Yuan appreciation – just another sideshow

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1. I thought the same thing reading Baker’s article.

   Still, if you were ranking comprehension / effort at comprehension on a scale of 1 to 10, where MMT is 10 by imposition, then Baker seems around 5 or 6 – a good start, but off the rails part way through – although not in an utterly irremediable way. It doesn’t seem entirely bad.

   I haven’t been exposed to Mankiw’s textbook, but it sounds like he’s off the charts at 0 and unsalvageable.

2. Hi – please can you recommend any useful commentary / analytical frameworks on import propensity?

   Scott Fullwiler’s piece at the link below is very helpful to illsutrate how the govt sector and private sector reach an ex post balance at a given level of GDP, based on the two sectors’ relative propensities to run a surplus / deficit; but when you add the foreign sector, it doesn’t feel as compelling.

   http://neweconomicperspectives.blogspot.com/2009/07/sector-financial-balances-model-of_26.html

3. The argument that if a trading partner wants to accumulate our currency in exchange for their labour then good luck to them seems to me somewhat dodgy. The elite people in the exporting country will already be getting everything they personally want from the importing country. They may be sending their children to university in the importing country, using medicines made in the importing country etc etc. Like all people everywhere who already have every luxury, what is left is an appetite for money, hence the elite are very happy to export in return for currency rather than real goods and services. If the importing country had a fiscal rule that it would balance government spending with taxation, then in order to import it would have to come up with something other than currency to exchange for the imports. Likewise the exporting country would have to accept something other than currency. To my mind that would benefit the average joe in both countries. The elite in what was just an exporting country would have to pass on the fruits of the labour to the average joe as say places to study abroad or medicines or whatever can not be hoarded in a bank account. Similarly the average joe in what was the purely importing country would probably much rather be doing work that was wanted by the trading partner rather than doing say a JG job.

4. Dear Stone (at 2010/10/09 at 0:16)

   Remember we are doing macroeconomics which (mostly) abstracts from the details that concern you (and me!).

   best wishes
   bill

5. Bill, I just think that if a voter (my only influence) wants to avoid harming repressed people in other nations and also to ensure that their own personal employment prospects are protected then the only avenue is via macroeconomics and it is to vote for government spending to be balanced by taxation. That conclusion seems to fly in the face of the typical MMT conclusion- am I muddled about that?

6. Dear stone (at 2010/10/09 at 0:37)

   There is nothing logical that follows in your statement. You are muddled.

   1. You may not want to net exploit another nation’s resources/labour and think running a trade balance is okay.

   2. Then if you want the private domestic sector overall to save (and be able to risk manage their debt positions etc) then the government has to run a deficit. If Net Exports = 0, and the budget is balanced, then the private sector can never save overall and thus never spread consumption over time in a pattern that they may desire.

   best wishes
   bill

7. Bill I should have stated that I also want the pool of savings in my country to remain a constant size in the long term (no long term net saving). Does that sort it out?

8. Bill I realize that your second point-
   “2. Then if you want the private domestic sector overall to save (and be able to risk manage their debt positions etc) then the government has to run a deficit. If Net Exports = 0, and the budget is balanced, then the private sector can never save overall and thus never spread consumption over time in a pattern that they may desire.”
   -is the absolute crux of my difficulty with accepting the MMT stuff. To my mind for every person who is saving at any given time there will be another person at a different stage of life who will be drawing down savings. So to my mind for individual people or corporations to “spread consumption over time in a pattern that they may desire” there is absolutely no requirement for the aggregate “private domestic sector overall” to net save.
   Persistent overall saving by the private sector is what is enabled by persistent deficits and equates to a ponzi structure for empowering the oligarchy as far as I can make out.

9. Among the bloggers I (non-economist) follow, in order to get some perspective to try to understand present-day economics conundrums, billy blog explanations have been very helpful. In the case of today’s blog, it could have been more helpful if Bill had presented formulaic representations similar to those shown above for MMT in order to demonstrate how his concepts regarding MMT sectoral balances differ from those formulated by Dean Baker or Greg Mankiw of Doug Elmendorf.

10. stone: if you didn’t want to bequeath anything to your offspring, and if you could predict your date of death perfectly, then yes you should never want to net save over your lifetime. But since those conditions don’t hold for most people, there is at least an aspiration to net save over the lifetime. That is simply an empirical fact, I think; so the govt needs to strike a stance which will accommodate this desire.

    Plus there’s the simple fact that each accounting period, private sector agents balancing income and expenditure like to run at least a small surplus as a buffer to ensure they at least break even.

    If you look at my Scott Fullwiler link above, you’ll see that there are propensities to run a surplus/deficit in both the private and public sectors: if the public sector insists on balancing its budget during a recession, GDP will clear at an unattractively low level.

11. MMT Proselyte, in the UK at any rate people do not need to predict their date of death because pensions have to convert to an annuity before you are 70. Also many UK people who own their houses (about 70% of people) buy an equity release scheme to convert the value of their house to an annuity in old age. Many other people sell their houses to pay for nursing home accomodation if they get dementia or whatever. It seems that what you are advocating is not a practical measure but rather that each generation should accumulate ever greater savings simply as a kind of dynastic fantasy game that obviously was never possible prior to expanding currencies being introduced. That would be all very well except that ever greater savings leads to a gross destortion of the economy with the FIRE sector expanding to deal with all the acumulating wealth.

12. So to my mind for individual people or corporations to “spread consumption over time in a pattern that they may desire” there is absolutely no requirement for the aggregate “private domestic sector overall” to net save.

    There are two problems with this. First. unless the pensions are quite handsome, people will want to net save in order to be prudent. In the US, pensions are not only generally inadequate but also insecure, with the possible exception of some government positions (although in today’s environment everything is up for cut backs and there is even agitation about government employee pensions).

    Secondly, most Americans place a high priority on passing wealth to offspring. They regard this as basic to the American Dream. Bottom line is that this cannot be changed politically. A corollary to this is that the American Dream also includes becoming wealthy as one’s birthright as a citizen. This is also a core American value. Altering these would require cultural change.

    The other issue is capital investment which is also a kind of saving that comes out of either retained earnings or debt. Prudent management looks to their financial ratios and desires to limit leverage, which requires savings for financing expansion.

    The idea of keeping savings constant, e.g., as a percentage of GDP, is problematic macro-wise for a lot of reasons, especially if the percetage is zero as you seem to suggest. The largest difficulty perhaps is that the result of trying to control savings leads to an increase in the use of leverage. Do you propose to limit the amount of debt as a percentage of GDP, too? And as you do these things, one thing leads to another, and there are unintended consequences. Moreover, how could this possibly become a political platform that the public would buy?

    As I have said elsewhere, the real problem is not savings in the economic sense of income that is not consumed or taxed but rather in economic rent in the sense of revenue derived from non-productive sources. Income needs to be distributed and productive investment needs to provide resources including employment proportional to population growth in a sustainable way. Furthermore, government needs to provide for public purpose. This requires optimal use of economic/financial resources, which means eliminating inefficiencies, and economic rent – land rent, monopoly rent,and financial rent – the primary inefficiencies. Economic rent/financialization results in in the long-term financial cycle of expanding leverage that the world is now having to deal with again.

    The answer is not limited saving but rather reducing inefficiency by eliminating conventions and institutions based on economic rent-seeking as well as cheating. There is no problem in growing the pie in a sustainable fashion. The problem is slicing the pie to the advantage of some without justification based on productive contribution. Wealth (stock of cumulative saving) that is gained from productive contribution is the basis of capitalism. Wealth is a chief economic motivator or incentive. Proposing to alter this is tantamount to calling for a social, political and economic revolution in the West (which ins’t a bad idea in my book, but I don’t see happening anytime soon short of systemic breakdown that is not out of the question). No savings is way out of paradigm.

    Operating in the current model, the solution is incentivizing productive contribution and disincentivizing non-productive extraction aka parasitism. That is possible, but very difficult with a corporatocracy/kleptocracy in charge.

13. Sorry cannot resist this: (though I have done this very often and plan to do this less frequently but surely).

    MMT semi-quibbles about the statement “governments do not borrow.” Thats fair to some extent, given that governments and their central bank can unilaterally set the yield curve. However, when applied in the context of the external world, complaining about a nation with a negative net asset position not being indebted to the Rest of the World is a one hell of a quibble!

    Let us consider the US Household buying a Chinese Car example. Assume that the household purchases a Chinese car by borrowing from a bank. Since loans make deposits, initially the household finds himself with increased deposits at his bank account. He then makes a transfer to the Chinese car company and now is indebted to the banking system. The bank in turn is indebted to the Chinese Car maker. Why is this a liability. Firstly because accountants tell us that it is so. More importantly if someone is going to buy the bank, he/she will surely look at the deposits of this bank. Jump a few steps – the People’s Bank of China acquires the dollars and since it has an account at the Federal Reserve, it becomes the Fed’s liabilities. Now, imagine the US Treasury announcing an auction and the PBoC purchasing Treasuries. Now the US Treasury is indebted to PBoC. Why – because the US government borrowed from the Chinese 😉

    (I am sure MMT fans will think how misguided the last statement is)

    In the above example, the liability of a US bank was transferred to the US Treasury. If “debt is not debt”, the US of A is less indebted to the Chinese once the US Treasuries are purchased ??? Paradoxical … ain’t it ?

    Someone may ask (accusing me of failing to distinguish between the Gold Standard and fiat money regimes) – we live don’t live in the Gold Standard era – what is the liability ? Just more pieces of paper – isn’t it .. etc. Short answer: a debtor nation is liable to be target net exports or face pressure on its currency and its acceptability.

    I do not think Dean Baker said anything grossly wrong in the first few paragraphs. He gets into the neoclassical logic of giving importance to price elasticities as opposed to income elasticities but thats different – though in the case of the United States and China, it becomes important.

    Dean Baker is right. Exports minus imports is saving in the sense that running a current account surplus leads to a situation in which a nation’s income is higher than its expenditures. If a debtor nation is running a current account surplus, it leads to a situation in which it is less indebted to the rest of the world. Dean Baker does not advocate a government surplus. He just says that such an such situation leads to a national saving. There is a great advantage of consolidating the balance sheets of all the sectors of a nation!

    Yep – nobody forcing the US citizens to import, But that precisely is the problem!. However Tim Geithner and Ben Bernanke (and Alan Greenspan) know this! Imports cannot be banned because of WTO rules.

    However what Greenspan and his followers do not understand is actually understood by some Post Keynesians. Mainstream economists simply do not properly understand how damaging current account deficits is. Endemic trade deficits are a haemorrhage from the circular flow of national income. Why ? Simple. Combine the balance sheets of all sectors of a nation and you have an evergrowing indebtedness to the rest of the world if the situation arises. Now I understand some commenters may point out that growth can do the trick, but what if growth itself constrained by the balance of payments problems ?

    In the previous post, it was suggested that in the case of an ever expanding public debt to national income, blowing up of interest payments do not appear problematic. Well if foreigners hold a lot of government debt, then ? Ben Bernanke and (today) Alan Greenspan have spoken about this possibility. However, they are confused and want austerity. They live in a world where agents are optimal and superefficient and hence there is no possibility of discretionary attempts to reach net exports or possibilities of concerted efforts in using fiscal policy and coordinated efforts to do international trade.

14. As the restrictions on international capital mobility were relaxed, the large surpluses Japan had been accumulating courtesy of their trade strength manifested in large outflows on the Capital Account of its Balance of Payments as the Japanese pursued asset building opportunities in other currencies. These net outflows thus reduced the excess demand for the Yen in the foreign-exchange markets and that was the main reason the Yen didn’t appreciate despite the growing trade surpluses.

    I’m having trouble following this. How did Japanese purchase of capital assets abroad keep the Yen from appreciating?

    Ken

15. Ramanan: “Assume that the household purchases a Chinese car by borrowing from a bank. Since loans make deposits, initially the household finds himself with increased deposits at his bank account. He then makes a transfer to the Chinese car company and now is indebted to the banking system. The bank in turn is indebted to the Chinese Car maker.”

