern Monetary Theory (MMT) by leading mainstream economists. As the critiques have escalated over the last few years, I can safely say that not one has really said anything: (a) that the core body of work we have developed hasn’t already considered and dealt with – about 20 years ago!; (b) which means, none of the long line of the would be demolition team has achieved their aim. And when they write Op Ed articles that basically just say – oh, MMT economists ignore “the demand for money” and “MMT falls flat on its face” when inflation emerges as part of the emergence out of this crisis, I get bored. Really, is that the best they can come up with. The latest entreaty in the boring stakes comes from Willem Buiter, who seems to have left the commercial banking sector and gone back into academic life. His latest Op Ed – The Problem With MMT (May 4, 2020) – is not his best work. Boring is the best descriptor. Why did he bother? Did he think he had to establish his relevance. He would have been better concentrating on the archaic mess that his mainstream framework is in. Anyway, sorry to end the week like this.

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The advanced nations should take the lead of Pakistan in job creation

Last Thursday (April 30, 2020), the US Department of Labor’s – Unemployment Insurance Weekly Claims Report – showed a further 3,839,000 workers filed for unemployment benefits in the US, taking the cumulative total since March 14, 2020 to 30,589,000. In a labour force of 164 million odd, that implies the unemployment rate is already around 22 per cent. The highest rate endured during the Great Depression was 24.9 per cent in 1933, which prompted the US President to introduce the major job creation program to stop a social disaster – the New Deal. History tells us that the major job creation programs (starting with FERA then morphing into the WPA) were opposed by the conservative (mostly) Republicans in the Congress. As is now! It wasn’t just the unemployment that mattered. Hours of work were also cut for those who maintained their jobs and some estimates suggest over 50 per cent of America’s labour force were underutilised in one way or another (read David Kennedy’s 2001 book for a vivid account of this period). The problem now is that the US has a Presidency that is unlikely to take the bold steps that Roosevelt took in the 1930s, even though the latter was a fiscal conservative and the former does not appear to be so inclined. However, some nations are leading the way – and they put the more advanced nations to shame in this regard.

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The European Commission non-stimulus is a waiting game before new austerity is imposed

Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.

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Why does anyone read the New York Times?

It is Wednesday and I offer a few snippets for readers today. I have a number of projects on the go at present and time is short today. Apart from introducing a stunning guitar player (now long dead) that very few people have ever heard of but is one of my favourites (what does that say?), I ask the question: Why does anyone read the New York Times? I also announce the development and publication of our latest Employment Vulnerability Index (EVI) now in its third iteration. You can look at colourful maps as a result of this work! And tomorrow I will be trawling through employment losses around the world. All along the path to releasing my 10-point plan later next week.

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The provenance of the Job Guarantee concept in MMT

As the public scrutiny of the body of work we now refer to as Modern Monetary Theory (MMT) widens there is a lot of misinformation abroad that distorts or otherwise undermines what has been done to date. Most, but not all the misinformation or emphasis comes from those who attack our work. Their criticisms usually disclose an incomplete understanding of where MMT came from and what the core propositions and logic are. They stylise, usually using terms and constructs that are present in mainstream thinking, but inapplicable to an MMT way of thinking, and end up spitting out things like ‘printing money’ etc, which they think represents a devastating rejection of our work. As part of my own work, and I do this in liaison with Warren Mosler, I am interested in documenting the train of events that led to what we now call MMT. I love history and think it is very important in helping us understand things. So today I am continuing to examine archives to trace the provenance of key MMT concepts. And I am continuing to document the idea of a Job Guarantee, which is central to the MMT framework, despite many who claim to be MMTers thinking otherwise. I have noted in the recent press, claims that the origins of the buffer stock employment approach that became the Job Guarantee was the work of Hyman Minsky. Nothing could be further from the truth as you will see. It is important, in my view, to make the provenance very clear and that is what this blog post is about.

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