Iceland should not peg its currency to the euro or any other currencies

In between reading economics articles, I read a lot of fiction novels especially when sitting around airports and flying places. I get through a lot of novels. I am currently tracking some Icelandic noir writers (for example, Arnaldur Indriðason and Ragnar Jónasson) and have been sort of ‘living in the fjords’ lately such is the imagery these great writers present of life in Iceland. I am right up north in a place called Siglufjörður at the moment surrounded by towering mountains and snow storms and enjoying it a lot. It was also where the excellent TV series ‘Trapped’ was filmed. Anyway, Iceland has been firmly in my focus. And the politics of the place is interesting at the moment because with the economy well down the recovery path, the neo-liberals which nearly ruined the place are trying to reassert their mindless policies – to wit, in this case, the Finance Minister claiming that Iceland is thinking about pegging the króna to the euro or perhaps a basket to maintain ‘stability’ (now you can laugh). Current Prime Minister Bjarni Benediktsson has rejected the plan it seems setting up an internal power struggle within the government. One of the reasons Iceland has recovered so well and left the Eurozone nations in its wake is because its currency was floating. Pegging it to the euro would be a very silly thing for that nation to do. Only a little less stupid that trying to revive their old neo-liberal plans to join the Eurozone as a Member State. If they did that then it would be a case of Dark Iceland (the theme of Ragnar Jónasson’s novels) – the economic lights would well and truly go out.

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Currency-issuing governments never have to worry about bond markets

How many times have to heard a politician claim they had to cut government spending and move the fiscal balance to surplus because they had to engender the confidence of the bond markets. Apparently, this narrative alleges that if bond markets are not ‘confident’ (whatever that means) then they will stop begging treasury departments for more debt issues and the government, in question, will run out of money and then pensions will stop being paid and the public service will be sacked and public trains and buses will stop running and before we know it the skies will blacken and collapse on us. The narrative ignores the usual statistics that bid-to-cover ratios are typically high (hence my ‘begging’ terminology) which are supplemented by well documented cases where the bond dealers (including banks etc) do actually beg central banks to stop driving yields down in maturity segments where these characters have pitched their “business model” (read: where they make the most profits). The facts are exactly the opposite to the neo-liberal pitch. Currency-issuing governments never need to worry about how bond markets ‘feel’. Essentially, the bond markets are irrelevant to the ability of such a government to design and implement its fiscal plans. And, the central bank always can counteract any tendencies that the bond markets might seek to impose where governments do actually issue debt.

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The Weekend Quiz – April 1-2, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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Front National – seems confused on its monetary proposals

Earlier this year, the French collectif Ecolinks, which is a group of economics academics and students in various French institutions published their Petit manuel économique anti-FN, which carried a preface from Thomas Piketty. The group says it is opposed to the current consensus in economics yet its blog seems to be full of Paul Krugman or Wren-Lewis quotes or links to their articles (or other New Keynesians – who are the ‘consensus’, unfortunately). They are obviously worried about the political popularity of FN (Marine Le Pen’s National Front) and have thus produced their anti-FN book as a critique of FNs economic approach. They claim that FN proposes policies that represent “le repli sur une identité étriquée et une vision fantasmée de la nation, rendent cette perspective catastrophique” or in translation, “a retreat into a narrow identity with a fantasised vision of the nation, which would be catastrophic”. The book has received some coverage since its release by a French press that is increasingly worried about Le Pen’s popularity. Please do not interpret in what follows any hint of support for FN from this blog other than as a ‘cat among the pigeons’ force in European politics, anything that upsets the right-wing, neo-liberal, corporatist elites that run the show is to be welcome. I also support Marine Le Pen’s observation that the “The EU world is ultra-liberalism, savage globalisation, artificially created across nations”. That is why I hoped the Leave vote in Britain would win. It is a pity that she marries these views with other hostile views towards immigrants etc, although I am not an expert on immigration so I do not write much about it. It is also a pity that the so-called progressive Left in France (or elsewhere) has left it to the likes of Le Pen to articulate what I would consider to be progressive economic policies. Although, that assessment has to be tempered by the observation that Le Pen’s approach to economic policy is somewhat confused – in part, by her ‘political’ assessment that France is not yet ready to leave to Eurozone. At that point, some bizarre contradictions emerge and the anti-FN book correctly points them out.

