Saturday Quiz – February 21, 2015 – 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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Recessions can always be avoided and should be

Recessions are very costly events. The income losses come quickly and sustain for several periods after the worst has occurred. Unemployment rises sharply and if government doesn’t take appropriate action (job creation), it takes a very long time to return to previous levels. The losses of income are huge and are lost forever. The related pathologies such as increased rates of family breakdown, increased crime rates, increased alcohol and substance abuse, increased suicide rates, increased incidence of mental and physical problems, the lost opportunities for skill development and work experience among the young, make the costs of enduring recession very high. These costs dwarf any of the estimated costs of so-called structural rigidities (micro imbalances) that have been produced by researchers over the years. Mass unemployment is the single greatest source of income loss. It is amazing therefore that policy makers do not prioritise the avoidance of recession yet expend vast energy talking about structural reforms etc. The fact is that recessions can always be avoided and should be. Governments can always adjust fiscal policy settings to ensure there is sufficient total spending in the economy to avoid recession, irrespective of what the private sector spending patterns are.

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Henry George and MMT – Part 2

This is the second part in my discussion about Henry George and Modern Monetary Theory (MMT). In general, there is nothing particularly incompatible between the introduction of a broader LVT at the Federal level to replace or reduce other taxes currently levied and the insights provided by MMT. However, once you understand MMT, you realise that the discussion of the design of the tax system is quite different than just raising income from the most ‘efficient’ means. The Georgists would do well to come to terms with that and demonstrate how a land value tax (LVT) would work to free up real resources to give the real space for governments to spend. There doesn’t appear to be any analysis provided by Georgists to calibrate the impacts on non-government spending of such a tax and how this would alter the tax mix required to maintain full employment spending levels and satisfy the socio-economic spending goals of government. There are other things that might be done as well (if not prior to imposing a LVT) which would reduce the likelihood of property price bubbles. Finally, the obsession with the single LVT as a saviour is in denial of the causes of recessions and the the role that financial capital plays in destabilising economic systems. A LVT alone will do little to resolve those problems.

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Henry George and MMT – Part 1

I get several E-mails (regularly) from so-called Georgists who want to know how the Single Tax proposal of Henry George, outlined in his 1879 book Progress and Poverty, fits in with Modern Monetary Theory (MMT). I have resisted writing about this topic, in part, because the adherents of this view are vehement, like the gold bugs, and by not considering their proposals in any detail, I can avoid receiving a raft of insulting E-mails. But, more seriously, I see limited application. In general, the Georgists I have come across and the literature produced by those sympathetic to the Single Tax idea, is problematic because there is a presumption that national governments need tax revenue to fund their spending. Clearly, this is an assertion that MMT rejects at the most elemental level. But there is some scope for considering their proposal once one abandons the link between the tax revenue (which they call rent) and government spending capacity. The question that arises, once we free ourselves from that neo-liberal link, is whether a land tax has a place in a government policy portfolio with seeks to advance full employment, price stability and equity. The answer to that question is perhaps. I am writing about this today and tomorrow (with an earlier related post – Tracing the origins of the fetish against deficits in Australia) as part of my research into the life of Clyde Cameron, given I am presenting the fourth Clyde Cameron Memorial lecture tomorrow night in Newcastle. I hope this three-part blog suite is of interest. In some parts, the text is incomplete.

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Saturday Quiz – February 14, 2015 – 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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Australian labour market – deteriorating and approaching crisis

Today’s release of the – Labour Force data – for January 2015 by the Australian Bureau of Statistics shows that the Australian labour market contracted in January 2015, after the slight Xmas boost in December. Full-time employment growth was sharply negative and overall employment fell. Unemployment rose sharply and with the labour force growing at the rate of underlying population growth (participation rate steady), the unemployment rate shot up 0.3 points to 6.4 per cent. This is a disaster that has been unfolding for the last two years and now reflects the incompetent policy position of the current federal government. The Treasurer should now resign before he does any further damage. The broad ABS labour underutilisation rate – the sum of unemployment and underemployment – will now be heading towards 16 per cent (it is published in next month’s release). The teenage labour market went backwards again this month, which signals an urgent policy problem that the Federal government refuses to recognise or deal with. They are so obsessed with cutting fiscal deficits that they cannot see the future damage they are causing as a result of the appalling state of the youth labour market.