    Could you explain that last statement, please? The bank certainly does not owe the car maker any money. Do you mean that it owes the car maker gratitude? Or what?

    Thanks. 🙂

16. The most patent reason was that the rapid appreciation of the Yen created fears of a major recession in Japan and they reacted to the loss of export competitiveness by loosening monetary policy and the lower borrowing rates.

    This subsequently was a factor in the huge real estate boom in the late 1980s that led to its property price meltdown and subsequent “lost decade”.

    Again, I’m having trouble following. I thought it was the MMT position that the natural and appropriate rate of interest was zero and that this would not in and of itself cause asset price bubbles. But here you say that loosening monetary policy was a cause of the Japanese real estate bubble, which seems to contradict that thesis ….

17. Tom Hickey and MMT Proselyte, it may have always been the American dream that each American would forge a dynasty of ever increasing wealth such as the Rosthchilds or whatever. However – and this is an extremely important however- before sophisticated expanding fiat currency it had to remain just that a dream. I think infact you are being very generous in saying that it is a special to Americans. People fall for that way of thinking right accross the world. However when you think about it it is a proposterous sick in the head dream and we should face up to that. By defination we are talking about wealth that is never spent and never going to be spent- it is just numbers on a bank balance. It is exponentially increasing with no limit because the expansion of the currency is specially designed to accomodate it. I also think it is worth bearing in mind that the fascination with growing wealth for the sake of it is probably an inclination that people (such as me) who have an interest in how money works are much more likely to fall for. My fear is that the way the economy is constructed is governed by that (probably small) subset of people who want to grow money rather than spend it. I think that that twists the whole architecture of the economic system. Captitalism should be about different economic agents with POTENTIAL for exponential growth in deadlocked struggle against the finite limit of our finite world. Just as ecology is about POTENTIAL exponential growth of populations of organisms in deadlocked struggle in the finite biosphere. The terminal sickness capitalism is now in is because people have stupidly thought that they could convert POTENTIAL exponential growth into actual universal exponential growth. Didn’t Einstein say the greatest force of all is compound interest. If constrained that can be a force for stability and efficiency. If unrestrained- then in the human body that is cancer.

18. Ken – don’t forget, MMT is big on targeted taxation incl on asset values, in such a way as to limit asset bubbles. Japan, needless to say, didn’t have such mechanisms in place.

    stone – maybe you won’t be convinced by the desire to accumulate net assets. But the prudence point is key: if you aim to break even, you’ll come unstuck when you get some unforeseen expense.

19. So MMT admits that a zero interest rate policy could trigger asset bubbles, but relies on an activist fiscal/tax policy to squash them?

    Ken

20. Mr Cameron looks over the fence into Mr Kan’s backyard. He sees rows of lovely fruit trees, ripe peaches, plump raspberries and other delectable fruits. Mr Kan’s large and busy family is cheerily working, riding around the well kept garden on small shiny trains.

    Mr Cameron sighs and looks around his scruffy back yard. Several scrawny boys are struggling to dig up a rather odd looking turnip. He would so love to have a yard like Mr Kan. Being well meaning (but rather dim witted) he considers his options.

    Mr Kan’s family is hard working. They also love collecting IOU’s to stick on their walls. Mr Cameron’s family has a talent for writing IOU’s. In the kitchen, one obese boy is enthusiastically colouring IOU’s. Another is cutting them into delightful shapes, just how the Kans like it. The table is groaning with lush fruit.

    Outside in the yard, two thin boys fight feebly over a rotting carrot. He muses. “If I get my family hungry and fit enough, they will whip me up a garden like Mr Kans in no time at all. We can stop giving IOU’s to Mr Kan. We can paper our walls with Mr Kan’s IOU’s.”

    After putting the back yard boys on a stricter diet, he was surprised the garden was not growing as planned. The two fat boys had unilaterally embarked on an intensive programme, re-colouring all the IOU’s. Amazingly….. with no effect whatsoever. Mr Cameron even asked the postman to pop around Mr Kan’s house and tell him to increase his prices. A large tattooed man came out of Mr Kan’s kitchen, and told him politely to bugger off. He also said to stop sending him coupons for crappy turnips.

    Luckily a wise old farmer called Bill was strolling by. A deflated looking Mr Cameron asked him what he might do. Well said Bill. To start with, get those scurvy backyard boys motivated on a fruit diet. Slim down the fatties, get them out to buy some good quality tools and seeds. You’ll see, with the right tools and encouragement you too can have a lovely garden. Grow your own fruit boy!

    Well ….! As you can imagine, Mr Cameron didn’t like that piece of advice at all. He had been to the Oxford college of abolished knowledge. The two fat boys had filled his heads with all kinds of woeful stories, even threatening to leave home if their fruit was reduced. It just wouldn’t do.

    Dear readers. I can leave you all to finish the story and it isn’t a “happy ever after” ending.

21. MMT Proselyte, I’m very convinced by the desire to accumulate net assets. I’m also very convinced of the inanity of thinking that a viable (except in the immediate term) economy could be based on attempting to accomodate that desire on a net basis. Any viable system has to be one where people strive to do that but are constrained by a finite limit. Any attempt to do otherwise inevitably leads to the financial economy becoming disconnected from the real economy because the real economy is always grounded in the real finite world.
    With regard to “don’t forget, MMT is big on targeted taxation incl on asset values, in such a way as to limit asset bubbles. Japan, needless to say, didn’t have such mechanisms in place”- So the idea is that some infinitely wise politically pure pannel of MMTers will oversee and be able to quench all asset bubbles whilst prudently pumping money in so as to appease the desire to accumulate net assets American dream ?

22. Ramanan, I’ve been totally with you on the need to avoid trade deficits. to my mind even if the people in the exporting nation never spend their USD, the trade deficit is still a great social evil. The fact that government deficit spending enables trade deficits is one of the key reasons for having the “arbitary fiscal rule” of balancing (over the long term) government spending and a wealth tax in my opinion.

23. Tom Hickey, I just want to reclarify- I think people and corporations should be freely able save at stages of their life when they can with a view to amassing wealth to pay for things at other stages or for expediencies. For individuals, the best way to cover expediencies late in life is to convert wealth into insurance and annuities early on in old age. The state should do everything to facilitate people in saving for and insuring for possible expenses in old age. The role of the state should not be to artificially inflate accumulated dynastic wealth by expanding the currency. That by definition does not result in pensioners spending more. By definition it results in ever more wealth being handed on to the next generation and so on. It is also a ponzi structure. It distorts capitalism and prevents capitalism from being able to serve its social purpose. There is a clamour for sound money. The only thing holding many people back from politically demanding sound money is the fear that all the money will get hoarded by an oligarchy. That is why “sound money” can only work in conjunction with a wealth tax as far as I can see. Any other tax type would get evaded by oligarchs. Inheritance tax is little use because as far as I can see how oligarchs pass on inheritance is by the old man making a loosing trade with the heir making a winning trade in the markets.

24. Tom Hickey, with regard your assertion that a non-expanding currency in conjunction with redistributative taxation would result in greater use of leverage- I think the opposit would be the case. In a general enviroment of expanding currencies, short term government surpluses can induce private sector indebtedness- but that is a very different scenario from one where all the major currencies are non-expanding (what I’m suggesting is needed). In a non-expanding currency with redistributative taxation, money for investment would have great scarcity value and earning potential. There would be plenty of lucrative earning possibilities for directly employing the money rather than lending it on to provide leverage. It is a glut of cheap money that fuels use of leverage.

25. Hi Stone,

    “a glut of cheap money that fuels use of leverage.” A glut is a stock, you’re back into a stock here, do you want to be like this goofball: 😉

    Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets NOT BEING RELENT, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said.

    (Aside: I often wonder how mch better off we in US might be if he just kept to the clarinet and an Ayn Rand groupie vice civil service)

    Stone, this is revealing, he and his ilk (sociopaths) think all this is just a “psychology” problem that is preventing loan origination, yes to him WE have the psychological problem. They think they have established this huge stock of reserves for we peons to come begging and sign up for, then all will be better…nice. This isnt even how credit works, but even so, it is now over 2 years that this stock of reserves have sat there to no effect and they still dont get it, talk about slooooow to pick up on things, stubborness.

    Consider: Stock measures of “money” are useless to all but the unjust, you may not want to associate intellectually with this concept even in your limited way where you are hypothetically considering a policy of a fixed stock of “money” here.

    The only thing that is holding things together over here is about a $100B+/mo. flow of NFAs to the non-govt sector created by current US fiscal policy, they (mainstream policymakers) are blind to this flow. Without this I swear it would be chaos over here.

    Resp,

26. Ramanan,

    Think of the US as running a current account deficit by delivering NFA to the rest of the world.

    For the moment, assume a US government budget balance. That would mean that the US private sector is delivering NFA to the rest of the world, while generating negative NFA for itself.

    From a pure MMT perspective, that’s not a good situation for the US private sector. You can frame in terms of either a dearth of private sector NFA, or a leakage in aggregate demand.

    So now assume the government attempts to fill the private sector NFA gap by delivering NFA outward – i.e. by running a deficit.

    Some of that government NFA delivery may end up net with the private sector, and some of it may add to the external leak by ending up net with the rest of the world.

    It appears to me that the MMT criterion for such an operation is that the government continues to deliver NFA in this situation until employment has filled up and the inflation constraint becomes binding. When the inflation constraint becomes binding, the government starts to increase taxes in order to reverse the NFA delivery. The inflation constraint includes allowing for any effect that the exchange rate may have on imported inflation.

    Viewed in this way, the external sector is a relatively minor conceptual adjustment to a closed economy MMT NFA mechanism.

    Moreover, your concern about the nature of foreign delivered NFA as liabilities or borrowing is subsumed by the operation of the overarching NFA-inflation constraint mechanism. However, I do think the theory becomes more robust by assuming the government’s fiat control over interest rates is put into practice along with the inflation constraint/taxation criterion.

27. JKH,

    Yes I understand such arguments.

    Your point about viewing it as a “relatively minor conceptual framework adjustment” is what I am writing against. Many Post Keynesians point out that Keynes should have started from the open economy. And btw, Keynes seems to have understood balance of payments problems well. The recent meet of Finance Ministers and talks of currency wars is a proof of that.

    Unfortunately it is not so simple JKH. Somehow current account deficits such as a few percentage of GDP appears minor. Over time, it builds up adding to the stock of net liabilities to the rest of the world and nations end up being hugely indebted to the rest of the world. 40% is bad.

    The inflation constraint etc are imported but simply diverts the attention from important unsustainable processes which are building.

    The supplying of NFA to the rest of the world is simply a restatement of Ben Bernanke’s the global saving glut.

    There is a big danger in consolidating all sectors. One is told of the US as a single person and the rest of the world exporting stuff to her in exchange of worthless pieces of paper. However, this consolidation is dangerous. It totally hides the mechanisms happening.

    Not only do nations import by increasing their liabilities to the rest of the world, they also import by selling assets – foreign reserves. In the latter case, is the importing nation “supplying NFA” to the rest of the world ? The payment is in some other currency.

    Imports are due to demand from citizens. Imports put a downward pressure on demand. Imports just leave foreigners with IOUs which provide interest payments in perpetuity. If a nations “does not borrow” to pay for imports, why do foreigners earn interest ?

    I agree with Alan Greenspan that the US is engaged in a dangerous game. However his reasons are completely crazy. He wants austerity which is a nonsensical solution. However, any doctrine which says expand fiscal policy without worrying about the external world is just overconfidence. Of course nations have biased their fiscal policy in the opposite direction of what is needed but they are just worried. “Net saving desire” of foreigners depends on various factors. It is not an innate desire. It depends amongst other things, the trade performance of the debtor nation. Foreigners may be impressed by the temporary deterioration of trade if there are good reasons for reversals.

