In an article in yesterday’s WSJ The Fed’s Exit Strategy, federal Reserve Chairman Ben Bernanke provides an account of some of the operations of the monetary system that I write about in billy blog. While he doesn’t say it explicitly, he confirms that debt is issued to support interest rates (not fund net government spending) and that debt is not necessary at all if the central bank pays a “competitive” rate on overnight bank reserves held at the central bank. He also confirms that inflation is not an inevitable aspect of an expansionary package but it could be. All fundamental propositions of a modern monetary view of macroeconomics. So in one week, a Nobel Prize winner and now the Chairman of the Fed are stumbling around logic that confirms the neo-liberal driven deficit-debt-inflation-higher-taxation hysteria is without foundation.

There were two related stories this week from either side of the Pacific Ocean. From the east coast came – Rollout of jobs scheme ‘a sham’ and from the west coast – Stimulus Is Bankrupt Antidote to Failed Stimulus. While the US-based article is a polemic from the right-wing American Enterprise Institute and the second is a journalist’s reporting on Australian political trivia, they both raise interesting issues regarding the way fiscal policy is conducted. The issues raised provide further justification for employment guarantee schemes as a sophisticated addition to the automatic stabilisation capacity that is inherent in fiscal policy and makes it superior to monetary policy.

I read the headline in the UK press this morning – UK can’t afford another fiscal rescue – as a sure sign that all current and future keyboard operators within the UK Government had resolutely decided to refuse to enter a number in any government spending account from now on. This clearly would make it hard for the Government to continue spending given that a sovereign government like in the UK just spends by crediting private bank accounts and only a typist or two is needed to make that happen any time the government desires. I wondered what the Government had done to their operational staff that they would take such drastic action. So I started out to investigate what seemed to be a major yet fascinating industrial relations dispute between a government and its typists.

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.

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.

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!

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 New York on business for the next few days then off south to the capital Washington. In this blog I want to outline the horrible scenario that everyone has been predicting would happen – the increasing fiscal deficits will increase taxation. I know that has been on our minds. I have reached the ineluctable conclusion that future taxation will increase as a direct consequence of the current deficits. The tax revenue gained by the government will also reduce future deficits. Wouldn’t it be preferable that we didn’t push future taxation up and instead controlled net government spending? If you believed that you would have rocks in your head. In this blog I will be also be discussing debt, inflation, and other nasties.

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.