Today we go into the kitchen cupboard for a lesson in macroeconomics. That is according to the main economics writer of the Sydney Morning Herald, which is published in a city of over 4 million people. The reality is that while we are encouraged to get our heads into the cupboard, all we succeed in doing is further obscuring any understanding at all of how budgets work and the opportunities and capacities of a sovereign government operating within a fiat monetary system. We were really scraping the barrel today!

This week’s Economist Magazine (print edition) is running a story Making fiscal policy credible – Bind games, continues the mounting conservative push for governments to return fiscal conduct back to the days before the crisis. The conservatives (except the really loopy ones) are begrudgingly being forced to recognise that the fiscal stimulus packages have saved the World economy from a total disaster. But after taking a deep breath they get back on track with the “debt is bad” “surplus is good” mantra that got us into this mess in the first place.

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.

On July 8, 2009 a world first occurred in Sweden when the Swedish Riksbank (its central bank) made announced that its deposit interest rate would be set at minus 0.25. While this has set the cat among the pidgeons around the financial markets, it is a classic example of “central banking gone crazy” or more politely “quantitative easing on steroids”. The only problem is that performance enhancing drugs seem to make athletes ride or run faster. This move will do very little to make the Swedish economy increase output or employ more people. For a background to my analysis on this event in central banking history you might like to read my blog – Quantitative Easing 101.

I saw the latest Government Finance Statistics released by the ABS today just after I read the Financial Times where there was an article by former Cambridge Professor of Modern History, Peter Clarke entitled This is no time to throw away the crutches. There was a symbiosis in time. Then I read all the geeing up that is going on about rising manufacturing output in China and Japan and the News Limited themes that we have to get interest rates up sooner rather than later or the inflation genie will escape and I remembered the real world.

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.

In today’s Australian newspaper ex Federal Treasury official Tony Makin writes that We keep repeating Keynes’s mistakes. Do we now? The story is a litany of half-truths and basic conceptual errors. He is now a professor of economics. Bad luck for his students. The article, one of a regular contribution he makes to the increasingly squawking right-wing News Limited daily, is a classic example of how to deceive the public with spurious economic reasoning – that the author knows most of the public will just accept without question.

In yesterday’s (August 23 2009) Financial Times, so-called financial markets expert Nouriel Roubini wrote that The risk of a double-dip recession is rising. The American academic was recently in Australia as a speaker at the Diggers & Dealers Forum which is an annual mining conference. The problem is that Roubini is an influential advisor to the US Government and so will have a hand in determining the direction of fiscal policy. He continually demonstrates, however, that he does not understand how the fiat monetary system operates and in that context becomes part of the problem.

Someone wrote to me today and said they had been reading Paul Krugman’s 1999 book Peddling Prosperity, where he presents the now-famous baby-sitting model. You can read a shortened version of the model HERE. The reader asked me whether the model had any relevance to modern monetary theory. The short answer: yes but not necessarily in the way Krugman thinks (he is still locked into gold standard thinking).

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.

This blog is based on some research on Japan I have been doing as a precursor to a book contract I am working on which will be about developing a progressive macroeconomic narrative – a sort of cookbook for progressives to enable them to challenge the major myths that are perpetuated by neo-liberals. These myths lead to the imposition of voluntary constraints on the government capacity to achieve and sustain full employment. Some of the underlying dynamics of the system which expose these constraints for what they are – an ideological distaste for fiscal intervention – are still not well understood though. Here is some more on that theme.

Today I have been working on part of a new book I am writing on the pathology of recessions. I have written a lot about this in the past and my last book was about this topic. But you can never say it enough – recessions impose huge social costs on the most disadvantaged members of our society and it is the responsibility of national governments to do every they can to avoid them. The neo-liberal onslaught on public policy has seen governments all around the world abandon this responsibility with obvious (ugly) consequences. Anyway, here is a way of thinking about all of this. It is not a happy story.

There have been several related reports and articles in the last few days about adjustments that are going on as the economy goes into recession. New data is also available to shed light on movements in wage costs and labour productivity which can help us better understand what is going on at present and provide comparisons with the now perennial question – is this recession different to that experienced in 1991. Today I decided to write about these matters as an on-going investigation into what is happening out there in the labour market. This is sort of my other main interest in economics alongside the development and explication of modern monetary theory. Today we find that the neo-liberal dumbing down of our labour market may have saved a few jobs – but at what cost!

Yesterday, regular commentator JKH wrote a very long comment where he/she challenged some of the statements and logic that modern monetary theorists including myself have been making. While I don’t want to elevate one comment to any special status – all comments are good and add to the debate in some way – this particular comment does make statements that many readers will find themselves asking. In that sense it is illustrative of more general principles, points etc and so today’s blog provides a detailed answer to JKH and tries to make it clear where the differences lie. Some of these differences are at the level of nuance but others are more fundamental.

In November last year, during a visit to the LSE, the Queen of England (and Australia to our eternal shame) asked some pointy heads why “if these things were so large, how come everyone missed them?” in relation to the apparent inability of the mainstream economics profession to foresee the crisis. Apparently, the Royal Academy then called a special workshop to discuss this and came up with an answer which they then relayed post haste … as “Your Majesty’s most humble and obedient servants” to Liz. The whole affair represents the standard massive denial that defines mainstream macroeconomics. There are no saving graces. It would be useful if they just desisted for a while and went and played gin rummy.

The public debate is constantly distorted by claims that cannot be substantiated. One such claim is that the current period of budget deficits is building a stock of future claims on the well-being of the future generation – our kids. Accordingly, the neo-liberal deficit terrorists claim that the best thing we can do for the future generation is to avoid running deficits. My view is that we have been imposing a huge future burden on our children but this would be larger if we tried to run surpluses now. In fact, the years of surpluses exacted a huge toll on our children’s prospects that they will have to endure for years to come.

Why doesn’t this article get headlines in the newspapers? Today I read a recent article – Why Are Banks Holding So Many Excess Reserves? – from two researchers at the New York branch of the Federal Reserve Bank. It is obvious that the authors understand much more about the modern monetary system than most of the journalists, economists and politicians who make so-called informed commentary about such matters. Three messages emerge: (a) bank reserves play an important role in the conduct of interest rate policy and budget deficits put downward pressure on interest rates; (b) the money multiplier conception of economics is inapplicable to a modern monetary system; and (c) the current build-up of bank reserves will not be inflationary. I thought that it would be nice for you to read this stuff from someone other than billy blog (and my fellow modern money travellers!).

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.