I was reading this IMF working paper today – The Outlook for Financing Japan’s Public Debt – which was released in January and was on my pile of things to catch up on. The paper is now being used by journalists to predict doom in the coming years for the Land of the Rising Sun. As I note, the stark deviation of the Japanese experience with the predictions of the mainstream macroeconomics models has given the conservatives a headache. As an attempt to reassert their relevance to the debate, the mainstream commentators are inventing new ploys so that they can say – yes we agree that the facts in the short-run don’t accord with our models but brothers and sisters just wait for what is around the corner. My assessment is that they have been saying this for 20 years already. In 5 more years, they will still be disappointed and still prophesying doom. They are pathetic!

The Federal Reserve Chairman Ben Bernanke gave a speech entitled – Economic Challenges: Past, Present, and Future – on April 7, 2010 in Texas. It emphatically demonstrated why he should never have been appointed to the position he is in and why his reappointment just compounds that initial mistake. While he has been largely quiet on fiscal matters over the last few years this speech outlines without doubt that he doesn’t really understand the monetary system he supervises and has an understanding that is seemingly limited to that found in any erroneous mainstream macroeconomics text book. The only other interpretation is that he does understand the system yet chooses to deliberately deceive the wider public so as he can support ideological attacks on government activity. Either way, he is part of the problem we face.

Today I decided that there is another macroeconomics research unit that needs to be closed down. My decision was reached after I read the latest paper from the Bank of International Settlements – The future of public debt: prospects and implications – which confirms that the Monetary and Economic Department of that organisation is publishing deficit terrorist literature. The paper is so bad that I am sorry I read it. I may avoid BIS publications altogether in the future. But if I apply that reasoning I am going to be back to reading Stieg Larsson novels and there are only three of them and I have already read them!

I have been resisting writing about the US health care fiasco because frankly the whole debate is a fiasco and demonstrates the ability of mainstream economics to obscure a widespread understanding of how the monetary system operates and the opportunities that system provides a currency-issuing government. But I have had more E-mails on this topic over the last few weeks than most other issues (bar EMU). Most readers want some analysis from a Modern Monetary Theory (MMT) perspective and so here it is. If only to stop the E-mails.

… and we are stuck in the middle. In some US states they are rationing street lighting because they have run out of “money” even though the electricity generators have spare capacity. Hospitals are cutting services even though there are plenty of bandages idle. In the US, the federal government is now crowing about its “historical” health care victory which imposes new taxes now and no new spending until 2014 – it is still enduring the impact of a deep recession – some victory. Private spending remains very weak in most economies and fiscal interventions dominate the modest growth in aggregate demand that we are witnessing in some countries. In almost all countries unemployment has risen sharply and will persist at higher levels for some years to come. So what does my profession say … the fiscal cuts need to be even bigger because growth is slower and the deficits are “worse” than expected. So clowns to the left, jokers to the right … or whatever.

On Friday (February 12, 2010) as Eurostats released the flash estimates of fourth quarter GDP for the EU (see below), the IMF released a new staff position note entitled – Rethinking Macroeconomic Policy. The bad news is the Europe is looking more like a region that is heading for a double dip recession. The even worse news is that that cretins at the IMF are claiming they know why they messed up in the past and how to address their failure. Stay tuned for a modified version of the same. The fact is that the IMF Report reveals they are as ignorant as ever of the workings of the modern monetary economy. So this revisionist exercise doesn’t signal a major paradigm stage.

Tonight’s blog title L’horreur Economique is taken from one of my favourite (though depressing) books by a French writer (Viviane Forrester). I will discuss the book a bit at the end of the blog. But I was thinking about it (and re-reading it) today when I reflected on the US President’s most recent Radio address on the reining in budget deficits. We – collectively – have allowed the most grotesque set of lies, half-truths and irrelevancies to become the centrepiece of the public debate on the economy. The crisis exposed the lack of credibility that mainstream economics has and should have dispatched the ideas to the rubbish bin forever. Instead, as unemployment and poverty rates continues to rise the mainstream ideas are now taking centre-stage again. And the policies that result will be to our collective misfortune. It really is “L’horreur economique”.

