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Saturday Quiz – April 24, 2010 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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What the hell is a government solvency constraint?

Today my RSS feed was full of all sorts of information and it took me some time to get through it all. The reason? I just purchased an Amazon Kindle DX and it arrived this morning. As a frequent traveller I seem to carry too many books and papers given I read a lot and so the Kindle is my proposed solution – everything is going to being stored on it – novels, travel documents, bus timetables, academic papers, mp3s, you name it. My bags will now be lighter and that continual shuffling of papers to access the right one at the right time is going to be a thing of the past. So I got to know it a bit today! Anyway, one paper I did read today was from the European Central Bank (ECB) entitled – The Impact of Numerical Expenditure Rules on Budgetary Discipline over the Cycle. It is so bad you would gasp for air reading it. It is replete with statements that just appear without scrutiny and are taken for granted but, which in fact, are at the basis of the whole argument about fiscal rules and are hardly acceptable.

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Same old arguments = lack of leadership

You realise how misguided the economic debate is in the West when you read that the British Opposition has been telling the British people that governance is about to break down and the IMF are poised to take over the country – that is, unless they vote for their austerity plans – and on the same day the UK Office for National Statistics releases the latest unemployment data which shows that unemployment has risen to a 15-year high. And while the British election debate appears to be all about who can cut public net spending the most, the IMF releases its latest World Economic Outlook (WEO), which is far from optimistic about the future and is warning against withdrawing the fiscal support for the very fragile demand conditions around the world. Then you read the Financial Times and see that former Clinton deputy treasury secretary Roger Altman is predicting a debt explosion. The general conclusion: our education systems have failed – and have been pumping out a population that mindlessly believes all this stuff while the elites run us over in their rush to bank the wealth they are harvesting.

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When a huge pack of lies is barely enough

Today I read another appalling beat-up from the researchers at Société Générale. The fabrications and poor analysis contained in the Report should instigate class actions from their subscribers for grossly misleading them in their investment decisions. But the real problem is that the financial journalists seem content to function as meagre mouthpieces for this hysteria – to use their columns to spread it widely without the slightest introspection or critical scrutiny. The result is that the public are continually confronted with outrageous propositions – which carry not even a skerrick of truth. They then form fallacious perspectives about public policy that ultimately undermine their own welfare. The lies are all presented as being “iron clad laws” and “inevitabilities” and “fundamental truths”. But as I learned as a youngster – lies are lies.

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Taxpayers do not fund anything

At times some document from the past is discovered that no-one much has read or paid any attention to but which offers fundamental insights into the options facing governments operating a monetary system based on a fiat currency. We have available now one such document which I will discuss in some detail. The essential insight can be summarised by the title of the blog – taxpayers do not fund anything. So when you hear commentators and politicians and the like use terms like “taxpayers’ funds are being mis-spent” etc, you can immediately conclude they do not understand how the monetary system functions. At that point, it is advisable to ignore what they have to say – given it is likely to be erroneous as a result of the initial false premises. The problem is that the public policy debate is largely based on these false premises. As a result, the policy positions that emerge are typically inferior and in many cases extremely damaging to the fortunes of the disadvantaged.

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Saturday Quiz – April 17, 2010 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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Japan … just wait … your days are numbered

I was reading this IMF working paper today – The Outlook for Financing Japan’s Public Debt – which was released in January and was on my pile of things to catch up on. The paper is now being used by journalists to predict doom in the coming years for the Land of the Rising Sun. As I note, the stark deviation of the Japanese experience with the predictions of the mainstream macroeconomics models has given the conservatives a headache. As an attempt to reassert their relevance to the debate, the mainstream commentators are inventing new ploys so that they can say – yes we agree that the facts in the short-run don’t accord with our models but brothers and sisters just wait for what is around the corner. My assessment is that they have been saying this for 20 years already. In 5 more years, they will still be disappointed and still prophesying doom. They are pathetic!

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Saturday Quiz – April 10, 2010 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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US federal reserve governor is part of the problem

The Federal Reserve Chairman Ben Bernanke gave a speech entitled – Economic Challenges: Past, Present, and Future – on April 7, 2010 in Texas. It emphatically demonstrated why he should never have been appointed to the position he is in and why his reappointment just compounds that initial mistake. While he has been largely quiet on fiscal matters over the last few years this speech outlines without doubt that he doesn’t really understand the monetary system he supervises and has an understanding that is seemingly limited to that found in any erroneous mainstream macroeconomics text book. The only other interpretation is that he does understand the system yet chooses to deliberately deceive the wider public so as he can support ideological attacks on government activity. Either way, he is part of the problem we face.

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Robin Hood was a thief not a saviour

I quite liked Robin Hood on TV when I was young. After each episode, there were famous sword duals in backyards, with usually some oppressive older brother playing the role of the sheriff and the youngest least defenceless kids were “his men”. The rest of us were the outlaws and we hid in bushes and sharpened dangerous bits of wood and fired them from powerful home made bows at the oppressors. Mothers had first-aid kits constantly in use. Neighbourhood girls were usually attracted to the outlaws which was always a useful by-product that the sheriff and his “men” seemed to overlook, although most of the “men” were too young to gauge the significance of this. Yes, 1960s suburban Australia. Anyway, Robin is back in town but this time some do-gooders are invoking his name to solve the problems of the world. However, none of their “solutions” are viable and are based on faulty understandings of the way monetary systems operate.

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Another economics department to close

Today I decided that there is another macroeconomics research unit that needs to be closed down. My decision was reached after I read the latest paper from the Bank of International Settlements – The future of public debt: prospects and implications – which confirms that the Monetary and Economic Department of that organisation is publishing deficit terrorist literature. The paper is so bad that I am sorry I read it. I may avoid BIS publications altogether in the future. But if I apply that reasoning I am going to be back to reading Stieg Larsson novels and there are only three of them and I have already read them!

