Several readers have written to me asking me to comment on a recent paper that the New York Federal Reserve released as a Staff Report (May 2011) – A Note on Bank Lending in Times of Large Bank Reserves. Apparently, there is an impression that the federal reserve economists might be seeing the light a bit about the banking system and the way economists think about it. The reason that some readers have concluded that is because the substantive conclusion of the paper is that credit expansion is independent of the level of banking reserves held at the central bank. This conclusion is totally consistent with Modern Monetary Theory (MMT) but is at odds with the standard mainstream macroeconomic view (as taught in textbooks) that relies on the money multiplier to draw a (spurious) connection between bank reserves and the money supply. As you will see – my advice is to be very careful when reading such papers – they are not what they seem. The FRNY paper reaches the correct conclusion using erroneous theory which they partition as a special case arising from the extreme circumstances surrounding the crisis. Even in defining their “model” as a special case, they employ flawed logic. It is a case of being beware of the wolf in sheep’s clothing.

Some years ago – I did not have sexual relations with that woman – were the famous words that seemed to redefine everything we had come to think of sexual relations between two consenting partners. Suddenly we could have sexual relations without having them. The same person has come up with a new conclusion – the US never ran “permanent structural deficits of any size before 1981”. Hmm, you mean that for 84 per cent of those years from 1930 when the US federal government ran deficits they were just cyclical events indicating deteriorating economic conditions? Maybe the former president might say a structural deficit equivalent to 3 per cent of GDP was not of “any size”. My conclusion is different – that this statement like the previous one was another case of a former US president making things up.

Individuals often carry history on their shoulders by virtue of the positions they hold and the actions they take. When these individuals hold views about the economy that are not remotely in accord with the way the system operates yet can influence economic policy by disregarding evidence then things become problematic. It is no surprise that my principle concern when it comes to economics is how we can keep unemployment and underemployment low. That was the reason I became an economist in the late 1970s, when unemployment sky-rocketed in Australia and has been relatively high ever since. So when I read commentary which I know would worsen unemployment (levels or duration) if the opinion was influential I feel the need to contest it. That has been my motivation in economics all my career. A daily contest given that the mainstream of my profession is biased to keeping unemployment and underemployment higher than it otherwise has to be. Today I present a simple reality check for the austerians.

Having heard the “historic” Press Conference held by Ben Bernanke, the Chairman of the US Federal Reserve Bank (April 27, 2011), I confirm the advice I gave on December 20, 2009 that – Bernanke should quit or be sacked. During that conference he chose to wade into the fiscal policy debate claiming that the priority of the US government was to reduce its budget deficit by cutting spending. He gave no justification for those statements and there is no supporting research paper available which might give us a clue as to the rationale for this extraordinary intervention into the policy debate. The fact is that Bernanke is another mainstream macroeconomics stooge who in my view has chosen to abuse his position of power to misinform and distort the policy debate. It is clear that the US Federal Reserve chairman has lost his independence and even mainstream economists who put the concept of independence on a pedestal of virtue should be calling for his resignation.

It is the Easter holidays and I am not writing as much today. But there have been some stunning examples of how mad the world has become with respect to matters economic. I present three vignettes of such madness which highlight the way in which lies and outright lies are dominating the policy agendas of governments at the expense of workers and their families. It is also raining outside and getting cooler so good weather for sitting down and writing – holiday notwithstanding.

In his recent New York Times column (April 21, 2011) – What Are Taxes For? – continues to engage with Modern Monetary Theory (MMT) but trips up because his mainstream view (dressed up as a progressive) reveals serious flaws in reasoning about the way a fiat currency system operates viz-a-viz the former monetary system based on convertibility via some commodity standard. In this blog I correct some of the analytical mistakes that appear in that article. Krugman concludes by claiming that he is really disturbed by those who don’t get mainstream logic – and is especially upset by “a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together”. My only response is to look in a mirror Paul or in the words of Bob Marley ask “who the cap fits”.

I have been tied up most of today so have little time to write my blog. I was interested in the most recent US labour market data which suggested that in net terms there was some improvement in employment growth. I wondered how this translated into increasing the probability that an unemployed person might get a job and how likely it was that an employed person would lose their job. The recovery is clearly nascent and risks being squashed by the moronic leadership being shown in the US Congress at the moment. So how far has the US labour market come since the recession started? Gross flows analysis allows us to gain insights into this sort of question. So are things improving in the US?