IMF struggling with facts that confront its ideology

I haven’t a lot of time today (travel) but I thought the latest offering of the IMF was interesting. In their latest World Economic Outlook (April 2012 – which will be released in full next week) they provided two advance chapters – one – Chapter 3 – Dealing with Household Debt – demonstrates just how schizoid this organisation has become. They are clearly realising that their economic model is deeply flawed and has failed to predict or explain what has been going on over the last five years. That tension has led to research which starts to get to the nub of the problem – in this case that large build-ups of debt in the private domestic sector (especially households) is unsustainable and leads to “significantly larger contractions in economic activity” when the bust comes. They also acknowledge that sustained fiscal support is required to allow the process of private deleveraging to occur in a growth environment. But then their ideological blinkers prevent them from seeing the obvious – that sustained fiscal deficits are typically required and that in fiat monetary systems this is entirely appropriate when . Which then leads to the next conclusion that they cannot bring themselves to make – the Eurozone is a deeply flawed monetary system that prevents such fiscal support and should not be considered an example of what happens in fiat monetary systems. Some progress though!

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Governments should not worry about deficits

Another relatively short blog coming up today – it is still holidays here and very sunny. There was an interesting Bloomberg article the other day (April 5, 2011) – Don’t Worry About Deficit That Will Heal Itself – which although containing some conceptual flaws arrives at the correct conclusion. That governments would be far better pursuing real goals – such as ensuring there is adequate infrastructure investment, putting into place appropriate climate change initiatives and maintaining high levels of bio-security – that becoming obsessed with fiscal horizons that they have very little control over. Further, in attempting to control these horizons, governments tend to err on too much austerity (for example, the UK and the Eurozone), which not only undermines growth but also thwarts their deficit reduction goals (via the automatic stabilisers). The lesson to be drawn from all of this is that – Governments should not worry about deficits.

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Back off austerity and give growth a chance

The Australian Treasurer wrote an Op Ed in the Melbourne Age today (April 4, 2012) – Return to surplus is the right move at the right time – trying to defend his obsessive pursuit of a budget surplus in the next financial year. It was in direct response to an article yesterday (April 3, 2012) from the Melbourne Age economics editor Tim Colebatch – Budget cuts will bring on recession. Tim Colebatch’s commentary was a followup to his article last week (March 30, 2012) – Swan’s foolish surplus fetish – which I considered in this blog – A seriously reckless act. The pressure is mounting on the Government to abandon their reckless pursuit of the surplus. Even the conservative State premiers have expressed concern (States warn Wayne Swan over budget cuts. It is clear that the forecasts that the surplus were based on have no hope of being realised over the relevant horizon. The Australian economy is performing well below what the Treasury expected and deteriorating. The surplus obsession is based on these overly optimistic forecasts. The Government would be advised to assume the worst case scenario at present and calibrate its May Budget accordingly, rather than persist with the myth that the Treasury has it right.

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The Eurozone has failed – time for an orderly retreat

The voice from the parallel universe announced that “The euro as a currency is a great success indeed … it is backed by remarkable fundamentals” and harsh fiscal austerity is “the best way to get sustainable growth and job creation”. The only problem is that the voice was none other than the retiring ECB boss Jean-Claude Trichet as he prepared to retire from his post in October 2011. During his term, Trichet was constantly preaching how the introduction of the Euro was a “success”. The only problem is that it is hard to reconcile that conclusion with an examination of the actual data. The Eurozone has failed and an orderly dismantling of the entire monetary system with a return to floating sovereign currencies is the only way that any semblance of prosperity will return.

