There’s not much on Luke’s blog at the moment but blogging is a slow process when you’re attempting to be factually correct.  Check it out at Shmookey.net/blog.  Nice to have more locals on the scene.

Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 39,000 times in 2011. If it were a concert at Sydney Opera House, it would take about 14 sold-out performances for that many people to see it.

Click here to see the complete report.

Happy Federation Day! Can  you believe it has only been 111 years?  Are we young or what?  But wise beyond our years…well for the most part.

Thanks to Plutocracy Files and Occupied Media, here is Australia’s version of Paul Krugman versus  MMTers favourite White Collar Criminologist Bill Black

Here’s Australia’s John Quiggin on OWS & fraud

Versus UMKC William K. Black on OWS & fraud

What I’d really like to see is a Neochartalist/MMT debate between Pavlina Tcherneva and John Quiggin or Stephanie Kelton and John Quiggin.  Professor Quiggin seems sympathetic to Pavlina as a choice based on Facebook interactions hence my preferred choice; as John Quiggin is currently a Hinkley Visiting Professor at Johns Hopkins University it doesn’t seem entirely beyond the realms of possibility.

MMT is pretty simple. That’s why this series of videos goes for so long (02:39:24) & no that wasn’t sarcasm. Stay tuned for the Video Series in February that makes things even simpler.

Let us know in the comments whether you prefer the video at the top or the bottom of the posts. Have an MMT Day!

However I would like to let you know about a few changes to this website. There are a few new links down the right side. You should check them out. I have recorded testimonials (via twitter) about this site and I have added some Resources under the Resources Tab – both Resources and the drop down MMT for Economists are clickable.

Now I would like to introduce you to the MMT Channel. It is a channel where I set up playlists of MMT related news that is uploaded to YouTube. There will be no change to other videos on the site. I hope to be able to bring you a new “show” at the start of each month.

Now not entirely MMT but certainly closely related to the recent ongoing global recession / global financial crisis and the Occupy Wall Street movement; not to mention in the news a lot lately, I give you the Bill Black Show (01:44:01).

Have an MMT Day!

For the people that have had some economics training or some form of economics background, I recommend placing your mouse cursor over the Resources link above and selecting MMT for Economists from the drop down lists.  I give you fair warning though many of the propositions you hold to be true will be challenged along the way, the very foundation of your economic thinking may be challenged.

The FAQs or Frequently Asked Questions are still very much a work in progress and you are welcome to add your own.  Other things you might like to see are Audio Visuals listed on the Video tab and the drop-down section Fiscal Sustainability Teach-In.  Yes they are two distinct links.  The latter are individual videos whilst the former are playlists you might like to view and review.

The Resources and Other tab also provide links to written pieces on Modern Monetary Mechanics often called Modern Monetary Theory but it is only a theory in its recommendations or prescriptions, not the description of how modern money works today.  And of course there are a few links to check out under  Links in the right side-bar towards the bottom of the page.

Feel free to comment on making changes to the above so it can be more easily understood.

A book dealing with macroeconomic issues without a discussion of aggregate demand will be a novelty

David Leyonhjelm asks the pertinent question:

…but I thought aggregate demand was a fundamental economic principle…Do I need to read your book to understand, or is it simple to explain?

To which another commenter answers: “Say’s Law“.

I began to type the following as a comment in reply to the blog post:

Say’s Law says supply creates its own demand, right?

According to latest statistics with  five per cent (5%)  unemployed, broadly speaking twelve percent (12%) underemployed and according to the way the statistics are taken in Australia, you only count as unemployed if your looking for a job – that is if you actually want one.  That is to go through the rigmarole of seeking-work tests according to legislation.

Today’s Labour Force figures shows unemployment static – so either you’re calling roughly 1.4 million Australians a liar or Say’s Law is wrong.  Otherwise there would  be jobs for them after all supply creates its own demand.

And if there is  no aggregate demand than there is no fallacy of composition (paradox of thrift) either?

Empirical evidence doesn’t seem to win that argument either as Europe and the United States of America shows in the case of each of their respective economies.

If no one is spending, no one is selling, which means jobs are lost and unemployment rises.

Of course you could counter argue that labour is not a product or a commodity. After all, products are paid with products.  However, the treatment of labour as buffer stock as has been done with diamonds, wool, copper, says otherwise.  All have been price stabilisation mechanisms just as a buffer stock of the commodity known as labour is an attempt to control the mythical NAIRU.

1. Private spending collapsed as a result of the effects on confidence of the global financial crisis. Firms felt the pinch as inventories rose and cut back production. The spending collapse was sharp as was the production response.

2. Unemployment rose as firms sacked their workers and the impact of the lost spending arising from the unemployment worsened the situation.

3. Government revenue fell sharply because of the unemployment and they were forced to increase outlays via existing welfare provisions – the so-called automatic stabilisers that are built into government fiscal policy. The consequence – budget deficits rise (or surpluses fall) – solely as a response to the decline in economic activity – the problem is the unemployment not the rising deficits.

4. Governments also chose to increase their discretionary net spending despite advise from conservative economists and Austrian school adherents who claimed the “market” would resolve the problem quickly.

5. The dominance of neo-liberal thinking was weakened but still was evident in the misguided reliance on monetary policy. Central banks cut interest rates and engaged in quantitative easing. The premise was that these policies would reduce borrowing costs and stimulate credit demand.

There were two things wrong with this approach: (a) it doesn’t work. Consumers and firms were not borrowing because banks didn’t have enough funds. They were not borrowing because they were pessimistic for the future and realised they were carrying record levels of debt which had to be reduced via saving; and (b) the central bankers thought it would work which makes you wonder why they would want to be pushing the private sector to accumulate more debt when the crisis was the manifestation of excessive private debt.

