Saturday morning traditions … a long early ride on my bike (70 odd kms), then off to the local cafe for a cup of tea. Yes, time to read an actual paper paper. Time to talk about the state of the swell and wind direction (off-shore and pumping at present). The big match (Saints v Geelong, both unbeaten after 13 rounds – note no rugby here!). Perhaps some local gossip (who paid off who to get what development up!) … that sort of thing. Probably some politics. But no, before anything interesting could be raised by the assembled regulars … someone (a non-economist who claims he is just interested) had to begin proceedings with “Bill, why does the federal government borrow when you say it does not have too?” Can you put a sock in it, please! What about the surf? But why if they don’t have too? Saturday morning … the problem of being a macro economist. Things started getting ugly at this point.

A regular reader sent me a recent financial market report written by Tokyo-based economist Richard Koo which raises some interesting issues about the association between prolonged recessions and democracy. Koo has achieved some notoriety in the last decade or more by coining the term “balance sheet recession” to describe what happened to Japan during its so-called “lost decade”. He also applies the analysis to the present global economic crisis. While he is not a modern monetary theorist, he recognises the need for considerable fiscal intervention and the futility of quantitative easing. So this blog is about all of that.

Today the ABS released the May 2009 Retail Sales data which showed that retail spending is continuing to grow despite the gloom that surrounds the economy. The main culprit – the fiscal package. While the jumps in retail sales earlier in the year were tentatively ascribed to the fiscal intervention it was clear we had to wait a few more months before we could be more definite in our assessment. As of now we can confidently say that the early interventions by the Government have had positive impacts on the economy. Whether they will last depends on what happens to unemployment. If it continues to rise then ultimately this will undermine the positive spending trend. Then significantly more fiscal intervention will be needed.

At lunchtime today I decided to take matters into my own hands and help save the State of California which is in fiscal strife at present. This is what I did …

I seem to be stuck in the US at the moment – blog-wise. I can assure you I escaped their shores at the weekend and am now freezing in Newcastle, NSW. But I still have reading left over from hanging around US book shops last week. One story that is very interesting at the moment is the plan by the Californian State Government to begin issuing IOUs (reserved warrants) because it has “run out of cash”. As far as I can work out the IOUs will not become a second currency (alongside the USD) but one simple extra announcement by the State would be enough to allow California to be sovereign in their IOUs. What do you suppose that extra complication might be?

Well I am now back in Newcastle and in the last two weeks the ocean has slumped from a cold 19 celsius to a freezing 16. See what happens when you turn your back. I think the sharks like the cold water less though. At least that is what I am telling myself as I read another surfer (on the south coast) was mauled last week. Anyway, my casual travel reading also saw me read the July edition of the Harper’s Magazine which had two very interesting articles about developments in the US, which ultimately have global implications. In recent months, I have been becoming more pessimistic about the idea that the current global economic crisis will represent a major change in ideology, away from free market neo-liberalism towards a more sustainable and fairer social democratic policy structure. The articles reinforce that pessimism.

While I am still reflecting on the UNDP workshop I participated at earlier this week in New York, another issue which came up repeatedly during the workshop is the on-going dispute between those who advocate income guarantees against those (such as me) who advocate employment guarantees. I didn’t cover this dispute at all in yesterday’s blog – Bad luck if you are poor!. When you start digging into the claims made by the income guarantee lobby you realise that most of their case is built on a failure to understand how a modern monetary economy works. For those who understand the opportunities available to a government which issues a sovereign currency, then the attractiveness of income guarantees disappears (in my opinion). So this blog documents some of this debate.

Greetings from College Park, Maryland (pronounced Marrilynd! in Australian). It is near Washington (DC) and I have work here (at the UMD) and in the capital for the next 2 days. Weather is hot but we are 189 kms or 2.8 hours from the nearest surf according to Google maps, which is equivalent to being landlocked to me! So no quick surf before work! Losers! I came down here late yesterday (5 hour drive) after a workshop at the Levy Institute jointly hosted with the United Nations Development Program, which was held in upstate New York. No summer up there at the moment but the Catskills Mountains are very beautiful – it is near to Woodstock. Anyway, I left the workshop thinking – bad luck if you are poor!

