When does the experiment end?

It is a public holiday in Australia today remembering our First-World War soldiers who died during the ill-fated invasion of the Gallipoli peninsular in Turkey. Anzac Day is part of the Australian legend about heroism and the ideals of mateship that are (dubiously) prominent in our culture. However, this part of our history (and legend) is now being scrutinised by historians and more documentary evidence emerges and it is clear that the conventional history of the campaign that Australia was fighting a heroic struggle in service of the British Empire is not supportable (for example, see this Op Ed for one of the alternative viewpoints that make the Gallipoli story rather mirky). I also have a lot of travel coming up later today and so my blog will be relatively short. I have been rounding up the latest data – surveys, national statistical office releases, bank statistics – from Europe and the UK, to see how the fiscal austerity experiment is actually going. The neo-liberal proponents of austerity all promised us that the private sector was ready and willing to fill any spending gap left by government net spending cuts (and then some) so that the austerity would actually increase growth. Any reasonable person disputed that promise pointing out that spending equals income and private spending was going no-where fast. The evidence is increasingly supporting the latter view. The question is – given the massive damage the austerity policies are having is – when does the experiment end?

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Saturday quiz – April 14, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Australian labour force data – tentative improvement

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for March 2012 provides some positive news for once although as you will read the underlying trend situation remains weak. The labour force data tells us that employment grew, working hours grew, participation rose and unemployment fell, albeit only by a smidgin. Given the monthly variability in the data it is not yet cause for celebration. The pattern of growth/contraction in employment growth has been well documented over the last 18 or so months with nothing much happening in net terms when one takes a longer view (say 6 months or so). The outlook is not very positive either given the Federal government’s obsessive pursuit of a budget surplus which will cut economic growth by some percentage points. The most disturbing aspect of the labour market data remains the appalling state of the youth labour market. This should be a policy priority for the government. But they have gone missing in action – lost in their surplus mania. My assessment of today’s results – positive but cautiously so.

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The Academic Spring

The term Arab Spring is now entrenched in the lexicon although what it actually refers to – liberty or more oppression – is now a question in its own right. There is another Spring occurring – smaller, more obscure perhaps, but with significant potential to change the way academic research is disseminated and the way funding agencies treat universities. In the case of the economics discipline it offers significant scope to break down some of the barriers that allow the mainstream economics paradigm to retain dominance despite it being largely bereft of empirical support. I am talking about the Academic Spring, which is a grass roots revolt that is gathering pace. You can find out how to join this revolt at the end of the blog.

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Sociopaths, closed minds and a bit of Mayan cosmology

Yes, and more. There was an article in the EU Observer this week (April 3, 2012) – EU ‘surprised’ by Portugal’s unemployment rate – which I had to re-read a few times to check that I was actually reading the words correctly. The dialogue presented was so shocking that it raises fundamental questions about how one is interact with the economics debate. Then I read some more articles this week which investigated why mainstream economics retains its dominance in the face of its catastrophic failure to explain anything of importance to humanity. Closed minds are very resistant to change especially when socio-pathological dimensions are present. Which led me to investigate Mayan cosmology after being accused of being a practitioner of the art! Overall, another week in the life of a Modern Monetary Theorist (MMTist) – par for the course really.

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A nation cannot grow without spending

On Saturday (March 24, 2012), the Sydney Morning Herald published an article by University of Chicago economist John Cochrane – Austerity or stimulus? What’s needed in the US is structural reform. Earlier, on Thursday (March 22, 2012), Bloomberg published an Op Ed by Cochrane – Austerity or Stimulus? What We Need Is Growth. Different title but same article. However, the title, in each case, conveys a very different message to the reader. In either case, though, the content is the problem. A nation cannot grow without spending.

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US inflation expected to average 1.3827935 per cent for the next ten years

Yesterday (March 18, 2012), the Cleveland branch of the US Federal Reserve Bank released their latest estimates of US inflationary expectations. This data estimates what the “public currently expects the inflation rate to be” over various time horizons up to 30 years. The data shows that the US public “currently expects the inflation rate to be less than 2 percent on average over the next decade”. The ten-year expectation is in fact 1.38 per cent per annum. In the light of the massive expansion of the US Federal Reserve’s balance sheet and all the mainstream macroeconomic theory is predicting that such an expansion would be highly inflationary, how can the public expect inflation to be so low over the next decade? Answer: the mainstream macroeconomic theory is deeply flawed and should be disregarded. Modern Monetary Theory (MMT) correctly depicts the relationship between the monetary base and the broader measures of money and explains why movements in the former are no inflationary.

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The lessons of history – subtitled – are the Dutch printing guilders?