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Greek bank deposit migration – another neo-liberal smokescreen

There was a news report on Al Jazeera on Friday (January 5, 2015) – Greece’s left-wing government meets eurozone reality – which contained a classic quote about the supposed incompetence of the new Greek Finance Minister. A UK commentator, one Graham Bishop was quoted as saying “If you’re a professor of macroeconomics and a renowned blogger, you probably don’t understand precisely how the banking systems works”. Take a few minutes out to recover from the laughing fit you might have immediately succumbed to on reading that assessment. As if Bishop knows ‘precisely’ how the system works! The context is the current news frenzy about the deposit migration out of Greek banks as a supposed vote of no confidence in the anti-austerity stand taken by Syriza. Having voted overwhelmingly for Syriza, Greeks are now allegedly voting against the platform by shifting their deposits out of the Greek banking system. A close look at things suggests that is not going on and it wouldn’t matter much if it was.

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Saturday Quiz – February 7, 2015 – 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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Crikey, why is it is honourable to deliberately increase unemployment?

Knighthoods are handed out as part of the anachronistic Commonwealth honours system. They are an ultimate symbol of cultural snobbery in the UK and cultural cringe in the former British colonies, such as Australia. The Australian government effectively abandoned the system in 1983 because it insulted our sense of independence even though the Monarch of England remains our head of state (why?). It was formally abandoned by agreement with the British government in October 1992. But the creepy conservative government that took over again in September 2013 decided to reinstate the system of imperial honours, specifically to resume the award of Knight and Dame in March 2014. This demonstrated how out of touch the conservatives were. The criticism reached fever pitch a few weeks ago – on Australia Day (January 26, 2015) when it was announced that Prince Phillip (the Queen of England’s husband) would receive a Knighthood, the nation’s highest honour, from the Australian government. Why? Because our Prime Minister is unbelievably stupid but that is another debate beyond of the topic of today’s blog. This UK Guardian article – How giving Prince Philip a knighthood left Australia’s PM fighting for survival – will fill you in on that decision if you are interested. Now a so-called media watchdog, the Australian media site Crikey thinks the Federal Treasurer should be awarded a Knighthood if he can further undermine economic growth and deliberately cause unemployment and underemployment to rise further, not that they said it like that.

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Germany has a convenient but flawed collective memory

There is a lot of discussion at present about the historical inconsistency of the German position with regard any debt relief to the Greek government. Angela Merkel has reiterated over the weekend that there would be no further debt relief. Why she is now a spokesperson for the Troika that does not include the German government is interesting in itself. In this context, I recall a very interesting research study published in 2013 – One Made it Out of the Debt Trap – by German researcher Jürgen Kaiser, who examined the London Debt Agreement 1953 in great detail. After becoming familiar with the way the Allies handled the deeply recalcitrant Germany and its massive debt burden in that period, one wonders why the German government is so vehemently against giving relief to Greece. This is especially in the context that the only mistake that Greece made was joining the Eurozone and surrendering its own capacity to deal with a major financial crisis. The ‘mistakes’ of the German nation before the London Agreement have been paraded before us all again with the 70th anniversary of the liberation of the Auschwitz death camp featuring in world events last week.

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Saturday Quiz – January 31, 2015 – 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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Australian inflation trending down – lower oil prices and subdued economy

Despite missing out on the recession associated with the GFC, Australia is now following the rest of the world down the decelerating inflation route. Yesterday, the Australian Bureau of Statistics released the Consumer Price Index, Australia – data for the December-quarter 2014 yesterday. The December-quarter inflation rate was 0.2 per cent which translated into an annual inflation rate of 1.7 per cent. Recall that the September-quarter inflation rate was 0.5 per cent and the annual rate was 2.3 per cent. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now at the bottom end of their inflation targetting range (2 to 3 per cent) and are trending down. Various measures of inflationary expectations are also flat or falling, including the longer-term, market-based forecasts. This suggests that the RBA may consider that the major problem in the economy is declining growth and rising unemployment, especially in the context of China’s deliberate slowdown. The benign inflation outlook provides plenty of room for further fiscal stimulus.

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Smart Austerity – its just the same dumb austerity

“In its current form, EMU is not viable in the long run”. That quote comes from a Report – Repair and Prepare – Strengthening Europe’s Economies after the Crisis – jointly published by the – Jacques Delors Institut (located in Berlin) – and the Bertelsmann Stiftung – (located in Gütersloh, Germany). The Report purports to lay out a blueprint to prepare Europe for the “next potential threat to its very existence”. It proposes a “path towards renovation” to create an “ever closer union”. They claim that they have taken up this task because there is “extensive ‘crisis fatigue’ and ‘euro area debate fatigue’ in “in governmental circles and the media”. I would call it adherence to ideological Groupthink rather than fatigue. There has been a major failure yet none of those who created the failure have put their hands up to take responsibility. Once they dismissed the problem as being caused by “profligate and fat Greeks (insert vilified nationality as to your preference)”, various policy makers and media commentators resorted to the even more amorphous “structural problems” to explain the on-going crisis. The media has been full of captive writers who just reiterate press releases from neo-liberal politicians and/or mainstream economists. So is this new Report different? Is their plan viable?

