A continuum of infinitely lived agents normalized to one – GIGO Part 3

The IMF released a working paper recently (January 2012) – Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances – which purports to estimate the losses that the US economy will incur if the US government delays a major fiscal consolidation. The paper attracted a Bloomberg news headline (February 3, 2012) – How Reducing the Deficit Can Make Us Richer: The Ticker – which, in its own way provides an example of a dishonest piece of reporting. What has the IMF paper have to say about real world issues like real GDP growth, unemployment, underemployment etc? Answer: virtually nothing. It is an example of GIGO (Garbage In, Garbage Out) and confirms that my profession has learned very little (if anything) from its total failure to see the crisis coming or offer valid solutions. It also confirms that while the IMF leadership might be going around lately trying to sound reasonable (warning against austerity) the engine room of the IMF hasn’t changed direction at all. It is still pumping out indefensible rubbish, which then garner headlines and influence the policy debate to the detriment of the unemployed everywhere. The IMF consider humans to be a “continuum of infinitely lived agents normalized to one”. Which means this paper becomes Part 3 of my GIGO series.

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Saturday quiz – February 4, 2012 – 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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Monetary movements in the US – and the deficit

This week I seem to have been obsessed with monetary aggregates, which are are strange thing for a Modern Monetary Theory (MMT) writer to be concerned with given that MMT does not place any particular emphasis on such movements. MMT rejects the notion that the broader monetary measures are driven by the monetary base (hence a rejection of the money multiplier concept in mainstream macroeconomics) and MMT also rejects the notion that a rising monetary base will be inflationary. The two rejections are interlinked. But that is not to say that the evolution of the broad aggregates is without informational content. What they paint is a picture of the conditions in the private sector economy – particularly in relation to the demand for loans. In this blog I consider recent developments in the US broad aggregates and compare them to the UK and the Eurozone, which I analysed earlier this week. But first I consider some fiscal developments in the US, which, as it happens, are tied closely to the movements in the broad monetary measures. The bottom-line is that the US is growing because it has not yet gone into fiscal retreat and the broad monetary measures are picking that growth up. The opposite is the case of the European economies (counting the UK in that set) where governments have deliberately undermined economic growth and further damaging private sector spending plans.

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Bank of England money supply data paints a grim picture

Just as the recent monetary data from the Eurozone has revealed the parlous state of demand there, the money supply data released by the Bank of England yesterday revealed a collapsing borrowing by households and firms in Britain scale not previously seen. It is clear that the December data shows that households are deleveraging (paying credit cards down) and business firms are now in full retreat similar to the worst of the recent downturn in 2009. The evidence for that conclusion is to be found in the fact that the Bank of England’s broad money supply measure contracted by 1.4 per cent in December, which the Bank noted was the largest single month contraction on record (shared with December 2010). Just like the latest ECB monetary aggregates are showing what the real situation is like in the Eurozone, the Bank of England’s data is painting a very grim picture of life in Britain as the draconian fiscal austerity drives that economy into the ground. The data also provides a continued rejection of mainstream macroeconomic theory, which is an interesting aspect in its own right.

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Saturday quiz – January 28, 2012 – 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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The US is not an example of a fiscal contraction expansion

Recent data releases suggest that the current economic experience on the two sides of the Atlantic is very different. The latest data shows that the UK economy is now contracting and unemployment is rising as fiscal austerity begins to bite. Conversely, the latest US data shows that growth is on-going and the unemployment rate is finally starting to fall. This may be a temporary return to growth because the political developments that may occur later in this year could see some serious, British-style fiscal austerity being imposed on the US economy. At present though, my assessment of these disparate trends is that fiscal austerity is contractionary if non-government spending is insufficient to offset the decline in public spending. However, some observers are trying to hold out the US experience as vindicating those who believe in the notion of a “fiscal contraction expansion”. But the data tells us clearly that the US is not an example of this mania.

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Davos – an exercise in denial not solutions

Most of the failed political leaders and their corporate mates are in Switzerland at the moment, presumably wining and dining in fine style and pontificating about what the rest of this need to do next. The sheer preposterousness of the World Economic Forum in Davos is astounding. There remains a denial by the leaders of what has to be done. They seem insistent that the failed neo-liberal paradigm should remain intact. Apparently, calls for reforms just reflect an unrealistic nostalgia for the past. It is apparently nostalgic (meaning nonsensical) for us to long for the days when nations delivered full employment, real wages growth in line with productivity, and declining inequality. This accusation of nostalgic longing is the way the elites are avoiding facing the facts that their economic model based upon self-regulating markets has failed and will never deliver on its promises. We need a new approach that recognises the capacities and options available to a currency-issuing national government. This is not a nostalgic longing for an unchanged world. Rather it is a realisation that the macroeconomic fundamentals of a currency-issuing national state have not changed, notwithstanding the challenges that globalisation presents.