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Saturday quiz – March 31, 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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A seriously reckless act

I read this morning that there were riots in Spain overnight – Arrests, clashes amid general strike in Spain. I thought that, ultimately, this may be the only way that the neo-liberal economic madness that has beset the world, amidst the worst economic crisis in 80 odd years, will be curtailed. By people power. It is a pity that we have allowed the political class to move so far beyond what is required to introduce policies that enhance the well-being of the citizens. How that happened is a separate question which I hope the political scientists and other experts shed some light on soon. It seems totally bizarre that popular support is given to political parties that introduce policies which undermine the prosperity of the supporters. In Australia, the Treasurer delivered a speech yesterday that confirms that even though we are a long way from the European maelstrom, our intellectual underpinnings are the same. Our Government is currently about to walk the plank because it is engaging in a “seriously reckless” act – trying to cut public spending by around 2.6 per cent of GDP when the economy is already in decline.

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Saturday quiz – March 24, 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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Questions and Answers 4

This is the Q&A (Part 4) blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that. I plan to make this a regular Friday exercise.

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UK Budget reveals what is really going on

The British government brought down their 2012 Budget yesterday. I haven’t had time to fully digest all the detail yet and I am not yet fully conversant with all the discussion papers that underpinned the official budget documents. My experience tells me that one usually finds some really interesting points that are hidden in the fine print of some of the less obvious government documents. Sometimes these points are “game makers”, which really expose the ideological slant of the budget. Not that you have to do much digging in this budget to determine what agenda the British government is now pursuing. The “bond markets are about to close us down” rhetoric is giving way now to Thatcherite “trickle down” stories. This budget is trying to sell the “puppy” that if more real income is transferred to the rich then they will ensure, through their enhanced enterprise, that the poor (which cedes real income) will eventually be better off. That is a variant on the “fiscal contraction expansion” myth.

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Flawed macroeconomic models lead to erroneous conclusions

I get a lot of queries about the difference between fixed and flexible exchange rates in terms of the options that each present a sovereign, currency-issuing government. I considered this question several times in the past. Many of those questions are pitched in terms of the basic macroeconomic framework for an open economy that appears in most mainstream macroeconomics textbooks, particularly those written in the 1970s, 1980s and 1990s. I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.

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Inflexible governments undermine our standards of living

I keep reading news reports that claim that Apple (the company) has more cash to spend than the US government. For example, this ABC News report today (March 20, 2012) – Apple goes on massive spending spree – perpetuates this myth. I noticed a similar report was spread throughout the Internet overnight. Apple might have 90 odd billion US dollars in cash reserves at present which it could draw on at its leisure. But once its reserves were gone that would be it. Notwithstanding, the labyrinthine accounting arrangements, which obfuscate its true capacity, the US government could spend 90 billion tomorrow, 90 the next day, and 90 the day after that if it wanted to. I am not advocating that just noting the capacity. This example highlights how poorly we are served by the financial press which reinforces the ideologically-motivated lies the government’s and the corporate elites use to maintain their hegemony. Inflexible governments undermine our standards of living.

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Saturday quiz – March 17, 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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Questions and Answers 3

This is the third Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.

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Unemployment causes higher property and violent crime rates

The NSW Bureau of Crime Statistics and Research (BOCSAR) released an interesting study yesterday (March 13, 2012) – The effect of arrest and imprisonment on crime – which might be a strange topic for a Modern Monetary Theory blog to highlight. On the contrary, this type of research provides an invaluable reality check against those who think that entrenched unemployment during a recession is more efficient than fiscal initiatives that aim to directly generate public sector employment. We already know that that the daily real GDP losses that arise from an economy operating at less than full employment are massive. The BOSCAR report adds another loss in the form of higher crime rates. It confirms long-standing research findings that shows that unemployment causes higher property and violent crime rates.

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German hypocrisy and lunacy

I haven’t much time to write a blog today (travel and other commitments). But I have been examining tax revenue data for the EU in the last day or so as part of another project and thought the following might be of interest. The analysis is still unfinished (by a long way). But to the news – I laughed when I read the story from Der Spiegel (March 12, 2012) – Germany Fails To Meet Its Own Austerity Goals – which listed Germany as a serial offender in the hypocrisy stakes. I also laughed when I read that the German Finance Minister, in between games of Sudoku, told a gathering in Berlin yesterday that (as reported in a Bloomberg video) “deficit spending is the wrong way to bolster economic growth” and that “People who believe you can generate growth without pursuing budget consolidation have “learned nothing from the experience of the crisis.” The combination of staggering hypocrisy and manifest arrogance (thinking that the world is so stupid that they actually believe austerity will deliver growth) seems to have reached new heights.

