I saw a clip from John Stewart's Daily Show yesterday where he showed some Fox…
French protests reflect the dysfunctional architecture of the common currency
The social instability in France is now spreading throughout Europe. Already there are mass protests in Spain and Portugal, Belgium, Italy, and Albania. In France, initially students began protesting over conditions in the schooling system, but the grievances and parties involved have broadened out and the increasingly chaotic scenes in Paris have spread out to the main cities of France. I was a teenager when the 1968 protests spread across the world and part of the anti-war movement at the time. We had great hopes that we would overthrow the Western capitalist model and while some positive outcomes came out of the widespread unrest, the protests failed to achieve the primary aim, and, in some cases, increased oppression (for example, they helped Nixon split the Democrats, prompted the Warsaw-Pact invasion in Czechoslovakia, and saw hundreds of students in Mexico slaughtered by the state forces at the – Tlatelolco massacre – to name some of the negative outcomes). It was a different time and the issues were somewhat different. What the current social unrest tells me is that segments of the population are rebelling after the years of dysfunctional government policies constrained by the unworkable fiscal rules that were designed to support the common currency. In 1996, I was invited as a guest of the European Commission to speak at a conference in Firenze about the plans for currency integration. I predicted at that meeting that the design outlined in the Maastricht Treaty was unworkable and would collapse in time. I was vilified by the other participants and the EC technocrats. I think what is going on now tells me that the predictions were accurate.
Last week I attended a workshop at the university here that was focused on geopolitics.
I met a person there who had previously worked for Jacques Delors and was very sympathetic to his contribution even though she acknowledged that the European Union had become a dysfunctional nightmare.
My point was that Delors deliberately stacked his committee that finally reported in 1989 with Monetarists and conservative economists because he knew that he would get support for his preferred monetary union architecture, which would embed neoliberalism in the very legal framework of the system.
Neoliberalism in Europe is a political preference that can be abandoned if the electorate choose a party that is not enamoured with the ideology.
The ideology is part of the treaty structure, which is nearly impossible to alter given that all 27 nations would have to agree on a progressive alternative at the same time.
I thus consider Delors to have ‘blood on his hands’ given his central role in the design and establishment of the union.
The alternative view that the person presented was that Delors was an ‘instrument’ of the elites and was deeply unhappy with what was happening and tried to modify the outcomes to emphasise a vision of social well-being.
The evidence doesn’t really support that view and after he left his official positions and worked within his own institute he had plenty of opportunities to criticise the system he created but didn’t.
None of his written material or public speeches indicate that he thought the ‘creation’ was a mistake.
In his last written statement – Thinking Europe as ours (Penser l’Europe comme la nôtre) – that was read out on December 6, 2021 at the Odéon Theatre in Paris by Pascal Lamy, given that Delors was getting very old, there was no hint of mea culpa.
I wrote at length about all of this in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
Nothing I wrote about then has been shown to be inaccurate.
All of the mainstream commentary on the protests seem to be missing the point.
For example, this UK Guardian article (October 10, 2026) – France’s dilemma: protesters demand spending as markets require fiscal restraint – pits the concerns of the protesters against those in the financial markets.
For the bond markets the problem is clear and directly related to the chosen architecture of the common currency.
When France (or any of the Euro-using countries) chose to scrap their own currencies and adopt the euro, the currency in use became equivalent to a ‘foreign’ currency for them.
At that point, they lost their currency sovereignty and could only spend if they raised taxes and if they wanted to spend more than they generated in tax revenue, then they had to rely on issuing debt to the private markets.
Importantly, unlike the debt issued, for example, by the Australia, US, Japanese, UK governments (and any government that issues its own currency under monopoly conditions), the debt issued by the Eurozone countries suddenly carried credit risk.
The bond markets knew that such governments could run short of euros and potentially default on their outstanding liabilities.
We went close to that during the GFC, first in May 2010 and then again in June 2012 when several governments came under pressure as rising bond yields were being demanded by the bond investors.
It was only the fact that the ECB effectively funded the fiscal deficits of the nations under pressure – through the large-scale secondary bond market purchasing programs – that the Eurozone survived intact.
If the ECB had not have introduced those programs and bought up all the debt being issued then several Eurozone countries would have become insolvent and probably would have had to exit the common currency.
The problem of the ECB intervention was that severe austerity conditionality was imposed on the nations which made it very hard for them to exit the deep recession that accompanied the financial market chaos.
What we learned from that crisis was that the Eurozone governments had very little fiscal room to move when confronted with a major crisis.
Some might say that the pandemic experience refuted that assessment.
But the only reason the governments were able to run large deficits during that period was because the fiscal rules were effectively suspended and the ECB purchased most of the debt that was being issued.
Under the – Pandemic Emergency Purchase Programme (PEPP) – and the existing – Asset Purchase Programme (APP) – the ECB purchased over 95 per cent of the debt issued within the Eurozone during 2020.
For some nations, the proportion was much higher – for example, for Italy it was 117 per cent of the debt issued (meaning they also bought debt that had already been issued prior to the pandemic.
By the end of the period, the ECB owned more than 25 per cent of all the outstanding debt that had been issued by Eurozone Member States.
In other words, the private bond market was really given no discretion and the investors knew that if they purchased in the primary bond market (the place where the debt is first issued), they could offload it quickly in the secondary market to the ECB and make a profit (as the ECB demand pushed up the bond prices and lowered the yields).
So for the bond investors the fact that the debt carried intrinsic credit risk was irrelevant as long as the central bank was ultimately buying the debt.
Further, on March 23, 2020, the Council of the Europeran Union issued this statement – Statement of EU ministers of finance on the Stability and Growth Pact in light of the COVID-19 crisis – which announced that the Commission was invoking “the general escape clause of the EU fiscal framework” which meant that “the preventive and corrective arms of the Pact” were suspended until 2020.
The import of that decision was that, unlike the experience during the GFC, the Member States could run higher than usually allowed fiscal deficits and not face the austerity impositions under the ‘corrective’ arm.
At least, not until 2023, when the regular fiscal surveillance resumed and the technocrats in Brussels once again started demanding major cuts in government programs.
Some progressive economists claimed that this relaxation meant that criticisms of the Euro architecture were misplaced and the common currency system could deliver sound outcomes.
They were wrong.
First, several countries were reluctant to take full advantage of the temporary flexibility that the relaxation provided because they knew that the larger the deficit the worse would be the resulting austerity that would be imposed by the technocrats in Brussels once the general escape clause was deactivated.
Second, most countries used the pandemic flexibility for health care and temporary income support but the ingrained consequences of the two decades of austerity bias preceding the pandemic were not addressed.
Taking the opportunity to restore the quality of the public infrastructure, the education and health care sectors, etc was ignored and the degradation of those essential areas of social and economic life continued apace.
Fast track to 2026 and the citizens in many Eurozone countries have had enough.
Students are sick of having to undertake education in poorly equipped schools with teacher shortages and worse.
Their grievances have generalised into ‘cost-of-living’ angst, poor wages growth, housing inadequacies, energy prices.
Not all of these problems can be traced back to the dysfunctional architecture of the common currency.
For example, energy prices are solely due to Trump and his cronies and will resolve once the crisis they created resolves in some way – how? I don’t have a clue.
But the rest of it is directly the result of the fact that the Eurozone governments are highly restricted in their expenditure and have taken decisions to starve capital expenditure because from a political perspective the direct impacts of that are not easily visible.
Until they are!
It is much harder cutting recurrent spending like welfare support etc because the visible impacts are immediate and the victims are identifiable immediately.
However, it takes some time for a bridge to start collapsing or roads or schools to deteriorate.
