A continuum of infinitely lived agents normalized to one – GIGO Part 3

The IMF released a working paper recently (January 2012) – Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances – which purports to estimate the losses that the US economy will incur if the US government delays a major fiscal consolidation. The paper attracted a Bloomberg news headline (February 3, 2012) – How Reducing the Deficit Can Make Us Richer: The Ticker – which, in its own way provides an example of a dishonest piece of reporting. What has the IMF paper have to say about real world issues like real GDP growth, unemployment, underemployment etc? Answer: virtually nothing. It is an example of GIGO (Garbage In, Garbage Out) and confirms that my profession has learned very little (if anything) from its total failure to see the crisis coming or offer valid solutions. It also confirms that while the IMF leadership might be going around lately trying to sound reasonable (warning against austerity) the engine room of the IMF hasn’t changed direction at all. It is still pumping out indefensible rubbish, which then garner headlines and influence the policy debate to the detriment of the unemployed everywhere. The IMF consider humans to be a “continuum of infinitely lived agents normalized to one”. Which means this paper becomes Part 3 of my GIGO series.

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Saturday quiz – January 21, 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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They better keep the vacuum on or else!

While the Eurozone leaders appear to be obsessed with a relentless series of meetings which discuss largely irrelevant problems that they identify, there is a growing chorus that is highlighting the reality facing the region. It is patently obvious that the only short-term solution to the Euro crisis is for the ECB to keep its vacuum cleaner on and keep “hoovering” up the debt of governments who are unable to gain access to funds in private bond markets at reasonable yields. While the long-term solution is an orderly dismantling of the monetary union, the ECB is the only show in town at present that can in the spiralling crisis and ensure that the Eurozone countries return to growth as quickly as possible. This is even more paramount now Germany has recorded a negative quarter of growth with worse expected in the coming months. It beggars belief that the Euro elites have engineered a crisis of such a proportion that that their worst fears become the only solution.

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Britain needs more hours of work not less

A striking characteristic of the last few decades has been the way the so-called “progressive” political parties have adopted policy frameworks and thinking that were previously the exclusive domain of the conservatives. Nothing could be more obvious than the way in which all the major parties around the world now speak neo-liberal economics as if it was the only way of thinking about the economy and economic policy. Slowly but surely the options that parties are willing to consider have been narrowed down and policy is now conducted in a straitjacket which cannot deliver prosperity for all as well as advancing environmental objectives. It is understandable that during recessions expectations become downgraded by workers about the types of jobs they will except, by consumers about the level of spending they can sustain, and by firms about what investment projects will be viable in the period ahead, etc. But it is strange that when the prevailing economic paradigm not only caused the great recession but is prolonging it at great cost, that the major parties remain locked down in the neo-liberal mire – blinded to other options. It is clearly time to think outside of this box and that is what I try to promote in this blog. But we also have to be careful that when we go wandering we are still on solid macroeconomic ground.

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BIS now part of the neo-liberal propaganda apparatus

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

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Saturday quiz – December 24, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s special Santa-edition of the quiz. The information provided should help you work out why you missed a question or three! 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 – everything is bad

The Australian Bureau of Statistics (ABS) published the Labour Force data for November 2011 today. The data shows that employment has fallen, the participation rate has fallen and unemployment (and the unemployment rate) have risen. Monthly working hours have also fallen. This is the worst combination that can occur indicating that job creation is declining, workers are leaving the workforce because of the lack of job opportunities and labour underutilisation is rising. So while the Government and the uninformed were celebrating yesterday’s National Accounts data which showed that three months ago Australia was growing (below trend), today’s results are more immediate – they are a depiction of where things are now. The Government is undermining employment growth by insisting on its obsessive pursuit of a budget surplus. The most striking expression of how poor the Australian labour market is performing is the continued deterioration of the youth labour market. That should be a policy priority but unfortunately the government is largely silent on that issue. My assessment of today’s results are that – everything is bad.