    Its also true that theoretically there is no upper limit to the external debt/gdp. However that rule is an exception and may not even be true for the United States. Foreigners may allow the external debt to keep building but at some point with probability 1, it will get embarrassing. Also there is no automatic mechanism for any adjustment. None.

    Of course, none of what I am saying can be interpreted to be anti-fiscal. Good fiscal policy increases demand and consumers end up buying locally purchased goods. However, there is still a residual left – people also purchase foreign products. Different nations have different propensities to import. Also over time, this residual builds up and the effect of fiscal policy becomes less and less dilute.

    The fiscal policy reaction function depends in complex ways on external debt and the currency movements. And so does the central bank reaction function. Keeping rates at zero is another overconfident doctrine. The currency movement also depends on the two. Just because the short term rates are exogenous doesn’t mean it is “exogenous exogenous”. (As an aside, zero rates is another overconfident proposal – in theory, taxes may be used to reduce demand but its impossible in practice to fine tune this).

    There is a definite gap in demand post 1971. It is somewhat surprising that in the Gold Standard era, the growth was good.

    Why is there so much talk of protectionism and currency wars etc ? This is because nations are worried about the external world. Just like everyone wants to be on facebook, nations cannot but be social with the rest of the world. They want a devalued currency because they want to be net exporters and the weaker currency helps them. But isn’t it contradictory that nations want a weaker currency and at the same time be worried about currency devaluations ? No, not at all.

    Also its completely untrue that “twin deficits” is a myth. There was a post saying there is no correlation. A complex dynamical system can hardly be studied by simple tools such as correlation. It also puts the causality of external deficits causing budget deficits into trouble. One cant say A is correlated with B and B is not correlated with A.

    Nations seem to be moving in the right direction about coordinated efforts. But the confusion with economic concepts prevents any rational solution. Its the only way to prevent further cracks in the foundations of growth.

28. stone, I think you need to start a political party. 🙂

    I agree with Bill. Your macro is muddled, and I am afraid that if your party won and implemented your program, it would be a disaster for the nation. What you are proposing amounts to returning to some sort of fixed rate regime, which is what setting a limit on currency issuance amounts to. That never worked so well in the past, and it is not likely to work well again. Moreover, it did not prevent the wealthy from increasing their wealth either.

29. Ramanan, I think you are overlooking the fact that the US is a special case with a GDP of ~15T and the runner up with a GDP of less than 2T. The US not only runs the global reserve currency, its physical currency has been the world standard. The international underground economy prefers $100 bills, for example.

    Floating rates generally work to correct trade imbalances, but they don’t work “as they should” in the case of the US and the ROW in the minds of some economists. The answer is that the world wants the US dollar, so it is overvalued. The US would like to see the dollar drop about 20% relative to the major currencies to rectify the trade balance. This is what currency folks see as the objective of QE 1 and likely QE 2. This is not lost on the ROW. As a result a trade war is in the making. This is unnecessary and stupid.

    The MMT answer, which Warren argues eloquently, is that there is no problem with the US running full employment with large deficits and also accommodating a trade balance that is positive in real terms (imports exceed exports) by absorbing all the imports that the world want to send the US in exchange for holding dollars.

    It seems to me that this is the optimal solution globally at this point. It it good for the US in that the US gets what it produces at optimal capacity/full employment, plus imports less exports, which benefits the US in real terms. At the same time it benefits other economies by increasing revenue from exports, which is what the trading partners of the US want. What is not to like about this?

30. stone @ 18:03, why didn’t this happen under the (fixed rate) gold standard? The Great Depression was a monster debt-deflation.

31. Tom,

    “The MMT answer, which Warren argues eloquently, is that there is no problem with the US running full employment with large deficits and also accommodating a trade balance that is positive in real terms (imports exceed exports) by absorbing all the imports that the world want to send the US in exchange for holding dollars.”

    I am afraid its a mere assertion. How big can the US net external debt get ? 50%, 100%, 200% ?

    “Floating rates generally work to correct trade imbalances, but they don’t work “as they should” in the case of the US and the ROW in the minds of some economists”

    Any proof ? Unfortunately neither fixed or floating does.

    The US wants a devalued currency to reduce its trade deficits and perhaps go into a surplus. The fact that the latter may be morally incorrect is of no consequence.

    The currency folks do not see it as a tool to devalue the currency. Rather they take positions because “QE is a sin”

    “It seems to me that this is the optimal solution globally at this point. It it good for the US in that the US gets what it produces at optimal capacity/full employment, plus imports less exports, which benefits the US in real terms. At the same time it benefits other economies by increasing revenue from exports, which is what the trading partners of the US want. What is not to like about this?”

    Maybe in an imaginary world. Do the math. Endemic trade deficits keep increasing indebtedness to the rest of the world. Its the quibble about not being indebted in your own currency is what I am anti-quibbling about.

    Arguments such as the US being in the #1 spot ignore the fact that over time, others catch up. Who knows the Euro Zone nations become one nation ?

    Unfortunately, arguments such as “all policymakers are silly” is incorrect. The simple solution of expanding fiscally is not an optimal solution. It risks being more indebted to the rest of the world. No nation would do that.

32. Ramanan,

    “Not only do nations import by increasing their liabilities to the rest of the world, they also import by selling assets – foreign reserves. In the latter case, is the importing nation “supplying NFA” to the rest of the world ? The payment is in some other currency.”

    The bilateral NFA position between two countries does not depend on currency any more than it depends on bond versus stock financial composition. It’s an accounting identity.

    As usual, you raise some reasonable observations about CA deficit risk, but I don’t see where the presence of these risks contradicts the MMT interpretation of CA deficit sustainability. The latter doesn’t suggest CA deficits can grow to infinity any more than government deficits can grow to infinity.

33. R.,

    Maybe another way of putting the question is why wouldn’t taxation as a response to domestic inflation deal with the CA deficit risks that concern you?

34. JKH,

    The MMTers can always come back and say “where did we say that we are say that all current account deficits are sustainable?”. However its there everywhere indirectly. And neither have they discussed the sustainability and one hears “… Imports are benefits” Here is an MMT statement:

    “The irony/tragedy for the US is, of course, we should welcome all such moves, open ourselves for virtually unlimited imports from anywhere in the world (with sufficient quality control restrictions- no poison dog food, contaminated wall board, etc.), and enjoy the tax cut that comes along with it so we have sufficient purchasing power to be able to buy all of our own domestic output at full employment plus whatever the rest of the world wants to net export to us.”

    The only way to balance a deterioration of the current account is to make discretionary attempts to target a “primary surplus” on the balance of payments. It either reverses the indebtedness to the rest of the world or stabilizes the ratio net external debt/gdp. A miraculous escape is foreign assets earning more than foreign liabilities. However, that is a bet. Soon the net interest payments in one direction will catch up whatever the interest differential is.

    Neoclassicals on the other hand, argue for primary surplus on the government finances! That IMF solution works sometimes because there is a tendency to reduce demand and hence imports (People have less income to buy imports). The IMF solution also stresses on export oriented policies but strongly stresses on the former.

    Endemic trade deficits just lead to one situation: a growing public debt and a growing external debt – gold standard, fixed or floating. The currency adjustments do not automatically reverse the trend. Rather, discretionary efforts need to be made. But that is against the logic “exports are costs…”

    The United States was once the Creditor of the Rest of the World. The number in 1971 +30%. That number is now around -25% to -30%. The net factor income went negative as well around 1994 but for some reason came back to being positive. Once the number goes negative, it just keeps increasing and the external debt keeps rising without a limit. The trouble is that foreigners may allow the process to go on for a long time, just like an equity boom and the devaluation is not smooth. One cannot keep saying imports are benefits etc.

35. Also I have avoided talking of inflation because even though it is important, it unnecessarily complicates the subject.

36. Ramanan: Who knows the Euro Zone nations become one nation ?

    This is bordering on the ridiculous. The economic asymmetry is obvious, and the cultural and historical asymmetries greatly exceed it. I would say that the likelihood of another European war is greater than a United States of Europe anytime soon.

37. R.,

    Good comment.

    The important word in your quote is “want”.

    BTW, can you cite any current account disasters of the type that concern you, where the country was borrowing in its own currency? If so, would be interested in how the actual dynamic matched up with your analysis.

38. Ramanan, as far as I can see, the MMT’ers say that the CAD will continue until it doesn’t, and that will happen when other countries no longer want to hold dollars in increasing amounts. That won’t be a sudden occurrence of dollar flight, which would harm everyone, but rather it will be presaged by a falling dollar, which will automatically begin to reverse the trade balance as the US exports increase due to price advantage and imports decrease due to increased costs. The US is intentionally provoking this with its current monetary policy.

    Floating rates replace tariffs. Both affect price and have similar effects. One is a liberal solution the other a command solution. As a currency weakens its trade advantage strengthens. This acts as an across the board tariff.

    But why should a government like the US care about its trade deficit if it capable of running full employment along with it, while maintaining price stability, as MMT’ers hold is possible operationally under the present monetary system? If it becomes “unsustainable,” market forces will act to restore a balance that the world can live with. Why would that not happen?

    As far as your argument about debt goes, according to MMT it doesn’t make sense to say that a monetary sovereign which is the monopoly issuer a nonconvertible floating rate currency is either indebted in its own currency or needs funding from revenue. It is nonsensical operationally.

    Moreover, the US has enjoyed historically low inflation due in part to low cost imports, and labor arbitrage has also checked the cost of domestic labor. While this has created structural problems in the US, the US has faced large structural problems before, e.g., through industrial innovation that resulted in the transition from an agricultural economy to an industrial one. Now the US is transitioning from an industrial economy to a service economy on one hand and a digital economy on the other. The US will take this in stride, and appropriate fiscal policy can facilitate a smooth transition.

39. Tom,

    I am merely suggesting possibilities. Do not take it as if I am suggesting that. You cannot bet on the US being on #1, especially when I am talking on the restriction of growth because of balance of payments problems. Implicit in my argument is the position of the US weakening. You cannot counteract the argument saying that the US is #1. Also think of other nations – you cannot use such arguments there.

40. Okay second statement should be “do not take it as if I am serious”. Its just a way of saying “please do not ignore possibilities”

41. JKH,

    Iceland had issues in 2008. Turkey is in a dangerous situation. In fact its currency has been appreciating over the years which makes it more fragile.

    More importantly, the problems start before one even gets to some stage like that. Nations end up constraining demand because of external factors.

    The situation is complex for countries who are forced to defend their exchange rates, though it may not be a sharp peg. It will be difficult for them to float it freely as they are in the vicious circle. Central banks must increase rates to allow foreigners to finance the current account deficit, (if there is no debate on that language) and force the government to go into an austerity mode. They have to promise the foreign investors about the stability of the currency. Its difficult to stop imports directly as they violate WTO rules.

42. On the question of “borrowing in your own currency”, the important thing is that nations do enjoy that but when they do not, its not out of choice.

    Also, most transactions happen through the banking system. The transactions flow – or payments – automatically make sure that accounting identities are satisfied. If a nation has large imports, and one doesn’t see capital inflows happening, it means that the banks have a liability position in the foreign currency.

    If the government bond auctions attract foreign demand, the capital inflows cause the banking system’s liability in foreign currency to go down. So the nation as a whole is indeed borrowing, even though its in its currency.

43. Great discussion going on here. I had some thoughts about this “NFA” idea that is often mentioned.

    I have previously seen it suggested that MMT believes that govt deficits are necessary in order to create “Net Financial Assets” (physical currency, CB reserves and government bonds) which are required for the non-govt sector to save.

    Where has anyone actually attempted to establish that the amount of NFAs held by the non-govt sector in an economy actually has any bearing on the economic health, savings level or performance of that economy.

    I believe it is largely irrelevant for the following reasons:

    1) It is based solely on financial assets and ignores the amount of real assets in the economy

    2) Grouping the entire non-government sector together is not particularly instructive for this purpose. Rather we should consider the private sector as consisting of the (i) the household sector (ii) the business sector and (iii) the banking sector. The banking sector is able to provide whatever level of financial assets are required by the household and business sectors.