But eventually, an extended period of austerity becomes visible and the consequences of that are playing out in France and beyond now.
Research by Mathieu Plane and Francesco Saraceno – Financing Public Investment in France – shows that:
After a long period of sustained growth during the 1960s (5% of GDP on average … public investment remained at a relatively high level during the 1970s and 1980s (4.4% of GDP on average). The first break took place during the 1990s, a period during which priority was given to reducing the public deficit to meet the Maastricht criteria and join the euro. This resulted in an adjustment to public investment that, on average, fell below 4% of GDP from the mid-1990s to the beginning of the 2010s, when a second shock occurred. Following the sovereign-debt crisis, the fiscal stance changed, and a substantial part of the fiscal adjustment was achieved by reducing capital expenditure. Indeed, the reduction of public investment during that period has contributed to almost a third of fiscal consolidation even though investment represented only 6% of public expenditure. The share of public investment-to-GDP from 2014 to 2022 fell to 3.5 % on average and, during the period 2015–2018, reached its lowest level since 1952.
Moreover, the French government pushed the funding responsibilities down to the local government authorities, which led to a further stagnation in capital expenditure.
For example, we learn from the International Transport Forum article – Evolution of transport infrastructure investments since before the financial crisis – that:
The most significant declines in share of spending on roads when comparing 2017 to 2007 were Slovenia decreasing by 37 percentage points (91% to 55%), Denmark by 33 percentage points (82% to 48% in 2016) and France by 24 percentage points (74% to 50%).
As a result of deferred maintenance, the capital value of roads in France fell by 7 per cent between 2007 and 2017.
I could recount similar statistics for other aspects of essential infrastructure including school capital investments etc.
My conjecture is that human societies are malleable but only up to a point.
Eventually, if a population is pushed too far, then rebellion results.
There was a reason that trade unions formed and discussions about welfare states accelerated in the late C19th.
The years of abuse by industrialists of their workers and their families went too far and citizens demanded changes.
The current social instability should, I think, be seen in that context.
The UK Guardian article cited above correctly notes that the years of austerity has left France in a non-viable state.
Business investment is weak and many businesses have indicated they will “become vulnerable or even go bankrupt if economic policy remained deadlocked for the next five years.”
The outlook for France within the common currency is very bleak.
The government does not have the fiscal capacity under the EU rules to do what they should be doing – restoring confidence, redressing the years of infrastructure neglect, helping low income families get better housing, supporting the next generation with a best-practice and well-equipped education system and more.
The bond markets simply won’t let them run the fiscal deficits necessary to achieve those necessary outcomes.
And when the bond markets finally turn on France, the ECB will certainly step in and buy up the debt again but only at a price – of even more damaging and unsustainable austerity requirements.
France is trapped because it uses a foreign currency and the issuer of that currency (the ECB) is part of the problem.
The only viable path is for France to exit the common currency and restore the franc and the powers of the Banque de France.
Then it would have the flexibility to ease the tensions among its population.
Is that likely to happen?
Unlikely unless the current social instability becomes so threatening to the state that the mainstream populace seeks an alternative political solution.
The problem with the UK Guardian article is that the journalist gets ahead of himself and demonstrates how little he understands the situation.
He writes:
There is much about the economic situation in France that mirrors what has happened in the UK and the US.
As I have previously noted – when a journalist conflates the fiscal prospects of a Eurozone Member State with those for a currency-issuing government such as the UK and the US, you can conclude one thing immediately.
Clueless.
There is even confusion in his article.
After claiming all these countries with high debt ratios are in trouble because investors want higher yields, he writes that “Japanese investors, typically strong supporters of France as a haven for their savings, have been instrumental in the panic after they found better returns on home turf, heaping further pain on the French treasury”.
If the high public debt was the reason for the higher yields and investor concern in the UK and the US, why would the same issue not be felt by Japanese investors who are flooding back into JGBs, despite the nation having the highest growth public debt as a percent of GDP?
No clue is provided by the journalist to that inconsistency.
The rising bond yields in many currency-issuing nations at present has little to do with their fiscal situations.
The investment boom in the AI bubble is distorting capital markets in a huge way and is driving funds that would normally go into government debt into the hands of the speculative AI firms.
That shift will probably come to grief but that is a separate issue.
When the demand for a bond falls (because funds are going elsewhere), the yield rises.
It is as simple as that yet many journalists appear stuck on the public debt causing rising yields angle and they are thus misleading their readers.
Some of the French bond issues are AI related as well.
But there is also genuine concern among investors that the capital risk attached to French government debt is rising and so they want a higher yield to compensate for the increased risk exposure.
Conclusion
The problems facing France and its Euro Member State partners is that they are boxed in fiscally and the longer-term consequences of being boxed in for a few decades are now manifesting.
There is no way out while they persist with membership of the common currency.
Turning to the Far Right is not the answer given that Marine Le Pen is now proposing harsh austerity as the answer while claiming to want to improve the health and education system.
It seems that only Jean-Luc Mélenchon, leader of La France Insoumise offers a solution yet how far the European elites will go to stop his (unlikely) election in next April’s Presidential runoff is anyone’s guess.
And, mean while the place is burning.
That is enough for today!
(c) Copyright 2026 William Mitchell. All Rights Reserved.
Dear Bill,
if ChatGPT is to be trusted, Mélenchon is not advocating for France to leave the Eurozone. If anyone wants to go behind the paywall, his latest interview is here: https://english.elpais.com/international/2026-06-11/jean-luc-melenchon-the-right-no-longer-has-anything-to-offer-except-fear.html?utm_source=chatgpt.com.
According to the chatbot, although he stated that the European economic model was obsolete and needed to change, he said, “We have never said we would leave the euro […] Likewise, we will not leave the EU.”
Can you imagine what will happen when the European working class finally accepts that the European Union has always been a reactionary project, deliberately created to hurt the majority?
Thanks Bill.
It seems that it is not just the ‘progressives’ that don’t get regarding the ECB
The leftish UK Tribune has an article by Frédéric Lordon (an economist and writer for Le Monde Diplomatique), where not once does he mention that France scarified its monetary sovereignty.
https://tribunemag.co.uk/2026/10/the-total-strike-has-come-for-france
There is a problem of public attitudes towards the euro. According to the Irish news outlet RTE some 75% of French people wish to keep it. Presumably Marine le Pen is aware of this which is why she has shifted her stance on it since the last French presidential elections.
Even though we in the UK have never used the euro, and always baulked at the idea of joining the eurozone, we have a similar public perception problem with currencies. Nearly everyone has a “higher the better” mentality when it comes to the value of the pound on the forex markets. Which is understandable, everyone knows that the price of nearly everything increases when the pound falls in value. I don’t know anyone who agrees with me that it would be better all round if the pound were to depreciate by 10% or so on the forex markets.
The MMT prescription for France of leaving the eurozone is therefore not going to be politically popular. A floating currency will inevitably be viewed more as a sinking currency which will mean higher prices for everyone in the shorter term.
PM: Peter, why would you like the UK to have to give up more to the ROW (higher export cost) to obtain less from the ROW (smaller import benefit)? That’s what happens when the pound depreciates.
To think that it is better for net-exports to rise or net-imports to fall is to forget a major reason for engaging in economic activity. It’s to enjoy the benefits from consuming the goods produced.
Consuming less than what you produce, which is what a net-exporting nation does, only seems desirable if you have a GDP-fetish and/or are concerned about the employment impact of declining net-exports, which needn’t be a concern if the central government is a currency-issuer and employs all unemployed labour (I.e., employs any labour made redundant by a decline in net-exports).