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Australia – external sector continues to drain growth

A lot of readers write in asking what about external balances – what they mean etc. They are also sometimes puzzled why I say that the external sector in Australia is currently (and typically) draining real growth in the economy when at the same time they read that the terms of trade are at record levels and that we are in the midst of a “once-in-a-hundred-years” mining boom which is reshaping our economy. So today’s release by the ABS of the latest (September quarter 2011) – Balance of Payments and International Investment Position, Australia – provides me with a platform for a brief (I promise) explanation of these concepts and how they might be interpreted from a Modern Monetary Theory (MMT) perspective. The bottom line is that for Australia, our external sector continues to drain growth.

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Tightening the SGP rules would deepen the crisis

This week, the European Union Summit should see the leadership take the monetary union further into the mire and further away from an effective solution to their woes. The German Chancellor has vowed to create a new fiscal union across the Eurozone. She announced this plan to the German Parliament and declared she would push for a change to the treaty that established the common currency. Let me state at the outset – the plan as the press are reporting it – will not work. It is just the latest in a long line of Euro “solutions” that has fallen on its face soon after being announced as the way forward for the EMU. It won’t work because it doesn’t address the problem and will make changes that will make the actual problem worse. Europe is suffering a lack of aggregate demand and needs to address that head on by increasing public spending. Further constraining the capacity of governments to spend will make the situation worse.

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Saturday Quiz – December 3, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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Don’t tell the Germans – the ECB weekly deposit tender failed

Its summer! After reading this blog – The ECB is a major reason the Euro crisis is deepening – many readers have written to me asking to provide more explanation of the “sterilisation” operations that the ECB is engaged in. It is clear that an increasing number of people are becoming interested in arcane things like central bank operations which can only augur well for creating capacity for better public debate. A lot of readers overnight have reacted one way or another to the announcement by several central banks that the swap lines are open again albeit at a lower “cost” than previously. There was also considerable interest in understanding what the “failed” sterilisation yesterday means. The answer is not much but we had better not tell the Germans that the ECB weekly deposit tender failed.

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Autumn or Spring – the madness continues

It is the season of “mini-budgets” with the Australian Treasurer launching the Mid-year Economic and Fiscal Outlook 2011-12 yesterday (November 29, 2011) and his British counterpart – the Chancellor of the Exchequer – releasing his Autumn Statement. At least Australia has summer coming tomorrow to look forward to. Both documents outline strategies of failed governments. I am watching the Australian Treasurer on the news screen at the airport right now as he asserts over and over again that even though they are now forecasting a rise in the unemployment rate over the next year there is “growth in the pipeline” and so aiming to achieve the largest fiscal consolidation in history (of the world) in one year is still a sensible strategy. I described the strategy on national radio last night as madness! Worse applies to the British government’s fiscal strategy. I consider that to be venal rather than misguided.

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When you’ve got friends like this – Part 8

I noted a proposal overnight from so-called progressive American economist Dean Baker on Al Jazeera (November 28, 2011) – Time for the Fed to take over in Europe – which suggests that the US Federal Reserve Banks should insulate the US economy from the bumbling leadership crisis and “step in if the European Central Bank fails to deal with the debt crisis”. The proposal is that the US central bank should fund EMU nation deficits. This is another one of cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions When you’ve got friends like this to see what the problem is. The simple point that far from protecting the US economy this proposal would likely cause a collapse in the currency and an inflationary surge that would divert attention of the US government away from creating employment, undermine the real standard of living of workers, and provide new ammunition for those who want to implement damaging austerity. For all that, the US government would only put the EMU nations into a holding pattern anyway.

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A radical redistribution of income undermined US entrepreneurship

There was an Bloomberg Op Ed today (November 22, 2011) – Protesters Ignore American Love of Entrepreneurs – by Harvard economist Edward Glaeser. It is an attack on the OWS movement and an appeal to how great American entrepreneurship is. The ideas resonate with some recent work I have been doing on the impacts of national income redistribution under neo-liberalism on aggregate demand and the role of the financial sector. The link is that entrepreneurship in the US is not what it was and it is an illusion to think that the past two decades or so bears much similarity to the heyday of US entrepreneurship, whatever your view of the latter is. The entrepreneurs are disappearing in American and being replaced by rapacious wealth shufflers who add nothing to productive capacity or general prosperity.