    3) Where is emperical evidence that economies with less NFA perform worse than those with more. For example, there is a very small amount of NFA in the Australian economy (denominated in AUD). In contrast the amount of NFA in the US economy (denominated in USD) is very large. Is there a huge difference in real income, growth and so on, between the countries? If anything, AUstralia is in a better position than the US.

    4) The facts are that the Australian non-govt sector does not want to hold positive levels of NFA. Proof? We have over $600bn of foreign debt, while there is only something like $150-200bn of NFA available. Therefore the Australian non-govt sector actually has a negative NFA position. Does this mean that it has negative wealth or savings? No, it means that the wealth or savings of the non-govt sector are mainly held in real assets, especially real estate. This just reflects the preference that many Australians hold for owning houses as opposed to savings in the form of financial assets like bank deposits or bond holdings.

    5) Finally, what is not commonly acknowledged is that the level of NFA is not solely determined by the federal budget deficits. NFA are also created whenever the central bank buys assets which are not local currency government bonds. So what would these other assets be? There are 3 main ones in Australia (1) foreign currency reserves ie foreign govt bonds (2) semi-government bonds (issued by state governments) and (3) gold.

    So in conclusion, I believe that the banking and financial system is able to provide whatever level of financial assets are required to facilitate the desired (financial) savings level. Furthermore the reserve bank can generate NFAs independently of new government deficits at any time if necessary.

    Therefore I can see very little support for the argument that federal government budget deficits are necessary or desirable to facilitate private sector saving. In essence it seems like this thing called “Net Financial Assets” is just an arbitrarily defined accounting identity in which the causal relationship to the rest of the economy is either weak or poorly understood.

44. R.,

    Iceland was a case of about 100 people turning an entire country into a hedge fund.

    Borrowing in their own currency? I don’t think so.

    Is there any more standard example of the runaway risk you fear where the country has borrowed in its own fiat currency?

45. Implicit in my argument is the position of the US weakening.

    I would agree with that, but it is not because of the trade balance but rather bad management.

46. If the government bond auctions attract foreign demand, the capital inflows cause the banking system’s liability in foreign currency to go down. So the nation as a whole is indeed borrowing, even though its in its currency.

    Seems to me that this is mincing words. When foreigners sell their exports into an economy they receive payment in the importer’s currency, which they then deposit in commercial banks in that that country. These deposits are liabilities on the banks books, but this is not money that the country has borrowed. It is simply an exchange of real goods for “paper.” The banks’ liabilities to foreign firms and individuals must be settled in bank reserves when those funds in deposit accounts are withdrawn for transfer to wherever. If the funds stay in the importing country, they are just shifted through the interbank settlement system (FRS in the US). If they are exchanged for other currencies, the same thing happens. If they are spent in another country, then the reserves are credited to that country’s account at the Fed and the appropriate commercial accounts are credited. If the dollars are used to purchase tsy’s, the somebody’s time deposit account goes up at the Fed and their deposit account goes down. Where’s the “borrowing” here?

    It is true as an accounting identity that a country’s capital surplus account is called “national savings.” You could call the CAD the external “debt” I suppose, but you have to understand what that means operationally. All that is “owed” is the proceeds of what has already been bought and paid for and held in the importing country, some in interest-bearing accounts, public and private. The financial obligation is just to honor withdrawals of deposit accounts.

47. JKH,

    Yes I understand that there are many factors which contribute to a crisis and it becomes then to identify the important points.

    Will find out about this. The point is that the troubles start even before the scenario I provided starts to happen and that nations are forced to go into austerity.

    In the case of the United States, you know about the numbers about the Rest of the World. The nation has suffered a huge reversal of being the net creditor to the rest of the world to being the biggest creditor.

    If the current account situation continues the way it is, the net liability keeps deteriorating. There is no way to reverse this.

    Right now, using Fed’s Z.1 numbers, the external liabilities is $14T and the assets is around $10T. The BEA numbers are higher but the difference of the same order. Now purely because of the difference in interest rates, dividend rates etc, the $10T has been earning more than $14T. So the current account deficit is less wider than it should be. Now if the US keeps running the trade deficits at the same rate, not only is the gap which is $4T is widening, there is a pressure on the interest transfers in both the direction purely because the gap is widening. Soon, the $4T will be $8T and likely, the trade balance and other items in the balance of payments have the same sign.

    The US has now an unemployment rate of 9.6% and fiscal action will lead to a higher national income and less employment but at the expense of increasing the trade imbalance. This is because imports are proportional to the national income. There is just one way in which the net external debt will go relative to the gdp. Now one can argue that growth may dilute this, but if growth itself is constrained by this issue then ? A higher growth rate will deteriorate the current account even more.

    An then there is the argument about having control over interest rates etc. The US has enjoyed borrowing at its own interest rates. Not all countries can do so. In fact very few. Most nations are forced to increase interest rates to bring in the capital flows to finance the current account. Some are lucky, the capital flows in-flows faster than the current account change – making it a topic of debate on which caused which.

    The point I am making is that even the United States borrows in its own currency – in case you thought I wasn’t.

    Again, most nations do not reach the scenario presented because they take austerity measures to curb demand and hence imports. Plus they target surpluses on trade. That is what the currency wars is all about. Its not silly. Its many nations not being able to find an optimal solution.

    Most poor nations continuously face the problems I have mentioned. They have to go to the IMF and accept its terms and conditions.

48. Gamma,

    Good comment.

    MMT doesn’t exactly ignore real assets in my view.

    It subtracts both real assets (i.e. real investment) and the amount of saving required to support such investment to arrive at NFA balances by sector. These NFA balances sum to zero across all sectors – which is the same as equating government NFA with non government NFA.

    The implicit assumption in this construction is that the amount of saving required to support real investment is in balance with the amount of real investment that gives rise to that requirement. In other words, the matching requirement is assumed to be matched by construction. What remains by derivation is the sectoral mismatch in net saving at the margin, which is zero in total but uneven across sectors. The mismatching portrayal is a partial function of the matching assumption, and the totals sum correctly to all required identities, so the logic is not really disputable.

    Economic behaviour is then analyzed according to these constituent NFA mismatch sensitivities.

    The assumption there is that such analysis is valid at the margin, whatever the underlying level of real investment and corresponding saving is. I think there is considerable validity to that assumption and that marginal analysis. But your point that there is no specific linkage between the mismatch distribution and the actual level of the underlying investment/saving is also valid. It’s also interesting, but I don’t think it damages the value of MMT marginal analysis of sectoral financial mismatches.

    Sectoral grouping is hierarchical. E.g. Drilling down into the banking / business / household decomposition is not prohibited. That doesn’t negate the information value of the government / non-government decomposition at the highest level.

    The commercial banking sector without government can only provide horizontal money. It requires the government to intervene with vertical money, using the commercial banking sector as a conduit. Given the potential for non government to seek higher levels of aggregate saving that it has, it is quite possible for the banking sector not to be able to intermediate that level of saving, simply because the actual level of real investment isn’t high enough to do so. Hence – the MMT logic that government is there to backstop the supply of saving that non government may seek at a point in time. And only government can do this under those conditions. Non government and the banks cannot achieve the same thing if private investment generated saving is not achieving the level being sought.

    I don’t believe MMT draws strict conclusions about the relationship between a particular country’s stock of government supplied NFA and its economic performance compared with other countries. What it does do is draw conclusions about the relationship between its actual NFA stock position versus possibilities under alternative scenarios, including the potential effect on its own economic performance. Again, the analysis is marginal in this regard.

    My understanding is that MMT uses the construct of net financial assets (as a stock) in the context of the government’s ability to generate same through a budget deficit, in that this corresponds to net saving (as a flow) by non government. This includes the case where central bank financial intermediation consists of issuing reserves or currency, offset by purchase of government debt. The net effect of such transactions is to issue government type net financial assets against a cumulative deficit. In short, true deficits generate corresponding saving by non government, and it is in this sense that the term “net financial assets” used, I believe.

    Two of the examples you cite are cases of central bank financial intermediation where the assets acquired are other than the government’s own liabilities. As such, the net effect is not cumulative deficit financing, but true financial intermediation, which has no effect in terms of net financial assets held by non government. The assets in question – foreign or state bonds – are non government liabilities, so the net NFA effect of issuing central bank liabilities against them is zero.

    Finally, it looks to me like NFA issued against gold may be the exception as you point out – assuming reasonably that the correct way to view gold is as a real investment and not a deficit expenditure.

49. above, I meant state bonds are non government liabilities in the sense of the fiat currency issuing government

50. Tom,

    “I would agree with that, but it is not because of the trade balance but rather bad management.”

    So you think that the net external debt of the US can be 100% and there is no problem ?

51. R.,

    “the troubles start even before”

    OK.

    But such troubles could well be manifest in MMT terms.

    i.e. the effect of currency depreciation on imported inflation

    And doesn’t MMT say it will respond to inflation as necessary?

52. “It is true as an accounting identity that a country’s capital surplus account is called “national savings.” You could call the CAD the external “debt” I suppose, but you have to understand what that means operationally. All that is “owed” is the proceeds of what has already been bought and paid for and held in the importing country, some in interest-bearing accounts, public and private. ”

    Precisely the quibble. Putting debt in quotes etc. Because that means that it can anything on earth and its not a problem.

    “When foreigners sell their exports into an economy they receive payment in the importer’s currency, which they then deposit in commercial banks in that that country.”

    Lets be clear – India doesn’t pay for its oil imports by issuing Rupees. To reverse the dollar shortages of the banking system, the Indian central bank has to raise rates to bring the money in and/or export to the rest of the world.

53. Tom Hickey says:

    “When foreigners sell their exports into an economy they receive payment in the importer’s currency, which they then deposit in commercial banks in that that country. These deposits are liabilities on the banks books, but this is not money that the country has borrowed. It is simply an exchange of real goods for “paper.”…..Where’s the “borrowing” here?”

    Tom, if a bank owes someone a deposit, they have “borrowed” money from them. That’s just the terminology, nothing controversial about it. It really is that simple.

    If I have money in a term deposit, the bank owes me money – I am lending to them and they are borrowing from me. If a foreign firm has an account denominated in local currency the bank has borrowed from them in the local currency.

54. JKH @6:47,

    Its not just a question of imported inflation. A commenter (Keith) told me Canada didn’t suffer inflation in spite of deterioration of its currency.

    Its also about the acceptability of the currency. Nations cannot go in a fiscal expansion mode when there is a problem. Also there are issues – when the currency is falling, the imports increase because quantity adjustments take time – its process is represented by a “J-curve” in literature. Governments end up going into a fiscal austerity mode even when there is no full employment.

55. Tom,

    India is an excellent example of what I am saying. Unfortunately most accounts of the events are neoclassical.

    Recently the India’s net external liabilities has increased a lot.

    Exporters to India may either receive payments in Rupees or not. In case of the former, they exchange it leaving the Indian banking system looking for funding in the foreign markets. In case of the latter, the central bank’s reserves position goes down. In either case, capital inflows must be attracted to reduce indebtedness in the foreign currency or increase foreign reserves back to where it was respectively.

    The person holding the Indian Government Securities and/or equities doesn’t necessarily have the citizenship of the person who exported stuff to India.

56. R.,

    Canada has a history of serious monetary tightening in periods of serious currency weakness. It’s difficult to say how much additional currency weakness and additional imported inflation was forestalled by such tightening – but there was certainly inflation per se in those periods.

    My understanding is that MMT prefers tax increases to interest rate increases.

57. R.,

    I believe India has a lot of dollar denominated external debt. That changes things.

58. 52 per cent dollar
    17 per cent rupee
    12 per cent yen

59. only 9 per cent of the government’s external debt is rupee!

60. Will check on this. Many Indian firms raise money in the foreign debt markets – because the Indian interest rates are higher.