That it could make sense to do anything that prevents unemployment from rising is why governments give approval to so many undesirable activities (sometimes in contravention of their own planning and environmental regulations) and why a full-emoyment policy incorporating a Job Guarentee is so important. The latter not only maintains full employment under any circumstances, it eliminates any need to engage in undesirable activities simply for employment reasons (prevent rising unemployment).
Environmental groups need to understand this, as much as anyone, because a JG would ensure any closure of a coal mine or logging operation would have zero net employment effects. Indeed, a CICG could employ all redundant labour on award wages up to the point where inflationary pressure emerges and only direct redundant labour to a JG queue (minimum wages) once the NAIRU is reached.
And if we could target the training of people to better match skill requirements, we could reduce the NAIRU to something close to the frictional unemployment rate (aka 1950s and 1960s) and have full employment with very few people on the JG at minimum wages.
Yet political cohesion in Oz is also fraying, given the ‘austerity’ forced on politicians by mainstream neoclassical economics (while the public don’t understand what’s happening).
Interesting information from Nugent’s social media was briefly exposed yesterday, re his relationship with the NDIS and a period of homelessness (regardless of any psycitric problems).
Heven’t heard any more about this today, while the media are demonstrating their usual inability to consider causes, preferring to exploit emotion ; but if government ‘austerity’ is shown to be linked to the Haines’ catastrophe, and the general public recognizes a relationship, the consequences for governments could be massive.
So far politicians have demonstrated they haven’t got a clue why democracy is failing; all I have gleaned from politicians so far is “Haines is a lovely, kind, generous woman” (which no doubt she is) – which makes the tragedy even more grotesque….
@ Phil,
You seem to be slipping back towards an “imports are good but exports are not so good” argument which we discussed a couple of weeks ago. I thought we agreed then that this was fair enough up to a point but there are drawbacks and limitations to running a continued surplus of imports. Just to recap on what I was saying these were:
1) The government needs to have interest rates higher than they should be to attract an inflow of foreign capital into the capital account to make up for a deficit in the current account. This is at variance with the MMT idea that interest rates should be kept low or even at zero.
2) The inflow into the capital account inevitably will lead to the acquisition of capital assets by foreign owners. In the UK we don’t even own our postal service any longer! Pretty much all our major industry and utilities are no longer UK owned. The only exceptions being defence related industries which are more heavily regulated.
3) The loss of our manufacturing industry has created severe social problems outside of the SE of England. If a factory closes down then we have a group of workers whose skills are likely no longer saleable in the market. Probably most will find alternative employment but it won’t be the kind of employment that makes for a contented working class.
@ Phil,
A month ago you wrote ” I basically think the best way for a country to operate is with X = M, G greater than T, and S greater than I.”
X=M is what I would aim for too.
You once said that I shouldn’t assume governments can control what happens with other sectors. So, we can’t say S is always going to be greater than I. Or that X is always going to be close to being equal to M
I’d add that governments can’t even control what happens in its own sector. So G isn’t always going to be greater than T.
Governments can influence the sectoral balances though. So the Govt can aim for what you suggest. One way to do that is to have a policy on the exchange rate. Just saying that we should let it freely float is a cop-out . Govts don’t do that anyway. They adjust interest rates to keep it at a desired level which in the case of the UK is too high. IMO.
I don’t doubt the restraints with the central currency (euro) have a negative impact on funding, as much as the neoliberal policies adopted by the eurozone, and I guess Thomas Piketty’s observations on wealth distribution and inequality strengthens your argument. Worth a read.
[Bill deleted a long quote – not because it was objectionable but because I think readers should access other writer’s material from the original source, where a long quote is deemed worthwhile]
Original source:
https://thomaspiketty.wordpress.com/2026/10/20/high-schoolers-students-the-twilight-of-macronism/
“The government needs to have interest rates higher than they should be to attract an inflow of foreign capital into the capital account to make up for a deficit in the current account. ”
There is no “making up for” any deficit in current account under a floating exchange rate regime. Under a float, foreigners voluntarily take exchange rate risk and other risks to purchase UK financial assets. If you don’t want foreigners taking over essential services, you can use laws. If this makes foreigners unwilling to hold GBP denominated assets, the CAD is crushed to zero automatically.
Regardless, even if the owner of a factory is abroad, the output and employment of the factory stays within U.K, the foreigner has to worry about exchange rate of GBP for their own currency. That is unless the foreigner decides to export.
Regarding raising rates as a means to get stronger currency. This does not in any way create more reliable currency sources. It’s an artificial import subsidy provided to foreigners and domestic wealth holders by the central bank, which chooses a floor rate above natural rate of interest under float, which is zero.
You can raise rates to 10%, this brings in inflows temporarily by foreigners seeking free money. But the foreigners have to swap this free money for their currency in the foreign exchange market in the future. Reliable inflows such as exports and remittances do not increase with rate hikes, in fact immediate appreciation may undermine these. It raises unreliable flows, where foreigners seek to get more risk free rate in their own currency by taking exchange rate risk.
FDI/FPI, for all its issues is a somewhat reliable flow (not in the sense it doesn’t reverse but in the sense of how it came to be), it happens when foreigners see that they can get decent return in their own currency without the distortion caused by central bank keeping rate above 0. They take multiple risks, both in local currency (equity prices are uncertain) as well as exchange rate risk.
Note: I am not saying FPI/FDI for foreigners should be allowed or not. Global risk-off events results in stock market sell-offs for example.
Raising risk-free rate to get stronger currency temporarily completely removes the other risks foreigners typically take while buying a country’s assets. The only risk they take are capital control risk and exchange rate risk.
What the state should seek to do is to offload as much risk as possible to foreigners.
Risk free rates don’t do that. It reduces the risk that foreigners take relative to their own currency.
In a zero risk free rate regime, the extra risk the foreigners must be made to take on sovereign currency debt is in my view, illiquidity (on top of capital control/exchange rate risk). Unfortunately, sovereign bonds as they currently exist are the most liquid assets only next to cash.
‘There is no “making up for” any deficit in current account under a floating exchange rate regime.’
I’m not sure why you should say this. The capital and current accounts have to balance. If there is a tendency for imbalance the currency shifts in value to correct it.
So I suppose you could say that the ‘making up’ applies equally to the capital account too.
On the point about ownership of factories: The factory, and real capital assets generally, may stay in the UK but the profits will not. I would agree that we need good owners rather than UK owners but I’d also say we need more UK govt ownership. There’s no reason why we need foreign capital to build a bridge or a new road which then forces us to pay tolls indefinitely. The privatisations that we’ve had in the last 40 years or so have led to a high level of foreign ownership.
For example, Deutsche Bahn, largely owned by the German govt, runs several UK rail franchises. The German govt will naturally take notice of German public opinion on the way it runs railways in Germany but will have no reason to be concerned about UK public opinion. Is this part of the reason the UK has the most expensive railways in Europe?
PS I should say that I’m including the financial account in the capital account.
I say this because even though balances balance, the way you get there is very different under a float.
Under a fixed exchange rate regime, the Government has to meet any deficit in the Current Account by drawing down reserves or borrowing. In the long run, a CAD results in massive foreign currency borrowing.
In the meanwhile, things appear stable because of the stable exchange rate. Exchange rate pass-through is low if the peg isn’t moved. But that stability is illusory.
Governments have a tendency to misuse exchange rates too, keeping them overvalued to win elections even though it comes at the expense of foreign currency debt. Everything that mainstream economists say about “Governments spend too much” applies much better to exchange rates. It’s done in a currency the Government can’t even issue.
Of course, floats aren’t free from this, but any foreign currency borrowing under a float is voluntary.