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The hypocrisy of the Euro cabal is staggering

As they say in the classics – “some of my best friends are” … and in my case I might have added German. The Euro crisis – that is, the crisis that has arisen because the creation of the Euro stripped member nations of their capacity to defend their economies against negative private spending episodes – is being worsened because of the incredible resistance by Germany and the Troika (EU, ECB, IMF). The Brussels-Frankfurt consensus – which claimed the creation of the Eurozone would engender stability and growth is shattered – irretrievably humiliated one might venture to say – yet the cabal that hides behind that “consensus” maintains power and influence. The hypocrisy that the cabal engage in is staggering. Their narrative is almost totally dislocated from the reality. They regularly disregard their own rules to favour the vested interests that keep them in power. And meanwhile, they are overseeing a collapse of all the ideals they claimed their system was designed to achieve.

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The ECB is a major reason the Euro crisis is deepening

I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.

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Imagine that NSW was Ireland

Imagine that the state I live in NSW was for want of a better association Ireland. Imagine Victoria was Greece (a good association because Melbourne is the second largest Greek-speaking city in the world). Imagine Queensland was Spain (both enjoy considerable sun). Imagine South Australia was Portugal (both regions have world-renowned wine making industries). Imagine Tasmania is Italy (both are southern regions in the respective hemispheres). Western Australia can stay as WA although it will not be long before we can add another association (Belgium, France, Estonia?). Anyway, let’s imagine that NSW was Ireland for a moment.

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We will not pay for your crisis

As the Occupy Wall Street movement grows and is spreading to other cities in the US and other cities around the World, my profession is “feverishly” trying to discover the “financial sector” to plug into their New Keynesian models. The global financial crisis caught them out badly. Now they are fixing that “deficiency” up and we will all be better informed again once the boffins do their work. That is what the Bank of International Settlements is trying to tell us anyway. As usual, the BIS is part of the problem rather than being part of the solution. The OWS movement is a recognition of that and anything the mainstream macroeconomists dish up will only inflame the resistance further. It is becoming clear that more people daily are saying “we will not pay for your crisis”.

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Redistribution of national income to wages is essential

It is a public holiday in NSW today – Labour Day – which originates from the “eight hour day movement, which advocated eight hours for work, eight hours for recreation, and eight hours for rest”. History will tell you that on April 21, 1856, the stonemasons and building workers on building sites around Melbourne, Australia (my home town) laid down their tools and marched to Parliament House to call for an 8-hour day. They were successful and were the “first organized workers in the world to achieve an eight hour day with no loss of pay”. Similar action saw the spread of the 8-hour day to the other states. Now Australia is in the farcical situation where 600 thousand workers cannot get any hours of work, 750 thousand cannot get enough, and millions are coerced by employer-friendly industrial relations legislation into working more hours than they desire just to keep their jobs. In recognition of the holiday I will write less than usual! The issue surrhttps://billmitchell.org/blog/?p=16325&preview=trueounding wages and conditions of work are crucial to understanding why the world entered the crisis and why it is persisting. At present policy makers, in response to the disaster that beset them in 2007-08, are skating around the edges of reform and are refusing to recognise that they will have to engage in a wholesale abandonment of neo-liberal policies before sustainable recovery will be possible. There is no more stark demonstration of this reality than in the area of wages.

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Accelerating inflation has to be out there somewhere … in the dark or somewhere

Today I was trawling through old issues of the now-defunct The Public Interest quarterly today and unfortunately stumbled on a recent issue of its successor National Affairs (Number 9, Fall 2011 edition) which carried an article – Inflation and Debt – written by Chicago economist John H. Cochrane – a known free market/anti-government commentator. It was one of those articles where the analytical framework was taken from some textbook rather than being ground in the realities of the monetary system and all the evidence pointed away from the major conjecture but the conjecture was still asserted as an inevitability. The title reflects the sort of wan, desperate need to find inflation despite vast volumes of excess capacity and zero wage pressures. Accelerating inflation has to be out there somewhere … in the dark or somewhere.

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