Today there were two feature articles in the Australian press which attracted attention. The first article was an interview with the former Australian prime minister (Howard), who (by the way) was called a “lying rodent” by one of his own colleagues during his time in office. The second article was by the Sydney Morning Herald’s political editor who claims the Time has come for Rudd to face the big test. Both articles carry the same messages which are relevant to the macroeconomic debate in all nations (so this is not a parochial Australian discussion). They also nonsensical pieces of fiction when you consider them from the perspective of modern monetary theory (MMT). They show the power of the mainstream macroeconomics “textbook straitjacket” which has the world debate in a vice-like grip.

Today, I have read a number of different reports from various organisations (IMF, Bank of England, US mortgage brokers, etc.) keeping up to date with what it going on. It all adds up to a bleak way to spend the day although that is the lot I bear (violins out!) as an economist. Imagine being a dentist though (apologies Martin!). Then you would be really working in confined spaces. My confined spaces are the claustrophobic world of mainstream economics. The economic crisis has really demonstrated how stupid (and evil) this body of theory (and policy) is. Anyway, today’s blog reports on what I have been reading and writing about today – all from a modern monetary theory (MMT) perspective – which is the free-range and sunny world that all economists should migrate too!

Today I have been working on a new book and have been deeply emeshed in paradigmic debates. The practical relevance, other than the work gives me another day’s pay to maintain my part in keeping aggregate demand growth moving, is that two Nobel prize winners (Phelps and Krugman) have had a recent paradigmic dispute about similar themes. One attack was implicit (Phelps on Keynesians), the other very direct and personal (Krugman on Phelps). Neither understand modern monetary theory (MMT) although Krugman is closer than Phelps. Phelps’s work, in my view, has been used by neo-liberals for years to undermine the employment prospects of millions of workers. It is also a primary IMF tool for keep less developing countries poor. Sounds like a topic to be discussed.

There was an almost euphoric outlook for the Australian economy by Australia’s central bank yesterday as they raised interest rates once again. And earlier this week, the Federal Treasurer released the Mid-year Economic and Fiscal Outlook 2008-09 saying that “Australia is the strongest-performing advanced economy in the world …” Strongest is a superlative – the best. So you wonder what he is talking about when you consider that we have more than 14 per cent of our labour resources underutilised in one way or another. Then some bad news comes in today and you realise the government (both arms – central bank and treasury) are spinning away …

Today we consider the current debate about whether we need to return to fixed exchange rates and create a new reserve currency for the World – which might even be a supra-national currency. In general terms the calls for these sort of reforms reflect a misunderstanding of how a modern currency operates and also the opportunities the fiat monetary system presents to a national government which desires to advance public purpose (full employment and price stability). The claims for this type of currency reform also reflect serious misunderstandings about trade and the financial flows which accompany trade. More worrying is that the fixed exchange rate call is becoming a cause celebre for progressive economists who see flexible exchange rates as somehow a cornerstone of a neo-liberal free market plot against prosperity. Talk about being misguided. So this blog introduces these issues – and will probably be the first of several on the topic.

A story in today’s media reminded me that the way we construct a problem significantly affects the way we seek to solve it. The story – Change or lose drought assistance, farmers told (and the related Editorial) – appeared in The Australian newspaper. They indicated that on-going drought assistance to farmers would have be accompanied by significant changes in farming practices. This is a major shift in our policy thinking but still begs the question of why we have such inconsistent ways of thinking about policy problems and their solutions.

I was going to write about manufacturing today in the light the Campaign for America’s Future staging of Building the New Economy conference in Washington DC today. I started investigating what it was about. It raises a lot of issues what a progressive position should constitute. However, I got way laid by other things which were also interesting and will leave my blog about the demise of manufacturing for another day. But what this conference demonstrates to me is that we have a long way to go before we get a united progressive understanding of the way the modern monetary system works. And until we have that understanding, no real progress will be made reforming the economy. We will always be trading off tax cuts for spending increases and all that sort of mainstream mumbleconomics and feeling defensive any time a deficit arises. And then today, I started reading the latest report from the IMF …