U.S. and U.K. CADs under a float are very different, for example, compared to Sri Lanka before its balance of payments crisis.
PM: When X = M, we are talking about monetary values, not quantities. If an institutional mechanism was put in place that ensured X always equalled M, then depreciation of the currency would mean, quantitatively, more X (more domestically produced stuff surrendered to the ROW) and less M (less foreign produced stuff received from the ROW). In and of themselves – that is, irrespective of any side issues – exports are costs and imports are benefits, which is not the same as saying that exports are ‘bad’ and imports are ‘good’. When X = M, exports are the costs borne by a nation to obtain beneficial imports. If exports were bad, it would not be desirable to export at all. They are not bad, they are simply the cost of being able to obtain imported goods (goods that a nation can’t easily produce itself). From a domestic perspective, if the marginal benefits of consuming the goods exported are low and the marginal benefits of consuming imported goods are high (presumably the reason for trading with the ROW), the nation is better off simply by trading and without the need to grow its GDP.
I occasionally give some thought to an institutional mechanism that would ensure X = M or something very close to it for all participating countries. I’m still working on it. I’m not sold on Keynes’ idea of the bancor. Borrowing from someone else, I like the idea of imports only being permissible following exports. In other words, a country must export before it can import and the value of imports are limited to the value of exports. When someone exports something to someone in a foreign country, the exporter receives what might be called IMPEX dollars. The IMPEX dollars are issued by the central bank. That is, the foreign currency earned from exporting is converted to IMPEX dollars prior to being issued to exporters. Importers must obtain IMPEX dollars in order to import. Importers must purchase IMPEX dollars from the possessors of IMPEX dollars (exporters) prior to conversion to the currency of the nation they are importing from. The quantity of IMPEX dollars available for importers to purchase is always limited by exports and fluctuates as exports fluctuate.
The exchange rates of currencies adjust as per normal, but you now have IMPEX dollars as an intermediate ‘trading currency’ where the price of IMPEX dollars fluctuates as the supply of IMPEX dollars (from exporting) and the demand for IMPEX dollars (would-be importers) fluctuates. All other things equal, should there be a large increase in the demand for imported goods relative to exported goods, the price of IMPEX dollars rises, thus making exporting more attractive and importing less attractive, and vice versa. The system ensures X always equals M, and the changing price of IMPEX dollars does much to bring export and import desires into line.
Each country would have its own IMPEX dollars. For example, Australian IMPEX dollars would only be issued to exporters operating in Australia and could only be purchased by importers operating in Australia. The central bank would retain the IMPEX dollars and oversee the market for IMPEX dollars. Issued IMPEX dollars would be registered in an exporter’s name and be transferred to an importer upon their purchase. There would be a going price for IMPEX dollars. IMPEX dollars converted to a foreign currency to facilitate the purchase of imported goods would be ‘destroyed’ by the central bank. Hence, IMPEX dollars are ‘created’ by exports and ‘destroyed’ by imports.
Zid is correct. If the currency is floating, there is no need to ‘attract’ financial capital if X is less than M. The inflow of capital has already taken place because the current account and capital account balances always sum to zero. Decisions made that generate a current account deficit are offset by decisions made to generate a capital account surplus. If the inflow of capital is insufficient at the existing exchange rate to offset the change in the current account balance, the exchange rate accordingly adjusts, thus altering the values of X and M to bring the two accounts into line.
As for the side effects of M greater than X (i.e., more import benefits than export costs). I don’t like the idea of M greater than X, as much as it would benefit a country, because it requires other countries (at least one, anyway) to consume less than what they produce. That’s not fair and it’s not what the rationale for international trade is about. It should be about countries increasing their productive capacity (if short of an essential production input) and their consumption net benefits by ridding themselves of surplus low marginal benefit goods to obtain scant high marginal benefit goods. Most discussion about international trade loses sight of this. It is why you hear a lot of people talking up the rise in exports (because it increases GDP) and talking down imports, ironically while every piece of clothing they are wearing is imported!
Yes, if M is greater than X it is possible for the ROW to own more of your productive assets. That generally wouldn’t be good, but it’s not an issue if X = M. It’s also not a great issue if the domestic assets that foreigners own are bonds issued by the CICG. China possesses a lot of US govt bonds, which the US Fed Govt can repay with computer keystrokes. The USA gives up virtually nothing useful for many of the goods it receives from China, so the USA is a definite winner here.
Yes, like the UK, the USA has lost a lot of manufacturing to China, which also isn’t desirable. But that’s the result of factors other than the desirability of imported goods. The principle governing international trade differs depending on the mobility of international capital. Unbeknown to many, textbook justifications for international trade – that is, the comparative advantage (CA) argument for trade – are based on strict assumptions. Firstly, it assumes that international capital is immobile. When capital is highly mobile, as it has essentially been since 1971, trade is governed by the principle of absolute advantage (AA). Despite this, you constantly here economists refer to the CA reason for free trade agreements.
Australia no longer as an automotive industry. I didn’t hear anyone say that it might be desirable for Australia to keep making and exporting cars because despite it having an absolute disadvantage in producing cars (high absolute cost), it had a CA in producing cars (lower relative cost than other countries). It was simply a case of the cost of making cars in Australia is higher than the cost elsewhere, so therefore Australia should not produce cars anymore. There was a good reason for saying this – international trade and global production locations is governed by the principle of AA. But it was wrong to say that Australia should stop making cars because it had a comparative disadvantage in producing cars (despite the fact that this could have been the case but was never investigated).
CA is based on relative cost differences, not absolute cost differences. It is easy to show, as a first-year economics lecturer does, that a country can have an absolute disadvantage in the production of everything but have a CA in the production of some things, but only if capital is immobile!
It is also easy to show, as I used to do when I lectured, that a country can have an absolute disadvantage in the production of everything despite using fewer real resources to produce all goods (i.e., is technically the most efficient producer). How? The textbook explanation, usually with the assistance of a production possibility curve, measures costs in terms of the quantity of physical resources used. However, in a monetary economy, physical resources first have to be purchased. The cost of using real resources depends to a large extent on how much you pay to obtain them and to use them. In the UK, it costs a lot to purchase an hour of labour. It costs a lot to provide decent working conditions for the people employed. It costs a lot to comply with environmental standards. That’s not the case if you operate in a Third World country. The lower per unit resource cost in the Third World is often large enough to overwhelm any technical efficiency disadvantages, thus making it cheaper (lower average cost) to produce in the Third World. The UK and the USA have lost a lot of technically efficient industries (and some inefficient industries). Asking UK and US operators to compete against companies operating in low-cost Third World countries is like asking a rugby team to compete with each player having one arm tied behind their back.
To sum up, when capital is highly mobile, it moves to the cheapest production locations. Transnational corporations can easily move to low-cost locations and therefore bypass laws and decent wages and working conditions designed for social purpose if compliance is too costly. If the UK and the USA want to enter into free trade agreements that disadvantage domestic producers, de-industrialisation is the inevitable result. Of course, it’s not the owners of capital that suffer. They continue to make their profits from operating in the cheapest global locations whilst playing golf at home. Meanwhile, in a world devoid of full employment policies (guarantees), many people in First World countries end up on an unemployment scrap heap. And while the Third World countries do the production that used to take place in the First World, the workers in these countries work ridiculously long hours in sweat shops for little pay (exploited) and have their air, land, and water putrefied.
Governments don’t like losing industries. Instead of calling for an international trading system that benefits everyone, they ask workers to dampen their wage demands and they dilute environmental and workplace standards/laws. Thus, we get a degenerative global race to the bottom, an ever-growing disparity between rich and poor, and a trashed planet.
