There is a great sense of denial in Europe

Over the last week or so I have been in Europe and talking to all sorts of people. In the streets the decay is clear and I am in a relatively rich part of Europe (Maastricht). Unsold properties are multiplying and the there are lots of shopping space vacant in the main centres. It is very apparent to me but when I ask people about this some express surprise – not having noticed it themselves. I concede that when you come here once a year you note the changes but the reality is fairly stark. If we put this anecdotal evidence together with the way in which the Euro bosses are behaving and the overall quality of the policy debate in Europe at present it is clear to me that there is a great sense of denial in Europe. Nowhere is this more apparent than in Germany. Their growth model has failed and must change. But it will be very difficult to achieve the sort of national awareness that will render that change possible. The Eurozone was always going to fall apart as a result of its basic design flaws from its inception. But the German strategy – which they consider to be a source of national pride – actually ensured that once the basic design flaws were exposed by the collapse of aggregate demand, things would be much worse than otherwise.

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Greece should default and exit the euro immediately

Regular readers will note that I have consistently advocated the abandonment of the Euro and especially the immediate exit of Greece, Spain, Portugal, Ireland and Italy to push things along. The basic design flaws in the ideologically-constructed monetary union were always going to bring it down. It wasn’t a matter of if but when. The when was always going to be the first major negative aggregate demand shock that the union experienced. Come 2008 we saw very starkly how quickly the region unravelled and now the situation is getting worse not better. Not many commentators agreed with me and most argued that with some tinkering and some harsh austerity the zone could rescue itself. The problem is basic though and has little to do with behaviour of the member states, although I will write tomorrow how the conduct of the Germans has exacerbated the crisis. It is clear that governments like Spain were more frugal than Germany’s government prior to the crisis and they now have 20 per cent unemployment and worse. As the crisis deepens though more commentators are now arguing for a Greek default and/or both default and exit. The sooner the southern states get out of the bind they are and free of the pernicious ideology of the EU/IMF/ECB troika the better. Tomorrow is not a day too soon.

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The coalition of the willing

When the Liberal Democrats went into coalition with the British Tories I was surprised how readily and brazenly their leadership was prepared to compromise the underlying principles of the party for power. While the Party Constitution claims they stand for – “a fair, free and open society” balancing “the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity” and “that the role of the state is to enable all citizens to attain these ideals, to contribute fully to their communities and to take part in the decisions which affect their lives” it is clear that they have become partners in a policy regime that is the anathema of those ideals. By entering the coalition they have allowed a pernicious regime to be inflicted on the British people – one which is driving unemployment up and incomes down. The Liberal Democrats are having their Annual Conference this weekend in Birmingham and it is clear if the utterances of some of their members are anything to go by that the Party is struggling with their identity. The Deputy Leader for example said (September 17, 2011) that the job of the Liberal Democrats was “to rein in the ruthless Tories”. The reality is that it is the government that is ruthless and the Liberal Democrats are part of that government and give it the air it needs. I was unfortunate to listen to a BBC interview today with Liberal Democrats leader Nick Clegg and it left me with the impression that there is little to distinguish the coalition partners on the main economic issues. Both parties are infested with neo-liberalism and both fail to understand basic macroeconomics – that spending creates income.

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You couldn’t make all this stuff up

Its hard to know where to start today. I opened my hard copy version of the Financial Times this morning and every page was “Greek yields off the scale”; “Greece default talk”; “Number of Americans in poverty at highest in 50 years”; “Rome set to identify next asset sales”; Fears of Greek collapse prey on French banking”; “Brics to debate possible eurozone aid”; and so it went. You couldn’t make this stuff up. To avoid sinking into an inconsolable depression, I closed the orange pages and, maybe foolishly, turned my attention to the Wall Street Journal. That came up with gems such as “Limiting the Damage of a Greek Default”; “Exit Strategy Goes Right Out the Door for Euro-Zone States”; “Yields in Italian Bond Auction Highlight Financing Challenge”; “China Not Seen as Knight Riding to Rescue of Italy”; at which point I wondered – given my current geographic location – what happens if I get stuck here? And then, to ease the day’s burden I wondered why the WSJ spells the Eurozone with a hyphen. That seemed to calm things down. Researching the use and mis-use of hyphens splitting words in two. But the thought kept lingering – this is so bizarre that you couldn’t make all this stuff up.

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Better off studying the mating habits of frogs

Day 3 in the Land of Austerity (LA LA land). I sometimes enjoy a regular little private activity now which I call for want of a better term – “I told you so” – and which involves going back to articles that were written prior to the crisis about macroeconomic trends and having a laugh about their contents. Today I thought I might share one of these articles with you because it came up in a telephone conversation I had today with a British journalist who was seeking background on a story they were writing. Their contention was that the ECB is in danger of going broke. I suggested (nicely) that they would be better off focusing on the mating habits of frogs in the Lake District of England than writing a story like that. Here is why I said that.

