I had to double-check over the weekend whether I had actually read an article in the Fairfax press – Alarming debt bomb is ticking – given that my flu-ridden state was playing havoc with the clarity of my eyesight. Upon checking today, I concluded that I had read it. It is one of those articles that uninformed readers will consider erudite given the technical language it uses but which in fact is so misinformed at a theoretical level that it is has to be considered pure propaganda. It is sad that this sort of techno-mumbo-jumbo nonsense gets any space in our leading daily newspapers. I would rather more cartoons or brain teasers if they are struggling to fill their pages. Even an advertisement about the latest skin cream that not only eliminates wrinkles but also increases the reliability of the left-hander at Nobby’s would be better (Nobby’s = surf break)!

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.

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.

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.

The talk at present is that while we are hoping for a V we might have to accept a W. Its all about shape. The shape of the future. The shape of the recovery! In Post-Lehman World Will Mean W-Shaped Recoveries we read that Japan’s former economic and fiscal policy minister, Hiroko Ota said that “The worst is over but I can’t say the economy is heading for a recovery at all”, Japan’s recovery may be W-shaped instead of V-shaped. There are some very real reasons why W might rule over V. They all relate to the lack of understanding of the characteristics of a fiat monetary system and the opportunities that such a system presents the sovereign government. Unfortunately, the ignorance (or wilful neglect) among policy makers may force millions of people to endure unnecessary hardship.

The euphoria over a 0.4 quarterly growth figure which translate into annualised GDP growth being at least 2.5 per cent less than would be required to keep the unemployment rate from rising should be attenuated by the fact that National Accounts data is very slow to come out. The picture it paints which conditions our current expectations and debates is old – at least 3 months old by definition. And it is sobering when amidst all the self-congratulation and applause for our strong export performance that newer data has come out today which suggests that GDP growth is probably now negative although we won’t find that out for three more months. Meanwhile the debt and deficits argument continues in the public debate. Here is an update.

I was going to write about retail sales and company profits data today but the short story is that retail sales continue to defy the predictions (stimulus packages work). I ran a regression model today to generate a (reasonable) forecasting model of retail sales behaviour up to the point the stimulus packages were announced (November 2008) and then projected out to April 2009 and compared the dynamic trend with the actual data. Every data point since November 2008 is above the trend (which is why the ABS has abandoned its trend series for the time being). But it does tell you that the Australian economy is withstanding the world downturn. We will know more on Wednesday, when the national accounts (GDP) data comes out. Anyway, there has been more engagement with the “other side” or should I say “another side” today and I guess I should respond to that. And so the saga continues for another day.

It is interesting when a local journalist exploits the work of a foreign journalist to perpetuate neo-liberal myths about the way the modern monetary economy works without any critical scrutiny of the underlying ideas that he is mimicking. So we have one US journalist reiterating the views of a so-called “top US policy maker” without critical scrutiny then being copied a few days later by a senior Australian journalist who also doesn’t bother to question whether the underlying economics being fed to his readers makes any sense at all. Pretty poor really – the power of the conservative press!

In the Sydney Morning Herald print edition today (later found in the Tapei Times there was an interesting article – Japan pays a price for lifetime jobs about the way the Japanese are coping with the recession. The story documents the Japanese life-time employment approach which explains why that country can have lower unemployment rates even though its economy is contracting fast. However, once you think about his scheme you realise that it is not without problems. The sentiment and collective will is admirable. But there is a superior buffer stock approach available which also embraces these social values but delivers better outcomes overall – I call it the Job Guarantee.

I read the headline – Aussies don’t understand deficits: MP – in the Canberra Times with interest and after reading the article I returned to the on-going conversation I have with myself – why have we all been so stupid to have been so duped by the neo-liberal agenda? Almost all the public debate about the Federal Budget tomorrow is a total non sequitur. It bears no relation to the important questions that the Budget process has to deal with. Somehow, we are all sidelined by a rhetoric and a focus that conveniently diverts us away from these real issues and, instead, transfixes us on a piece of fiction. But a convenient fiction which maintains the relative power elites and perpetuates disadvantage. I understand all of that … but I still can’t get my head around why we have allowed ourselves to be so conned.

Today I have been working on a project for the Asian Development Bank concerning regional development and macroeconomic risk management in the Central Asian countries (all the “stans” plus a few others). I have also been reading a lot of the development economics literature lately, which is generally a place that the neo-liberal troglodytes really run amok. It certainly focuses one’s attention. In the advanced countries the media focuses on our own losses. In Australia, a lot is written about superannuation losses. And journalists, who largely ignored the fact that during the boom we still had around 10 per cent of our willing workers without enough work – wasted and excluded, are once again talking about unemployment. But overall, the public debate is not at all focused on how the current economic crisis is damaging the weakest of the weak in far off lands and killing people.

The discussion about the relative merits of monetary policy and fiscal policy is on-going. A regular billy blog reader has asked me to give some thought to this discussion, specifically in terms of whether monetary policy is a useful counter-stabilisation option. My view is that if one takes a modern monetary perspective then it is clear that the current reliance on monetary policy (accompanied by the budget deficit phobia) will always fail to deliver full employment and relies on the impoverishment of the disadvantaged for its ability to achieve low inflation. Accordingly, it would be far better for the government to set the short-term interest rate at zero and achieve full employment through appropriate levels of net spending (fiscal deficits).

In today’s Melbourne Age we learn very clearly that the previous Federal Treasurer didn’t have much idea at all about how the economy actually works. While he continues to promote his years in office as the great period of fiscal rectitude, the reality is that after 11 years at the wheel he still failed to create full employment. His Treasury years, in fact, will be remembered for his Government’s wilful neglect of the disadvantaged and the on-going and incredible waste of human potential that this disregard created. Now, as he sits at the back of our Parliament smouldering about his lost chance to rule, he thinks he has something to say about the monetary systems. Its a shame he isn’t clever enough to know how little he knows.