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EMU posturing provides no durable solution

Today I have been looking over documents from the EMU which emerged from last week’s summit in Brussels. Within the plush environs of their meeting halls and probably over very sumptuous dinners the best they could come up with was a half-baked plan to stop the daily headlines which have been indicating impending Greek default. Such a default would damage the Eurozone monetary system and probably show the way for other nations, which are being similarly bullied by the EU bosses into impoverishing their nations. Given some reporting today they may have succeeded … in stopping the headlines … for the moment. But the approach of the EMU leaders will do nothing to address the fundamental structural flaws in the their whole system. With the prospect of an extended period of austerity throughout the zone, they are really just making it more certain that the next major global downturn sinks them for good. That is, if social instability doesn’t do it beforehand.

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The bullies and the bullied

The events continue to get more strange in the Eurozone by the day. Yesterday, Portugal was downgraded, which will worsen their situation, despite the rating agency claiming that the fiscal austerity plan in place was credible. Tomorrow, European leaders meet in Brussels but the German leader doesn’t even want the crisis on the agenda. The Germans only want to discuss imposing even tougher restrictions on the ability of governments to govern in the interest of their citizens. It is like a B-grade horror movie script. But all the intrigues that are playing out in the Eurozone at present demonstrate (albeit tragically so) the dynamics that led to the collapse of the fixed exchange rate system (the Bretton Woods arrangement). Same old story – bullies and the bullied. It means the only viable solution is to abandon the EMU as soon as possible and restore some sanity … and democracy.

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Ladies and gentleman, civilisation is ending

Today I wasted 20 minutes reading about the end of the World. But before I did that I read some so-called progressive literature that was calling on the UK government in tomorrow night’s budget to seek a balanced budget. You say what? That’s right, what goes for progressive thought these days is what used to be the exemplar of fiscal conservativism not so long ago. While the current crisis exposed most of the myths that mainstream economists have promoted for years it seems that progressives are not seizing the day but trying to sound more reasonable (read: right-wing conservative) than the conservatives. The crisis has also pushed all these opinionated loonies like Niall Ferguson into prominence. Its getting pretty lonely out here …. wherever I am (and don’t say the left word)! (<= joke).

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Hyperdeflation, followed by rampant inflation

The title of the blog is a little misleading but was too good not to use. I get to that five-year forecast (2010-2015) later in the blog but the first part is material that sets the scene. Yes, I am writing about deficits and debts … again! But new nuances come out in the public debate which need to be addressed. The conservative assault on government support for their economies at present is multi-dimensioned and is being pushed along by two main journalistic approaches. The manic Fox new-type approach which I realise is influential but is so patent and ridiculous that I don’t care to comment on it often. Then we have the approach adopted by journalists in so-called credible media outlets such as the UK Guardian. They dress their deficit terrorism up in arguments that the middle classes, who think they are far above Fox new rabble intellectually, will find convincing. But when you bring both approaches down to basics – rubbish = rubbish.

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iWorry about the conservatives

I can now safely call my blog – ibilly blog or billy iblog thanks to a court ruling preventing Apple from monopolising the i construction. But then I would have to change the logo and I don’t have time to do that so I won’t take advantage of the court ruling just yet. But on more substantive matters, today I have been thinking about how much momentum the conservative lobby has at present and that history is being continually re-written to give these characters the oxygen they need to warp public opinion. We are now in danger of an even greater shift to the right in the coming years than was represented by the “neo-liberal” era. It is an ugly thought. But the macroeconomics is clear – if these ideas really take over the policy making process – then we will be facing a lengthy period of economic malaise.

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Dumb is too kind really

I am now back in my normal office after a few days experimenting with a mobile office by the sea. Back in Newcastle I am still only a couple of minutes from the beach but somehow it was different being holed up in a little cabin. Anyway, on the way back down the coast this morning I was bemoaning the idiocy of the human race … again. Or rather cursing the vicarious way the elites exploit the lack of understanding in the community about economic matters to further their own ends. That is a better way of constructing the dilemma. Even some good intentioned souls are proposing “solutions” to non-problems which will worsen the actual problem. Other devious characters are continuing to reinvent themselves in the public sphere – presumably to get access to more personal largesse. Then whole blocks of nations are imposing penury on their citizens to make the “markets” happy while another national government has actually forgotten it is a currency-issuing government. All in a day’s work!

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A modern monetary theory lullaby

In recent comments on my blog concern was expressed about continuous deficits. I consider these concerns reflect a misunderstanding of the role deficits play in a modern monetary system. Specifically, it still appears that the absolute size of the deficit is some indicator of good and bad and that bigger is worse than smaller. Then at some size (unspecified) the deficit becomes unsustainable. There was interesting discussion about this topic in relation to the simple model presented in the blog – Some neighbours arrive. In today’s blog I continue addressing some of these concerns so that those who are uncertain will have a clear basis on which to differentiate hysteria from reality. We might all sleep a bit better tonight as a consequence – hence the title of today’s blog!

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Some neighbours arrive

The other day I introduced a simple model of how a monetary economy works. The model was centred on the payments of my personal calling cards to elicit labour from the kids that live in my house. All the basic national accounting results that apply in a real economy were present. The simplicity extended to considering only two sectors – the kids (private) and the “house” (public). In terms of modern monetary theory (MMT) we start by examining the broad relationships between the government and non-government sector, where the latter comprises the private domestic and foreign sector. Some readers have suggested that the results obtained would not apply if I had have explicitly modelled the cross-border flows (that is, the external sector). Well today, I have some news … some neighbours have arrived next door to my place and the kids from each house are jumping fences.

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