The US President appeared on the US commercial television show 60 minutes program on March 22. He was talking about about the AIG debacle, the economy, and his first challenges in his new job. His responses to questions about the economy though were positively scary. The most powerful man in the World and he doesn’t understand how the modern monetary economy works. Very scary indeed.
This morning I was reading the Sydney Morning Herald and Economics writer Ross Gittins was talking about the fact that the ALP election victory in Queensland over the weekend violates the dogma that Treasury officials (federal and state) like to put around. Of-course, Gittins is in his own words “has great sympathy for treasuries” so I never expect him to tell his readers how the modern monetary system actually operates. But at one point, he advances without any critical scrutiny one of the greatest myths propogated by neo-liberals (including treasuries) about the way federal government budgets work. The myth: budget surpluses increase national saving. The truth is they do not. Its that time again. Time to debrief.
I read a headline in the Australian newspaper yesterday (March 19) – Nation building funding crisis as private sector fails to find cash. What? Nation building requires significant budget deficits. When was it dependent on the private sector having to trump up cash? I soon recalled that we have been living in the Public Private Partnership (PPP) era where governments have relinquished their responsibilities to build essential public infrastructure that not only supports a sense of public good but also underpins the prosperity of the private market economy. Its that time again. Time to debrief.
Some readers have written to me asking to explain what quantitative easing is. Some of them had heard an ABC 7.30 Report segment the other night which interviewed the Bank of England Governor who outlined the BOE’s plan to “print billions of pounds” as its latest strategy to stimulate lending and hence economic activity in the very dismally performing UK economy. Once again we need to de-brief and learn what quantititative easing actually is. We need to understand that it is not a very good strategy for a sovereign government to follow in times of depressed demand and rising unemployment. We also need to get this “printing money” mantra out of our heads.
After yesterday’s shock admission that our Federal Finance Minister Lindsay Tanner was losing sleep because he was worried about the Federal debt buildup, there he was on the ABCs 7.30 Report last night giving us more cause for concern that his sleeplessness is having a negative effect on his ability to conduct reasonable dialogue on economic matters.
Today I heard that our Federal Finance Minister Lindsay Tanner is suffering from insomnia because of the growing Government debt burden. Poor thing. Why is he worrying himself sick? Well I have the cure. If he reads this blog and understands it I think he will back in slumberland sooner rather than later.
Senior journalists often do more harm than good when they write about technical issues that they clearly do not understand. In many cases, they rely on the technical knowledge of their favourite economist or the flavour of the month economist and they are not skilled enough to know when their “economist” is also talking rubbish.
The long-awaited National Account data was released today by the ABS and shows that the Australian economy is now sliding along the zero line. The headline result was that the measure of overall economic activity, Gross Domestic Product (GDP) decreased by 0.5 per cent in the December quarter. This is the first negative result since December 2000. So one more negative quarter and we will all cry recession. For the 12 months December 2008, the economy grew by the very modest 0.3 per cent but this was driven by agriculture. Non-farm GDP did not grow at all over that same period. What are the signs for employment and what is the government doing? Here are some of my thoughts …
The US Bureau of Labor Statistics released underemployment data for the US overnight. The results are disturbing and follow the same trend that is now common in Anglo countries – these economies, even in good times are increasingly generating marginal employment with low pay and job security, and, most importantly, deficient hours of work relative to the preferences of the workforce. But underemployment presents an added danger as we enter this current downturn.
A good way to understand the origins of the current economic crisis in Australia is to examine the historical behaviour of key macroeconomic aggregates. The previous Federal Government claimed they were responsibly managing the fiscal and monetary parameters and creating a resilient competitive economy. This was a spurious claim they were in fact setting Australia up for crisis. The reality is that the previous government created an economy which was always going to crash badly.
Opposition leader Turnbull has decided to go to the wall in opposing the $42 billion package. In particular, they want tax cuts rather than the $12.7 billion in cash handouts. He said they will not be provide economic stimulus and that December’s $10.4 billion in handouts had not worked. Soon after Turnbull provided these conclusions the ABS released the latest retail trade figures which showed that consumer spending shot up by 3.8 per cent in December, the highest monthly increase since August 2000 (since the GST came in).
Various estimates about the size of the federal budget deficit are starting to emerge. The Government has acknowledged that the data shows that tax receipts have fallen dramatically and now their budget is in deficit. For me that is a time of national rejoicing … finally … the federal government is doing what it should … resuming its crucial role in financing non-government (in this case) domestic private savings. Finally, there is a net injection of financial assets coming from the excess spending over receipts. Finally, the drain on private wealth that the creation of budget surpluses requires is at an end.
Today in the Fairfax press, economics writer Ross Gittins in an article entitled No good reason to feel depression claims that we should not be too worried about the looming recession because after all things aren’t likely to be that bad. Well from my perspective recessions are episodes that wreak havoc on the most disadvantaged citizens in our society and should never occur.
The extraordinary events in world financial markets which have undermined the basis of capitalism have led to equally amazing Government responses – massive injections of public spending, nationalisations of banks and bailouts of huge financial institutions with little regard for the relevant shareholder interests.
A major paradigm shift is occurring in economic thinking away from the free market deregulation era that has dominated since the 1970s. All the logic that justified government cut backs; the run down of public infrastructure; the harsh treatment of welfare recipients; the wasteful privatisations, and the rest of the neo-liberal litany that served to transfer wealth from poor to rich and create an disadvantaged underclass has been destroyed by these events.
In the Melbourne Age today (January 3, 2005), the forecasts of 18 economists for the year ahead. The group was overwhelmingly comprised of economists with vested corporate sector interests with only one academic economist being included. They make interesting reading given I also indulge in a bit of crystal ball gazing myself.
Foreign minister Downer displayed his fundamental macroeconomic ignorance yesterday when he was trying to explain to reporters the accounting behind the relief payments the Australian Government is proposing to aid the tsunami victims. Reported on the ABC he said that “the Government will need to dip in to the Budget surplus to provide relief money to areas affected by the tsunami disaster. The amounts proposed are beyond the government’s current disaster relief fund. For reasons I explain below this fund can be nothing more than a notional accounting allocation that the Government considers it will spend each year on disaster assistance. It does not exist in the same way as you and me (as households) might have saving accounts with actual dollars in them in a building society (or bank) each year.
In the UK Financial Times article by Darryl Thomson, Dollar falls to fresh lows in thin festive trade posted December 24, the continued slide of the USD against the Euro is put down to “disappointing US economic data” (mostly sharp slowdown in new home sales). However, a so-called currency strategist claims it is the “deficits rather than the data which were weighing on investors minds”. The hoary old neo-liberal twin deficits attack on public spending is making a comeback.
Recently released ABS Statistics show that household debt has hit a record $815 billion but the growth is slowing as the property slowdown deepens.