What had to happen was a move from credit-based private spending (particularly consumption) to public spending.

6. Public debt levels rose because governments have been hectored into retaining institutional arrangements that were relevant under the gold standard but totally superfluous under the fiat monetary systems that emerged when President President Nixon abandoned what had been called the gold standard (or US-dollar standard).

Under that monetary system which endured for 80 odd years (with breaks for war), currencies were convertible into gold, exchange rates were fixed and governments could only expand their spending by increasing taxes or borrowing from the private sector.

After 1971, governments issued their own currencies which were not convertible into anything of value and were floated freely in foreign currency markets. Most nations have operated “fiat monetary systems” ever since and as a result national governments no longer have to “fund” their spending. The level of the liquidity in the system is not limited by gold stocks.

Under the “gold standard” governments had to borrow to spend more than their tax revenue. But since 1971 that necessity has lapsed. Governments issue debt to match their deficits now as a result of the pressure placed on them by neo-liberals to restrict their spending. The conservatives know that rising public debt can be politically manipulated and demonised and this places a brake on government spending.

But there is no operational necessity to issue debt in a fiat monetary system. Interestingly, the conservatives become schizoid when public debt is involved. The on-going public borrowing provides corporate welfare in the form of risk-free income flows to the rich. The fact that bond yields have remained low throughout the crisis (reflecting strong demand for public debt) tells you that the parasitic bond markets do not buy the neo-liberal political rhetoric. They know that national governments (outside of the Eurozone) have no solvency risk.

7. There are massive stockpiles of machines and productive capital idle and ready to be brought back into production but there is no spending to justify switching them on. One of the problems of a lengthy recession is that firms go broke and productive capacity is scrapped reducing the potential output level. The longer the recession the worse this problem becomes.

It is true that creative destruction is a positive force that emerges during a recession. Low productivity capital is driven out and in the recovery best-practice capital is introduced so the overall vintage of capital becomes younger and more productive. This is one of the arguments that the conservatives make – let the recession rip and clean out all the bad capital.

But when the recession is deep and long, otherwise productive capital is lost and the future growth path is severely compromised as a result. When that impact is observed (as it is now) it becomes much harder to kickstart the economy and the losses are very large.

8. Most importantly, there are millions of workers who still have two arms and legs as before willing to work but unable to find jobs.

The real situation seems to have become obscured in all the policy debates at present.

Prior to the crisis, the overall aim of this neo-liberal agenda was clear – reduce government protection of the weak and transfer power to employers by undermining the capacities of trade unions to bargain for advantage. While the public justifications were all about creating more jobs and reducing the poverty the reality was different. Since 1975 most nations have failed to create enough jobs to match the willing labour supply.

The program of deregulation and the attack on workers’ rights set in place the conditions for the global financial crisis.

Bill Mitchell

As we all know by now (I – S) + (G – T) + (X – M) = 0.

It all seems very self explanatory Net Private Sector Saving + Government Balance + Current Account Balance = 0.

That is the catch (X-M) is only a stylised representation of the Current Account. (X-M) more accurately is the Trade Balance.

As usual we will be drawing heavily on Bill Mitchell’s work. I think we will let Bill take it from here.

Many people have asked me to explain how one measures the net exports contribution and whether it is the same as the Current Account outcome. So here is a brief explanation drawn from the Australian National Accounts: Concepts, Sources and Methods.

The following ABS Glossary is also very informative.

A non-resident is defined as:

Any economic entity (individual, enterprise or other organisation) ordinarily domiciled in a country other than Australia. Note that foreign branches and foreign subsidiaries of Australian enterprises and other external territories are regarded as non-residents.

Primary income represents

* compensation of employees;
* dividends;
* reinvested earnings;
* interest;
* investment income attributable to policy holders in insurance, standardized guarantees, and pension funds;
* rent;
* and taxes and subsidies on products and production.

Secondary income:

… include current transfers that offsets to the provision of resources that are normally consumed within a short period (less than twelve months) after the transfer is made. Examples include food aid, remittances from residents temporarily abroad, and remuneration received by international students undertaking university studies.

The Current Account is “the sum (net) of credit and debit entries for goods, services, primary income, and secondary income”.

I constructed the following Table to show the sequence of transactions that help us understand how net exports and the primary and secondary income flows are accounted for.

So the first rows describe the components of aggregate demand which drive output – C + I + G + (X – M).

So the contribution to real GDP growth from the external sector is measured by (X – M) which is also the Balance of Trade. That is, the sum (net) of the credit and debt entries fro goods and services.

In addition, to this flows of primary and secondary income are recorded between Australia and the rest of the world. They are shown in net terms (NPI and NSI) in the Table. These flows are sometimes called “invisibles” meaning they are not goods and services. They are added to the Balance of Trade to give the Current Account Balance (CAB).

Bill Mitchell

The reason for this is that we have more or less covered our broad overview of Modern Money Mechanics more commonly known as Modern Monetary Theory. As anyone that has followed through by now, is that it is not actually a theory hence my use of ‘mechanics’.

The significant MMT pieces are all laid out in the Index. All anyone has to do is start from the top and work their way through day by day or week by week or a combination of the two as convenient.

Next week’s post will be our final MMT post for now. The site will stay live, FAQs will stay open & I will gradually add to them over time as I work through these posts again myself.

The remaining videos can be found under the Video tab & the Fiscal Sustainability Teach-In tab.