In the coming period and probably years you should expect to hear, read and be submerged with mainstream economists coming out and assessing the structural budget deficit. Across most economies, these so-called “experts” will be arguing that the structural deficit in the nation is too high and deep cuts are needed to bring it into surplus. The importance of this debate is that they use the structural deficit estimates as an indicator of the fiscal stance being taken by the government and thus separate out the effect of the automatic stabilisers. The problem is that it is an inexact science. The mainstream approach is highly dependent on the NAIRU concept (see below) and thus will err on the side of concluding that the deficit is “too big” and “likely to cause inflation”, whereas it is probable that the deficit will be too small to underpin private savings and high levels of employment.

I mentioned in yesterday’s blog that there is a growing number of deficit-terrorists out there who are trying to appear reasonable to separate themselves from the more loony Austrian-school fringe. They are appearing reasonable by saying that “now we should have deficits” but soon (unspecified) “we will need surpluses” to “pay back the excesses”. That sort of spurious reasoning. Even some self-styled progressives who want us to think they are both reasonable people and knowledgeable commentators are starting to emerge within this broad camp. But in general their arguments reflect, at best, an ignorance of how the monetary system operates. This unholy gathering will prove to be very damaging to the need for a broader understanding of how these operations and how government fiscal interventions impact.

Today we explore the problem of squirrels falling down holes. The exact number and size of the holes is to be determined – there is some disagreement. Who the squirrels are is also somewhat confused. But some thorough analysis should get us through this difficult task. Suffice to say, I have been reading the World financial press again … as I do against my own better judgement on a daily basis … and have done for the last too many years.

In the last recent period we have been told that Goldman’s is doing “god’s work”, that they are “sorry” for the “things” they have done wrong, and that their operations are essential to the well-being of the economy. Conversely, there have also been (influential) calls to “break up the banks” so that retail banking would be separated from the investment (risk-taking) activities. During the neo-liberal period, these two distinct roles became blurred and banks increasingly behaved as hedge funds. Legislation that supported the separation was abandoned under intense lobbying from vested financial market interests. The mess that these developments has created is now for all too see. Modern monetary theory (MMT) provides some simple rules for assessing whether the break-up plan is sensible and necessary. That is what this blog is about.

Today in NSW it reached 41 degrees Celsius again. The bushfire season has started early and of-course we all conclude it is related to climate change. But I was thinking about other things – to wit – the difficulty new ideas that have relatively complex underpinnings face in gaining traction in the public debate which is saturated by single line mantras that the media loves to repeat over and over again. This thinking was, in part, motivated by two opinion polls I examined from the US. The second one indicated that a growing (and already dominant) proportion of US citizens want the US government to run balanced budgets. How I thought would they think that would work?

It’s Friday and today has been very hot (nigh on 40 Celsius). One could also easily get hot (under the collar) just engaging in one’s daily reading given the amount of misinformation and sheer terrorist journalism and public commentary there is at present. The IMF released its latest Economic Outlook calling for a general return to surpluses. Why have we fallen prey to this insidious notion that government surpluses are normal and deficits are for fighting fires? In fact, the latter is more the truth. Surpluses are only required if the external sector is so strong that the economy will overheat if the government doesn’t drain private purchasing power. Anyway, I just stay calm through it all … like any good modern monetary theory (MMT) soldier. There is a war going on out there in ideas land and cool heads are needed.

Today, the Cabinet Office in Tokyo issued the third-quarter Japanese national accounts data which showed that the economy has posted positive growth for the second consecutive quarter and is now motoring along at an annualised rate of 4.8 per cent (1.2 per cent in the September quarter). In the June quarter growth resumed at 0.7 per cent (2.8 per cent annualised) and so the recovery is getting stronger. Given they did not allow labour underutilisation of labour to rise very much (a large increase by Japanese standards but relatively small compared to countries such as the UK and the US, they should be able to absorb the jobless fairly quickly. But this will only strengthen the growing call for the government to cut back net spending. It is a case of denying what is staring you the face.

The US President is in Asia at present for the annual Asia- Pacific Economic Cooperation group summit visiting China today and with a cap-in-hand or some would have it. This is a talkfest where North Korea and Copenhagen are meant to be the official talking points. But the journalistic hysteria is all focusing on how the US banker (China) is the culprit for the World’s woes at present and how it should allow free market forces to work and rebalance world trade. The argument has reached the hysterical level in recent weeks and at its elemental level just reflects a failure to understand how a modern monetary system operates.

Here is today’s mystery question: when is it imperative that interest rates should rise? Answer according to most business economists in Australia: when official unemployment creeps up, underemployment rises; participation remains subdued, 88 per cent of the modest employment rise measured in persons is part-time, total employment in hours falls, and you have 26.4 per cent of your 15-24 year olds idle. The real answer: none of these commentators have the slightest sense of national priorities in terms of advancing public purpose and providing an adequate future for our youth. Talk about intergenerational burdens. All the focus is on the so-called debt overhang we are leaving our children. The biggest overhang we are leaving is our support for a government that refuses to provide enough jobs for them.

UK Tory leader David Cameron is back in print in the Guardian (November 10, 2009) with his claim that Big society can fight poverty. Big government just fuels it. In the same edition of the Guardian, regular commentator Polly Toynbee provided a critical analysis to the Cameron line in her article – David Cameron, social policy butterfly. However, sadly, neither writer understands the principles of modern monetary theory (MMT) which means that neither has the slightest inkling of how the monetary system that they live in works. If they did understand that system and the opportunities that it provides a sensible national government then they would probably not write what they did.

Late this afternoon I appeared on ABC Radio National Saturday Extra at a public forum on the future of coal that was held at Fort Scratchley which is near my favourite surf beach in Newcastle (Nobby’s). The site is near the mouth to the Newcastle Port which is the World’s largest coal export port. The program will be broadcast this coming Saturday (see link) but there was a public audience (to heckle the Minister!) present. They filmed the forum and it will be available via podcast sometime later. But that is not the topic of today’s blog. It is about another Nobel Prize winner.

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.

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.