As indicated yesterday, Steve Keen and I agreed to foster a debate about where modern monetary theory sits with his work on debt-deflation. So yesterday his blog carried the following post, which included a 1000-odd word precis written by me describing what I see as the essential characteristics of modern monetary theory. The discussion is on-going on that site and I invite you to follow it if you are interested. Rather than comment on all the comments over on Steve’s site, I decided to collate them here (in part) and help develop the understanding that way. That is what follows today.

The mainstream economics profession is not saying much during the crisis apart from some of the notable interventions from conservatives and a few not-so conservative economists. In general, what can they say? Not much at all. The frameworks they use to reason with are deeply flawed and bear no relation at the macroeconomic level to the operational realities of modern monetary economies. Even the debt-deleveraging (progressives) use such stylised models which negate stock-flow consistency that their ability to capture sensible policy options are limited. This blog discusses New Keynesian theory which is a current fad among mainstream economists and which has been defended strongly by one of its adherents in a recent attack on Paul Krugman. The blog is a bit pointy.

It is clear that next year’s federal election will be based on the deficit-debt-waste agenda, if the mounting calls for the federal government to cut back net spending now to avoid us drowning in a mountain of debt are any guide. However, the political rhetoric is at odds with the major forecasts (such as the OECD and IMF) which confirm that the stimulus packages must not be wound back. The fact that the IMF and OECD are saying that is some endorsement given their neo-liberal credentials. Today, I thought I would do some digging to construct some of my own scenarios. This is what I came up.

Mostly, financial markets (the wealth shuffling casino) and the real economy (where people live and work) run as parallel universes. But occasionally as in the case of the GFC morphing into a full-blown real crisis with massive income and job losses the two merge. In many cases the merger is driven by a poor understanding of the way the fiat monetary system operates. As a consequence we get decisions taking by the gamblers (they prefer to be called speculators – it sounds better) based on faulty analysis of how the econmy works, pushing asset prices up (or down) which in turn affect the way governments are reacting to the “real crisis”. The surge in gold prices in the last few days might be an example of that.

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.

Strange events come together sometimes. One was the continuing railing against the ABC, our national broadcaster by the failed former federal treasurer. He somehow thinks the national broadcaster continues to display left-wing bias. The other event was an astonishing interview on a popular national ABC program where the content was about as far away from the sort of thing the failed former treasurer was railing against. The ABC program interview will have New Yorkers marching in the streets to defend the buildings of their famous newspaper. Here is how the events unfolded.

I am catching up on the mountains of things I have to read. It is a pointless task – the pile rises faster than my eyes can process it. But I try. There was an article in the June 25, 2009 edition of The Economist entitled A slow-burning fuse, which carried the by-line “Age is creeping up on the world, and any moment now it will begin to show. The consequences will be scary”. It definitely might be scary getting old but the discussion that needs to be had is nothing remotely like the discussion that dominates the current policy debate about the ageing society.

Today I am a keynote speaker at the LHMU National Conference in Canberra. I am talking about the challenges of underemployment and low wages and the need for the union movement to broaden out their activism from narrow concerns about wages and conditions for their members to development and pursuit of a full-scale attack on neo-liberalism. In much the same way that the neo-liberal think tanks boosted the saturation of those ideas. I will report back when I get back – much later this evening.

The Australian Prime Minister released his second essay over the weekend, in which he outlines his vision for a modern Australia steered towards new levels of prosperity and equity by his government. Well my reading of the 6098 words is that far from presenting an acceptable vision for the future, they rather, outline how his Federal Government has chosen to continue the abandonment of full employment and impose huge costs from the cyclical downturn on the most disadvantaged workers and their families in our communities for years to come.

The world seems to be going more insane every time I check. I have this naive belief that we bother to elect governments because we understand they can do things (as a collective) that we cannot do very easily (as individuals). I also assume we all think our elected governments will broadly use their fiscal powers to pursue an agenda that will advance public purpose – that is, seek ways to improve our standard of living and ensure all citizens participate in the bounty that the economic system generates (including sharing the losses when it doesn’t so generate). Of-course, I know that our polities basically govern to keep themselves in power. But there is the occasional election. Anyway, recent events suggest that governments seem to be able to construct popularity by taking actions that do us harm.

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.

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.

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!

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.