Governments should be demanding restrictions on the mobility of capital to restore CA as the principle governing international trade and the ability to impose border-tax adjustments to offset the degenerative cost differentials between countries. The border-tax adjustments should require sanctioning by the WTO (to prevent tariffs that merely protect inefficient industries), which should operate as an institution that fosters the interests of nations within a community of nations (its original charter) and not the interests of transnational corporations.
People will say that this would be a system that protects First World nations. The current system doesn’t serve anyone particularly well, except for wealthy asset holders. In addition, economic advancement requires capital formation in a sustainable and equitable manner and by producing goods predominantly for domestic consumption by citizens with decent spending power (decent wages and conditions of employment). It certainly doesn’t come from net-exporting fancy goods to rich First World asset owners in the cheapest and most destructive way. How did the USA, the UK, and Europe become wealthy? By net-exporting fancy goods to Mars? No, they did it by pulling themselves up by their own bootstraps – by investing in their own countries and distributing a reasonable share of the benefits of increased productive capacity in the form of higher real wages, access to high-quality public goods, and stricter environmental standards. Sure, they also became wealthy through colonial exploitation. But that’s a reason why Third World countries, as they are induced to pull themselves up by their own bootstraps by an international system that facilitates genuine advancement with assistance given to the countries in genuine need, should receive foreign aid from the countries that exploited them in the past.
Sorry for the length of this.
@ Phil,
Thanks for your comprehensive reply. I’ll keep mine very short, I agree with much of yours including that M and X are based on monetary values and not other quantities like kg or whatever.
I’ll just ask some questions:
1) What would happen to exchange rates, M and X if the UK were to follow MMT advice and follow a ZIRP unilaterally?
2) If it took steps towards a ZIRP rather than an abrupt shift, my favoured policy, would this bring M and X closer together? If so, presumably this would also bring G and T closer together.
You probably see what I’m getting at. Somewhat ironically, the way to satisfy neoliberal demands to have a reduced govt deficit, and more balanced trade, is to follow MMT advice and reduce interest rates.
It is some time since I thought about the IMPEX system. Contrary to what I said, the IMPEX dollars created by export revenue would not be registered in the exporter’s name unless an exporter wishes to retain the IMPEX dollars earned in order to import something later on, in which case they would not receive the domestic currency as income. The exporter would instead receive IMPEX dollars to be later used to purchase a foreign currency to import goods.
Let’s assume that the exporter does not want to import something but wants the export revenue immediately in the form of the domestic currency. The foreigner currency earned is converted to IMPEX dollars which are in turn converted to the domestic currency. The exporter loses possession of the IMPEX dollars, which are placed into a pool of IMPEX dollars held by the central bank. The pooled IMPEX dollars are available for importers to purchase. Importers purchase the required IMPEX dollars with the domestic currency they possess to buy the foreign currency of the nation they are importing from.
Export revenue alters the size of the pool of IMPEX dollars. More X relative to M increases the pool of IMPEX dollars and drives the price of IMPEX dollars down. This makes it cheaper to buy IMPEX dollars in order to import, which increases the attractiveness of M. The lower price of IMPEX dollars reduces export revenue, which reduces the attractiveness of exporting. M rises and X falls until X = M.
I’ll put some numbers to this. Let’s assume that Australia only trades with the USA. Let’s assume that 1AUD = 1USD. Also, 1AUD = 1$IMPEX. An Australian company exports $1 million AUD worth of goods to an American importer. Since 1AUD = 1USD, the Australian company receives 1 million $IMPEX (note: the exchange rate between a foreign currency and IMPEX dollars is dictated by the exchange rate between national currencies). The Australian company wants AUD as income. The 1 million $IMPEX are converted to $1 million AUD. All up, the Australian exporter receives 1 million AUD for exporting 1 million AUD worth of Australian-made goods.
An Australian company imports $1 million worth of goods from an American exporter. Since 1AUD = 1USD, the Australian company must buy 1 million $IMPEX to purchase 1 million USD (again, the exchange rate between a foreign currency and IMPEX dollars is dictated by the exchange rate between national currencies). It costs the Australian importer 1 million AUD to purchase the 1 million $IMPEX. All up, it costs the Australian importer 1 million AUD to purchase and import 1 million USD worth of US-made goods.
For whatever reason, Australia’s exports rise. The pool of IMPEX dollars rises. This drives down the value of IMPEX dollars so that 1AUD = 1.2$IMPEX (or 0.833AUD = 1$IMPEX). We shall assume that 1AUD remains = 1USD.
Reconsider an Australian company exporting $1 million AUD worth of goods to an American importer. Since 1AUD = 1USD, the Australian company receives 1 million $IMPEX. The Australian company wants AUD as income. The 1 million $IMPEX are converted to $0.833 million AUD. All up, the Australian exporter receives 0.833 million AUD for exporting goods that could be sold in Australia (if there was a willing purchaser) for 1 million AUD. Exporting is a less attractive means of earning income. X falls.
Reconsider an Australian company importing $1 million worth of goods from an American exporter. Since 1AUD = 1USD, the Australian company must buy 1 million $IMPEX to purchase 1 million USD. It now costs the Australian importer 0.833 million AUD to purchase the 1 million $IMPEX. All up, it costs the Australian importer 0.833 million AUD to purchase and import 1 million USD worth of US-made goods. Importing is more attractive because the cost of importing the US-made goods has fallen. M rises.
Although a country would always have X = M (balanced trade), it could have unbalanced trade with individual nations. This can lead to changes in the exchange rates between currencies, which can also affect X and M. Regardless, X would always equal M and the price of IMPEX dollars would always move in a direction to counteract any increase in exports and/or any increased desire to import. Whenever exports rise relative to the desire to import, X subsequently falls and M rises. Whenever the desire to import rises relative to exports, X subsequently rises and M falls.
Peter Martin: As for the domestic private sector not having much control over ‘S’ and ‘I’, I would have to disagree. In mainstream models, ‘I’ is misleading because it assumes that all private sector borrowing is spent on capital goods (investment). As we know, households sometimes borrow to purchase consumer goods. Households also dip into past savings to purchase consumer goods. We can safely say that ‘I’ refers to all private sector spending – both on consumption goods (C) and capital goods (investment) – financed by the borrowing of credit money plus any spending of past savings (private sector financial injections). Putting aside investment spending, households are never forced to finance spending this way unless we are talking about non-discretionary spending. Most non-discretionary spending is financed by income or a welfare cheque (a government financial injection). Discretionary spending is financed by a mixture of income, welfare cheques, borrowed credit money, and past savings. Since the private sector is free to alter its discretionary spending (which includes a lot of investment spending – i.e., that which is not required to replace depreciated capital goods), most of ‘I’ is determined by private sector decisions. These decisions may be influenced by government spending (G) and taxation (T), but they are not dictated by them.
It is sometimes better to say that ‘S’ represents private sector deposits. These are destroyed by taxation (T) and the repayment of advanced credit money. Interest paid on credit money is a redistribution of deposits from the borrower to the advancer of credit money (note: I don’t use the word ‘loans’, but instead use the word ‘advances’, because nothing that belongs to someone (e.g., savers’ deposits) is lent when credit money is advanced).
Mainstream models assume that ‘S’ is a function of disposable income. The same is assumed for consumption spending (C). This is not strictly correct. The consumption expenditure function and savings function used in most mainstream models are based on Keynes’ ‘absolute income hypothesis’ (AIH). It and the various consumption expenditure functions derived by others in the past (e.g., the ‘relative income hypothesis’ (RIH) and the ‘permanent income hypothesis’ (PIH)) are all flawed because they attempt to kill two birds with one stone. There is a behavioural and financing element to consumption expenditure and saving. The behavioural and financing elements both require a separate function. Keynes’ consumption function is not a behavioural function but a financing equation. The consumption functions used in the RIH and PIH models are more like behavioural functions and are not financing equations.
