Japanese economist Richard Koo recently published his latest paper – The world in balance sheet recession: causes, cure, and politics – which reminds us that patience is the virtue that is required right now and that the major political responses to the crisis are exactly the opposite to what is required to safely steer the World economy back into health. The insights he provides, mostly consistent with Modern Monetary Theory (MMT), demonstrate how the current political cycle (and the imperatives that are being imposed) is so far out of kilter with what responsible macroeconomic management requires. The world economy will require continuous and historically large budget deficits in most advanced nations for many years to come. The demands for fiscal consolidation talk about this year and next year and surpluses in a few years. The reality is that deficits will be required to support growth while the private sector reconstructs its unsustainable balance sheet for more than a decade. We have to get use to that or suffer the consequences. To repeat: Historically high budget deficits will be required for the next decade – at least.

It is a public holiday in Australia today and I am not working a full day. But I have been collecting some items from the past five or so years which I am weaving into the text book that Randy Wray and I hope to have out in the coming year. When academics or others comment on public affairs it is clear that our commentary is to a certain extent time-dependent. The language we use, the topics we focus on and the conclusions we draw. So some things that are written sound quaint when we go back to them after some years. I hoard information and occasionally I access my databases to see who said what in some year and compare it to what might have happened in the interim and then what the same person might be saying in retrospect. It is an interesting exercise and when applied to my own profession reveals some amazingly nonsensical predictions or assessments. The global crisis has provided a major event to test many of the assessments made prior to the crisis. The most surprising thing is that the same sort of assessments made prior to the crisis that were demonstrated to be entirely false are still being made and still influencing policy design. But the most robust assessments have withstood the crisis and remain relevant today. I include the developments in Modern Monetary Theory (MMT) in this latter category. Mainstream macroeconomics was largely wrong before the crisis and is wrong now (for the same reasons) and should be disregarded.