they all waiting for a new definition...!

view of Paul De Grauwe of the University of Leuven and the Center for European Policy Studies who wrote:

"There can be little doubt. The science of macroeconomics is in deep trouble. The best and the brightest in the field fight over the most basic problems. Take government budget deficits, which now exceed 10% of gross domestic product in countries such as the US and the UK. One camp of macroeconomists claims that, if not quickly reversed, such deficits will lead to rising interest rates and a crowding out of private investment. Instead of stimulating the economy, the deficits will lead to a new recession coupled with a surge in inflation. Wrong, says the other camp. There is no
danger of inflation. These large deficits are necessary to avoid deflation. A clampdown on deficits would intensify the deflationary forces in the economy and would lead to a new and more intense recession.

Or take monetary policy. One camp warns that the build-up of massive amounts of liquidity is the surest road to hyperinflation and advises central banks to prepare an exit strategy. Nonsense, the othercamp retorts. The build-up of liquidity just reflects the fact that banks are hoarding funds to improve their balance sheets. They sit on this pile of cash but do not use it to increase credit. Once the economy
picks up, central banks can withdraw the liquidity as fast as they injected it. The risk of inflation is zero.

Both camps line up an impressive list of Nobel prize-winners to buttress their arguments. Economists have often disagreed in the past, but this time the tone is different. The protagonists do not hesitate to accuse the other camp of ignorance or bad faith. I have never seen anything like this.

So what? Does it matter that economists disagree so much? It does. Take the issue of government deficits. If you want to forecast the long-term interest rate, it matters a great deal which of the two camps you believe. If you believe the first one, you will fear future inflation and you will sell long term government bonds. As a result, bond prices will drop and rates will rise. You will have made a reality of the fears of the first camp.

But if you believe the story told by the second camp, you will
happily buy long-term government bonds, allowing the government to spend without a surge in rates, thereby contributing to a recovery that the second camp predicts will follow from high budget deficits.

Most people are not sure which camp is right. They hesitate. One day, when green shoots are popping up here and there, they believe the story warning about inflation; the next day, when the shoots turn brownish, they believe the other story. Disagreements among economists take away the intellectual anchors around which market participants interpret events and forecast the future. Ultimately, all our
forecasts use a particular economic model to interpret data and to forecast their future course. The existence of wildly different models takes away this intellectual anchor and this translates into more market volatility.

This conflict matters not only for market participants, but also for policy-makers. The two camps of economists have wildly different estimates of the effect of a 1% permanent increase in government spending on real US GDP over the next four years. According to the first camp, the Ricardians, the multiplier is closer to zero than to one, i.e. 1% extra spending generates much less than 1% of extra GDP, producing little extra tax revenue. Thus budget deficits surge and become unsustainable.

By contrast, the second camp, the Keynesians, predict that the same 1% of extra government spending multiplies into significantly more than 1% of extra GDP each year until the end of 2012. This is the stuff that governments dream of, because such multiplier effects are likely to generate additional tax income so that budget deficits decline.

With so much disagreement, it is no surprise that policy-makers are unsure and vacillate. Some countries, such as the US and France, go all out for the Keynesian story; others, such as Germany, put more faith in the Ricardians. Personally I think the Keynesians are right, but my opinion is irrelevant.

The point is that the cacophony of analysis helps to explain why policy-makers react in different ways to the same crisis and why it is so difficult for them to come up with coordinated action.

How to resolve this crisis in macoeconomics? The field must be revamped fundamentally. Some of its shortcomings are obvious. Before the financial crisis, most macroeconomists were blinded by the idea that efficient markets would take care of themselves. They did not bother to put financial markets and the banking sector into their models. This is a major flaw.

There is a deeper problem, however, that will be more difficult to resolve. This is the underlying paradigm of macroeconomic models. Mainstream models take the view that economic agents are superbly informed and understand the deep complexities of the world. In the jargon, they have rational expectations. Not only that. Since they all understand the same truth, they all act in the same way.
Thus modeling the behavior of just one agent (the representative consumer and the representative
producer) is all one has to do to fully describe the intricacies of the world.

Rarely has such a ludicrous idea been taken so seriously by so many academics. (Other fields of economics have not been deluded by this implausible idea and therefore do not face the same criticism.)