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Greek elections – a solution doesn’t appear to be forthcoming

It is late Sunday afternoon as I write this in Colombo, Sri Lanka and about 4.5 hours to the west the Greeks are getting ready to vote in their national election. It has been hailed as a make or break-type of affair but from what I know from inside-type conversations with some of the players and from general reading it has the hallmark of a fizzer, even if Syriza wins the ballot. Essentially, none of the main players seem to be willing to actually solve the problem. The entrenched interests have helped create the problem and are impoverishing the Greek people (themselves excepted). So they are part of the problem. Syriza talks bit about freeing Greece from the Troika-yoke but has a set of proposals that are mutually inconsistent. They might help around the edge and redistribute income a bit but what is needed is a massive boost in national income and that can only come from a massive increase in spending. The non-government sector is not going to do provide the source of that spending boost to get things moving again. So, ladies and gentleman you know what the answer is – there is only one other sector left in town to do it. And, you also know what is stopping them – membership of the Eurozone and the requirement to obey fiscal rules that restrict necessary spending to stagnation-enduring levels. That is why Syriza’s strategy is mutually inconsistent. Even a debt jubilee – the current favourite of the progressives, which warms their hearts so they can convince themselves that they are different from the neo-liberals will not solve the problem. Repeat: a massive fiscal boost is required, which means deficits above 10 per cent of GDP for many years forward. Repeat: that can only be accomplished within the current political reality if Greece leaves the Eurozone. It should have done that in 2008. It should never have joined. It should do it next week.

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Denmark should abandon its euro peg

In my soon-to-be-published book on the Eurozone I examined the case of Denmark in some detail in the context of the evolution of the European Monetary System, the European Exchange Rate Mechanism (ERM), and the ratification process of the Treaty of Maastricht. Denmark was a participant in all the attempts to maintain fixed exchange rates after the Bretton Woods system collapsed in 1971. Further, while Denmark did not formally enter the monetary union by adopting the euro that doesn’t mean that they have maintained their currency independence. They chose instead to peg the Danish kroner against the euro (effectively continuing the ERM parities), which immediately meant that its central bank had to follow ECB monetary policy. Fiscal policy then became a passive player to ensure it didn’t exacerbate the peg parity and Denmark also bought into the Stability and Growth Pact fiscal rules. This meant that internal devaluation (wage cutting) was the only real counter-stabilisation option available to them when facing external imbalances and domestic recession. It hasn’t worked well as one would expect. In fact, the euro peg works against the interests of the Danish people, particularly low income workers prone to unemployment. Yet the nation has an obsession with maintaining it. Groupthink abounds. The correct policy strategy which would give the Danish government a wider range of policy tools to enhance the well-being of its people would be for Denmark to abandon its euro peg. It should do that virtually immediately.

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SNB decision tells us that the crisis is entering a new phase

Switzerland – homeof the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types.

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Saturday Quiz – January 17, 2015 – 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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Friday lay day – more snake oil from Brussels

Its my Friday lay day blog. I am in Sri Lanka at present and will have some reports about that over the next 14 odd days. I was amazed overnight by the comments from IMF boss Lagarde who made overt political statements in an upcoming election year by claiming that David Cameron had shown “eloquent and convincing” leadership in the global recovery. She said they were a model for the European Union. When asked why the IMF had criticised Britain in 2012 for “playing with fire” by invoking fiscal austerity, she said the IMF had “got it wrong” (Source). Hmm. No recognition that Britain cannot be a model for most of the EU nations, given the latter surrendered their currency sovereignty, imposed fiscal rules that prevent growth, and have a central bank that will not act as a responsible currency issuer. Further, it was a false admission of failure. In fact, the IMF got it right and Britain didn’t implement the austerity that it had initially planned and has kept a relative large fiscal deficit that has helped support growth.

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Australian labour market – moderate growth recorded

Today’s release of the – Labour Force data – for December 2014 by the Australian Bureau of Statistics shows that the Australian labour market modestly in the month of December. The good news is that full-time employment growth was positive and the participation rate rose, and unemployment fell. The bad news is that employment remains below the underlying growth in the labour force and the bias is thus towards higher unemployment. Monthly working hours fell this month, which was curious given the predominant full-time employment growth. But monthly data is volatile and the trends are still fairly poor. Remember that last month, the broad ABS labour underutilisation rate – the sum of unemployment and underemployment – was estimated to be at 15 per cent. That is a crisis. So a month’s growth in December is good but needs to be kept in context. The teenage labour market went backwards again this month, which signals an urgent policy problem that the Federal government refuses to recognise or deal with. They are so obsessed with cutting fiscal deficits that they cannot see the future damage they are causing as a result of the appalling state of the youth labour market.

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Saturday Quiz – January 10, 2015 – 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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