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IMF – the height of hypocrisy but still wrong as usual

When I read the latest news from the IMF early this morning I sent out a tweet saying that it was the height of hypocrisy for the IMF now to be trying to reclaim the high ground in the current economic debate by lecturing nations about the dangers of fiscal austerity. The IMF will always be part of the problem rather than the solution. They are consistently the architects of misinformation and bully national governments on the basis of that misinformation only to come back 3 months later and say “gee whiz”, look how bad things become. Currently the IMF is pleading for more funds. If I was a national government contributing to this bullying, incompetent organisation I would immediately cancel the cheque and, instead, spend the money pursuing domestic growth for the benefit of the citizens is that rely on my decisions. The current position of the IMF represents the height of hypocrisy. Further their forecasts are significantly error prone as usual. Wrong models will generally produce terrible forecasts that have to be continually revised. In the case of the IMF, these errors are also systematically biased by the ideological nature of their approach to macroeconomics.

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Employment fell in December, no it didn’t employment rose – and other apparent inconsistencies

In the last few weeks I have done several radio interviews about the veracity of the labour force data published by the Australian Bureau of Statistics. The pretext has been an increasing awareness among commentators and journalists of an alternative series published by pollster – Roy Morgan. The juxtaposition of an ABS unemployment rate estimate for December 2011 of 5.2 per cent against Roy Morgan’s estimate of 8.6 per cent worries people and curious minds have been seeking to find out what is going on. The curiosity also extends to matters like seasonal adjustment. Last week, I consistently said that in seasonally adjusted terms people were dropping out of the labour force (as evidenced by the falling participation rate), which had lessened the impact of the negative employment growth on the unemployment. But in one interview I complicated matters by saying that in fact more people were in the labour force in December and employment rose. The two statements were not inconsistent. The former was about the seasonally-adjusted data and the latter was about the original time series produced by the ABS. I often get E-mails about this question. Which estimates should we use to tell us what is going on? So I thought I should write a blog about that – to catalogue these issues.

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The catechism of the IMF

In early January 2012, the IMF published the following working day – Central Bank Credit to the Government: What Can We Learn from International Practices? (thanks Kostas). In terms of the title you can’t learn very much if you start off on the wrong foot. The bottom line is that if the theoretical model that you are using is flawed in the first place then you wont make much sense applying it. The other point is that while this paper presents some very interesting facts about the legal frameworks within which central banks operate and provide a regional breakdown of their results, their policy recommendations do not relate to the evidence at all. This is because they fail to recognise that the patterns in their database (the legal practices) are conditioned by the dominant mainstream economics ideology. So concluding that something is desirable because it exists when its existence is just the reflection of the dominant ideology gets us nowhere. Their conclusions thus just amount to erroneous religious statements that make up the catechism of the IMF and have no substance in reality.

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Australian labour force data – things are getting worse

The January release of the Labour Force data is always a week later than the releases in other months as we enjoy the summer holidays. But the wait hasn’t improved the news. In December 2011, my headline was “everything is bad” meaning that the evil three – falling employment, rising unemployment and falling participation – had appeared. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for December 2011 shows that the deterioration in the Australian economy towards the end of the year gathered pace. The data shows that employment has fallen and the participation rate has fallen sharply. This is the worst combination that can occur indicating that job creation is declining, workers are leaving the workforce because of the lack of job opportunities and labour underutilisation is rising. So while the Government continues to pursue its obsession to get the budget back into surplus in the next year, it is actually only succeeding in undermining employment growth and prolonging unemployment. The most striking expression of how poor the Australian labour market is performing is the continued deterioration of the youth labour market. That should be a policy priority but unfortunately the government is largely silent on that issue. My assessment of today’s results are that – everything is bad and getting worse.

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Food speculation should be (mostly) banned

Last year, Cyclone Yasi wiped out about 75 per cent of national banana production in Australia and drove the price of bananas up to around $A15 to $A17 per kilo depending on where you lived. They are usually less than $A3-5 per kilo. But all banana lovers complained about the imposition on their real standard of living even though Australians allocate only 10 per cent of their total expenditure to food and, obviously, much less to banana consumption. So imagine what it is like for the most disadvantaged citizens to see prices rise by 60-odd percent over 18 months on their basic food stuffs, especially when they allocate upwards of 60-70 per cent of their total expenditure to food, and they spend all their meagre income? Not a good outcome that is for sure. While the financial market excesses caused the crisis in the first place, and the policy folly of our governments is prolonging it, one of the worst features of the neo-liberal years of financial deregulation has been the speculation on food which has driven prices up dramatically, impoverished and starved millions. Food speculation is something I would ban as part of a new oversight of the financial markets aimed at restoring the real economy and ensuring economic activity worked to improve the human condition.

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Budget deficits are part of “new” normal private sector behaviour

Today I am in the nation’s capital, Canberra presenting a class at the European Studies Summer School which is being organised by the Centre for European Studies at the Australian National University. My presentation is entitled – the Euro crisis: fact and fiction. I will have more to say about that in another blog. Today I am considering the issues surrounding the decline in personal consumption spending and increased household saving ratios. The argument is that this behaviour which is now clearly evident in most economies marks an end to the credit-led spending binge that characterised the pre-crisis period of the neo-liberal era. But with that era coming to an end and more typical (“normal”) behaviour emerging, the way we think about the government (as the currency-issuer) will also have to change. There is clearly resistance to that part of the story, in part, because there is a limited understanding to the central role that the government plays in the monetary system. As private sectors become more cautious, we will required continuous budget deficits to become a part of this return to the “new” normal.