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Impeccably running a sinking ship

Today I am writing from Austerity Land a.k.a Europe. I know Britain is also austerity land but it has its own currency and will be able to reverse direction more easily as the political sentiment moves against them. I know the US is also trying to emulate the austerity lands but so far the deficit is sufficient to maintain some vague sense of growth there and the politicians haven’t really been able to agree on anything. But in Europe the politicians and central bankers are systematically demolishing their economies – one step at at time – and pushing the system ever more closer to collapse. It is only the extraordinary “outside the rules” intervention of the European Central Bank that is keeping the EMU from collapsing virtually immediately. The Australian ABC News is carrying a story (September 13, 2011) – Shares hit 2-year low as Eurozone crisis deepens. The message of that article is being repeated in various languages over here in Europe across the mainstream media. There is an advanced state of denial over here – a denial that the problem is the Euro itself. How could a currency be a problem? Answer: when it is foreign to every government that uses it. Whatever we conclude about who pays taxes in Greece or who doesn’t; about whether certain public servants have excessively generous pay and conditions or not; about whether workers in one nation are lazier than workers in another; none of these mini-debates focuses on the issue. The problem is that when a nation surrenders its currency-issuing capacity and starts borrowing in a foreign-currency then it is open to solvency risk and cannot respond easily to a negative demand shock of the proportions that we say hit the world in 2007-08. Setting up a monetary system with those intrinsic features ensured that the EMU would enter crisis when the first significant negative demand shock arrived. It was not if but when. Now the same logic that got the EMU into this mess is also prolonging the crisis and denying the region of much-needed growth.

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When you’ve got friends like this … Part 6

Today I continue my theme “When you’ve got friends like this” which focuses on how limiting the so-called progressive policy input has become in the modern debate about deficits and public debt. Today is a continuation of that theme. The earlier blogs – When you’ve got friends like thisPart 0Part 1Part 2Part 3Part 4 and Part 5 – serve as background. The theme indicates that what goes for progressive argument these days is really a softer edged neo-liberalism. The main thing I find problematic about these “progressive agendas” is that they are based on faulty understandings of the way the monetary system operates and the opportunities that a sovereign government has to advance well-being. Progressives today seem to be falling for the myth that the financial markets are now the de facto governments of our nations and what they want they should get. It becomes a self-reinforcing perspective and will only deepen the malaise facing the world.

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Keynesian and regular economics

Everywhere I look I find examples of politicians and leading lights making macroeconomic statements without understanding macroeconomics. Given that these statements have policy implications that impact on real people making such erroneous statements – no matter how well-intentioned one is – is a dangerous thing that we should avoid. Imagine if I suddenly started to make claims about the strength of bridges such that they would fall down if my advice was taken. There would be a law against that. One notable economist apparently thinks that macroeconomics is not “regular economics” – but rather some far-fetched misplaced set of ideas that would be better forgotten. My view is different. A correctly specified macroeconomics provides a safeguard against falling into logical traps – such as the fallacy of composition. The so-called “regular economics” is a fantasy world where the angels on the pinheads are assumed away into one representative angel who knows all and never makes a mistake (on average). If you want to understand how mass unemployment arises and how it is solved then the mainstream version of “regular economics” will leave you in the dark.

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MMT – an accounting-consistent, operationally-sound theoretical approach

Many people have drawn to my attention in recent weeks the evolution of the Modern Monetary Theory (MMT) Wikipedia entry and raised concern about the criticisms that are now on that site. I thought I better go and read the entry. I certainly have not added material to the site. Having said that I am happy that there is a page available. It seems that the criticisms cited are sourced to blogs by an Austrian Schooler, a graduate student blogger, and Brad DeLong. There does not appear to be an sound academic citation. The critics actually admit to basing their views on a cursory reading of the MMT literature and then only on the blogs that are out there now (including this one). The major claim is that MMT is just an accounting tautology. That just means they have read the first of hundreds of pages of MMT and then probably haven’t really grasped its significance. MMT is in fact an accounting-consistent, operationally-sound theoretical approach to understanding the way fiat monetary systems work and how policy changes are likely to play out.

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S&P decision is irrelevant

In the last few days I have read more misinformation and downright lies from financial and economic commentators in the media than I have for the last year. The decision by the irrelevant S&P to get some attention for their corporate profit-making activities by downgrading US government debt has sparked a frenzy of nonsensical “analysis” which is as ridiculous as was the S&P decision. The fact is that the S&P decision is irrelevant as long as the US government makes it so. The danger is that the Government will think there is something to be addressed and the US economy will suffer as a result. As long as the US government realises who calls the shots the S&P decision will be irrelevant.

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Saturday Quiz – August 6, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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Day by day the evidence mounts

I was looking at yields today and you cannot help noticing that bond markets are become more attracted to government debt each day. So much for the arguments we have been hearing ad nauseum over the last few years that governments were about to feel the cold hand of the markets who would punish them by dumping their debt unless they imposed harsh austerity. The problem is that the attraction of government debt does not signify that markets are rewarding governments for their fiscal austerity efforts. In fact, it is exactly the opposite. The markets are realising that austerity is now undermining economic growth and the claims by politicians and economists that we would enjoy a “fiscal contraction expansion” if only the government got off the backs of the private sector are now being revealed as lies. The world economy is tanking. Day by day the evidence mounts. The safest place to be when the economy heads south is in cash or government bonds.

