Here’s a piece from yesterday’s NYTimes by Annie Lowrey: “Warren Mosler, a Deficit Lover With a Following.”

In the piece, Lowrey quotes blogger Mark Thoma as follows:

“They [followers of MMT] deny the fact that the government use of real resources can drive the real interest rate up,” said Mark Thoma, an economics professor and widely followed blogger who teaches at the University of Oregon. After delving into the technical details of modern monetary theory for a few minutes, he paused, then added, “I think it’s just nuts.”

Thoma might have been misquoted, but the “real interest rate” is a compound term, comprised of the nominal interest rate and the rate of inflation. Technically, the real rate is the nominal rate less expected inflation. As we know, the Fed sets the overnight nominal rate. The real rate is then the Fed’s target rate less expected inflation.

Now, it is possible that “government use of real resources” might raise expectations of inflation. That is what gold buggism is all about. So let us say Ron Paul whips up inflationary expectations. What happens to the real rate? Well, we are subtracting a bigger expected inflation number from the Fed’s target rate. So the real rate goes down! Now, Thoma might think the Fed will also react to Ron Paul’s gold buggism and so increase its target rate. How much? Who knows. Is there any guarantee the Fed will raise it more than Ron Paul raises inflation expectations? I see no reason why one would jump to that conclusion. And historically, the ex post real rate does often fall when inflation rises (it even goes massively negative).

That is not proof that it is impossible for the real rate to rise when government uses real resources, but there’s no reason to think the real rate automatically goes up. It depends. On whether inflation expectations increase by less than the Fed raises the nominal rate target.

Finally, Warren and “Deficit Owls” are by no means “deficit lovers” – so Lowrey’s title is misleading. There’s a time for deficits, a time for balanced budgets, and even a time for budget surpluses. It all depends on the other two sectors (reminder: Government Balance + Private Domestic Balance + Foreign Balance = 0). A more accurate title would have been: Warren Mosler: Not Afraid of Deficits.

Segment (in Greek) begins at 49:35.

In this Skai TV interview, Dimitri Papadimitriou focuses on the eurozone banking crisis and rising unemployment in the southern tier, arguing that the approval of 200 million euros to combat unemployment in Greece is far too small to reach the desired outcome.  (Segment, in Greek, begins at 23:30)

Paul Krugman warns against “caricaturing” Keynesian economics, and in particular the General Theory (GT), Keynes’s best known work. One caricature heard from time to time is that the book is not mathematically tractable. The caricature also claims that no one has succeeded in fitting such a contradictory and confusing bunch of arguments into a clear, mathematically coherent model. Okay, in the spirit of a concession to these macro skeptics, what follows is a schematic caricature of sorts that seems okay to me as a broad summary of the first 18 chapters or so of the book, from a classic book by Pasinetti. So for those who insist that (1) they need a preview in a very concise form or (2) that they will never have time for the lengthy and complicated GT, below is the aforementioned schema. It is only meant to show that one can in fact simplify this oft-misinterpreted work quite a bit using mathematical symbols and keep the gist of the first part of the story.

where the variables are defined as follows:

L = liquidity preference (psychological factors affecting long-term interest rates, especially expected future rate changes)

M-overbar = policy-determined money supply

I = nominal interest rate

E = expected profitability of investment projects, given economic conditions

C = consumption

I = investment

Y = total output

All arrows (→) show directions of causality, so that A→B means that knowing A allows us to determine B.

Finally, f(), ψ(), and φ() signify functions endowed with properties that allow one to use math to analyze the model.

(I have altered some of Pasinetti’s notation slightly.)

As Pasinetti points out, this causal schema is different from Krugman’s favored IS-LM model, and it does leave out much that is important, including changes in the numéraire (chapter 19) and long-run dynamics, which the formal argument left up in the air. In a footnote, Pasinetti says that the model is only a first approximation to Keynes’s theory, and that care should be taken with attempts to do exercises involving shifts in the curves. But while Pasinetti’s schema, and the simple model it represents, certainly succeeds in simplifying the GT, it is really not a caricature. The original version of the schema can be found in Growth and Distribution, by Luigi Pasinetti, chapter II, Cambridge University Press, a 1974 collection of generally lucid essays (publisher’s book site).

Last week Allan Sheahan published a piece arguing that “Jobs Are Not the Answer” to America’s unemployment problem. Here’s his reasoning:

“The current unemployment rate of 7.5% percent means close to 20 million Americans remain unemployed or underemployed. Nobody states the obvious truth: that the marketplace has changed and there will never again be enough jobs for everyone who wants one — no matter who is in the White House or in Congress. Fifty years ago, economists predicted that automation and technology would displace thousands of workers a year. Now we even have robots doing human work. Job losses will only get worse as the 21st century progresses.”