    I think most of the GoI liabilities is in the local currency.

61. Gamma,

    ” which are required for the non-govt sector to save.”

    I think it is more than just the saving. Some saving is desired yes, but the incomes created by the flow of NFAs to the non-govt sector (both domestic & external, HT:Ramanan) helps keep employment/output up, in the case of the US, both here and abroad.

    “The banking sector is able to provide whatever level of financial assets are required by the household and business sectors.”

    Consider that banks are capital constrained. If they run down their capital thru idiot loans going bad, and cant get new investors, this channel could shut down, Govt has to then step up if output is to be maintained (BIG ‘if’ here in the US!).

    “there is a very small amount of NFA in the Australian economy (denominated in AUD). In contrast the amount of NFA in the US economy”

    Bill has said that the AUS banks were not as negligent as the ones here in US, so maybe the AUS system is not broken as here in US. AUS business/households may still have some access to credit that is helping to sustain output/employment.

    “NFA are also created whenever the central bank buys assets which are not local currency government bonds”

    Wouldnt this just be an asset swap and no NET FAs are created? CB exchanges RBs for whatever asset?

    Overall I dont think the argument is that people’s desire to hoard piles of NFAs is what creates the prosperity, rather it is the NFAs measured as a flow that support incomes/output that is the key to better economic health.

    Resp,

62. JKH,

    Thanks for your comments, there’s a lot in there and I will give it some thought. A couple of things firstly:

    “The assets in question – foreign or state bonds – are non government liabilities, so the net NFA effect of issuing central bank liabilities against them is zero.”

    I would disagree. First foreign bonds. Foreign bonds are liabilities of the external sector. When discussing the govt / private sectors I assume it is the domestic private sector we are talking about. The rest of the world (govt and private) is really another thing. I suppose you could define the split as Domestic govt sector versus the rest of the world (all govts and private). But this gets back to my point about being an essentially arbitrary distiction…what does this tell us about anything?

    For example consider this scenario. The RBA buys some gold from the Perth Mint. This increases NFA. Now the RBA sells this gold to the US Federal Reserve in exchange for Treasury bonds. Are you saying this now decreases NFA? Well of course if that’s how you define it to be, it will….but what does it really mean? Does the act of shipping some gold from Perth to New York and adjusting the registry of the 10y note owners effect anything else in the economy? No, I would say you have to treat the external sector seperately from the domestic private sector if the “model” is going to tell us anything useful.

    Second state bonds. State bonds are correctly viewed as semi-government securities. Both federal govt and state govt securities are “repo eligible” in Australia, meaning they can be used as collateral in repo transactions with the Reserve Bank of Australia. This means the RBA regularly buys them as part of their open market transactions to manage the overnight cash rate. They play exactly the same role in the monetary system as govt bonds. So why are govt bonds NFA and semi-govt bonds not when they perform more or less exactly the same role? Again this just shows that the distinction is arbitrary.

    Consider this example. The federal govt issues some bonds to an investor to pay for construction of some capital works in Queensland. NFA increases. What if instead the Queensland govt had issued the bonds to the very same investor. How is this really any different?

    In the current monetary system (in Australia for example) both the federal govt and state govts are both users of the currency. The “fiat currency issuer” is the Reserve Bank of Australia, and all forms of govt have accounts with the RBA. Now MMT might argue that this is just a voluntary arrangement and that the true currency issuer “could” be the federal govt if they chose to do so. But this is just a hypothetical possibility, there are an infinite number of ways governments could chose to arrange monetary policy.

    Cheers.

63. Gamma: Tom, if a bank owes someone a deposit, they have “borrowed” money from them. That’s just the terminology, nothing controversial about it. It really is that simple.

    This is why I am saying it is mincing words. This is just part of the intermediation process and to call it “borrowing” is somewhat misleading. It is like calling tsy issuance “debt.” It creates an idea in ordinary people’s minds that is just wrong. This, I think, is Bill’s objection to using the term “borrowing” loosely in such cases. The meaning is ambiguous because the term is not used univocally. When a bank accepts my deposit, it is not taking a loan out from me in any normal sense of “borrowing.” It is performing a service that I in fact have to pay for, if I don’t have a free checking account, unless I simply deposit and withdraw funds at the window. Even then, the bank may levy a fee just to maintain an account, and many banks do unless one maintains a sufficient balance. This is a funny kind of borrowing where I have to pay the one I am “lending” to for the privilege of doing so.

64. Gamma,

    I was attempting to decompose some of the very valid issues you raised.

    With respect to the fundamental government/non government split and state bonds in that context, I referred to the “effect in terms of net financial assets held by non government”, where non government is everybody but the government, including the foreign sector. And I qualified that definition further by saying “state bonds are non government liabilities in the sense of the fiat currency issuing government”.

    So that issue is about clarifying the definitional framework.

    A second and separate issue is about the usefulness of the definitional framework. I take your point there, and qualified it with: “Sectoral grouping is hierarchical. E.g. Drilling down into the banking / business / household decomposition is not prohibited. That doesn’t negate the information value of the government / non-government decomposition at the highest level.” In other words, don’t damn the basic message of the consolidated view when the insight that is surely available from a more deconsolidated view won’t change the starting point for the top-down logic.

    A third issue relates to the difference between the sovereign and its constituent states. The highest level of the government/non-government split is about the relative capacity for fiat currency issuance by sovereign governments. State governments do not have a direct banking relationship with the central bank in the way that the federal government does (I’m talking generics here – not Australia alone). In fact, they tend to have banking relationships with commercial banks, including actual credit limits. So their capacity to issue any kind of liability is limited in a way in which the fiat currency issuer is not. (And the ability of the central bank to take in non government collateral is an entirely separate issue from the banking relationship itself.)

    A fourth issue relates to the distinction between the real world operating relationship between the sovereign government and its central bank versus a hypothetical operating structure in which the two are merged. I’m aware of the debates on this. But ultimately, the government is in charge of its monetary architecture, in which case the hypothetical is an always available option in terms of actually changing the existing architecture.

    I think picking single transactions (e.g. gold for treasuries) can trivialize the subject matter in a way that isn’t very illuminating at times. The main message is that of the macro capacity of the sovereign government to issue liabilities against deficit spending – liabilities that correspond to income and saving and net financial assets for non government. You can break down the non government effect from there – it’s a downstream analytical exercise for additional illumination, so to speak. And we can debate the meaty subject of relative constraints etc., but it’s pretty clear that the sovereign issuer is less constrained (and not constrained at all MMT would argue) than its constituent state issuers.

65. Ramanan,

    Whether or not most of GoI’s liabilities are rupee, only 9 per cent of it’s external liabilities are rupee.

66. “Stone: I’m very convinced by the desire to accumulate net assets. I’m also very convinced of the inanity of thinking that a viable (except in the immediate term) economy could be based on attempting to accomodate that desire on a net basis. Any viable system has to be one where people strive to do that but are constrained by a finite limit.”

    “desire to accumulate net assets” is the driving force behind capitalism. Even most wealthy persons need this motive in order to grow their businesses. Think about it. Any sort of limit would effect management of largest companies in the world and hard limit would be worst option. Reduced desire to grow would be huge blow to standard of living. That’s what went wrong in communism.

    I think best way to limit accumulation of assets would be taxes, especially inheritance tax. Tax money goes nowhere as we know. So you release money as spending and extinguish it by taxing, preventing emergence of these dynasties you talked about. Any sort of “sound money” system cant even work when population is growing and people want to have (net) savings, maybe variable amount over lifetime, so demographic transitions effect on these saving desires. You got to have variable money supply.

67. Dear All,

    Having read Bill’s post above and similarly, Michael Hudson’s recent America’s China Bashing: A Compendium of Junk Economics I am wondering about possible MMT global mechanics:
    1. Each sovereign govt. provides NFA to its private domestic sector and ROW according to its own hopefully, sociable, resource sustainable and environmentally responsible fiat;
    2. The ROW ‘global’ NFA’s are exchanged and leveraged globally;
    3. NFA’s can only be destroyed by each sovereign govt., presumably in defence of inflation in the national economy, and governance (steering) of the above fiat;
    4. Is there global oversight of inflation? – is global inflation possible???

    It appears global oversight of sustainable, sociable resource management and global environmental responsibility is also necessary, which are collaborative human decisions. Then we have the little bother of energy supply? And predators amongst our own species.

    We live in interesting times! Have always liked the formula:

    • Dignity – for each human being
    • Peace – because the battles that rage on the inside explodes on the outside
    • Prosperity – because each human life seeks fulfilment

    Thanks in advance if anyone comments about the possibility of global inflation.

    jrbarch

68. Is there global oversight of inflation? – is global inflation possible???

    Global inflation is not only possible but almost inevitable as global demand excedes global supply of many resources, like petroleum. Were you watching the run up in grains when the US just announced a shortfall of supply expected this year?

    As a recovery kicks in, we are going to find out if there is any global oversight of supply-induced inflation.

    I suspect that there is going to be a free-for-all over scarce resources. Why do you think that the US has over 800 bases scattered around the world when there is no serious threat to US national security by a credible enemy. Strategically, it’s to project power globally in order to ensure access to resources vital to national security, and the US deems its economy vital to national security.

    Fortunately slow growth is expected, so there may be time to adjust to a new normal. Global climate change, for example, is going to have an increasing effect on supply of vital resources like food and water.

    “Sustainability” and “efficiency” are going to become the mantras in economics in the coming decades. Scarcity likely going to mean rationing, and the traditional way to ration scarce resources is through market price. That means prices will rise on everything that involves increasingly scarce resources.

69. The way we are all being condemed to servitude and our planet is being laid waste is by global asset price inflation fueled by global deficit spending. The 1920s credit boom and 1930s debt deflation were due to money creation by commercial banks. That is just as bad. A fixed stock of money that could be lent and spent would serve us so much better than the totally unsustainable mess of expanding currencies that we are wasting our time wringing our hands about the consequences of. All this long discussion with much hand wringing about the (very real) evils of trade imbalances would be a non-issue if the world had non-expanding currencies because trade imbalances then become an accounting impossibility. All the hand wringing about the very real evils of a vastly oversized and rapidly expanding FIRE sector would be a non-issue if the world had non-expanding currencies because that sector has only expanded because the amount of savings has expanded. All this awful rubbish is not even to provide people with unneccessary luxuries -it is to pander to an entirely moronic desire to watch numbers on a bank balance increase. By definition to provide phoney money that will never be spent.
    Matt Franko, if there is another round of QE that increase in bank balances will provide cheaper leverage for day trading and that will inflate global tradable asset prices. I am very removed from that world but from what I can see the mere prospect of coming extra QE is already being reflected in the SP500 and the gold price.- stocks of money do matter a very great deal because they lead to flows.

70. JKH,

    Source for 9:03 ?

71. Dear Gamma (at 2010/10/10 at 5:15)

    You focus only on stocks. But the important impact of the government-non-government transactions are the flows. The final manifestation of all the transactions show up in bank reserves (financially). But in the meantime people are working, creating real goods and services and earning incomes.

    You claim the private banking system can “fund” all the net saving desires of the private sector. Then you need to explain why we have recessions. Yes, the banks can create credit (but not net assets). But they will only extend to credit worthy customers which is not the same thing as extending to satisfy the overall saving desire of the non-government sector. If your disavowal of the need for government injections of net financial assets was remotely correct then there should never be any aggregate demand failures and no unemployment or involuntary build-ups of unsold inventory.

    Finally, there are important insights to be gained from disaggregating the non-government sector. In our book this discussion is presented as Figure 2 where we talk about horizontal relationships. The important point is that they net to zero. To really understand the way in which governments impact on the economy you have to start with the government/non-government aggregations because it is at that level that net liquidity is added or destroyed and that has significant implications.

    best wishes
    bill

72. Dear Ramanan (at 2010/10/10 at 4:24)

    I note that you are now reducing your extensive input – which started out claiming the way MMT understands the external sector is wrong, dangerous, etc. I now note that you are “merely suggesting possibilities. Do not take it as if I am suggesting that” which in my view sees you inching towards the camp that rings the emergency sirens without any cause. Hyperinflation, Interest rates through the ceiling, exchange rate collapse, international debt explosion, insolvency, mayhem … I have heard all that before. I am surprised you want to join that chorus.