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S&P ≠ ECB – the downgrades are largely irrelevant to the problem

The Australian Prime Minister, trailing hopelessly in the public opinion polls, made a fool of herself yesterday by commenting on last week’s S&P downgrade of European government debt ratings. she not only gave S&P more credibility than they are worth, but also demonstrated, once again, the mangled macroeconomic logic that is driving her own government’s obsessive pursuit of budget surpluses to our detriment. But there has been a lot of mangled logic about the S&P decision from a number of quarters in the last few days. Ultimately, the decision is only as relevant as the EU authorities allow it to be. The reality is that the fiscal capacity of the Eurozone is embedded in the ECB, which while ridiculous and reflecting the flawed design of the EMU, still means that the private bond markets can be dealt out of the game whenever the ECB desires it. In that context the S&P decision is irrelevant except for its political ramifications. And they arise as a result of the government’s own flawed rhetoric with respect to the role the ratings agencies play. That flawed rhetoric is exemplified by the Australian Prime Minister’s weekend offerings not to forget the French central bank governor’s recent claims that S&P should downgrade Britain’s debt ratings before it downgrades France. But does the downgrading matter? Answer: only if the ECB allows it to matter. The ratings agencies do not wield power. The issuer of the currency in any monetary union has the power – always.

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Saturday quiz – January 14, 2012 – 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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They better keep the vacuum on or else!

While the Eurozone leaders appear to be obsessed with a relentless series of meetings which discuss largely irrelevant problems that they identify, there is a growing chorus that is highlighting the reality facing the region. It is patently obvious that the only short-term solution to the Euro crisis is for the ECB to keep its vacuum cleaner on and keep “hoovering” up the debt of governments who are unable to gain access to funds in private bond markets at reasonable yields. While the long-term solution is an orderly dismantling of the monetary union, the ECB is the only show in town at present that can in the spiralling crisis and ensure that the Eurozone countries return to growth as quickly as possible. This is even more paramount now Germany has recorded a negative quarter of growth with worse expected in the coming months. It beggars belief that the Euro elites have engineered a crisis of such a proportion that that their worst fears become the only solution.

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Labour market deregulation will not reduce unemployment

Underlining the current obsession with fiscal austerity is an equally long-standing obsession with so-called structural reform. The argument goes that growth can be engendered by deregulating the labour market to remove inefficiencies that create bottlenecks for growth even when fiscal austerity is slashing aggregate demand and killing growth. The 1994 OECD Jobs Study the provides the framework for this policy approach. The only problem is that it failed even before the crisis emerged. But with policymakers intent on slashing aggregate demand, which they know will kill growth, they have to offer something that they can pretend will generate growth. The structural reform agenda has zero credibility in the same way that fiscal austerity has zero credibility.

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Britain needs more hours of work not less

A striking characteristic of the last few decades has been the way the so-called “progressive” political parties have adopted policy frameworks and thinking that were previously the exclusive domain of the conservatives. Nothing could be more obvious than the way in which all the major parties around the world now speak neo-liberal economics as if it was the only way of thinking about the economy and economic policy. Slowly but surely the options that parties are willing to consider have been narrowed down and policy is now conducted in a straitjacket which cannot deliver prosperity for all as well as advancing environmental objectives. It is understandable that during recessions expectations become downgraded by workers about the types of jobs they will except, by consumers about the level of spending they can sustain, and by firms about what investment projects will be viable in the period ahead, etc. But it is strange that when the prevailing economic paradigm not only caused the great recession but is prolonging it at great cost, that the major parties remain locked down in the neo-liberal mire – blinded to other options. It is clearly time to think outside of this box and that is what I try to promote in this blog. But we also have to be careful that when we go wandering we are still on solid macroeconomic ground.

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Hungary helps to demonstrate MMT principles

I have received a lot of E-mails overnight about developments in Hungary. The vast majority of these E-mails have suggested that these developments (sharp rise in government bond yields since November) coupled with the fact that the Hungary uses its own currency (the forint) and floats in on international markets provide problems for the Modern Monetary Theory (MMT) understanding of the monetary system. I have been digging into the data on Hungary for some months now as I learn more about the history of the nation and its political and institutional structure. I am always cautious researching foreign-language material because outside of documents published in Dutch or French my comprehension skills are weak and I know that even in English documents there are tricks in trying to come to terms with the way data is collected, compiled and disseminated. However, unlike many non-English-speaking nations, access to very detailed data for Hungary in English is reasonable. I will have more to write about their problems in the future as I accumulate and process more information. But at present what I can say is that Hungary is a very good example of what a government with its own currency should not do and the current developments reinforce the insights available from MMT rather than present us with problems. Hungary is in deep trouble exactly because it has violated some of the basic macroeconomic principles defining sound fiscal and monetary policy.

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BIS now part of the neo-liberal propaganda apparatus

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

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