{"id":7988,"date":"2010-02-14T17:25:47","date_gmt":"2010-02-14T06:25:47","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=7988"},"modified":"2010-02-14T17:25:47","modified_gmt":"2010-02-14T06:25:47","slug":"we-are-sorry","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=7988","title":{"rendered":"We are sorry"},"content":{"rendered":"

\t\t\t\tOn Friday (February 12, 2010) as Eurostats released the flash estimates of fourth quarter GDP for the EU (see below), the IMF released a new staff position note entitled – Rethinking Macroeconomic Policy<\/a>. The bad news is the Europe is looking more like a region that is heading for a double dip recession. The even worse news is that that cretins at the IMF are claiming they know why they messed up in the past and how to address their failure. Stay tuned for a modified version of the same. The fact is that the IMF Report reveals they are as ignorant as ever of the workings of the modern monetary economy. So this revisionist exercise doesn’t signal a major paradigm stage.
\n
\nI am writing this apology for various IMF officials who are now claiming they were wrong:<\/p>\n

    \n
  1. We are sorry, truly sorry for being so arrogant that we forced our beliefs in the primacy of monetary policy and the failings of fiscal policy onto policy makers around the World and we acknowledge that this arrogance has now helped contribute to the current economic crisis which is impoverishing millions of people and severely damaging entire nations. We were wrong.<\/li>\n
  2. We recognise that this ideological obsession we had with monetary policy was a denial of the evidence before us but we were too blind to consider it important. We were wrong.<\/li>\n
  3. We are truly sorry for perpetuating the myth of the Great Moderation<\/a> and giving credence to the views of blind ideologues such as Lucas, Barro, Sargent, Taylor and others as they strutted the international stage declaring an end to the business cycle. All academic economists who continue to perpetuate that myth should be dismissed from their positions. We were wrong.<\/li>\n
  4. We are sorry for not realising that fiscal policy is an important tool that governments can use to stabilise and support aggregate demand and employment. We now recognise that for years we have been pressuring governments to deliberately create unemployment and the associated poverty because we wrongly believed this would be the most effective way to fight inflation and deliver stable growth and prosperity. We were wrong.<\/li>\n
  5. We are very sorry we supported the ideologues in the economics profession who lied to the World about the NAIRU. We now realise it is unmeasurable and all our own efforts to produce estimates have been built on flaky foundations. We recognise that policy makers have used this misleading estimates to inflict damage on their populations. We were wrong.<\/li>\n
  6. We are sorry that some of us have written textbooks that systematically lie to students about the way the macroeconomy works with particular focus on the way we have misrepresented banking and money markets and the policy interactions. We were wrong and will offer refunds to all the students who used the books (fees and book purchase price).<\/li>\n
  7. We are sorry for being so dim-witted to believe that wide-scale deregulation would enhance the prosperity of the World. We now recognise that we have been imposing blind ideology onto policy makers and allowing the elites to gain greater access to the resources in each nation at the expense of the poor. We were wrong.<\/li>\n
  8. We are sorry for inflicting this dogma on the world, particularly the poorest nations where we have caused children to die because we have bullied governments into cutting back on spending on health. We were wrong.<\/li>\n
  9. We are sorry for holding back the development of many of the poorest nations by bullying their governments to cut back on education and public infrastructure investment while at the same time pressuring them to give cheap access to their natural resources to predatory first-world corporations who have paid very little in return. We were wrong.<\/li>\n<\/ol>\n

    I am also preparing resignation letters for all the top officials. They should be ready in the coming days.<\/p>\n

    We will consider the IMF Report after the grim news from Eurostat.<\/p>\n

    Europe staring at a double-dip<\/strong><\/p>\n

    On Friday (February 12, 2010) Eurostat released its Flash GDP estimates<\/a> for the fourth quarter of 2009. While the official press released highlighted:<\/p>\n

    \nGDP increased by 0.1% in both the euro area1 (EA16) and the EU271 during the fourth quarter of 2009, compared with the previous quarter …\n<\/p><\/blockquote>\n