In fact, economists have recognized this possibility since at least the early 19^th century, when David Ricardo posed it as “the machine problem.”  “Robots” have been doing “human work” since the time of Adam Smith’s pin factory. Or, indeed, since the first proto-human discovered the fulcrum and lever so that one could do the work of four.

However, “unemployment” has existed only since the development of production for market. Our tribal ancestors “worked” about a dozen hours a week to provide the food, clothing, and shelter required for the standard of life they deemed acceptable. They occupied themselves the rest of the time with all the other human activities that we regard as “culture”: dancing, singing, tattooing, shaman-ing, piercing, ritualizing sacrifices, child rearing, storytelling, marrying, fighting, debating, drawing, and thinking.

Neither were our peasant forebearers, who had access to the main means of production—agricultural land—unemployed. They might have worked much longer days, and they grudgingly turned over an ever-rising portion of their production to rapacious feudal lords, but they were not unemployed. It is only once they lost access to land through enclosures, etc, that their livelihood depended on the whims of the employing class.

Why didn’t the inexorable trend to greater use of “robots” from the time of Smith forward lead to the dis-employment of all (or most all) human labor? First we raised living standards (arguably, of course, since it is not altogether clear that we live better than our tribal cousins in all important respects), always finding other ways to employ humans to produce products that our ancient ancestors never knew they needed. Second, we reduced the workweek—adding “weekends” and “holidays,” and reducing the daily grind from 16 hours to 12, and hence to 10 and finally 8. And there it got stuck—at least in America.

Further, being a Puritanical/Calvinist sort, Americans really never embraced the idea of vacations, anyway, and so unlike every other civilized society on earth, there is no considered right to a vacation and most Americans either don’t get them or don’t want them.

In recent years, it seems that involuntary unemployment and underemployment in the US has been rising. There are a number of reasons. continue reading…

The French and German governments recently issued a joint statement titled “Together for a stronger Europe of Stability and Growth.” The communiqué emphasizes strengthened policy coordination and the use of indicators in establishing a common assessment of economic conditions in the currency union as a whole, member states, and particular markets. The new push for deeper policy coordination is intended to prevent future crises by identifying early on any incipient imbalances that might point toward fresh troubles ahead. Overall, the initiative aims at making the European economy more resilient and competitive.

Such an exercise begs the question of what should be the benchmark and underlying model in the envisioned common assessment. In this regard, Germany has sharpened its diplomatic skill-set, and is keen to have France on its side at the launching platform. For at some point the benchmark will need to be spelled out. While today’s German authorities may not wish to say so all too loudly, it is clear that they view Germany as the model to follow for its crisis-stricken euro partners. So it was left to Angela Merkel’s predecessor, Gerhard Schröder, to be a little more suggestive in a recent op-ed in The Financial Times titled “France should copy Germany’s reforms to thrive.” Referring to the experiences with Germany’s Agenda 2010 reforms of 2003-5, which apparently took a few years beyond Mr. Schröder’s chancellorship to bear fruit, the former German chancellor closes charmingly with the words: “I am confident that our friends in Paris will act accordingly.”

For it is France in particular who has come under immense pressure of late to finally do the right thing to get its ailing economy back on track. The right thing being to do the German thing of course: to embark on allegedly growth-friendly fiscal consolidation together with supposedly growth-boosting structural reform. Legend has it that this strategy restored Germany’s competitiveness and provided the foundation for the country’s miraculous resurrection from the depressing status as the “sick man of the euro” only so very few years ago. But is Germany really the model of excellence or perfection when it comes to the optimal economic management of the eurozone economy? continue reading…

Who is running the largest current account surplus in the world? China? Saudi Arabia? Both wrong! These are only the number two and three countries. China had a record $420bn surplus in 2008, but that imbalance has more than halved since. As a share of GDP China’s external imbalance is down from ten to two-and-a-half percent since the global crisis — evidence of a remarkable rebalancing. The oil price would need to be significantly higher still to make Saudi Arabia the number one.

So for 2012 the number one prize actually goes to: Germany! The world champion of 2012 ran up a current account surplus of almost $240bn. At a rocking seven percent of GDP, that’s just slightly below Germany’s pre-crisis record of almost $250bn in U.S. dollar terms. In euro terms 2012 actually set a new record for Germany. And that is an interesting part of the whole story, as the euro has depreciated by some 20 percent from its peak against the U.S. dollar.