A consumption expenditure curve for all disposable income below the current level would be very flat to represent the fact that people will do as much as possible in the short run to maintain accustomed consumption expenditure levels when disposable income falls. The curve would be somewhat steeper for disposable income levels above the current level, but still quite flat. How do people finance their accustomed consumption expenditure when their disposable income falls? They borrow and/or dip into past savings. The financing function shifts up so that it continues to intersect with the very flat consumption expenditure curve (note: the two curves must intersect because all expenditure has to be financed). The shifting up of the function is a shift up of the curve’s vertical intercept. The intercept value represents the consumption expenditure financed by borrowing, welfare cheques, and/or drawing on past savings (private sector financial injections used to finance initial consumption expenditure; the remaining consumption expenditure is financed by current disposable income as per the expenditure multiplier process). For ‘C’ to not fall by much in the short run when disposable income falls, the ‘S’ that is financed by disposable income must fall by a lot. However, ‘S’ (deposits) doesn’t fall that much because a lot of the still buoyant ‘S’ exists as deposits created by the increase in advanced credit money and the circulation of existing deposits as some past savings is reinjected into the economy, both in an attempt to maintain something near accustomed spending levels.
Thus, when disposable income falls, if households do all they can to maintain accustomed spending levels, they must throw their net-savings plans (S minus I) out of the window. However, whilst things go close to plan, the private sector has considerable control over ‘S’ and ‘I’. Usually, the domestic private sector likes to operate with ‘S’ greater than ‘I’. If an IMPEX system or bancor could keep X = M, then it is the CICG that loses control over G minus T. It is entirely dictated by the net-savings desires of the domestic private sector.
Of course, CICG’s hate G greater than T because they believe they can’t keep running so-called budget deficits. So, they cut G in a futile attempt to ‘balance the budget’. They get what they want for a while and GDP remains buoyant because the domestic private sector almost always abandons its net-savings desires to maintain accustomed spending levels. But this is financially unsustainable. If things don’t radically change, the domestic private sector must eventually abandon its spending desires (i.e., accept a lower level of consumption expenditure) and positively net-save to repay its debts. With ‘S’ greater than ‘I’ and GDP falling as private sector spending collapses, unemployment goes through the roof and the CICG operates a large budget deficit whether it likes it or not. Classic GFC-like stuff that has happened before and is bound to happen again!
I guess my point is that households have quite rigid spending and savings targets at any point in time base on expected disposable income (the rigid spending target represented by a very flat behavioural consumption expenditure curve). They also have fairly rigid borrowing plans. So long as actual disposable income is something near expected levels, ‘C’ and borrowing for consumption expenditure purposes are quite stable (i.e., vary in line with any increases in GDP). It is borrowing for investment purposes that is less stable, as is any ‘S’ (deposits) created by this form of borrowing/spending. However, the rise in ‘I’ is largely matched by the rise in ‘S’ such that S minus I is little changed. And while ‘S’ greater than ‘I’ is what the domestic private sector usually desires, it is ‘G’ greater than ‘T’ that CICGs need to learn to live but not worry about because ‘G’ can remain greater than ‘T’ forever!
My apologies again for the length of this.
@Peter Martin
Not them but,
If foreigners want to and can (allowed by capital controls) keep holding GBP assets especially risk ones like stocks and private debt, they can continue to do so, M and X may not converge.
If depreciation attracts opportunistic capital inflows, the CAD stays in place.
If you cut risk free rates to zero and prevent foreigners from buying any assets except cash or bonds, then it is very likely that CAD gets compressed.
However, even this is ambigous since foreign countries doing export led growth policies can continue to accumulate gilts and cash just to keep their local output and employment going (silly policy but capitalism leads to such things). So you may have to lock down capital account even more.
A persistent trade deficit even with exchange rate depreciation means the real flow of resources is from the world to the UK. Of course, there are distributional concerns since essential imports may be crushed while luxuries rise. But this can be solved by the Government targeting essentials with fiscal policy and letting the rest float according to exchange rate.
ZIRP in the US during COVID certainly weakened the Dollar but it didn’t lead to the CAD being compressed to zero or surplus.
True, US is *the* reserve currency issuer. However, other privileged countries like Japan have also done ZIRP, and its trade account (albeit not current account because Japan has a large net income) has swung wildly.
You can taper down to zero risk free rate instead of doing it instantly. However, markets tend to price in a credible taper to zero quite early. So much of the exchange rate moves will still happen upon announcement.
Dear Phillip Lawn (at 2026/10/21 at 9:13 am)
You wrote (edited):
You will be aware that I find the inference that the Job Guarantee buffer stock approach could represent a government’s front-line approach to the fallout from structural change (‘closing a coal mine) to be objectionable.
A lot of those sympathetic to MMT propose the same, especially in relation to deliberate policy-induced structural shifts designed to deal with climate change.
When we first proposed the JG (me in 1978) the idea was that it was a safety net only. The last thing a society wants is to replace full-time, career jobs (for example, coal miners), with minimum pay JG jobs.
The goal of government should be to minimise the size of the JG pool at all times, but be comfortable with it rising and falling as a buffer stock.
We want the JG pool to be as small as possible.
The idea that ‘oh, don’t worry about the unemployment when we close a coal mine down because we will have the JG’ really opens up the idea to attack.
The JG is there for those who cannot find work elsewhere and provides a socially acceptable minimum income security and connection to paid work.
The government should always be creating career positions if it is worried about the likely unemployment consequences of its structural policies.
best wishes
bill
Interesting conversation that notes falling food consumption in France but not in other EU states and connects this to the unrest.
https://www.youtube.com/live/N6Tv39PUitw?t=137s
Peter Martin read this
https://web.archive.org/web/20170609140747/http://www.3spoken.co.uk/2015/11/why-economists-fail-at-foreign.html
“ The whole focus on ‘balance of payments’ goes away because you’re focussed upon assets and income flows, not the physical location of entities within rigid borders. In any case for anybody to have a deficit there has to be a surplus somewhere. It’s all automatically balanced under the ‘fair exchange is no robbery’ principle. The surplus and the deficit arise at the same time and if they don’t then neither can exist – as the transaction would simply fail due to lack of the right sort of money somewhere along the chain.”
@ Phil,
As for the domestic private sector not having much control over ‘S’ and ‘I’, I would have to disagree.”
I’m not sure who you’re disagreeing with. I haven’t said this. I did write ” You once said that I shouldn’t assume governments can control what happens with other sectors. ” I agree with this. Therefore “So, we can’t say S is always going to be greater than I.”
And if Govt can’t control what happens in other sectors it also can’t control what happens in its own sector.
Thanks for your comment about the nature Investment (I) and consumption (C) though. This has, at least partially, answered a question I’ve previously wondered about. I’ve always thought the difference wasn’t that clear cut. Presumably if a private landlord makes some improvements on a property it would be counted as investment whereas if an owner occupier did the same thing it could be counted as consumption? Similarly the purchase of a car could be counted as investment if it was by a car hire company but consumption if by a private individual.
Maybe we shouldn’t but If you count everything as consumption, the I in the sectoral balances equation drops out.
You’ve not answered my questions about the ZIRP though! What would happen if the UK implemented this. No-one seems at all keen to discuss any possible problems – both economic and political. But I’d say that anyone who is advocating for one should be prepared to do this.
