There was an almost euphoric outlook for the Australian economy by Australia’s central bank yesterday as they raised interest rates once again. And earlier this week, the Federal Treasurer released the Mid-year Economic and Fiscal Outlook 2008-09 saying that “Australia is the strongest-performing advanced economy in the world …” Strongest is a superlative – the best. So you wonder what he is talking about when you consider that we have more than 14 per cent of our labour resources underutilised in one way or another. Then some bad news comes in today and you realise the government (both arms – central bank and treasury) are spinning away …

Today we consider the current debate about whether we need to return to fixed exchange rates and create a new reserve currency for the World – which might even be a supra-national currency. In general terms the calls for these sort of reforms reflect a misunderstanding of how a modern currency operates and also the opportunities the fiat monetary system presents to a national government which desires to advance public purpose (full employment and price stability). The claims for this type of currency reform also reflect serious misunderstandings about trade and the financial flows which accompany trade. More worrying is that the fixed exchange rate call is becoming a cause celebre for progressive economists who see flexible exchange rates as somehow a cornerstone of a neo-liberal free market plot against prosperity. Talk about being misguided. So this blog introduces these issues – and will probably be the first of several on the topic.

I was going to write about manufacturing today in the light the Campaign for America’s Future staging of Building the New Economy conference in Washington DC today. I started investigating what it was about. It raises a lot of issues what a progressive position should constitute. However, I got way laid by other things which were also interesting and will leave my blog about the demise of manufacturing for another day. But what this conference demonstrates to me is that we have a long way to go before we get a united progressive understanding of the way the modern monetary system works. And until we have that understanding, no real progress will be made reforming the economy. We will always be trading off tax cuts for spending increases and all that sort of mainstream mumbleconomics and feeling defensive any time a deficit arises. And then today, I started reading the latest report from the IMF …

Australia is already heading the charge back into the neo-liberal macroeconomic policy orthodoxy, which caused the financial crisis that has seen millions of jobs shed and poverty rates sky-rocket around the world. Next Tuesday, the central bank will surely increase its target rate of interest again because it is worried about the inflation genie escaping again. When actually did we last have an inflation problem anyway? The problem with this strategy is two-fold. First, it is highly unlikely that monetary policy does effectively operate as a counter-stabilising force. It has distributional effects clearly which punish low income earners but they not the cohort driving the housing prices, for example. Second, it forces fiscal policy to play a passive role so there will be even greater pressure on the government to start winding back the fiscal stimulus. More pain ahead on both fronts.

Today’s blog is short. I returned home today to a mountain of things to do and missing luggage. In this day of computer networks and claimed security I fail to see how airlines cannot match every person who has a seat with a bag in the hold. They claim they take bags off when there is a no show so why do they lose bags? Anyway, all my papers from last week’s meetings are in the bag and my favourite coat so I am hoping it turns up. On the blog front, several readers have written to me in the last few days asking me about the rising risk of sovereign defaults that financial markets are apparently “pricing in”. In particular, so-called influential traders are now claiming that the US and Japan are approaching situations reminiscent of “countries on the verge of a sovereign debt default”. Sounds dire. We better investigate – but only for a short bit because I am tired from my journeys.

At present I am in transit in Dubai waiting to fly home to Sydney after a week or more away in Central Asia. I am definitely being careful to avoid any public swearing, which means I am not reading any economics or business reports in public spaces. With the worry that I might swear out aloud and get stuck here, I judiciously completed all my reading in the privacy (assumed) of my hotel room at the airport. Lucky. Imagine what would have happened if I had been reading this article – David Cameron’s tonic to snap us out of recession – out on the concourse?

Its Sunday morning in Kazakhstan and cold. My meetings in Almaty are over and I am heading home today via Dubai (backwards to go forwards). It has been a long week and it hasn’t been helped by the fact I have come down with a heavy cold. But overall a lot was accomplished, not the least being the startng dialogues with the Central Asian government officials. I have also been thinking about the book on economic development that we have started working on (with a colleague at the Asian Development Bank). In this context, today’s blog is about development, trade and modern monetary theory (MMT). Many readers have asked me to comment on recent articles in the Australian press about our current account situation. So-called experts (not) are claiming the budget balance has to be cut back quickly to avoid an external crisis. The reality is that they fail to understand what the current account balance is about.

Today’s meeting in Almaty will be discussing how the CAREC countries, that I are working with at present via the Asian Development Bank, can best achieve regional cooperation and integration. The region is very interesting and I will report more fully when things are more clear. But the challenges these countries face are exacerbated by the grip that market liberalism has on them. This is especially to be understood in the context of the Soviet heritage of most of these countries. There is a curious mix of past and present which makes market liberalism even more dangerous. So what? Well, I have been asked by many readers about Latvia, another former Soviet satelite. The deep crisis that economy is enduring is a good example of how market liberalism has failed. Yet, depressingly, the solutions proposed involve more of the same. Modern monetary theory (MMT) clearly offers an alternative and much more productive alternative recovery path.