    The fact is that you cannot produce an empirical example to support your case. Iceland does not help you. Please produce a case where there has been a major exchange rate collapse and resulting meltdown in the financial and real economy of a nation which has been running a persistent budget deficit, a persistent external deficit, floats its currency without exception and has no external debt in a foreign currency.

    I also note you demanded someone “produce the math” in a recent comment. I realise you are not an economist and will not know the “cultural” significance of that comment. But you might like to know that it is a comment that the arrogant mainstreamer macroeconomists make all the time to progressives as a way of avoiding uncomfortable discussions and as a way that they think gives them a superiority and thus authority. You should know it is always a smokescreen. First, the maths that the mainstream use is hardly sophisticated and mostly any undergraduate mathematics student is capable of producing it. Second, GIGO – garbage-in-garbage out. I can write a mathematical model any time I like that will “prove” your point and then write another one that “proves” my point. The structure of the model and the assumptions I use to construct it can produce any result I like. So it is not really a reliable authority or discipline in a debate to demand someone “produce the math”.

    In the context of my profession, those who demand people “produce the math” are the most arrogant, narrow-minded practitioners around. They consider their stylised constructed worlds (which only reflect their inner biases anyway) are in some way immutable truths. They are not – these models never will replace a systematic understanding of the underlying forces operating.

    I agree, an exchange rate meltdown is “a possibility”. But I am also well trained in statistics and probability and so I assess the likelihood of that happening (not withstanding the difficulties of making any probabilistic statements in a world of endemic uncertainty) to be low and within the capacity of the government to prevent.

    I will be interested in your examples.

    best wishes
    bill

73. Tom Hickey: “Global inflation is not only possible but almost inevitable as global demand excedes global supply of many resources, like petroleum. Were you watching the run up in grains when the US just announced a shortfall of supply expected this year?

    “As a recovery kicks in, we are going to find out if there is any global oversight of supply-induced inflation.

    “I suspect that there is going to be a free-for-all over scarce resources. Why do you think that the US has over 800 bases scattered around the world when there is no serious threat to US national security by a credible enemy. Strategically, it’s to project power globally in order to ensure access to resources vital to national security, and the US deems its economy vital to national security.

    “Fortunately slow growth is expected, so there may be time to adjust to a new normal.”

    There is a very real possibility that we have already seen world oil production peak. The spike in prices a couple of years ago might have been a sign of that. Be that as it may, from what I hear, inflation in oil prices is not necessarily the likely result, but increased volatility. One reason is that rising oil prices may dampen demand and slow economic growth. Since reading about that I have noted that oil prices and the U. S. stock market have moved in tandem. If I understand this kind of scenario correctly, we may find that, as recovery continues, oil prices will rise, creating more and more of an economic drag. Then, as the economy slows, oil prices will drop again.

    As for the new normal, unless policy changes, I am afraid that high unemployment will come to be considered normal and acceptable.

74. Tom Hickey and Bill- PLEASE PLEASE think through who looses and whether anyone actually gains by our subservience to the desire to net save on an aggregate global basis (obviously some people saving whilst oythers are drawing down savings so causing no net saving is totally fine).
    You say about non-expanding currency “That never worked so well in the past, and it is not likely to work well again. Moreover, it did not prevent the wealthy from increasing their wealth either.”- The reason it did not work in the past is BECAUSE there were not measures to prevent the wealthy from hording all the wealth. If that end of the equation were addressed then there would be adequate aggregate demand and the required flows would occur. A wealth tax (so that inorder to have legal ownership of anything you have to demonstrate that you have paid that year’s tax on it) would be a cast iron way to redistribute so as to maintain aggregate demand. Money needs to be something that applies equally to all holders. The MMT idea of having a system of MMTers identifying individual asset bubbles so that they can be targeted for quenching by taxation runs so counter to that. It is a recipy for pratfalls and corruption. How on earth would your pannel of MMTers distinguish between asset price rises due to momentum trading (and so to be targeted with tax) versus those due to people identifying future earning potential (so to be left alone). If you cared to think it through, expanding currency removes from money the properties of money that make it worth having. Even if there were no corruption the expanding currency system leads to a situation where the state needs to identify the needs of the real economy and target funding to address them. The point of money is to avoid as much as possible the state needing to do that. On a global basis having expertly run expanding curencies in just a few of the world’s countries leads to exploitation and escalating deprivation of those people living in other countries. The technical demands of administering a non expanding currency basically amount to being able to enforce a wealth tax. The technical demands of administering an expanding currency are extreme and expand in complexity and cost as the currency expands. I came to this site hoping to find a coherant explanation of who benefits and how from having an expanding currency. I have searched hard and have heard nothing coherant to suggest other than the expanding currency system is a way to enable people to see numbers on a bank balance increase indefinately at the expense of starving a billion people and destroying the planet.

75. Bill I despair at how you MMTers defend your theory with a smokescreen of straw men such as hyperinflation etc etc. The actual real gross problem with expanding currencies- ie build up of savings and its consequent evils- is the unmentionable “emperor’s new clothes” that the economics profession seems willfully negligent about failing to face up to

76. A very interesting discussion. I like this: Currency War Battlefield Tactics

    Especially the tactics for a “Developed country with surplus trade”: (1) Group up with many many many less productive countries (2) Adopt a common currency (3) Reap the benefits as your partner countries’ debt problems cause a falling currency (4) Constantly blame their idiocy, but keep bailing out their debt. Keep the gravy train rolling for your local exporters. HA we here in Germany are way ahead compared to the rest of the crowd. We know our Clausewitz.

77. I should add that another “winner” from the expanding currency rather than non-expanding currency descision is the state sector of rich nations. So basically expanding currencies are a way for oligarchs to see numbers on bank accounts increase indefinately and for governments of rich nations to be able to appropriate the real resources of poor nations rather than having to mobilize their own people and resources.

78. Ramanan,

    India’s external debt:

    http://finmin.nic.in/the_ministry/dept_eco_affairs/economic_div/External_Debt_Qmarch10.pdf

79. jrbarch- There is abundant evidence that if one nation expands currency, the effects act on a global basis just as if one nation emits CFC the ozone depletion acts on a global basis. The Japanese attempts at reviving the Japanese economy during the lost decade lead to abundant credit with zero interest rates. That led to a 1T USD Yen carry trade that provided much of the funding for the credit fuelled asset bubble that lead to the global 2008 crash. There is currently a carry trade out of the USD because the US has adopted Japanese style measures. As the accumulated deficit spending mounts, this global problem will mount. As always it is the worlds poorest who actually suffer the effects.

80. Stephan, the alternative probably more sane approach would be for German workers to be paid the same as they were but only required to do as many hours of work as were required for Germany to recieve the imports it needs. Germany is a more sane country than most- so am I correct in remembering that such a scheme (paid the same for shorter hours) is now belatedly being implimented in Germany? The point is that most German people (I guess) would all along have only turned up to do short hours if that was all they were required to do. The “benefit” of our mad expanding currency World accrues to the owners of the companies that are producing and exporting more goods than needed to cover German consumption of imported goods. The tradegy is that the “benefit” is only in the form of numbers on the company owner’s bank balances. If it were in terms of them gaining anything real then that would not be a trade surplus.

81. Tom Hickey- you say “It seems to me that this is the optimal solution globally at this point. It it good for the US in that the US gets what it produces at optimal capacity/full employment, plus imports less exports, which benefits the US in real terms. At the same time it benefits other economies by increasing revenue from exports, which is what the trading partners of the US want. What is not to like about this?”- trading partners of the USA in operational terms means the wealthy elite of the nations trading with the USA. As I said above USD can be put in a bank account, real goods and services can not. The very great deal that there is “not to like about this” is that the set up enables the fruits of the labors of the general people in the trading partner nations to be kept from them as would not be the case if it were an accounting neccessity to have balanced trade such as would be the case under a non-expanding currency.

82. Dear Bill,

    I was merely replying to Tom Hickey’s comments about the US being #1 and that causing no issues. My point was to let him know that others can catch up. Now if you equate those possibilities with hyperinflation, I do not know what to say. What kind of argument is the argument that the US is #1 ?

    The possibility I offered was that its possible that the Euro Zone becomes one nation or something along those lines. Not a fear mongering possibility as is made out to be. It doesn’t mean I am advocating it – just a possibility. If someone wants to taboo it as fear mongering, not sure what to say.

    Its fine if you want to deny the possibilities of the external debt blowing. I sincerely believe it is a genuine possibility. Unfortunately – to my knowledge – it hasn’t been discussed in the Neo-Chartalism literature. Instead one hears of current accounts being indefinitely successful – a quote I showed you earlier.

    Doesn’t matter if I am not an economist. I have been in academics for quite a while, and I know the Post Keynesian culture simply because I have made attempts to access good literature. While some people may avoid the topic by asking others to “produce the math”, I believe in this case – it is straightforward in some sense.

    It doesn’t help avoiding not being analytic. While modeling cannot capture all the truth, it helps. There are Post Keynesians doing that.

    As far as examples are concerned, I will come back with some examples at some point. The point is missed – nations end up facing issues about acceptability of currency. It is difficult to get out of that vicious circle. There is a good reference for this. Basil Moore’s Shaking The Invisible Hand has so many discussions about issues with the open economy. Now you may not like some of his proposals (which he himself may not be convinced of, probably), his thesis is quite a revelation. C’mon Iceland is a blow to your “There is no financial crisis so deep that …”

    To be honest, as per my first comment in this post – my opinion is that the MMT stand is merely a quibble about not borrowing in your own currency.

    The points are simply missed – you can deny the increase of current account deficits of an expansionary fiscal policy. I do not know any government facing balance of payments problems doing that. Thirlwall and Mccombie’s Economic Growth and the Balance of Payments Constraint is an excellent reference.

    Its surprising that so much discussion about acceptability of currency is made in the context of the closed economy whereas Chartalists do not talk much about the same for the open economy.

83. Sorry “Instead one hears of current accounts being indefinitely successful – ”

    should be

    “Instead one hears of current accounts being indefinitely sustainable – “

84. bill @ Sunday, October 10, 2010 at 18:10

    Bill,

    Yes I focus only on the stocks. This is in fact my point. I do not dispute that it is the flows (the actual spending) that stimulates “working, creating real goods and services and earning incomes.”

    The point I am making is that it is not particularly important whether these flows occur between the govt and non-govt sectors, or whether these flows occur within the non-govt sector. The important effect occurs due to the flow of money, not where the stocks of assets are held after this point.

    You say, WRT to non-govt flows that “the important point is that they net to zero”. Well, why is this important? I say it is relatively unimportant for all the reasons I have previously mentioned.

    And again: “To really understand the way in which governments impact on the economy you have to start with the government/non-government aggregations because it is at that level that net liquidity is added or destroyed and that has significant implications.” What are these “significant implications”?

    To illustrate exactly what I am talking about, I will give you an example which might very well occur in Australian economy.

    Consider that the various state and federal govt decide to build a high-speed train between Brisbane-Sydney-Melbourne, as has been suggested recently. IMO this would be a great idea. We would be creating new transport infrastructure. As well the spending (flows of money) to build this would create jobs, income and all the other benefits which you routinely discuss.

    How is this paid for? 2 possibilities.
    1) The Commonwealth government issues treasury bonds to an investor. NFA are created.
    2) The 3 state governments issue bonds to the same investor. No NFA are created.