There was a Wall Street Journal article (March 14, 2012) – Default and the Nature of Government – which demonstrates how a recall to history can be misused if key additional (contextual) information is left out of the discussion. The article in fact tells us nothing meaningful about the likelihood of sovereign debt default. The sub-title relates to the latest news from the Netherlands which suggests that the strident rhetoric of their leadership about the failure of the “southern” states to meet their obligations to the Eurozone might now be coming back to haunt them. If they are not, then they should. If the Dutch are to be consistent then massive and destructive penalties should now be imposed on them by Brussels. They won’t be – but that just tells you how dysfunctional the Eurozone is!

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A tale of two economies – Greece and Iceland

Last Friday (March 9, 2012), the Greek government effectively defaulted on its public debt after the required minimum of 75 per cent of private creditors agreed to the so-called “haircut” or debt swap. I find it amusing how the Euro leaders have attempted to massage the default as a debt swap or some other euphemism. The facts are obvious – close to 100 per cent of those who are holding Greek government debt will lose at a minimum 53.5 per cent of the value of their assets. This was forced on the private sector by the Troika (EU, ECB, and IMF) who apparently think it is preferable to undermine private sector wealth than introduce changes to their the Eurozone monetary system which might actually make it work! The discussions in Europe will quickly move to when Bailout 3 is required because reducing the level of Greece’s debt does very little to alleviate the problem which is the capacity of the Greek government to service the flow of interest payments while simultaneously destroying its tax base with austerity. The recent performance of Iceland serves as a timely reminder of how currency sovereignty (monopoly issuance and floating currency) can assist an economy make substantial structural adjustments without major attacks on living standards. Moreover, such an economy can restore growth relatively quickly in contradistinction to EMU nations which are locked in (variously) to years of recession-cum-depression. This blog is a brief tale of two economies – Greece and Iceland

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Saturday quiz – March 10, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Australian Labour Force data – an unambiguously bad result

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for February 2012 presents a very poor set of numbers. Yesterday, we learned that the Australian economy had cut its growth rate in half in the December 2011 quarter (compared to September 2011). The labour force data tells us what is happening in the last few weeks and so gives a much more timely assessment of where things are at. The conclusion is that the trend signified by the National Accounts data has accelerated and the economy is shedding jobs, driving workers out of the labour force (participation falling) and unemployment is rising as a result. The Federal government’s reaction to the poor growth figures which are undermining its obsessive pursuit of a budget surplus was that they would have to cut spending even harder. That approach exemplifies irresponsible and failed macroeconomic management. Their policies settings are contributing to the poor labour market data. The most disturbing aspect of the labour market data over the last year or more has been the appalling state of the youth labour market. Teenage females did gain some modest relief this month from the relentless loss of jobs, but teenage males continued to go backwards. This should be a policy priority for the government. But they have gone missing in action – lost in their surplus mania. My assessment of today’s results – the evil troika is evident – falling employment, rising unemployment and falling participation. That is an unambiguously bad result.

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Athens burned, while I played Sudoku

Today, I am back in Greece. Yesterday, there was a confidential in-house “Staff Note” leaked from the Institute of International Finance, which purported to estimate the costs of a disorderly default on Greek government debt. Most of the paper was about ECB and related “contingent liabilities” which summed to around €1 trillion. However, once you understand the nature of those “contingent liabilities” in the context of the capacity of the ECB as the currency-issuer in the EMU and compare them with the real losses being endured by the Greek economy and its people, then you soon realise that the Greek government should reintroduce its own currency immediately. The European elites, however, are too busy playing Sudoku to appreciate that, ultimately, their ideologically-motivated austerity will not only impoverish Greece, but will also cause their whole monetary system to collapse.

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Societies that exclude their youth will rue the day

The British Office of National Statistics released a new report yesterday (February 29, 2012) – Young people in work – 2012 – which provides a scary view of how austerity is impacting on the future British adults. It shows that the employment rates of 16-24 year olds in Britain have fallen dramatically in the least several years and that they are bearing the brunt of the recession. The evidence once again highlights the nonsense of imposing fiscal austerity on a nation that is struggling to generate private spending growth sufficient to provide ample employment growth. Once again, the myopia of fiscal austerity is staggering. What does the British government think that British society is going to look like in 20 years when its future adults are being excoriated by the lack of opportunity that the government policy is creating as a deliberate act? Collapsing youth employment rates mean that this cohort is being excluded from the activities which promote stability both in individual terms (self esteem etc) and societal terms. Societies that indulge in this sort of exclusion will rue the day.

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When common sense fails

I was at a social function last weekend and the conversation turned to economics – surprise surprise. I was the only professional economist in the group. I try very hard to avoid discussing economics in these circumstances because experience tells me that misunderstandings quickly occur as the “intuitive” or “common-sense” economists seek the floor. I would much rather talk about weeds growing than the sustainability of budget deficits in times like that. But, alas, someone said “but we’ve got a 50 million-dollar deficit who is going to pay for that?” Another member of the group, who is very articulate and fairly well-read in Modern Monetary Theory (MMT) but not a professional economist stepped in to save the day. She proceeded to explain how common sense is a dangerous guide to reality and that not all opinions should be given equal privilege in public discourse. The conversation deteriorated because the “deficit worrier” and others immediately personalised this observation and considered it to be a attack on their life’s experience. Notwithstanding the tenseness of the situation, it was an interesting demonstration of the flaws in logic that govern the way people think about economics and the way politicians exploit our (flawed) reliance on common sense. Our propensity to generalise from personal experience, as if the experience constitutes general knowledge, dominates the public debate.