I am feeling a little uncomfortable at present – landlocked. I am working in Almaty, Kazakstan, which is part of Central Asia and one of only 44 countries that do not have a sea edge. But it would be worse if we were in Uzbekistan which is one of only two countries that is doubly-landlocked. That means it is a landlocked country surrounded by other landlocked countries so I would have to cross two national borders to get to the surf! I will report on what I am up to over here in more detail at a future date. But even though this is a remote region, the Australian national broadcaster the ABC has tracked me down. They rang early this morning and want to talk about the Australian Treasury’s claim that unemployment fears are easing and skills shortages are now the threat to our economy – what? 14 percent of our labour underutilised and we are now back to the skills shortage debate. Anyway, the ABC has been on my mind overnight …

In the Financial Times this morning there was a thought provoking article by Mort Zuckerman entitled The free market is not up to the job of creating work which is in stark contrast to another article – Goodbye, Macroeconomics, which appeared last week in the FT and was written by Eli Noam. The former seems to understand the depth of the problem and has the right priorities but doesn’t come up with the right policies. The latter raises some interesting points but just misunderstands the nature of macroeconomics.

Ah Sunday. I don’t go to my office at the University. I ride lots of kms on my bike. I mix working at home on my research with digging in my food production system (garden). And … if I am stupid, I read the financial press and study the data trends. At that point, any sun that is around becomes a dark cloud and I sink into a malaise and wonder why modern monetary theory (MMT) ….

Earlier this week my professional association (which I decline to join) – the Economics Society (ACT Branch) awarded its inaugural Enemy of the State/Friend of the People award to a microeconomist for advocacy in defence of economics and its application to public policy. The stunt reflects the major historical revisionism that is now a daily occurrence and appears worse than anything that occurred in the communist states. Those who think they have an entitlement to make huge profits (helped by government guarantees) yet return to behaviour that brought the world economy unstuck are now in attack mode. There is denial, outright deception, constant hectoring. To redress this issue, I am now calling for nominations for the Modern Monetary Theory’s (MMT) Friend of the state, Friend of the people award. It will be awarded to all persons (we believe in collectives) who understand how our monetary system operates and how it can be managed via fiscal policy to serve public purpose and advance the welfare of the most disadvantaged.

Several readers have asked me to explain in a little more detail what I mean by statements such as investment brings forth its own saving or government budget deficits finance non-government saving. So this blog is about those topics and takes you on journey from what you won’t learn if you study macroeconomics in a typical university through to a clearer understanding of the way macroeconomies work via modern monetary theory (MMT).

I am researching a new book project at present. I plan with a (development economist) colleague to outline a new development agenda for low income countries. The imposition of neo-liberal policy agenda has artificially and immorally constrained development in the poorest nations. This paradigm is in denial of the opportunities forthcoming to a sovereign government to expand employment and national well-being. We intend to outline a modern monetary approach to economic development as a rival development paradigm. As part of this project, I was reading a research report released last week by the Centre of Economic Policy Research (Washington). The report shows that around 75 per cent of IMF agreements in the current downturn are pro-cyclical. That is we learn what we have always known – the IMF should not be allowed out without supervision.

Today I read an interview with Richard Koo from the Nomura Research Institute in Japan who is the touring the world promoting his views of why the fiscal stimulus packages are so important. His views are drawn from his extensive experience of the Japanese malaise that began in the 1990s. The interview was published in the September 11 edition of welling@weeden which is a private bi-weekly emanating from the US. I cannot link to it because you have to pay to read. Anyway, much of what he says reinforces the fundamental principles of modern monetary (MMT) and is quite antagonistic to mainstream economic thinking. It is the latter which is now mounting political pressure to cut the stimulus packages. Koo thinks this would be madness, a view I concur with.

GIGO … that process or mechanism that we are beguiled by what amounts to nothing. GIGO emerges out of highly specialised and technical structures that bright minds create. It occupies hours of time that might be spent finding a cure for cancer or making renewable energy instantly viable on a wide-scale. GIGO keeps our most disadvantaged citizens in states of joblessness and poverty for no reason other than we think it is something. GIGO ravages the developing world and leads to wars, terrorism and other pathologies. Something has to be done about it.

It is on days like today that you see how far away from the mainstream economic opinion my macroeconomic thinking is. Why today? For overseas readers, the central bank (RBA) started hiking its official cash rate target by 0.25 basis points to 3.25 per cent. What is wrong with this? There is around 14 per cent of available labour resources currently underutilised and rising. Last month full-time employment continued its collapse. The only signs of activity in the labour market are some casualised, low-skill, low-paid jobs being created. My conclusion: neo-liberal paradigm remains intact. Stay tuned for the next crisis.