Today I have been reflecting on minimum wages and employment. As the Australian economy slides slowly along the bottom (close to zero growth), the conservative forces are mobilising to attack the changes that the current federal government made to the industrial relations laws when they won the last election. Ex-liberal party hack (advisor) and now Director of the conservative Sydney Institute and regular Sydney Morning Herald columnist Gerard Henderson is one person who is leading the charge. While the first of the changes will not come into effect until next month, employers who have revelled in the massive redistribution of national income that the deregulation the labour market delivered to them are already enraged and looking to commentators such as Henderson for succour. The problem is that there is no argument they can make that is defensible. This will become a new battlefront for unions who seek to defend the interests of the most disadvantaged workers in the land.

Today I was in Sydney for some meetings and also I attended the first sessions of the Society of Heterodox Economists conference. I took some papers with me to read on the train coming back to Newcastle. Sitting on the train for 3 hours presents a good opportunity to catch up on back-reading. While I would have been better off reading the Phantom comic that I had in my bag, I chose, instead, to read the latest fiscal analysis provided by the IMF. The paper I discuss here is typical of the whole debate at present. It cannot provide any evidence to advance its scary “deficit and public debt” vision, but it doesn’t let the facts get in the way of presenting it anyway. My professional assessment. These guys should get a real job.

Here is today’s mystery question: when is it imperative that interest rates should rise? Answer according to most business economists in Australia: when official unemployment creeps up, underemployment rises; participation remains subdued, 88 per cent of the modest employment rise measured in persons is part-time, total employment in hours falls, and you have 26.4 per cent of your 15-24 year olds idle. The real answer: none of these commentators have the slightest sense of national priorities in terms of advancing public purpose and providing an adequate future for our youth. Talk about intergenerational burdens. All the focus is on the so-called debt overhang we are leaving our children. The biggest overhang we are leaving is our support for a government that refuses to provide enough jobs for them.

Today I have been working on a new book and have been deeply emeshed in paradigmic debates. The practical relevance, other than the work gives me another day’s pay to maintain my part in keeping aggregate demand growth moving, is that two Nobel prize winners (Phelps and Krugman) have had a recent paradigmic dispute about similar themes. One attack was implicit (Phelps on Keynesians), the other very direct and personal (Krugman on Phelps). Neither understand modern monetary theory (MMT) although Krugman is closer than Phelps. Phelps’s work, in my view, has been used by neo-liberals for years to undermine the employment prospects of millions of workers. It is also a primary IMF tool for keep less developing countries poor. Sounds like a topic to be discussed.

In the Financial Times this morning there was a thought provoking article by Mort Zuckerman entitled The free market is not up to the job of creating work which is in stark contrast to another article – Goodbye, Macroeconomics, which appeared last week in the FT and was written by Eli Noam. The former seems to understand the depth of the problem and has the right priorities but doesn’t come up with the right policies. The latter raises some interesting points but just misunderstands the nature of macroeconomics.

Earlier this week my professional association (which I decline to join) – the Economics Society (ACT Branch) awarded its inaugural Enemy of the State/Friend of the People award to a microeconomist for advocacy in defence of economics and its application to public policy. The stunt reflects the major historical revisionism that is now a daily occurrence and appears worse than anything that occurred in the communist states. Those who think they have an entitlement to make huge profits (helped by government guarantees) yet return to behaviour that brought the world economy unstuck are now in attack mode. There is denial, outright deception, constant hectoring. To redress this issue, I am now calling for nominations for the Modern Monetary Theory’s (MMT) Friend of the state, Friend of the people award. It will be awarded to all persons (we believe in collectives) who understand how our monetary system operates and how it can be managed via fiscal policy to serve public purpose and advance the welfare of the most disadvantaged.

This week’s Economist Magazine (print edition) is running a story Making fiscal policy credible – Bind games, continues the mounting conservative push for governments to return fiscal conduct back to the days before the crisis. The conservatives (except the really loopy ones) are begrudgingly being forced to recognise that the fiscal stimulus packages have saved the World economy from a total disaster. But after taking a deep breath they get back on track with the “debt is bad” “surplus is good” mantra that got us into this mess in the first place.

I have been intrigued with Japan for many years. It probably started with the post-war hostility towards them by the soldiers who saw the worst of them. The Anzac tradition was very unkind to Japan and its modern generations. It always puzzled me how we could hate them so much yet rely on them for our Post-World War II boom. I also thought we owed them something for being part of the political axis that dropped the first and only nuclear weapon on defenceless citizens when the war was over anyway. Whatever, I have long studied the nation and its economy. So yesterday’s election outcome certainly exercises the mind. Will it be a paradigm shift or a frustrating period where an ostensibly social democratic government runs up against the neo-liberal machine? I put these thoughts together about while travelling to and from Sydney on the train today.