We need a new science of macroeconomics. A science that starts from the assumption that individuals have severe cognitive limitations; that they do not understand much about the complexities of the world in which they live. This lack of understanding creates biased beliefs and collective movements of euphoria when agents underestimate risk, followed by collective depression in which perceptions of
risk are dramatically increased. These collective movements turn uncorrelated risks into highly correlated ones.

What Keynes called “animal spirits” are fundamental forces driving macroeconomic fluctuations. The basic error of modern macroeconomics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of
these decisions create collective movements that are not visible at the micro level.

The basic error of modern macroeconomics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of these decisions create collective movements that are not visible at the micro level.

It will remain difficult to model these collective movements. There is much resistance. Too many macroeconomists are attached to their models because they want to live in the comfort of what they understand – the behaviour of rational and superbly informed individuals.

To paraphrase Isaac Newton, macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try."

Pakistan suffers bloodiest militant attack in 2 years

REUTERS - Pakistan suffered its worst militant attack in two years on Wednesday when a car bomb killed more than 80 people in a crowded market in the city of Peshawar.

The blast, which pushed the year's total for deaths in militant attacks close to 500, came several hours after U.S. Secretary of State Hillary Clinton arrived in the country, pledging a fresh start in relations.

Following is a timeline of major attacks this year:

Feb. 5, 2009 - At least 24 people are killed in a suicide bombing near a Shi'ite mosque in Dera Ghazi Khan, central Pakistan.

Feb. 20 - Suicide bomber kills 27 people and wounds 65 in an attack on a funeral procession for a Shi'ite Muslim killed a day earlier in Dera Ismail Khan town.

March 3 - Gunmen attack a bus carrying Sri Lanka's cricket team outside a Lahore stadium, killing seven people, including six policemen and a driver, and wounding six of the cricketers and a British coach.

March 27 - A suicide bomber kills 37 people in a crowded mosque near the Afghan border.

March 30 - Militants armed with guns and grenades storm a police training centre in Lahore killing eight recruits, wounding scores and holding off police and troops for eight hours. The attack is claimed by Pakistani Taliban leader Baitullah Mehsud. Four militants are killed and three arrested.

April 5 - A suicide bomber blows himself up in a religious centre for minority Shi'ite Muslims in Chakwal in central Pakistan, killing 22 people.

April 18 - A suicide car-bomber rams a military convoy, killing 25 soldiers and police and two passers-by near Kohat, 190 km (120 miles) west of Islamabad.

May 27 - Gunmen attack a police headquarters in the Pakistani city of Lahore, setting off a car-bomb that killed at least 24 people.

June 5 - A bomb blast kills around 40 worshippers attending Friday prayers at a mosque in a remote area of northwest Pakistan.

June 9 - Militants attack the Pearl Continental Hotel, which is popular with foreigners, in Peshawar with guns and a truck bomb killing seven people including a U.N. worker.

Aug 27 - A suicide bomber kills 22 Pakistani border guards in an attack at the main crossing point into Afghanistan.

Sept 2 - Unidentified gunmen shoot and wound Pakistan's religious affairs minister, Hamid Saeed Kazmi, in a brazen attack in the capital that killed his driver.

Sept 18 - A suicide car-bomber kills 33 people on a main road near the city of Kohat in northwest Pakistan.

Oct 5 - A suicide bomber dressed as a paramilitary soldier attacks an office of the U.N. World Food Programme (WFP) in the Islamabad, killing five staff.

Oct 9 - A suspected suicide car-bomber kills 49 people in the city of Peshawar. About 100 people are wounded.

Oct 10 - Gunmen in army uniforms attack Pakistani army's headquarters in Rawalpindi. The next day Pakistani commandos storm the building and rescue 39 hostages. Nine militants, three hostages and 11 soldiers are killed.

Oct 12 - A suicide bomber hits a military vehicle in Shangla district, near the Swat valley. Forty-one people are killed, including 35 civilians and 6 soldiers, and 45 wounded.

Oct 15 - Militants launch a string of attacks in Lahore, capital of Punjab province, Peshawar and Kohat in the northwest killing at least 31 people.

Oct 28 - More than 80 people are killed and around 100 injured when a bomb explodes in the busy Peepal Mandi market street in Peshawar's old city.