IMF – the height of hypocrisy but still wrong as usual

When I read the latest news from the IMF early this morning I sent out a tweet saying that it was the height of hypocrisy for the IMF now to be trying to reclaim the high ground in the current economic debate by lecturing nations about the dangers of fiscal austerity. The IMF will always be part of the problem rather than the solution. They are consistently the architects of misinformation and bully national governments on the basis of that misinformation only to come back 3 months later and say “gee whiz”, look how bad things become. Currently the IMF is pleading for more funds. If I was a national government contributing to this bullying, incompetent organisation I would immediately cancel the cheque and, instead, spend the money pursuing domestic growth for the benefit of the citizens is that rely on my decisions. The current position of the IMF represents the height of hypocrisy. Further their forecasts are significantly error prone as usual. Wrong models will generally produce terrible forecasts that have to be continually revised. In the case of the IMF, these errors are also systematically biased by the ideological nature of their approach to macroeconomics.

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New central bank initiative shows governments are not financially constrained

On November 16, 2011 by the Australian Prudential Regulation Authority (APRA) published a – Discussion Paper – Implementing Basel III liquidity reforms in Australia – which details how the prudential regulator plans to implement the new Basel III reforms which aim “to strengthen the liquidity framework for authorised deposit-taking institutions (ADIs)”. in that paper, APRA indicated that there were not enough assets in the Australian financial system to satisfy the new liquidity requirements. In other words, there are not enough government bonds on the issue that the banks can use for this purpose. This is a consequence of the excessive pursuit of government surpluses over the last 16 odd years. APRA indicated that a country-specific solution to this asset would be required. in this context, the Reserve Bank of Australia (RBA) a new facility – the Committed Liquidity Facility (CLF), which will provide high-quality liquidity to the commercial banks to allow them to meet the Basel III liquidity requirements. What the CLF demonstrates once again is that a currency issuing government is not financially constrained and can maintain integrity of the of the financial system and purchase any goods and services that are available for sale in its own currency any time that it chooses.

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Employment fell in December, no it didn’t employment rose – and other apparent inconsistencies

In the last few weeks I have done several radio interviews about the veracity of the labour force data published by the Australian Bureau of Statistics. The pretext has been an increasing awareness among commentators and journalists of an alternative series published by pollster – Roy Morgan. The juxtaposition of an ABS unemployment rate estimate for December 2011 of 5.2 per cent against Roy Morgan’s estimate of 8.6 per cent worries people and curious minds have been seeking to find out what is going on. The curiosity also extends to matters like seasonal adjustment. Last week, I consistently said that in seasonally adjusted terms people were dropping out of the labour force (as evidenced by the falling participation rate), which had lessened the impact of the negative employment growth on the unemployment. But in one interview I complicated matters by saying that in fact more people were in the labour force in December and employment rose. The two statements were not inconsistent. The former was about the seasonally-adjusted data and the latter was about the original time series produced by the ABS. I often get E-mails about this question. Which estimates should we use to tell us what is going on? So I thought I should write a blog about that – to catalogue these issues.

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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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The catechism of the IMF

In early January 2012, the IMF published the following working day – Central Bank Credit to the Government: What Can We Learn from International Practices? (thanks Kostas). In terms of the title you can’t learn very much if you start off on the wrong foot. The bottom line is that if the theoretical model that you are using is flawed in the first place then you wont make much sense applying it. The other point is that while this paper presents some very interesting facts about the legal frameworks within which central banks operate and provide a regional breakdown of their results, their policy recommendations do not relate to the evidence at all. This is because they fail to recognise that the patterns in their database (the legal practices) are conditioned by the dominant mainstream economics ideology. So concluding that something is desirable because it exists when its existence is just the reflection of the dominant ideology gets us nowhere. Their conclusions thus just amount to erroneous religious statements that make up the catechism of the IMF and have no substance in reality.

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Australian labour force data – things are getting worse

The January release of the Labour Force data is always a week later than the releases in other months as we enjoy the summer holidays. But the wait hasn’t improved the news. In December 2011, my headline was “everything is bad” meaning that the evil three – falling employment, rising unemployment and falling participation – had appeared. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for December 2011 shows that the deterioration in the Australian economy towards the end of the year gathered pace. The data shows that employment has fallen and the participation rate has fallen sharply. 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 continues to pursue its obsession to get the budget back into surplus in the next year, it is actually only succeeding in undermining employment growth and prolonging unemployment. 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 and getting worse.

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Food speculation should be (mostly) banned

Last year, Cyclone Yasi wiped out about 75 per cent of national banana production in Australia and drove the price of bananas up to around $A15 to $A17 per kilo depending on where you lived. They are usually less than $A3-5 per kilo. But all banana lovers complained about the imposition on their real standard of living even though Australians allocate only 10 per cent of their total expenditure to food and, obviously, much less to banana consumption. So imagine what it is like for the most disadvantaged citizens to see prices rise by 60-odd percent over 18 months on their basic food stuffs, especially when they allocate upwards of 60-70 per cent of their total expenditure to food, and they spend all their meagre income? Not a good outcome that is for sure. While the financial market excesses caused the crisis in the first place, and the policy folly of our governments is prolonging it, one of the worst features of the neo-liberal years of financial deregulation has been the speculation on food which has driven prices up dramatically, impoverished and starved millions. Food speculation is something I would ban as part of a new oversight of the financial markets aimed at restoring the real economy and ensuring economic activity worked to improve the human condition.

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Budget deficits are part of “new” normal private sector behaviour

Today I am in the nation’s capital, Canberra presenting a class at the European Studies Summer School which is being organised by the Centre for European Studies at the Australian National University. My presentation is entitled – the Euro crisis: fact and fiction. I will have more to say about that in another blog. Today I am considering the issues surrounding the decline in personal consumption spending and increased household saving ratios. The argument is that this behaviour which is now clearly evident in most economies marks an end to the credit-led spending binge that characterised the pre-crisis period of the neo-liberal era. But with that era coming to an end and more typical (“normal”) behaviour emerging, the way we think about the government (as the currency-issuer) will also have to change. There is clearly resistance to that part of the story, in part, because there is a limited understanding to the central role that the government plays in the monetary system. As private sectors become more cautious, we will required continuous budget deficits to become a part of this return to the “new” normal.

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S&P ≠ ECB – the downgrades are largely irrelevant to the problem

The Australian Prime Minister, trailing hopelessly in the public opinion polls, made a fool of herself yesterday by commenting on last week’s S&P downgrade of European government debt ratings. she not only gave S&P more credibility than they are worth, but also demonstrated, once again, the mangled macroeconomic logic that is driving her own government’s obsessive pursuit of budget surpluses to our detriment. But there has been a lot of mangled logic about the S&P decision from a number of quarters in the last few days. Ultimately, the decision is only as relevant as the EU authorities allow it to be. The reality is that the fiscal capacity of the Eurozone is embedded in the ECB, which while ridiculous and reflecting the flawed design of the EMU, still means that the private bond markets can be dealt out of the game whenever the ECB desires it. In that context the S&P decision is irrelevant except for its political ramifications. And they arise as a result of the government’s own flawed rhetoric with respect to the role the ratings agencies play. That flawed rhetoric is exemplified by the Australian Prime Minister’s weekend offerings not to forget the French central bank governor’s recent claims that S&P should downgrade Britain’s debt ratings before it downgrades France. But does the downgrading matter? Answer: only if the ECB allows it to matter. The ratings agencies do not wield power. The issuer of the currency in any monetary union has the power – always.

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