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Why are CEOs now supporting basic income guarantees?

It does not quite add up. But then why should it. Spin is spin. On the one hand, we are being constantly told that the world has entered a new era of secular stagnation, driven by an ageing population and a fall off in productive innovation, and we just have to get used to the elevated levels of unemployment that come with that. Yet, other spin doctors are talking about the innovation revolution, the second machine-age, where the march of the robots who will be embedded with AI that will make them smarter than us, big data, automation, the Internet of Things, and more will render work obsolete. In both cases, apparently, the introduction of a guaranteed income is recommended. Suspicious? Then there is more. When CEOs of big companies start advocating a policy that they claim will improve the lot of workers I become immediately suspicious. And why would people with a progressive bent advocate policies that are part of the continuing conservative ambition to achieve social control and which essentially amount to an abandonment of responsibility that government has for maintaining employment for those who cannot otherwise find jobs? So what is with this rush of support for a basic income guarantee (BIG) from all sides of politics??

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Real wages below 2009 – another dimension of EU failure

How would we assess whether a monetary system was working? There are several dimensions that warrant attention. On any dimension that we might put forward, the Eurozone has been a miserable failure. I have just read the latest – Benchmarking Working Europe 2017 – compiled and published by the European Trade Union Institute and the European Trade Union Confederation (ETUC), which documents these dimensions of failure of the European Union and the Eurozone in particular. It puts the White Paper on the future of Europe released by Jean-Claude Juncker on March 1, 2017, into better perspective. The White Paper is the European Commission’s “contribution to the rome Summit on March 25, 2017” to “mark the 60th anniversary of the EU”. It is a document bereft of any substance and should be disregarded. The ETUI and ETUC Report provides sufficient evidence to conclude that the whole monetary union shebang should be dismantled as quickly as possible.

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Amazing what politics does to people

In 2012, while unemployment and underemployment was still at elevated levels after rising in the early days of the GFC, non-government spending was weak, the external deficit was around 4 per cent of GDP, real GDP growth remained well below its trend in the 5 years before the GFC, and the economy was no-where near full employment, the then Treasurer, Wayne Swan launched into the largest fiscal shift away from deficit in recent history (in the modern era since 1970). He was obsessed with ‘getting the budget back into surplus’ in the following year because somehow he had gleaned from the work of John Maynard Keynes that a responsible government has to pay back deficits with surpluses. The Australian government’s deficit had risen because tax revenue had fallen as a result of the slowdown in activity and because the Government introduced a rather large fiscal stimulus, which saved Australia from going down the recession route that other nations were mired in. Maintaining that deficit or enlarging it with further stimulus is what a responsible government should have done. But Swan, apparently thought that with Europe heading further into the morass (as a result of mindless austerity) that he had to show the world what a good government does – run surpluses. Apparently, he thought the credit rating agencies would close the government down. Apparently, he thought inflation would runaway from its low levels. Apparently, he believed the lie that fiscal deficits pushed up interest rates. Apparently, he didn’t know that introducing fiscal contraction when non-government spending was weak would further slow the economy and damage confidence. All of which happened. Quite obviously he didn’t know a thing. Swan, ever the politician (but in opposition now) is apparently thinking differently – now he is claiming fiscal deficits have to rise to push the economy towards full employment. This chameleon-like performance is rather sickening given the damage he caused when he was actually the Treasurer in charge of fiscal policy and full of neo-liberal lies and confusion.

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The Weekend Quiz – March 18-19, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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When fake knowledge peddled by macroeconomics starts to fail the ‘investors’

Last Tuesday, in Maastricht, I gave one of two lectures I presented in a series (the other was on the previous Monday night). The first lecture, which was public, focused on the Eurozone disaster and I outlined why an orderly breakup of the failed monetary union would be in the best interest of all (I will post video of that lecture next Monday). The next lecture, which was to staff and students only, focused on the failure of macroeconomics and I juxtaposed fake news with the fake knowledge of mainstream macroeconomics. I want to expand a little on that topic. The Wall Street Journal published an article last week (March 6, 2017) – Everything the Market Thinks About Inflation Might Be Wrong – which bears on the validity of Modern Monetary Theory (MMT) relative to mainstream monetary economics. What I would call actual knowledge (MMT) and fake knowledge (mainstream theory). The article is not without its issues but it correctly notes that the underlying basis of orthodox inflation theory is false and fails to explain movements in inflation.

