I haven’t much time today. I note that the British Chancellor has made an emergency speech to the House of Commons last night (August 11, 2011) – Statement on the global economy. He claimed that the fiscal austerity had made the UK a “safe haven” for investors. The reason that demand for gilts is high at present is because the bond markets know the UK has no default risk. I also noted Paul Krugman’s wrote a blog in the New York Times yesterday (August 11, 2011) – Franc Thoughts on Long-Run Fiscal Issues – where he challenges Modern Monetary Theory (MMT) directly. To challenge something you have to represent it correctly.

There has been a lot of “opinion” expressed over the last few days about the causes of the British riots. If I had a meter to assess the ideological biases given breath in the press over this issue to date it would be swinging out there in the right-wing of opinion – “cultural problem”, “lawless lazy youth fed by the welfare state”, “criminality”, “intolerable monsters” all words I have read or heard in the media recently. Anyway who has my view is labelled a “left-wing cynic” who want to “makes excuses for thugs”. Opinion is after all just that so it is always of benefit to temper it with research evidence. Anyway, the short conclusion – supported by the research evidence – is that I blame the British government for the riots.

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.

Last night we were watching the ABC news on TV and there was a story about American airports not being able to afford to pay security staff because the federal body who pay the bills had run out of money. I have been reading regional newspapers in the US which report on things like street lights being rationed not on environmental grounds but because the local authorities are starved of funds. Police beats are being trashed as rapes rise in the darkened, unpatrolled streets. Schools are being closed. People will die this coming northern winter because the governments have cut heating subsidies to the poor. Workers who saved all their lives then became unemployed in 2008 are still unemployed and have exhausted their life savings and are staring at poverty. And all of this is because the conservatives and the dullard progressives who have fallen into line lock-step have convinced us that our governments – which issue the currency we use – have run out of money. The people who are being most damaged by the fiscal austerity are the front-line troops in the conservative army attacking governments. It doesn’t make sense at all. For all the human achievements we are really a very dull lot. Governments have all the capacity to maintain adequate levels of spending and employment growth to allow the private sector to sort out their debt issues. This is a totally confected crisis which doesn’t mean that it isn’t real nor incredibly damaging.

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.

Everywhere I walked in Melbourne last Saturday there were sales. Signs emblazoned all over the front of shops advertising 30 per cent, 50 per cent and 70 per cent discounts. The only problem is that I see those signs all the time now whenever I go retail precincts. The annual sale concept is now a continuous effort to rid stores of excess stock as consumers go on strike. So what is going on? The Australian Bureau of Statistics (ABS) released the June 2011 – Retail Trade data today and in showing that retail sales have contracted for the second consecutive month they confirmed what we already knew from the empty shops and sale signs – the retail sector is now in recession and things are getting worse.

I would have thought the role of a Professor of Journalism at a university would be to teach students how to write copy and to research issues in the field of journalism. I would not assume that such a person would claim expertise in macroeconomics and start pontificating about national economic policy. But I was wrong – again. In this article (July 31, 2011) – American dream comes with a heavy cost – which was published in the Melbourne Age (but previously the UK Guardian) one Rosalind Coward proves how little she knows about economics. Contrary to the sway of media opinion from these “tin pot” experts – there is no federal public debt problem in the US.

This Report – The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009 – published by the Center for Labor Market Studies of Northeastern University (thanks Stephan) should have received headline attention from all the American media outlets instead of the disgusting venting of religious zealotry that goes under the name “debt ceiling debate” which has dominated media space. The Report was published in May 2011 and seeks to examine the way in which the recovering real output in US is being distributed to beneficiaries – workers, firms etc. It shows that the so-called economic recovery in the US has not delivered any tangible benefits to the vast majority of citizens and has rather, concentrated real gains among the top-end-of-town. Given that the recovery has floated on the fiscal stimulus the findings reinforce the biased nature of policy in the US. That indicates poor fiscal design by an incompetent and corrupt government not that fiscal policy is inherently unsuitable for advancing public purpose.

I watched the US President speaking live today from the White House. I wish I hadn’t. The local media (here) characterised him as talking tough. What I heard was a leader who doesn’t know what he is talking about. But he isn’t alone out there in the “debt ceiling” debate land. I have noted before that when the crisis really hit I thought it would spell the end of the stranglehold that mainstream macroeconomics had on public policy. That body of theory had led the world into the crisis by endorsing policies that set the financial system up to collapse. As it was becoming obvious (as far back as 15 years ago) that a major crisis was approaching mainstream economists were in denial and claimed that the “business cycle” was dead. I was wrong in assuming (more hoping) that the mainstream paradigm would be wiped out by the travesty. And as the months pass, their erroneous theories seem to be getting more credibility not less. The debt ceiling debate has reached proportions of madness that I didn’t think were possible in a broadly educated country (at least to primary school level). What must the Martians be thinking of us now. Anyway, certain practical matters not counted on by the ideologues suggest that 3 million Americans or so may find out the truth.

