Today I have been reading all the documentation surrounding the proposals issued by the Bank of International Settlements to reform the regulatory system for international banking. These considerations then took me to an interesting paper from Deutsche Bank where they refute (albeit unintentionally) much of the media hysteria about exploding government bond yields and bond markets “closing governments down” because their deficits are “ballooning out of control”. In fact, the DB Report shows categorically that within the new regulatory framework that the BIS (and hence the Australian Prudential Regulation Authority will introduce), there is scope for larger budget deficits. In terms of the state of the Australian labour market and the very slow growth that the world economy will experience in the coming years, a further stimulus package is necessary. The DB Report implies that the bond markets would welcome it. Curious?

Today I have been thinking how extraordinarily stupid human beings are. The so-called Club Med Eurozone nations are being fast tracked into a crisis by a pernicious concoction of corrupt and lazy ratings agencies, Northern European truculence, and a ridiculous monetary system that provides no fiscal support within what is really a federal system. And as the ailing governments boldly and stupidly declare a willingness to play ball with the Brussels-Frankfurt consensus bullies there are signs that social order is beginning to break down. Then I read that an American city is turning its lights off at night to save money. Then I read some goon telling everyone to short US bonds because there will be a debt meltdown. And all of this stuff stems from unnecessary constructions and constraints that we have placed on systems that should be geared to advancing general welfare.

Person the life-boats! Get the hard hats out! Strife and pestilence is coming! I am wondering what all these loons – the deficit terrorists – who are now elevating a simple endogenous fiscal balance into a national emergency – will say in a few years when growth returns, unemployment falls, people start rebuilding their savings and most importantly their children do not go into slave camps making widgets to send back to the previous generation to pay for the fiscal balances and … the sky stays firmly above our heads although it does rain occasionally down on us to help farmers grow vegetables. What will these hysterical idiots say then? Today, the budget deficit has become the latest WMD. A seek and destroy mission is required. Bring out the military and attack treasury offices everywhere. Rally patriots the hour of calling is nigh?

Today a relatively short blog buts lots of different colour graphs. I have been going through the updated IMF growth forecasts released on January 26 and doing some projections of what this might mean for the capacity of this growth to reduce the unemployment rate. Like any projection exercise you have to make assumptions. And it seems that there is still quite a bit of dispute about whether we are going to recover fairly steadily or keep skidding along the bottom in 2010 with tepid growth in 2011. The IMF are the most optimistic around at the moment and as you will see, even this level of optimism doesn’t paint a very good labour market picture.

Today is a national holiday in Australia (more about which later). In the lead up to the US President’s State of the Union speech tomorrow came news that he was planning to freeze public spending from next year to get the budget back on track. I wondered what track that might be. Governments all around the world are now being pressured by conservative lobbies to engage in a renewed period of fiscal austerity even though the respective labour markets are disaster zones. History has a habit of repeating itself. The US government did exactly this in 1937 and the unemployment worsened. Japan did it in 1997 with the same outcome. The UK government is likely to do it in 2010 with totally predictable results – their economy will falter. What the US government is now in danger of repeating is taking its economy down the fast track to a double-dip recession. It is plain stupidity and the “freeze” doesn’t reflect the reality they are in.

The news that the Democrats lost their long-held and iconic Massachusetts Senate seat has had the news services in apoplexy this week. One gets the impression from listening to the mainstream media, which is becoming more right-wing by the day, that the US President is on his last legs. The so-called progressive reaction seems to be that the “reform” agenda now has to be scaled back and a fiscal consolidation is required to steady nerves. While it is hard to actually see a progressive reform agenda in any country anyway, the more immediate danger is that the fiscal support that has been keeping our economies afloat all around the World will be withdrawn. The share markets are back, Goldman have record profits … so the crisis is over … That message dominates the business news. That the progressive side has not been able to take overwhelming command of the public debate, given the scale of the crisis and the fact that the neo-liberals/neo-cons etc have all been caught red-handed, is a stunning reflection of its obsequious and disorganised organisation. We need something very different to happen if things are not to revert to where they were.