Several readers have asked me about fiscal rules and I have been promising to write about them for some time now. I was finally goaded into action by the current German rush to madness which will see them constitutionally outlaw deficits. When I saw the news that the German government was pushing constitutional change along these lines I thought good – the Eurozone will be dead soon enough and perhaps a better aligned fiscal and monetary system will emerge. Fiscal rules can take lots of different shapes all of which entrench chronic unemployment and poverty. The only fiscal approach that is applicable to a sovereign government operating within a fiat monetary system is one that ensures full employment is achieved and sustained. Anyway, here is an introduction to the mean-spirited and wrong-headed world of fiscal rules.

Yesterday I reported on a document I received from one of the largest international investment banks in the world. That document is part of that organisation’s advice it gives to bond investors. I used some of the document to illustrate that the understandings of how a modern monetary system operates that I write about here are also now out there in the real world – in the financial markets where bonds are bought and sold. I didn’t identify the document because it is a subscribers-only publication sent to me by the author and I respect his privacy. Today’s blog provides some more insights that will help you better understand the public debate and allow you to cut through the nonsense being peddled by all and sundry.

I received a document today from one of the largest international investment banks in the world. One of its major offices is not far from where I am typing this right now in New York City. The document is a subscribers-only publication and so I cannot make it accessible here. But this blog discusses some of the contents of the document which might help readers who keep worrying about whether anyone important out there believes in the stuff that I write about. There is a constant undercurrent in the comments and private E-mails I receive that says that the treasurer, the central bank, the mainstream journalists and a host of other seemingly important people do not share my views on how the fiat monetary system operates. The issue then is one of credibility.

I am now in the US with a hectic week ahead. At present I am in Florida and for those who haven’t been here just imagine taking a landscape and pouring as much concrete as you can mix over as much of that landscape that you can access. Then once that sets, you build massive high-rise buildings and suburbs that span hundreds of kilometres and you have it. Oh, and plant a few palm trees as you concrete. But then there is surf nearby and before work this morning I am off to check it out. Anyway, in between other things I have been reading the so-called public debt exposition that appears in the latest issue of the The Economist Magazine. It will take a few blogs to work through it but here is Part 1. It might happen that there will be no Part 2 if I get so sick of reading this nonsense.

I wrote this for the Fairfax press early this morning before a 10km run around the Vondelpark in the heart of Amsterdam – in cold pouring rain. They call it high summer. Anyway, the opinion piece was confined to 500 words. I could have said a lot more but you can extrapolate each line accordingly. I also did an ABC radio interview hiding under a tree in the park – the juxtaposition of talking to Sydney about the NSW Government’s failure to deliver adequate services and being among the wonderful urban amenities (for example, public transport and bike paths) and public spaces provided by the Dutch was not lost on me. Pity public spending can’t fix the lousy weather over here. Anyway, now I am off to work for the day over here. Part 3 of the fiscal sustainability series coming next – for Wednesday.

Its winter here in Newcastle! Today my shark-o’clock morning surf expedition was freezing! Full wetty and still cold! But for northern hemisphere readers pleased be warned that freezing means a water temperature of 19 degrees celsius and air temperature of 14 celsius. Anyway, the sudden sensation of cold reminded me of my mortal origins. One thing led to another and I was soon thinking of animal spirits! This is what JM Keynes said drives the business cycle up and down. And today (and yesterday) we have been reminded of the role that sentiment might play in economic life. The news is probably good and suggests that this downturn might be more moderate for Australia than the global experience would have indicated. But it might also be bad. Ahh, economics!

I saw this story in the Melbourne Age today World’s best airport named. I knew it wouldn’t be Sydney or Melbourne where I am often in and out of much to my displeasure. So I scanned the list. Sure enough a whole lot of airports some of which I regularly fly and know to be excellent in terms of ease of use, charges and available facilities. Anyway, I had intended to write a blog today about trends in world foreign exchange markets (see digression below) but the airport rankings attracted my interest because I am also thinking about infrastructure provision at present.

I saw this in The Australian (on-line) front-page today – “POLL: Do unions have too much power?” So the campaigns are emerging: deficits, debt and union power. Seems like we are back in the 1970s when the conservatives last ran the union power campaign. The topic is apposite given the Government’s reaction last week to union requests to eliminate some of the nasty elements that remain from Work Choices. I laughed when I saw the poll – who are they trying to kid. Anyway, the current Government is playing hard cop with the union movement exploiting the lack of capacity of the latter to fight back.