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Why is Europe celebrating the 60th anniversary of the Treaty of Rome?

The tiny nation of Malta (~ 420 thousand population) and the only one of two Eurozone nations that have English as one of its official languages is now hosting the EU Presidency for 2017. This was a function that was established by the Treaty of Lisbon in 2009 and allows a nation to influence the European Union’s agenda. As the rules dictate Malta shares this function with two other nations (Netherlands and Slovakia) to form the so-called Trio Presidency. There will be a lot of talk and papers produced and a lot of flags and posters are appearing in Valletta (Malta’s fortress capital) but don’t expect much to come from it. The other thing about 2017 and the EU is that they are celebrating the 60th anniversary of the signing of the Treaty of Rome later this month (signed on March 25, 1957 and operational from January 1, 1958). The European Commission is clearly keen to give the impression that the Treaty of Rome was the first step in the succession of steps that made Europe what it is today. In one sense that is correct. But in a more important sense that claim is nonsense. The reality is that the subsequent revisions of the Treaty (Maastricht and Lisbon) represented fundamental paradigm or ideological shifts in the way Europe was to be governed. The Treaty of Rome recognised that limited economic cooperation could be beneficial to all participating nations as long as it was attenuated or managed by comprehensive system of state intervention. The subsequent treaties represent a shift from the Member States having the capacity to ensure full employment to a situation where the Member States are biased to enforcing austerity and creating persistent and elevated levels of unemployment and poverty at the behest of the ideological masters in the European Commission, who are neither elected by or accountable to the people of Europe they claim to represent. So … why are they celebrating the 60th anniversary of an approach to economic policy making and nation-building that they have now completely rejected?

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US labour market improves and interest rates will rise as a consequence

On March 10, 2017, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – February 2017 – which showed that total non-farm employment from the payroll survey rose by 235,000, which built on the 227,000 net change in January 2016. The unemployment rate fell to 4.7 per cent. The Labour Force also grew strongly as participation rose by 0.1 points. The signs are more positive than a few months ago, even if broader indicators (the U6 measure supplied by the BLS ) suggest caution. Overall, there is a large jobs deficit remaining and previous analysis has shown that the jobs that have been created in the recovery are biased towards low pay. One suspects though that the Federal Reserve Bank will take the chance offered by a stronger monthly result (February) to increase interest rates a notch when it meets this week.

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The Weekend Quiz – March 11-12, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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US Bond Markets cannot bring down Trump

By the time this blog is published I will be heading to Malta. I will have very little spare time in the coming days so the blogs will be shorter and perhaps non-existent or as normal as the case might be. There was an article in the ABC Opinion series (March 8, 2017) – Donald Trump’s presidency might be short-lived, because ‘something’s gotta give’ – which more or less claimed that the private US Treasury Bond markets had the capacity to bring Donald Trump’s Presidency to a halt. Apparently, if the bond markets form the view that Trump won’t deliver on his promises they can somehow end his term in office. What, by driving yields up? Not likely. And even if there was a way that higher US Treasury bond yields had some link to his political tenure, the central bank could control the yields at whatever level they wanted.