Today I was reading some academic articles on the implications of budget deficits. In general, the amount of effort that goes into these articles doesn’t match the quality of the argument. They all have predictable formats – some proposition, then invoke neo-classical assumptions, do some mathematics (mostly second-rate in quality), then make a conclusion that was given anyway by the structure of the exercise. As a consequence there is no information content at all in these articles. Just gymnastic exercises. However, one article I read presented a new slant on the case against government spending. It also resonated with my reaction to the release of a major report on executive salaries in Australia today, which quashed hopes that shareholders would have more say in disciplining the companies they own. The debate generalises and points to the conclusion that financial markets are mostly unproductive and have conned us into thinking otherwise.

Many readers have E-mailed me asking me to explain yields on bonds and sovereign credit ratings. There has been press coverage in recent days that following the downgrading of Greece, sovereign debt in the UK, France, and Spain will be downgraded unless severe “fiscal consolidation” is begun. All these places are suffering very depressed domestic conditions with high unemployment, falling per capita incomes and civil unrest looming. The last thing these nations need is for their national governments to be raising taxes and cutting spending. But the financial press are using the threats from these nefarious and undemocratic credit rating agencies to berate governments to do just that. Undermine the welfare of their citizens. Further, judging from the E-mails I have received on this issue there appears to be a lot of uncertainty in the minds of interested people about what all this means. Here is a little introduction which I hope helps.

Today the Australian Bureau of Statistics released the September quarter National Accounts data which gives us the rear-vision mirror view of how the economy has been travelling while we have all been speculating. The good news is that real GDP continued to grow. The bad news is that the Australian economy is creeping along the bottom. It just managed to keep its head above zero line in the September quarter courtesy of the strong public investment associated with the now, daily-maligned, fiscal expansion. The labour market was clearly spared the worst by declining productivity. As productivity returns to more reasonable rates of growth, unemployment will rise unless GDP growth turns significantly upwards … quickly. Having said all that – there is nothing in today’s data to warm the frozen hearts of the conservative deficit-haters. They should just find a ship to get on and boost our exports.

In Sunday’s New York Times, the Room for Debate series focused on one of my favourite topics – Should Public-Sector Jobs Come First?. The debate turns out to be very disappointing because even the so-called progressive offerings fall short of advocating an effective solution to the jobs crisis. Only one implies an understanding that the policy design proposed should not be compromised by an errant understanding of the way the fiat monetary system operates. Proposals that assume there is a financial constraint on government will almost certainly be second-rate. The debate could have been energised had the NYT sought expert opinion from those that are developing and implementing large public sector employment programs.

The government of the largest economy in the World has run short of money. At least that is what the US President was trying to tell his Jobs and Economic Growth Forum yesterday. Fancy that. This is a national government which issues its own sovereign currency trying to tell the world it is broke. This is a sovereign government that is responsible for capacity utilisation rates at 70 per cent and 15.7 million unemployed saying that is is running out of capacity to deal with the problem. My conclusion is that the only capacity they lack is sound economic advice. They should sack their existing advisors and hire some people who actually understand how the monetary system operates.

Over the course of this economic crisis, I have seen a lot of erroneous analysis based on the conflation of things that are not commensurate. It is getting worse as the debt hysteria mounts. These conflations are examples of category errors, which are common in monetary and macroeconomic analysis. Most of the theoretical development in macroeconomics text books used by universities fall foul of this type of error. The one thing that follows is that when you detect this type of error you should be deeply suspicious of the arguments being presented.

The Australian financial press today pushed the message “Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001”. Last time I knew, Dubai was an emirate and Argentina a sovereign nation. While the current crisis in Dubai is clearly an issue it is not an instance of sovereign default. Some research is required.

Today in NSW it reached 41 degrees Celsius again. The bushfire season has started early and of-course we all conclude it is related to climate change. But I was thinking about other things – to wit – the difficulty new ideas that have relatively complex underpinnings face in gaining traction in the public debate which is saturated by single line mantras that the media loves to repeat over and over again. This thinking was, in part, motivated by two opinion polls I examined from the US. The second one indicated that a growing (and already dominant) proportion of US citizens want the US government to run balanced budgets. How I thought would they think that would work?