    Now, anyone who understands the workings of the monetary system, would be able to tell you that both scenarios are essentially identical. The flows are identical. All the govt’s involved have accounts at the RBA. All the bonds issued would be repo-eligible (meaning they are exactly the same in the eyes of the RBA when it comes to creating settlement balances). The only difference would be the semi-govt bonds would probably yield 30 or 40 bps more than the govt bonds, which is mainly a liquidity premium (due to the fact that semis are less liquid than govt bonds).

    And yet you are trying to say that there is some kind of fundamental difference between the 2 scenarios. That there are “significant implications” present in (1) that are not present in (2).

    If you can convincingly make the case that there is a fundamental difference between the scenarios, then I would be very interested to hear it.

    Cheers.

85. Hi Stone,

    “stocks of money do matter a very great deal because they lead to flows.”

    Consider you could have the causation reversed: ie ‘flows of NFAs do matter because they lead to incomes and some stocks of savings’….something like that.

    SP500: In US current fiscal NFA flows are about $110B/mo. or 330B/qtr. Current SP500 earnings are around 190B/qtr (for qtr ended June). How much of the 330B quarterly flows can the SP500 Cos retain in earnings? forward 12 mo consensus earnings Ive read are about 825B, at the current flow of NFA, approx 1.3T of NFAs will be transferred next year, can the SP’s retain 825B of this? does not sound unreasonable as I think they do have earnings access to some of the external leakages of NFAs as well as purely foreign business profits.

    The recent trend here in the US is that these multinationals are growing earnings while at the same time throwing more people out of their jobs. (See FEDEX latest Qtr results)

    The only thing that could perturb this process is a US govt fiscal policy change. Lets see what the SP500 earnings are for qtr ended September for confirmation of earnings levels and then see what the results of the Nov elections are here in the US to get a read on any fiscal policy changes that may be in store for next year…if the SPs are creeping up it is due to the market discounting these factual events, not QE or some other accounting exercise.

    Resp,

86. The fact is that you cannot produce an empirical example to support your case. Iceland does not help you. Please produce a case where there has been a major exchange rate collapse and resulting meltdown in the financial and real economy of a nation which has been running a persistent budget deficit, a persistent external deficit, floats its currency without exception and has no external debt in a foreign currency.

    The point is that there are few nations with no external debt in foreign currency. If you take the international investment position of any nation, there are major exposures in foreign currencies including the United States. I am talking not just of the government.

    Also what are you suggesting here ? Run persistent current account deficits ? And the best part – Japan the favourite example persists to run surpluses on trade!

    Sooner or later, nations may be forced to issue debt in foreign currency and that immediately rules out giving any such example. Please note, nations are forced. Chartalism cannot bailout the nation.

    How much can the external debt go ? 25%, 40%, 200% ? Any mechanism to prevent it from blowing ? Don’t tell me floating rates do the trick.

    More importantly

    This desire leads the foreign country (whichever it is) to deprive their own citizens of the use of their own resources (goods and services) and net ship them to the country that has the CAD, which, in turn, enjoys a net benefit (imports greater than exports). A CAD means that real benefits (imports) exceed real costs (exports) for the nation in question.

    So the CAD signifies the willingness of the citizens to “finance” the local currency saving desires of the foreign sector. MMT thus turns the mainstream logic (foreigners finance our CAD) on its head in recognition of the true nature of exports and imports.

    So Steve Jobs ships iPhones to the rest of the world and it deprives the citizens of the United States to purchase iPhones ??

    Imports arise out of volitional decisions of the citizens of a nation to purchase a foreign good over a locally made product. It signifies a weakness of the local producers. FDIs cannot be said to be causing current account deficits. There may be FDIs into Japan but that doesn’t make Japan run a current account deficit.

    The quote above is a mixture of Ben Bernanke’s saving glut thesis and Alan Greenspan’s ideas which say that the US current account deficit is due to the decisions of foreigners to “invest” in the United States.

87. Bill,

    There is a claim in the comments that the Australian state government treasury functions clear directly through the RBA.

    Not knowing the facts, I find that difficult to believe.

    Is it true?

88. CURRENCY WARS – A VIEW FROM THE TRENCHES
    

    The talk of a currency war distracts us from the real threat to the economic recovery, which is not to be found in the pace that Asian, emerging market currencies in general, and the yen are appreciating. The real threat is closer to home: coping with the economic and financial fallout from years of excessive leverage and weak enforcement of lax regulation.

    This is an interesting guest post at Pragmatic Capitalism, where The Pragmatic Capitalist (TPC), Cullen Roche, offers daily market analysis based on MMT principles. It’s a good source of data and informed opinion.

89. Ramanan –

    Trying to cut through your copious (and fairly impenetrable, I find) comments, it seems this bit is the nub of your concern with MMT’s emphasis on govts issuing only in lcy: “Sooner or later, nations may be forced to issue debt in foreign currency and that immediately rules out giving any such example. Please note, nations are forced. Chartalism cannot bailout the nation. ”

    How is the US, UK or Australia going to be “forced” to issue in fcy? I simply don’t find this credible. Bond yields are tanking; the private sector has such a high propensity to save right now relative to GDP that they are even lapping up Spanish govt bonds at fairly reasonable yields and Spain isn’t even sovereign. I thought all fcy issuance by sovereign issuers was at their leisure in a misguided drive to diversify funding sources. Are there historical precedents for non-dollarised economics being ‘forced’ by the market to issue in fcy?

    “How much can the external debt go ? 25%, 40%, 200% ? Any mechanism to prevent it from blowing ? Don’t tell me floating rates do the trick. ” – why can’t floating rates be the correction mechanism? I used to be as worried as you are, noting that the UK’s net international investment position was 25% of GDP in 2006. But then by 2008-9 at one stage it had fallen to 6%! Isn’t the whole essence of MMT that without any conceivable govt default, any FX adjustments will be gradual/incremental and so not problematic?

    Bill and others have challenged you to come up with historical precedents for currency crises for sovereign issuers (‘sovereign’ being construed to include a modest % of fcy debt). I reiterate this request – until you do, it’s hard not to write you off as another Chicken Little.

    stone –

    If you’re worried about dynastic accumulation, this should be addressed purely with fiscal means (esp inheritance tax). If the private sector right now wishes to net save ex ante, then an ex ante balanced budget constraint such as you advocate would give full play to the paradox of thrift and be disastrous for GDP. Don’t you agree?

    Ultimately, stone, a balanced budget is very hard to achieve exactly in practice, for many private sector players and also for the govt. This means it makes sense for all parties to err on the side of caution – which obviously means prima facie a small private sector surplus.

    Cheers

90. JKH,

    The states have accounts at the RBA, but I don’t believe they use them for to settle all transactions. They probably have accounts at commercial banks and settle through them.

91. MMT Proselyte says: “How is the US, UK or Australia going to be “forced” to issue in fcy?”

    Why do any nations issue in foreign currency if they do not have to?

92. JKH:

    RBA does have an ovedraft facility which lends only for a week, at the market rate, to smooth out possible cash shortfall between weekly security issues. The overdraft has to be covered by the next issue:

    “It is not possible to ensure that the Australian Government’s need for funds are exactly matched day-by-day by issues of securities to the market. For one thing, issues generally occur only weekly. To overcome this mismatch between daily spending and financing, the Treasury keeps cash balances with the Reserve Bank that act as a buffer. The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender. ”

    http://www.rba.gov.au/monetary-policy/about.html

    The feds dos not have a similar overdraft provision, apparently they can “ensure”.

93. JKH (re-posting since the link did not get through):

    JKH:

    RBA does have an ovedraft facility which lends only for a week, at the market rate, to smooth out possible cash shortfall between weekly security issues. The overdraft has to be covered by the next issue:

    “It is not possible to ensure that the Australian Government’s need for funds are exactly matched day-by-day by issues of securities to the market. For one thing, issues generally occur only weekly. To overcome this mismatch between daily spending and financing, the Treasury keeps cash balances with the Reserve Bank that act as a buffer. The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender. ”

    [Link]

    The feds dos not have a similar overdraft provision, apparently they can “ensure”.

94. JKH:

    An irrelevant comment re. state clearing.

    Please ignore.

95. Gamma – as an ex-banker (not sovereigns), I’m fairly certain that bankers’ standard schpiel to treasury depts is “issue a bit in fcy; you don’t need to, but it’s cheaper today and will improve your prospects of being able to access a market with strong funds flow dynamics next time you want to issue; and these benefits offset the obvious ccy mismatch”.

96. Thanks TomH: Oct10 at 15:15 and Stone: Oct10 at 19:44

    So, in my lay understanding, we have a number of parameters:

    1) One humanity, one planet, limited resources (not another globe like it for light years around)!

    2) A limited plot of arable land, water – capping the food supply: from what I have read there is enough food available for the current population if the political, monetary and distribution problems were overcome; however current population projections far exceed the available food supply given current technology, including visioned advances.

    3) The only voluntary sustainable control over population growth is education.

    4) Similarly, there is an expanding energy and environmental problem, largely associated with exponential population growth and lack of care since the 1800’s.

    So, all of the petty political and religious posturing, back slapping, self congratulations, and imaginary goal accomplishments – even expansion and contraction of the economy, look like something of a fools sideshow in this context; distracting us from the basics.

    (For Tom): 800 American military bases is a measure of fear. People all over the world live in fear; it’s huge, they don’t like it, and have ever desired peace. (e.g. I don’t know why Americans bother with home security – (jokingly) who in their right mind would want the place: imagine trying to keep 306M Americans tucked in bed)?

    Respectfully Stone et al, I don’t think we can sheet everything home to expanding currencies or even whole monetary systems. Human beings are complex, and proliferating – the humble potato and grain of wheat/rice have had major effects within the species. Desire is rampant; concepts multiply every day; egos are strong!. The pressures on all species and the planet are growing and a just and structured mental approach must be at least, a small part of the solution. Human beings will just have to learn to think clearly, cooperate, look after, like, and manage themselves. Whether or not the species is up to it – well, I believe after much totally unnecessary pain and suffering (because as a species we aren’t all that bright) – we will persist. On the evolutionary clock we haven’t been around for all that long – and the unfoldment has been fast!

    Well, at the very least we can enjoy being alive each day, regardless!

97. @Ramnanan

    Hi Ram,

    Can we look at Armenia. How does Armenia (land-locked, politically bypassed by rail, small % of arable land, lack of exportable NR, etc)…if they want electricity for their people, how dow they get GE or Siemens to sell them generating equipment if GE wants to get paid in USD or Siemens wants to get paid in Euro? How does Armenia get the foreign currency to do the deal? Or do they have to live in the dark?

    Resp,

98. MMT Proselyte:

    “Bill and others have challenged you to come up with historical precedents for currency crises for sovereign issuers (‘sovereign’ being construed to include a modest % of fcy debt). I reiterate this request – until you do, it’s hard not to write you off as another Chicken Little.”

    The point gets completely missed. Here is a para from McCombie and Thirlwall’s book “Economic Growth and the Balance of Payments Constraint”

    It has been argued by some commentators that there is no need to be concerned about the current account deficit since the level of overseas borrowing is now determined by the private sector on the basis of commercial calculations about the costs and benefits of such a course of action. The only difference between borrowing domestically and abroad is that a risk premium is attached to the latter because of the volatility of the exchange rate. Any excessive borrowing overseas will be self-correcting as the cost of borrowing rises with an increasing risk premium as the deficit grows. The problem with this argument is that the resulting adjustments are neither smooth nor gradual. As the overseas debt to GDP ratio increases, the world financial markets become increasingly nervous about a collapse in the exchange rate with the consequent capital losses; once the exchange rate starts to fall, speculative actions are likely to be destabilising, leading to a rapid fall in sterling with the possibility of a vicious inflationary-depreciation circle occurring. The use of high interest rates to defend sterling has an externality effect of pushing the domestic economy into recession with adverse effects on investment and employment, even when there is existing unemployment. The Period of floating exchange rates from 1971 saw a number of spectacular examples ot the balance of payments constraining domestic macroeconomic policies. The sterling crisis of 1976 comes readily to mind, when the Labour government’s attempt to reduce unemployment in the face of excess capacity foundered on the balance-of-payments deficit and the collapse of sterling. Between early March and early June 1976, the effective value of sterling fell by a little over 12 per cent. Nevertheless, the government tried to keep interest rates low to encourage an increase in investment. As a result, sterling fell by a further 9 Per cent between early-September and mid-November. The fall in the exchange rate eventually caused a volte-face in economic policy; the minimum lending rate was raised from 9 Per cent in April to 15 Per cent in November 1976 and severe cuts in the PSBR were agreed with the IMP. Other examples include the failure of the ‘Mitterand experiment’ in 1982 at boosting growth, and the problems of the Italian economy during 1980-1981. The 1980s have also shown that even the US is not immune from pressures engendered by a balance-of-payments deficit.