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The Weekend Quiz – March 4-5, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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When progressives become neo-liberals and create a Trump

When you have a madman sounding, well “presidential” (according to the obsequious US press) what would you expect a Democrat politician to say in response? Yes I am talking about the Democratic response to the speech given by the US President on February 28, 2017 to the joint session of the United States Congress. The last thing I would want is for the response to begin with a report card on how the responder was fiscally responsible because he had achieved fiscal surpluses during the GFC. But then this is the Democratic Party circa 2016 we are talking about. The Party that lost an unlosable election to a showman who is sparing of the truth. This is the Democratic Party that having just lost an election because its candidate was seen as part of the neo-liberal establishment that has brought grief on millions of Americans, decides to replace its administrative head with another neo-liberal corporatist. But this problem is not uniquely American, although Americans do like to think they are unique. All around the world, political parties who should be defending workers and the poor have morphed into right-wing look-a-likes preaching fiscal rectitude (they would do it fairer) and cuts to public services and all the rest of it. They have so let down their natural constituents that real right-wingers preaching hate against immigrants and refugees and the like have seized the political initiative and taking votes from them. Trump is a sort of hybrid of that. Until the Left abandons its notions that fiscal responsibility does not mean running fiscal surpluses as a matter of course, it will continue to lose ground. And, we will all be worse off as a consequence.

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Gas reservation is not a progressive option despite scandalous profits

In the September-quarter 2016, Australia recorded negative GDP growth (-0.5 per cent). Over the last two years, employment growth has been flat and over the last 12 months, full-time employment has dived. Underemployment has risen sharply while unemployment remains at elevated levels and participation at depressed levels (meaning hidden unemployment has risen). And over the last four quarters, wages growth in Australia has been at record lows. Sounds bad. Well for some – make that most of us. But yesterday, the ABS shone a light on one cohort of income recipients – capital – profits rose in the December-quarter by 20.1 per cent. What? And wages fell by 0.5 per cent. Phew, I thought there might be some sharing of the spoils going on – you know, the top-end-of-town letting the workers in on the action a bit. This data comes as Australian workers are being shafted by rises in energy prices as a consequence of large companies, many foreign-owned, being given carte blanche to our national energy resources. A major union’s response today has been to call for a gas reservation policy to guarantee domestic supply (which is waning as we export our heads off). Unfortunately, while the call appears to be based on reason – lower prices, guarantees to local industry etc – any move to a domestic reservation policy would slow down the shift to renewables and just shift profits from export to import operations. It is not the sort of regulation that a progressive should support.

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The Weekend Quiz – February 26-26, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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Australia’s wage outcomes – a race to the bottom and nowhere

Yesterday (February 22, 2017), the Australian Bureau of Statistics released its latest – Wage Price Index, Australia – for the December-quarter 2016. For the fourth consecutive quarter, annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. Real wages are barely growing and trailing productivity growth by a long way. The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The Australian government, which should be showing leadership, is obsessing about who it can rope into a free trade deal now the US have scuttled the TPP. The lessons have clearly not been learned.

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The ECB should not become a fiscal agent

On November 29, 2016, Mario Draghi, the President of the ECB wrote to Mr Jonás Fernández, a Spanish European Parliament member in reply to a request for clarification from the Chairman of the EP’s Committee on Economic and Monetary Affairs (ECON). The Letter discussed whether it would be legal under the Lisbon Treaty for the ECB to engage in direct monetary transfers to citizens bypassing the Member States and whether such a policy would be beneficial for economic growth. Several commentators have seized on the response from the ECB as saying that such a policy innovation would be both legal and beneficial. My view is that, in forming this conclusion, they have not fully understood the difference between a monetary and a fiscal operation. While I think the policy would produce positive results, in the sense that it would stimulate growth and employment and reduce unemployment, I also believe it would be illegal under the Treaty. Further, I don’t think it is a progressive position to argue that a group of unelected and unaccountable technocrats in the central bank should be in charge of economic policy. That should be the responsibility of the democratically-elected members of the government who are fully accountable every electoral cycle. The ECB should not become a fiscal agent. Rather, if the Eurozone elites cannot implement (which they cannot) a full federal treasury function then it should disband the monetary union in an orderly way.

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Mainstream macroeconomics – exudes denial while purporting to be progressive

The Federal Reserve Bank of Minneapolis recently published an Economic Policy Paper (February 7, 2017) – The Great Recession: A Macroeconomic Earthquake – by Lawrence J. Christiano (who is both at Northwestern University in Chicago and the Federal Reserve), which shows us that the mainstream profession has learned very little from their failures that were exposed by the GFC. This is a paper that exudes denial while purporting to advocated awareness and progression. There is a long way to go before economics turns the corner I am afraid.

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