@ Zac,
Thanks for answering the ZIRP question yourself. I appreciate that no-one can know in advance exactly what would happen and what problems would arise. This is why I was saying that we should move stealthily. As you suggest it probably would cause some consternation. So maybe we should at least try to hide what we’re up to! 🙂
@Peter Martin
I’ll say for sure that none of the scenarios I mentioned is a balance of payments crisis (that requires tightly managed exchange rates/foreign currency debt) like what happened in Argentina or Sri Lanka. The least desirable scenario is the Imports being crushed because of lower capital inflows. But even this is not a crisis.
Bill: You must have missed something I said in one of my comments related to this. I clearly said that the JG pool should be as small as possible. I also said in the comment you referred to that the currency-issuer could employ anyone made redundant on award wages until inflationary pressure emerges. These people could easily be employed to establish an alternative activity. The people rendered redundant by the closure of a coal mine would more than likely be on top of the people already on the JG filling the NAIBER entirely.
I have been critical of some people who see the JG as a job creation program that could be used to undertake vital activities that governments and/or the private sector are not doing at present, but should be doing, and could easily be doing, by employing some unemployed people on award wages without it being inflationary, especially given the current labour underutilisation rate, which is clearly above anything that could be considered the NAIRU.
There is no doubt that many undesirable activities are given government approval simply because of the employment benefits. There is also no doubt that a full employment policy would remove this excuse for approving undesirable activities, not because there would be a JG in place, but because the currency-issuer could always guarantee full employment, including spending on desirable activities that employ people on award wages and confine the employment of people on minimum wages to the filling up the NAIBER, which would be the case no matter the circumstances. With a full employment policy in place, there is no excuse for an inappropriate allocation of resources on employment grounds because the allocation of resources has no net employment effects. The appropriateness of resource allocation can be judged solely in terms of how it benefits society.
In the same way that a recognition of the fiscal capacities of a currency-issuer can lift the veil on the ideological position of a currency-issuer (i.e., we can’t do this and that (something desirable) because we don’t have the funds), so can a full employment policy (i.e., we must do this and that (something undesirable) otherwise unemployment will increase).
When I refer to a full employment policy, I’m not referring to anyone rendered unemployed being employed on the JG – only those that would make up the NAIBER, which could be kept to a minimum if people were appropriately trained so that the supply of skilled labour better matched skilled labour requirements. Current concerns about so-called labour shortages if immigration numbers are cut is evidence that there are needless mismatches. Unless the entire population of a country is on its death bed or in nappies (or both!), there is never a labour shortage. There can only ever be a skills shortage. Immigration increases the size of the labour force but also increases the size of the required labour force. If there is a labour shortage to begin with, it still remains a shortage following immigration. Migrant workers also need additional workers to support them.
@ Kester,
I don’t disagree with Neil Wilson but I can’t see that his article is an answer to the question of what problems would arise if the UK made a quick switch to a ZIRP. I haven’t used the phrase “balance of payments”. I am aware that this only applies to a system of fixed exchange rates. IMO the £ would fall a lot and the resulting price rises would probably cause any government to fall too. I may be wrong in this but no one is actually saying I am. I’m open to an alternative argument but it needs to be an argument that non-economists will understand, otherwise we won’t get the political support necessary.
I agree that we should have a ZIRP but I can’t see how we can unless all the major economies move in unison.
@ Phil,
Sorry to jump in on your discussion with Bill on the JG. As I understand the JG it makes perfect sense economically. BUT there’s a political aspect to it also. It’s easy to see why the political right doesn’t like it. Why, though, is the left somewhat less than enthusiastic? We need to at least discuss this.
There are likely some misgivings about it turning into workfare under a rightish inclined government. However, the main obstacle to acceptance is the concept of free collective bargaining which is a central tenet of the Trades Union movement. All previous prices and incomes policies have come unstuck when the TUs have moved against them. Having a pro capitalist government , which includes Labour governments, set a wage level for the lower paid which also is to be used as an anchor for the currency is bound to raise some concern in TU ranks.
Peter Martin: I only have so much time in the day.
The ‘I’ in the sectoral balances equation should be extended. ‘I’ supposedly denotes ‘investment’ because the simple model assumes that all private sector borrowing is spent on investment goods (none on consumption goods, which is absurd) and all investment spending is financed by borrowing (no financing of investment out of retained earnings, which is also absurd).
In reality, investment is financed out of retained earnings from current income/profits (Iy) and from borrowing (Ib). So, I = Ib plus Iy. Only spending initially financed by financial injections should appear in the sectoral balances equation since the remaining spending is injected money being respent in the current period. Remember, the sectoral balances equation only includes financial injections and financial leakages. It does not include injected money respent in the current period. Therefore, only Ib should be in the sectoral balances equation, not ‘I’ or Iy.
The consumption expenditure (financing) function is C = ‘a’ plus c.(Y minus T), where ‘a’ = consumption expenditure financed by borrowing and drawing on past savings; ‘c’ = the marginal propensity of households to finance consumption expenditure out of disposable income; (Y minus T) = disposable income. The sectoral balances equation should include ‘a’ but not c.(Y minus T), since the latter is injected money being respent in the current period as part of the expenditure multiplier process.
Therefore: (G minus T) = (S minus [Ib plus a]) minus (X minus M).
[Ib plus a] better reveals the domestic private sector spending on real goods and services financed by financial injections. Both Ib and ‘a’ create deposits (denoted by S). When S is greater than [Ib plus a], the net financial asset position of the domestic private sector increases, and vice versa. The difference between S and [Ib plus a] is what I refer to as ‘hard savings’ because they are permanent unless destroyed by taxation. The S resulting from [Ib plus a] is what I refer to as ‘soft savings’ because they are temporary given they are inevitably destroyed by the repayment of credit money. S = hard savings plus soft savings. Only hard savings add to the net financial assets of the domestic private sector. Soft savings don’t because they are matched (created by) the borrowing of credit money.
Sorry I have typed in minus instead of a minus sign, etc. In the past I have found that when I submit my comment, mathematical symbols go haywire or go missing.
Peter Martin: Why wouldn’t the political Right support a full employment policy? When aggregate spending is below the full employment level of spending, the private sector is earning fewer dollars. When the currency-issuer is ‘deficit’ spending, as would be necessary most of the time to achieve full employment, it is putting more money in the private sector’s pockets. Just ask the private sector companies arming the ongoing US war-mode (since WW2) how much they rely on US Fed Govt spending for their profits.
People who think that unemployment helps keep wages low fall into the trap of believing all labour is perfectly substitutable. “If you don’t work for me on a low wage, I’ll sack you and get an unemployed person to take your place”. To which the employee says “You mean the person who doesn’t know the ins-and-outs of this organisation like I do and has been on the unemployment queue for the past three years, during which time you have installed new machinery that she wouldn’t know how to use, and even if she had been capable once, she has lost her skills from being out of work for so long. On top of that, she is now addicted to heroin as a way to deal with her depression from having felt worthless for so long.” Unemployment does not discipline workers as much as people think.
To which the employer says “Didn’t you know, the Fed Govt introduced a full employment policy three years ago and so any person who becomes unemployed will have been working regularly, healthy, and has been undertaking the necessary on-job training to use the new equipment I have installed. Hence, she is a near perfect substitute for you and would be happy to work for me on your current wage.” Except for unskilled work, full employment would discipline workers more than people think, although the impact on the productiveness of long-term unemployed labour cannot be discounted even for unskilled labour. Appallingly, in Australia, some Indigenous Australians have been unemployed all their adult lives and are considered unemployable. They clearly do not serve as substitute labour.
