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.

Today the retail sales data came out in Australia and showed a 1.0 per cent fall in the month of July and the beginnings of a declining trend (2 negative months in a row). Many economists are seeing this as a sign that the impacts of the fiscal stimulus packages have come to a screaming halt and all we have left for our troubles is a public debt burden that will kill our kids and pets. While the fall-off in retail activity is a problem I don’t think we are about to follow the US path into temporary oblivion. Further, debates about retail sales allow me to extend my Austrian theme. Attack dogs on the ready!

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.

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.

So today’s National Accounts data offers us a rear-vision mirror view of where the Australian was between April and June of this year. To some extent events have overtaken the relevance of this information. More recent news in the past week indicates that right now we are even further advanced in recovery than the June National Accounts data is indicating. But be warned. Not everything is what it seems to be.

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.

On Friday, the RBA signalled that it wanted to start hiking interest rates early in the upturn (and be one of the first central banks to do so). The justification was that this recession was more like the shallow, short-lived downturn in 2000-2001. I disagree. The evidence doesn’t support that contention. Increasing interest rates now will have serious impacts on the solvency of households currently struggling to get anywhere near enough hours of work. The RBA once again will be choosing to use underutilisation as a tool rather than a policy target. Another disgraceful chapter in their history is looming.

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.

News Limited is still (mis)leading the way on the deficit-debt attacks. In another appalling piece of misrepresentation and erroneous reasoning, The Australian ran a story from its economics chief, Michael Stutchbury today entitled Now comes time to pay the piper. This newspaper has really excelled in recent months in the lengths it has gone to mislead and lie to its readers on matters relating to the macroeconomy and the conduct of fiscal policy. There will be a piper to pay – that I agree – but it will be because the federal budget deficit is not large enough right now rather than because it is too high.

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.

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.

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)!

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.