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The British government can never run out of money

Last week, the UK Office of National Statistics released their – Second Estimate of GDP Q4 2011 – which updates (once more information is available) the flash estimates that were released recently. The information confirms that the British economy went backwards in the fourth-quarter 2011 and confirmed that the September quarter 2011 growth was overestimated and the latest publication revised that downwards from 0.6 per cent to 0.5 per cent, a small revision but downwards nonetheless. There is now a real prospect of the economy entering a double-dip recession. The British government is now under pressure to revise its current budget strategy in order to prevent that probability. However the response of the British government (courtesy of the Chancellor) is to defend its ideological position with outright lies. The Chancellor claims that the British government can do nothing about the slide into recession because it is run out of money. Modern Monetary Theory (MMT) demonstrates its impossibility of that event occurring from a financial perspective. What the Chancellor really is telling the British people is that the government refuses to stop unemployment rising. Why the Opposition and the Press are not exposing these lies is a further problem.

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Standby for the third Greek bailout

I suppose I have to write something about the extraordinary deal that emerged out of Brussels yesterday. I tweeted at the time that the “Latest EU Bailout will not end the uncertainty. Greece will not be able to withstand a decade of repressive economic policies”. The ABC National News last night introduced the bailout in terms of “finally resolving the uncertainty” and then proceeded to interview an analyst who outlined why the deal will increase uncertainty. This is the state of confusion among the media commentators who are bullied by the Troika to mouth is the official rhetoric but who must also realise that the projections underpinning the approach are deeply flawed and that the situation in Greece will continue to deteriorate. The reality is that this “deal” only buys some more time. In the meantime, the real situation in Greece will continue to worsen. Standby for the third Greek bailout.

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There is no unemployment in a non-monetary economy

I wrote recently about Eugene Fama, a Chicago economist who basically denied that a breakdown in the financial markets had caused the current crisis. Please see – Yesterday austerity, today growth – but leopards don’t change their spots – for further discussion. Last week (February 17, 2012), one of Fama’s colleagues wrote a Bloomberg Op Ed – How 3 Myths Drive Europe’s Response to Debt Crisis. The article by one Harald Uhlig, from the Department of Economics at the University of Chicago demonstrates the way that the Chicago School likes to obfuscate issues. He develops a model, which purports to show that the imposition of fiscal austerity and zero impact on the standard of living of the population. The only problem is that the model not only makes some false conclusion, within its own logic, but is also inapplicable as a vehicle for explicating problems that might arise in a modern monetary economy. This is typical Chicago economics – a stylised but irrelevant analytical framework.

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The politicians in Europe and the UK are deliberately sabotaging their economies

Eurostat published their latest National Account estimates for the Eurozone on Wednesday (February 15, 2012) – Flash estimate for the fourth quarter of 2011 – which allows us to complete the picture for the 2011 calendar year. Overall, the results are appalling. Many nations are now double dipping and even the European powerhouse, Germany contracted last quarter. Over the Channel, the British economy also contracted in the 4th quarter 2011. None of this should come as any surprise. An economy cannot grow when the private sector is deleveraging and is in constant fear of unemployment and the public sector deliberately refuses to step in and provide fiscal support. It is even worse when the government further undermines the capacity of the private sector to spend (by harsh cuts in pensions etc) and cuts its own net spending into the bargain. As one commentator noted yesterday “it makes no sense to drive an economy into recession where it stops people from working and thus paying more taxes” if the goal is to reduce budget deficits. The political leadership in Europe and the UK is deliberately sabotaging their economies. The same mentality is gathering pace in the US. Spare us!

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Australian labour force data – mixed news with little to be happy about

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for January 2012 shows that the deterioration in the Australian economy towards the end of the year has temporarily ceased although working hours have fallen sharply. The data shows that employment has recovered a little and unemployment fell as a response – both good signs. The employment growth, however, is dominated by part-time jobs growth and underemployment is almost certain to have risen in January. The fall in hours worked is consistent with that conclusion. So the news is mixed this month. I still consider the Federal government to be undermining our prosperity by pursuing its obsession to get the budget back into surplus in the coming year. The most disturbing aspect of the labour market data over the last year or more has been the appalling state of the youth labour market. Teenage females did gain some modest relief this month from the relentless loss of jobs, but teenage males continued to go backwards. This should be a policy priority for the government. But they have gone missing in action – lost in their surplus mania. My assessment of today’s results – mixed news with little to be happy about.

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