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EU agreement on Greece – no solution at all

The big news over night apart from whether Murdoch junior lied and whether the Republicans will compromise with Obama and the Democrats was the successful conclusion of a package to save the Eurozone and stabilise Greece. I actually think the best European news was the drama that was being played out on the heights of Galibier Serre-Chevalier in Southern France yesterday. I thought the theatre and backdrops were stupendous. But while that is getting some coverage the news is being dominated by the “done deal” – the “solution” to the Euro debt crisis. When I read the – Statement by the Heads of State or Government of the euro area and EU institutions – I considered it a statement of a group of failed states who have lost perspective on what governments should be doing.

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When might that be?

With all eyes on the US wondering what would happen if the debt ceiling is not lifted you would think that bond markets would be losing interest in US government debt. If we trawled back through the debate over the last few years we could find many instances of commentators claiming interest rates would soar once bond markets ran out of patience with the rising US government debt. It was either that prediction or the other one – that all the “money” swishing around the system would cause inflation. Like some cult leader there was one self-styled US financial expert claiming that the Endgame was nigh. As the world didn’t slide into a void nor the debt-burdened US economy hyperinflate the date was shifted. Once, twice, thrice. Further, trying to overlay what is happening in the EMU at present onto US, UK, Japan or other sovereign nations is invalid. The monetary systems in place, in say the US, is vastly different to the system the ECB oversees when we focus on the member state level of the Eurozone. So it serves to remind people that none of the predictions the deficit terrorists have made have come true. The ideologues respond that it is only a matter of time. My reply, when might that be?

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Propose a solution to a non-problem and make the real problem worse

My time is short today so an early post. I am catching up on my reading and had time to study the evidence given by Simon Johnson to the Joint Economic Committee of the US Senate on June 21, 2011. There are many such committees within any national government and at present they are being bombarded with analysis from so-called experts who assume a non-problem, call it THE problem, then propose various solutions to the problem (that is, non-problem) which all in various ways would make the real problem even worse. That is the state of the public debate.

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Saturday Quiz – July 16, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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Saturday Quiz – July 2, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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BIS = BS – the I used to stand for integrity

I checked my calendar today thinking I must be a few months out. Upon checking I determined that it wasn’t April 1. So what the hell is going on? I refer to the announcement of a senior appointment at the World Bank. They have just appointed to the role of Vice President and Treasurer the former Lehman Brothers Global Head of Risk Policy who then was Lehman’s Global Head of Market Risk Management as they sailed into bankruptcy. Hilarious. As the Twitter-verse noted – Did they also interview Bernie Madoff? Anyway, I saw this news piece come in as I was studying the 81st Annual Report 2010/11 of the Bank of International Settlements – the central bank of the central banks – which was released yesterday (June 26, 2011). My conclusion: BIS = BS – the I is gone and used to stand for integrity

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How many more experiments do we need

Everything is Greek today in the financial press. The number of commentators who are concluding that Greece has to exit the Eurozone are increasing. It is obvious and it is only the obsessive desire of the Euro bosses to preserve the interests of a few banks at the expense of the welfare of millions that is keeping the EMU together at present. If they stepped outside their mainstream straitjacket for a moment they would see that the ECB could guarantee all French and German bank assets at the stroke of a pen. This mainstream blindness comes out in all sorts of ways. The problem is that social science of which economics is a branch (yes I am in that school rather than placing economics in “business”) – suffers in relation to the other sciences because it is hard to pin down things given the lack of controlled environments. With human behaviour essentially shifting the mainstream economists can get away with all sorts of lies and deceptions most of the time because it is too hard to prove otherwise. But sophisticated analysis is really not necessary. Over the last two decades we have had some real-life experiments going on before our very eyes that allow us to see through the cant that is mainstream theory. How many more experiments do we need before my professional colleagues are totally discredited?

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British labour market deteriorating

I have very little spare time to write my blog today so this will truly be brief. Amidst all the riots in Athens as the Eurozone farce descents further into the mire, the UK Labour Force data came out yesterday (June 15, 2011). There are some who are saying that the data presents good news. A closer examination reveals nothing of the sort. Others are claiming that there isn’t really a problem of unemployment in Britain because the unemployed are largely unemployable. That is a familiar refrain after a deep recession as the labour market struggles to keep pace with the underlying population growth. The conservatives always try to redefine what we might call full employment and claim that a much higher unemployment rate is now indicative of full capacity. The same game is being played out in Australia where despite unemployment and underemployment totally 12.2 per cent at present the Reserve Bank governor had the audacity to claim there were not that many spare labour resources (like 1.3 million odd workers don’t count any more).

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