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?

On the first day in her new job the IMF boss was interviewed by the in-house survey unit and asked to outline her agenda. She clearly thinks the IMF remains a centrepiece of the international monetary system. The evidence would suggest otherwise. The conduct of the IMF over its long history has not advanced prosperity and once the fixed-exchange rate system collapsed as unworkable the rationale for the IMF also disappeared. In trying to reinvent itself over the last 40 years, the IMF has become an exemplar of neo-liberal free market thinking and action and caused many of the larger crises that have evolved during this period. Its role in the current crisis exemplifies its culpability. It turns out that a leading mainstream economists also thinks it is time to shut the doors at 700 19th Street, N.W., Washington, D.C. 20431.

A few things came up today which I thought I would write about – albeit briefly (but then that is all relative I suppose). In general I am scaling down blog activity on Fridays. But today the Australian government released a final evaluation report on one of its big fiscal stimulus infrastructure projects. The Report attracted the typical biased headlines – massive government waste. Over in the UK, the wreck of News Limited’s News of the World proved – once again – that the private sector cannot be trusted to self-regulate resonating what we learned from the financial crash but seem to have forgotten already. These two observations are related and so today I consider the notion of government waste.

There are several different strands of mainstream economic thinking and these differences manifest in the way they think about monetary and fiscal policy. The extreme mainstream position is that fiscal policy is ineffective because it 100 per cent crowds out private spending. The only role for aggregate policy then is to allow an independent (politically speaking) central bank to adjust interest rates up and down to regulate inflation (via expectations). There isn’t much for economists to do if that view was accurate. Then there are mainstreamers who think that budget deficits are generally damaging to private spending because they drive up allegedly drive up interest rates and crowd out private spending, the latter which, is considered to be more efficient because it is backed by the so-called wisdom of the “market”. So generally monetary policy should be used to stabilise aggregate demand such that inflation is stable. However, this group of economists find some time for budget deficits when there is a “liquidity trap”. From the perspective of Modern Monetary Theory (MMT) – whether there is a liquidity trap or not is irrelevant.

I gave a talk about Modern Monetary Theory (MMT) today at a workshop on Stock-Flow consistent macroeconomics organised at the University of Newcastle by the economics group here. While I hold the research chair in Economics at this university I am not formally part of the economics group – my affiliation is with my research centre (CofFEE) which stands outside the Department/Faculty structure. So it was good to interact with the economics group. It is coincidental because the things I was talking about were being played out in the US and elsewhere (for example, Greece). The US conservatives are now pushing hard for a balanced budget amendment to the US Constitution. If they understood economics they would never consider doing that. If they succeed they will undermine US prosperity forever. It is a case of ignorance undermining prosperity which really describes a lot of what is going on at present in the public debates.

In yesterday’s blog, I mentioned that Paul Krugman gave a plenary lecture over the weekend just gone at a conference held at Cambridge University. The conference – 75th Anniversary of Keynes’ General Theory – seems to have been a remarkable event. First, I don’t know everything but I always know when there is a major “Keynesian/Post Keynesian” conference and sometimes I even go. In the case of the 75th Anniversary conference I didn’t even know it was being held. It seems that wasn’t exceptional. As Ann Pettifor points out the UK Post Keynesian Economics Study Group, which is a leading group who focus on studying Keynes and, arguably, has the leading UK Keynesian scholars among its membership, “found out about the conference by accident.” Second, if you examine the speaker’s list and read the papers that are available you might wonder what this conference had to do with Keynes. Certainly if the Cambridge organisers were aiming to “honour” the message that Keynes gave, then they had a strange way of doing that. The reality is that the celebration of 75 years since Keynes was a farce.

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?

I am travelling today and so have to steal time to write this blog between other commitments. Later this week I am presenting a paper at a workshop on stock-flow consistent macroeconomics and I was thinking over the weekend just gone what I would do with the time I have for the presentation (1 hour). I started putting together a database of IMF forecasts out to 2016 for various nations and simulating the implications for the sectoral balances. Then I thought I would discuss the internal inconsistencies of those forecasts from a stock-flow perspective and the implications of those inconsistencies. I will write a blog later in the week on that once I have finalised the presentation. But the preliminary thinking led to today’s blog. In policy you have to wish for the possible.