    But what the press release didn’t emphasise was the trend towards a double dip recession. The following graph taken from the Flash estimates data shows the quarterly GDP growth over 2009 for all EU nations who have reported December quarter estimates.<\/p>\n

    The data shows that the overall 16-country eurozone grew by only 0.1 per cent in the December 2009 quarter with Italy sliding back into negative growth and Germany stationary at zero growth. Of the four large EU economies, France was the only to record growth.<\/p>\n

    While German exports have improved, domestic demand (consumption and investment) fell significantly as the deflationary impacts of unemployment and stagnant real wages growth over the last several years begins to take its toll.<\/p>\n

    You can see that reversals of the previous quarter’s growth occurred in Austria, Germany, Italy, Lithuania, Netherlands, Portugal, and Czech Republic.<\/p>\n

    Further, Greece, Hungary, Latvia, Romania, and Spain remained in recession.<\/p>\n

    The data also shows that over the entire year the Baltic states who are queuing up for Eurozone membership were severely damaged by the crisis. Latvia contracted by a staggering 17.9 per cent; Lithuania by 15 per cent and Estonia by 9.4 per cent.<\/p>\n

    The worst-performed Eurozone nations over the whole year were Spain (-3.1 per cent decline); Italy (-2.8 per cent); Germany (-2.4 per cent decline); Netherlands (-2.2 per cent); and Austria (-1.8 per cent) although once the full December quarters are available Ireland will be up there (shrinking 7.6 per cent September 2009 to September 2009).<\/p>\n

    \"\"<\/a><\/p>\n

    <\/div>\n

    So nothing to cheer about there. The restrictions on EMU members that are now clearly in relief as a result of this crisis expose all the EMU governments to default risk. Without a fiscal redistribution capacity and with the SGP restrictions impeding the capacity of member governments to use fiscal policy to arrest the decline in aggregate demand there was reason to expect that growth would stall in the way the data is now showing.<\/p>\n

    The problem then will turn to the banking system which is still exposed to failure which the member governments are unable, under current structure and rules, to deal with.<\/p>\n

    IMF Report<\/strong><\/p>\n

    The IMF Staff Position Note entitled – Rethinking Macroeconomic Policy<\/a>, was written by IMF Chief Economist Olivier Blanchard with co-authors Giovanni Dell’Ariccia and Paolo Mauro.<\/p>\n

    Blanchard has his own textbook which is as bad as the Mankiw’s book – the so-called Barbeque Lighter<\/a>.<\/p>\n

    Section 1 of the IMF paper is entitled What We Thought We Knew<\/em>, which I would have summarised in advance of the crisis as nothing<\/strong>! Nothing, that is, that is relevant for understanding how a fiat monetary system operates within national borders and what happens when politics and ideology conspires to deny the efficiency of that monetary system and even constrain it by creating common currency areas (Eurozone) or currency pegs (like Latvia) or other deviant ways to stifle government policy.<\/p>\n

    I would have come to that conclusion well before the crisis based on my reading of Blanchard’s previous work and hearing him speak in the past. He is a mainstream ideologue in the same way as Mankiw.<\/p>\n

    Section 2 of the IMF paper is entitled What We Have Learned from the Crisis<\/em>, which after reading the paper I summarise as not much<\/strong>.<\/p>\n

    The first thing they thought they knew was:<\/p>\n

    \n… we thought of monetary policy as having one target, inflation, and one instrument, the policy rate. So long as inflation was stable, the output gap was likely to be small and stable and monetary policy did its job. We thought of fiscal policy as playing a secondary role, with political constraints sharply limiting its de facto usefulness. And we thought of financial regulation as mostly outside the macroeconomic policy framework.\n<\/p><\/blockquote>\n

    They say the “intellectual support for inflation targeting provided by the New Keynesian model”. Please read this blog – Mainstream macroeconomic fads – just a waste of time<\/a> – to see what an intellectual desert this model presents.<\/p>\n

    I justified three major conclusions in that blog:<\/p>\n