Saturday quiz – March 24, 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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Questions and Answers 4

This is the Q&A (Part 4) blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that. I plan to make this a regular Friday exercise.

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UK Budget reveals what is really going on

The British government brought down their 2012 Budget yesterday. I haven’t had time to fully digest all the detail yet and I am not yet fully conversant with all the discussion papers that underpinned the official budget documents. My experience tells me that one usually finds some really interesting points that are hidden in the fine print of some of the less obvious government documents. Sometimes these points are “game makers”, which really expose the ideological slant of the budget. Not that you have to do much digging in this budget to determine what agenda the British government is now pursuing. The “bond markets are about to close us down” rhetoric is giving way now to Thatcherite “trickle down” stories. This budget is trying to sell the “puppy” that if more real income is transferred to the rich then they will ensure, through their enhanced enterprise, that the poor (which cedes real income) will eventually be better off. That is a variant on the “fiscal contraction expansion” myth.

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Flawed macroeconomic models lead to erroneous conclusions

I get a lot of queries about the difference between fixed and flexible exchange rates in terms of the options that each present a sovereign, currency-issuing government. I considered this question several times in the past. Many of those questions are pitched in terms of the basic macroeconomic framework for an open economy that appears in most mainstream macroeconomics textbooks, particularly those written in the 1970s, 1980s and 1990s. I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.

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Inflexible governments undermine our standards of living

I keep reading news reports that claim that Apple (the company) has more cash to spend than the US government. For example, this ABC News report today (March 20, 2012) – Apple goes on massive spending spree – perpetuates this myth. I noticed a similar report was spread throughout the Internet overnight. Apple might have 90 odd billion US dollars in cash reserves at present which it could draw on at its leisure. But once its reserves were gone that would be it. Notwithstanding, the labyrinthine accounting arrangements, which obfuscate its true capacity, the US government could spend 90 billion tomorrow, 90 the next day, and 90 the day after that if it wanted to. I am not advocating that just noting the capacity. This example highlights how poorly we are served by the financial press which reinforces the ideologically-motivated lies the government’s and the corporate elites use to maintain their hegemony. Inflexible governments undermine our standards of living.

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US inflation expected to average 1.3827935 per cent for the next ten years

Yesterday (March 18, 2012), the Cleveland branch of the US Federal Reserve Bank released their latest estimates of US inflationary expectations. This data estimates what the “public currently expects the inflation rate to be” over various time horizons up to 30 years. The data shows that the US public “currently expects the inflation rate to be less than 2 percent on average over the next decade”. The ten-year expectation is in fact 1.38 per cent per annum. In the light of the massive expansion of the US Federal Reserve’s balance sheet and all the mainstream macroeconomic theory is predicting that such an expansion would be highly inflationary, how can the public expect inflation to be so low over the next decade? Answer: the mainstream macroeconomic theory is deeply flawed and should be disregarded. Modern Monetary Theory (MMT) correctly depicts the relationship between the monetary base and the broader measures of money and explains why movements in the former are no inflationary.

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Saturday quiz – March 17, 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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The lessons of history – subtitled – are the Dutch printing guilders?

There was a Wall Street Journal article (March 14, 2012) – Default and the Nature of Government – which demonstrates how a recall to history can be misused if key additional (contextual) information is left out of the discussion. The article in fact tells us nothing meaningful about the likelihood of sovereign debt default. The sub-title relates to the latest news from the Netherlands which suggests that the strident rhetoric of their leadership about the failure of the “southern” states to meet their obligations to the Eurozone might now be coming back to haunt them. If they are not, then they should. If the Dutch are to be consistent then massive and destructive penalties should now be imposed on them by Brussels. They won’t be – but that just tells you how dysfunctional the Eurozone is!

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