The existing pressure on workers does not come from the pool of unemployed labour, but from a lack of union representation and, although Third World workers are a poor substitute for many First World workers in a purely technical sense, they serve as a suitable substitute because they are paid so poorly and business owners could easily pack up and shift their operations offshore and make a similar profit. Sufficient pressure exerted by First World workers for a higher wage can push business owners to relocate their operations offshore or close down because they can’t compete with cheap imported products.
The political likelihood of governments introducing a full employment policy is another matter altogether, albeit an important one, which is why I keep saying that political institutional reform is as important as any other required reform. Our political system fails us miserably and we will be waiting forever (or at least until ecological, social, and economic systems collapse) if we think we will get the policies required from our governments from our current political system.
To make matters worse, and with all due respect to my fellow humans, the typical human is an ignorant, delusional, hedonistic philistine unlikely to alter his/her vision of ‘the good life’ and therefore unlikely to make the sacrifices many of us must make to extricate ourselves from the mess we are in. Our only way out of the mess is through a good dose of mutually agreed upon mutual coercion. Unfortunately, our political systems aren’t designed to do/impose this – it’s difficult enough to get people to accept taxation (a form of coercion) – and because humankind failed to impose the required mutual coercion decades ago, the required mutual coercion today is more stringent than what most people, with their excessive expectations, are likely to accept.
@ Philip,
‘Why wouldn’t the political Right support a full employment policy?’
I’m probably not the best person to answer this question as I’m on the other side of the political spectrum. Kalecki in his ‘Political Aspects of Full Employment’ has suggested a number of reasons which are probably still valid and I wouldn’t disagree with them. Maybe the right should accept your reasons for supporting it, but the observable fact is that they don’t, except perhaps in times of war, and this view is unlikely to change any time soon.
We perhaps should be more concerned why the Left has a problem with the JG, rather than the concept of full employment per se.
You earlier said that “G’ can remain greater than ‘T’ forever!”. Forever is a long time. Mathematically this would mean that sigma G-T tends to infinity, meaning that either sigma S-I (whatever I means) or sigma M-X must tend to infinity too. Nothing wrong with this mathematically, but what does it mean economically?
I’m not at all clear how this can be consistent with your wish that we should “make the sacrifices …..to extricate ourselves from the mess we are in.”
Peter Martin: As you say, continuation of G greater than T and therefore S greater than I (assuming X = M) means that the net financial assets (NFAs) of the domestic non-govt sector would approach infinity, which is mathematically possible, but not necessarily economically desirable. It is physically possible, not just mathematically possible, if our present system endured forever because a currency-issuing central government (CICG) can ‘deficit’ spend for as long as the system exists. The accumulation of non-govt sector NFAs is only limited by the size of a number that can exist in cyberspace. Of course, the system can’t endure forever, regardless of what humans do. So, by ‘forever’, I mean for as long as the system exists.
I would imagine the day would come where the NFAs of the non-govt sector would be sufficient for this sector, in the aggregate, to delay as much spending out of current disposable income (saving = S) as it would bring spending forward (borrowing = ‘I’). When that day arrives, there probably would be small fluctuations around G = T and therefore S = I. In effect, there would be a steady state of non-govt NFAs to match the steady-state (non-growing) nature of the physical economy, of which the latter is an inevitability but preferably attained through human design rather than collapse.
The accumulated NFAs of the non-govt sector are currently less than what could be considered desirable thanks to CICG austerity tendencies which keep forcing the non-govt sector to make a choice between abandoning their net-savings desires or abandoning their spending desires. The natural human tendency is to abandon the former for as long as possible (i.e., until it is no longer financial sustainable), which whittles down the non-govt sector’s NFAs to less than desirable levels. Thus, at present, a period of G greater than T is required to accommodate an almost certain return to a non-govt net-savings mode, which, while such a mode predominates, becomes necessary to maintain full employment and replenish stocks of public goods run down through years of CICG austerity.
G greater than T is not necessarily expansionary (i.e., need not lead to an increase in GDP), and can coexist with a steady-state economy whilst it boosts non-govt NFAs up to a desired (steady-state) level. In a steady-state economy (SSE), production of new goods equals consumption/depreciation of new/existing goods, thus maintaining a constant physical quantity of goods, although not necessarily an unchanging quality of goods. If the quantity of useful new gadgets (births of new goods) matches the quantity of depreciated useless widgets (deaths of existing goods), the quantity of goods remains unchanged, but the quality of the stock improves. Development without the need for growth.
Assuming that a particular SSE is being maintained by a constant level of production (same quantity of new goods added over time) and consumption/depreciation (same quantity of existing goods subtracted over time), the GDP required to maintain this SSE remains unchanged. If X = M and S is greater than I, then G must be greater than T to generate the same GDP required each year to maintain this SSE. The G over and above T would fill the spending gap left by S being greater than I. It would not be expansionary. Once NFAs reach the desired steady-state level and S need only equal I, G need only equal T to keep GDP constant over time.
During the period where G is greater than T and S is greater than I, there are two categories of sacrifices going on. The first is the additional goods that could have been produced by increasing GDP. That is not necessary a welfare sacrifice if marginal consumption benefits are less than marginal ecological and social costs. In fact, to increase GDP would mean increasing costs more than benefits, in which case the Genuine Progress Indicator (benefits minus costs) would fall if GDP was to rise. The second is the self-imposed sacrifice of private goods by the non-govt sector by positively net-saving (spending less than what it earns). The non-govt sector is rewarded for its self-imposed spending restraint (sacrifice). It would have access to additional public goods from having the CICG spend more than it taxes to offset the non-govt sector’s self-imposed spending restraint.
@ Phil,
What you’ve written makes sense under the assumption that M=X but I don’t agree that this is a good assumption for the UK. M has been significantly larger than X for the last 40 years and the consequences are what I’ve been describing in recent posts. It’s not S-I which is the problem it’s M-X.
The Thatcherite argument was that privatising just about everything could be privatised would put the ownerships into the hands of UK citizens. It’s actually meant that they’ve ended up in the hands of international finance capital. These SWFs and other holders of UK pounds obviously want something better for their financial assets than holding UK govt bonds. So there is a strong link between M-X and the ownership of UK capital assets.
The majority of the population would like our postal service, utilities and railways renationalised. But the government isn’t going to do this any time soon. Our new PM made some utterances before he was elected Labour leader but went quiet as soon as he was. There are obvious political problems of renationalising assets when foreign governments hold the shares.
It may seem a trivial issue but I do like my football. However the English Premier league has been corrupted by the involvement of the ££ bns from outside sources. A scandal has broken out over just how Manchester City FC has been systematically cheating the EPL’s financial rules since they were bought out by the UAE government 18 years ago. They’ve used to wealth to buy trophies. If it had been anyone else, MCFC would have long ago been kicked out of the league by the FA and demoted to the lower divisions. It may still happen but the government are extremely worried about the effect on international relations with the UAE if this were to happen.
I know MCFC have never been under public ownership, and so haven’t been privatised, but this is an example of what happens when we allow too many of our ££ to end up in foreign hands.
“…if the electorate choose a party that is not enamoured with the ideology.” Isnt this the problem? The electorate have become extremely unreliable and tbh really moronically stupid.
” The electorate have become extremely unreliable and tbh really moronically stupid.”
The Remain side, in the UK EU Brexit question, were prone to this characterisation of us Leavers and it really didn’t do them any good at all. I’d agree that many voted against the EU for the wrong reasons but to claim that we collectively were somehow ‘moronic’ for failing to see the benefits of EU membership was highly counterproductive.
So, by all means disagree but we should always be respectful of others. I often think that many MMT supporters don’t have it quite right either, but they aren’t ‘moronic’.