Back in the 2000s, the euro appreciated very strongly against the U.S. dollar (as well as in real effective terms) between 2002 and the summer of 2008. Euro appreciation cut Germany off from benefiting even more from the record global boom of the 2000s. However, somehow Germany, then also known as the “sick man of the euro,” managed to run up gigantic regional current account surpluses, both vis-à-vis its euro partners and vis-à-vis the larger European Union (of 27 member states). At its pre-global crisis peak Europe was the primary source of Germany’s current account surpluses. Don’t miss then what a remarkable re-loading and re-sourcing of German external surpluses has occurred since then. continue reading…

(Updated)

Here’s what’s new from yesterday’s FOMC statement and Bernanke’s press conference:  the Fed has indicated that asset purchases (QE) will end when unemployment hits 7 percent.  (Note that that’s different from the point at which the Fed will begin considering raising short-term interest rates — previously linked to a threshold of 6.5 percent unemployment.)

Commentators have pointed out that the Fed seems to be basing its expectations — that asset purchases will begin “tapering” this year and end by next year — on some fairly optimistic economic forecasts (this is a recurring issue).  There are also a lot of questions as to what’s motivating these signals of a less expansionary stance, given that inflation is too low by the Fed’s own measure.  “Frankly,” Yves Smith writes, “the real issue seems to be that the Fed has gotten itchy about ending QE.  Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures.”

Somewhat related to this post on the Fed’s historic “reaction function,” here’s Tim Duy’s analysis:

Bernanke continued to deflect attention from the low inflation numbers, describing them as largely transitory, identifying the impact of the sequester on medical payments as a factor.  Here is what I think is going on:  Overall, the Fed has basically a Phillips Curve view of inflation.  Low inflation now is attributable to high unemployment.  Given that unemployment is forecast to fall, and the forecasts are improving such that it is falling faster than anticipated, they anticipate that disinflation will soon be halted.  In other words, right now policy is being driven by the unemployment rate.  The more quickly unemployment is moving to the Fed’s long run target, the more they will reduce accommodation despite low inflation.  At least, that is what it appears.

One interesting wrinkle is that James Bullard dissented from the near-unanimous decision.  According to the official FOMC statement, he “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”

Normally, you would think of Bullard as a “hawk” (this dove–hawk framework seems to have become less useful in the era of unconventional monetary policy).  In his April speech at the Minsky conference, Bullard warned against unemployment targeting and suggested the Fed ought to focus primarily on price stability (price-level targeting).  The cynic might dismiss this as just a convenient technical excuse for ignoring high unemployment, but Bullard’s dissent suggests that he takes the model quite seriously — which is to say, not just when inflation is above or near the target.  If you want more insight into what might be motivating his vote, here’s the full speech:

Update (6/21):  Bullard explains his dissent (copied below from St. Louis Fed).  Key line:  “to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.” continue reading…

Remember last summer? The London Whale, that blockbuster adventure thriller, triggered one chill after another as the high-risk action at JPMorgan Chase was revealed. Today, the threats posed by megabanks remain just below the surface — no crisis at the moment — but they’re equally dangerous. A major sequel this year cannot be ruled out.

Dodd-Frank, the law designed to reform the financial system, had already been on the books for two years when JPMorgan’s troubles surfaced. In an effort to figure out how it failed to prevent massive losses by one of the world’s largest banks, a Senate subcommittee investigated. This spring, it issued its report on the outsize positions taken by the bank’s Chief Investment Office (CIO) — with a lead trader known as ‘the London Whale’ — and the department’s subsequent six billion dollar crash.

The committee detailed a list of concealed high-risk activities, and determined that the CIO’s so-called ‘hedging’ activities were really just disguised propriety trading, that is, volatile, high-profit trades on behalf of the bank itself, rather than on behalf of its customers in return for commissions.

Levy Economics Institute Senior Scholar Jan Kregel has taken these conclusions a step further, after analyzing the evidence. In a new research paper he makes the case that the primary cause of the bank’s difficulties was not that it engaged in proprietary trading: It was the concealment of this activity through the creation of a ‘shadow bank’, with the express purpose of this hardly-visible bank-within-the-bank being to create profits. What began as a unit to hedge risks — a safeguard — no longer served that purpose. He argues that when megabanks operate across all aspects of finance, this expansion of propriety trading becomes inevitable.

The solution, Kregel says, is not to prevent hedging, but rather to recognize that it can never be consistently profitable. continue reading…

Last week, James Galbraith was supposed to be interviewed by ERT, the public broadcaster in Greece.  Events intervened when the Greek government ordered that ERT be shut down, and so instead of sitting for the interview, Galbraith delivered this speech in Thessaloniki in front of a large gathering assembled in response to the closure (ERT defied the directive and continued broadcasting on the internet; yesterday, a Greek court ordered that ERT be put temporarily back on the air).  After noting that the Greek crisis has been going on for five years now, with no sign of progress, Galbraith suggested that it might be time to start reconsidering the policy approach:  “After a certain amount of time, even an economist ought to reconsider their ideas. Most other people would so much more quickly, but we are a very patient and stubborn profession.”