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Australian growth rate halves as obsession with budget surplus continues

Today the ABS released the Australian National Accounts – for the December 2011 quarter which shows that the quarterly real GDP growth rate was 0.4 per cent, down from 0.8 per cent in the September quarter. For the year, the Australian economy grew by 2.3 per cent down which when compared to trend (around 3.25 per cent) reveals how sluggish our recovery after the crisis has been. The worrying sign is that private business investment contracted and offset the growth coming from household consumption, net exports and inventory building. Growth is also being held back by the Government’s obsessive pursuit of a budget surplus in the coming fiscal year. The fiscal drag is damaging output and employment prospects and dampening expectations in the private sector. The growth rate is not strong enough to make a dent in the unemployment and underemployment ranks. The case for continued government support for higher growth remains especially with inflation now falling.

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Look after the unemployment, and the budget will look after itself

There was a Wall Street Journal article (March 5, 2012) – The High Cost of the Fed’s Cheap Money – which is full of statements like “could eventually lead to an economic calamity” etc. The WSJ article basically rehearses a confused form the old supply-side tradition of the pre-Great Depression era where the claim was that “supply creates its own demand” (so-called Say’s Law) which was shorthand for the proposition that flexible prices and interest rates would ensure that whatever was supplied would be purchased. The same sort of arguments were used in a recent lecture to Harvard EC10 students by the Director of the US Congressional Budget Office. It is extraordinary that these myths, which were part of the body of economic theory that led the world into the current crisis, still have currency. They should start by understanding what Keynes meant when he said “Look after the unemployment, and the budget will look after itself”.

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Saturday quiz – March 3, 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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Some appalled economists – just missing the boat

In January 2011, 44 per cent of Spanish working people below the age of 25 were unemployed. A year later Eurostat report (in its March 1, 2012 publication) – Euro Indicators – that the rate has climbed to 49.9. For the overall labour force in Spain, the unemployment rate rose from 21.7 per cent to 23.3 per cent over the same period. That is Great Depression-type magnitudes. At the other end of the unemployment spectrum, currently, is The Netherlands. Their overall unemployment rate has risen from 4.3 per cent in January 2011 to 5 per cent in January 2012. Notwithstanding the massive underemployment in The Netherlands (almost 50 per cent of the working age population work part-time – average is less than 20 per cent for EU) and the large proportion of workers hidden from unemployment by disability support pensions – this is a low unemployment rate. And therein lies the rub. The Dutch Centraal Planning Bureau released its latest – Short-term forecast yesterday (March 1, 2012) which showed that over the next 4 years it will violate the current Stability and Growth Pact (SGP) and face fines under the Excessive Deficit Procedure. And to put a finer point on this – the Dutch government has been one of the more rabid proponents of fiscal austerity and one of the first to heel-click in line to sign Germany’s … sorry the EU’s fiscal compact. All of that should tell you that the current leadership in Europe has no viable solution to its crisis. Some French economists have come up with a solution. This blog considers their work and concludes they are on the right track but haven’t penetrated all the neo-liberal myths that they seek to highlight.

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Age discrimination against our teenagers should end

I haven’t much time to write today – I’m off to Sydney later where I will be a speaker at the following event – Open Forum: Young and old-age discrimination and the economy. I will be sharing the podium was the Age Discrimination Commissioner of the Australian Human Rights Commission, a Federal government agency. The topic is how can Australian businesses and government make better use of our youth and senior citizens. As regular readers will know I regularly try to push the parlous state of the teenage labour market into the policy arena, with varying degrees of success. But today’s event is high-profile and provides a good platform for advancing these issues. This blog covers some of the issues that I will raise.

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