    The point gets simply missed. What is proposed and what I am arguing against is this:

    Most governments and their central banks restrict demand as a result of the external factors even though they are not resource constrained and other measures such as capacity utilization are not high to warrant such an action. This is the Thirlwall’s law in words.

    Now you want a situation in which governments have not done this – which is not the easiest to find! I though have provided one example – Iceland!!

    You want the government to be not worried about this – the example will come only after the ‘experiment’ has been performed.

    Now China has done the opposite and made sure that net exports are fantastic. Not that I support its policies – just giving an example for you to look and see how someone has used it in the opposite extreme. In the situation we are discussing, a nation keeps importing stuff (because imports are benefits) and doesn’t really matter because its supposed to signify someone’s desire to save in your *currency* – do the oil sellers desire to save in the poor nations’ currency ?

99. McCombie and Thirlwall: “As the overseas debt to GDP ratio increases, the world financial markets become increasingly nervous about a collapse in the exchange rate with the consequent capital losses; once the exchange rate starts to fall, speculative actions are likely to be destabilising, leading to a rapid fall in sterling with the possibility of a vicious inflationary-depreciation circle occurring.”

    This threatened inflationary-depreciation cycle could be spelled out more. The rising cost of imports would probably increase the cost of domestic goods and services, as demand shifted. But it would normally be by a lesser percentage, right? But what is the next step? How would the rise in the prices of domestic goods and services increase the prices of imports? But let us assume that that would happen, and there is a cycle. Under what conditions would it not be convergent?

    M & T: “The use of high interest rates to defend sterling has an externality effect of pushing the domestic economy into recession with adverse effects on investment and employment, even when there is existing unemployment.”

    Ah! The defense of sterling! (I. e., of the exchange rate.) Well, that violates the principle of letting exchange rates float, doesn’t it?

    M & T: “The Period of floating exchange rates from 1971 saw a number of spectacular examples ot the balance of payments constraining domestic macroeconomic policies. The sterling crisis of 1976 comes readily to mind, when the Labour government’s attempt to reduce unemployment in the face of excess capacity foundered on the balance-of-payments deficit and the collapse of sterling.”

    It would be quite interesting to see an MMT treatment of that crisis.

100. jrbarch “Well, at the very least we can enjoy being alive each day, regardless”-those are very wise words. I keep trying to resolve to just ignore everything I dislike. I’ve wondered whether the SETI program will never find life because the time between using radio waves for communication and planetary self destruction ends up being so brief :).
     MMT Proselyte “If you’re worried about dynastic accumulation, this should be addressed purely with fiscal means (esp inheritance tax). If the private sector right now wishes to net save ex ante, then an ex ante balanced budget constraint such as you advocate would give full play to the paradox of thrift and be disastrous for GDP. Don’t you agree?”- If there was enough fiscal spending (eg a “citizen dividend” as per Milton Friedman (boo hiss) and perhaps if needed essential infrastructure projects etc) in conjunction with a wealth tax that balanced the budget- then there would be asset price deflation (and so “bad” nominal GDP numbers) BUT the work that needed doing would be done, people would be able to provide for themselves and by any sensible real measure the economic system would have improved.

101. Two idiots commenting on things they know nothing about in one weekend (well maybe one who should know better).
     Wayne Swan moaning that other nations are intervening to keep their currencies articifially weak to support exports and that great Qld donkey Bob Katter saying that the fair valur for the AUD is usd0.60 (“somewhere like after the Keating comments”).

     With the AUD up here what a perfect time for the Govt and private industry to be importing capital goods to help expand capacity for future production.
     If these dopes listened to their industry advisors just occasionally they might realise that commodity prices inversely track the USD and that terms of trade are extremely favourable at present before declaring Australian export industries about to implode.

102. Dear Stone,

     If I could (extrapolating from SETI) “explore, understand and explain the origin, nature and instance of jrbarch in the universe” then that alone would be challenge enough for me! My chances are infinitely conditional and serenditious so I do concur: simple wisdom says stick to enjoying each day. And yes – focus on something you do like!! Yesterday is gone forever. Tomorrow never arrives! We are stuck in today, each moment – until one day, for us, it does not arrive. Until then, any sunset/sunrise will tell you: Life was meant to be celebrated and enjoyed! If I were in SETI I would do that first, then look for Life’s origins on Friday afternoons (after reading billy blog of course)! Cheers …

     jrbarch

103. @Stone
     I posted this “light” comment because I found the rogue economists post genuinely funny but also because the tactics for developed countries with surplus trade look obviously absurd and insane but are with us in reality.

     Now Germany has introduced shorter hours and the government subsidizes this scheme. But this is only an emergency policy. It will run out. For a more general sane economic policy I think we’ve to destroy the public bias/myth to be export-world-champion today, tomorrow and forever is a beneficial thing in itself.

     I don’t want to wade in the very sophisticated and technical discussions going on here. But I would like to note that there’s something like an FX market which is with us for quite a time. Now everybody who knows one or two FX traders als knows that these guys are very often spectacularly wrong in currency valuation. The FX market is notorious for being not aligned to what goes on the real world. Maybe I’ve missed it but I haven’t read in ante TGR years many pundits worrying about the FX market and wishing to reign in this inefficient global casino because its harmful for global trade balances.

     The only proposal in regard to the Chinese currency I’ve read so far which merits a discussion was on Vox.eu. The Chinese government may impose a pollution/carbon/green tax on exports. Such a tax can surely compensate Chinese citizens for some nasty externalities imposed on them by foreign importers. It would also be seen as a bold move by the Chinese government to recognize the problem of pollution and climate change. It will certainly comfort the wish of the US public to see Chinese export prices rise relative to the US dollar. And who knows: maybe leading US climate change deniers will have a harder time. My prediction: it will mostly shift demand to export nations with free for all pollution/exploitation policies.

104. @Stone
     I posted this “light” comment because I found the rogue economists post genuinely funny but also because the tactics for developed countries with surplus trade look obviously absurd and insane but are with us in reality. (For whatever reason WordPress doesn’t like the rest of my comment 😉

105. @Stone
     Please ignore the last comment. I didn’t get that there are so many comments that WordPress put mine on a new second page. May fault.

106. Gamma October 11, 2010 at 7:13,

     Gamma – again I don’t have the facts, but I expect that if they were available, you might find that the State treasury functions actually have lines of credit and credit limits with the commercial banks.

     This aspect of credit limits is the most interesting operational difference in my view between the sovereign “currency issuer” and the government levels below that. Clear limits on the one hand; somewhat open ended idea about lack of constraints at the other.

     I doubt very much that the actual banking relationships at the lower government levels are public. But somewhere there must be a general description of the nature of such arrangements. Couldn’t get anywhere on Google though.

107. Ramanan – I’m sorry but I am finding you ever more opaque.

     “Most governments and their central banks restrict demand as a result of the external factors even though they are not resource constrained and other measures such as capacity utilization are not high to warrant such an action. ” – I’ve no idea what you mean. Can anyone else paraphrase to make clearer?

     You bring up Iceland, but as has been pointed out, the country was one tiny hedge fund, plus they must have had loads of non ISK debt – ie non sovereign.

     I agree with Min that the 1970s period appears of interest; unfortunately, your example of the UK is pretty useless as a necessary condition for the 1976 sterling crisis was the UK trying to maintain a dirty peg – ie, in MMT terms, the UK was abdicating its sovereignty. Does Thirlwell have any other examples? How does he flesh out his US BoP constraint argument?

     stone – I think I probably agree, but the level of wealth tax reqd would be a political non-starter (and critically – even more politically unpalatable than the level of full-employment deficit spending MMT prescribes…)

     Cheers

108. MMT Proselyte, I’m interested to hear that a wealth tax sounds less palatable than the current smorgasboard of different taxes. A wealth tax instead of the current taxes would mean that most people would be paying massively less tax (as wealth is currently so unevenly distributed). The citizens dividend would mean that people currently “on the dole” could take any work without it cutting into their benefits. I’m left scratching my head as to why we continue to let a handful of oligarchs dictate terms to us.

109. Stone – brainwashing runs deep. Surveys indicate that maybe 50% of Americans think they’re in the richest 10%…

110. MMT Proselyte Even if they were in the richest 10% they would pay less tax. Its the 0.01% who have the distorting levels of wealth- and they are not even remotely likely to ever spend much of it.

111. MMT Proselyte,

     Thirlwall’s law is valid for most nations except the US and Japan.

     I am going to end this here – if you see the posts in recent months, I have been insistent on many points. I have also been promising to not write on this anymore 🙂

     On the question of Iceland – of course, as is always the case, one can make all kinds of arguments. Here is a fact – a nation facing devaluation of its currency can only survive by making discretionary attempts to increase exports and come back to a trade surplus. The nation’s products may get the advantage of price competitiveness but non-price competitiveness is more important. Why would foreigners buy your product ?

     More importantly, I do not wish to be associated with analogies such as hyperinflation etc. What I am saying is that nations want to be a creditor to the rest of the world rather than a debtor. If imports are high, they will definitely face currency pressures and the only way to come out of it is to target a trade surplus. No one has seen the future and nations want as high a trade surplus as possible. Fact of life 🙂

     The US has had major issues with trade imbalances – I find the solution of just relaxing fiscal policy alone without improving the trade performance silly. In fact, in the real world that is what is happening – Geithner has been trying continuously to do something and Obama has promised to increase exports. Nations want to be net exporters and that is the reason one talks of currency wars etc.

     Of course, they shouldn’t be worrying about fiscal deficits but fiscal policy alone will not solve US’s problems.

     Now most economists – mainstream or non-mainstream agree that imports reduce demand. In the US, the reduction of demand was not seen because of increase in demand created by private sector borrowing. When the private borrowing could not continue any longer, the effect of the trade deficit came back with a revenge. Now one can argue that the US could have relaxed the fiscal policy long back but that would have let the external deficits processes go on forever leading to both the public debt and the indebtedness to foreigners rising to unsustainable levels. The US should have targeted net exports long back by depreciating its currency and by support to the export industry.

     Coming back to my point you quoted. Here is from Marc Lavoie’s text Introduction To Post Keynesian Economics, Page 125

     Indeed, according to authors like McCombie and Thirlwall (1994), most governments impose severe constraints on growth as a response to external disequilibria arising from the overly rapid growth of imports. These countries have the means and the resources to grow rapidly, and they generate a domestic aggregate demand that is actually more than sufficient to justify a strong capital accumulation. Yet, these countries are constrained by a negative current account.

     It is true that a surplus in the capital account, arising from the influx of foreign capital, can easily compensate for the negative current account. But such a situation can only be a temporary one for countries other than the USA, since its currency serves as an international reserve asset. Indeed, countries cannot tolerate such current account deficits for too long because of the interest and dividends that must be paid on the accumulated external debt and foreign investments. In the long run, therefore, the current account must be balanced and imports must, at most, be equal to exports.

     The point is that when nations run into current account deficits, they tighten fiscal policy to reduce demand and since imports depend on demand, it is hoped that imports are reduced. Exports on the other hand depends on demand in the foreign countries and won’t be affected much. Now whether you like it or not is a different matter, but thats the game. They also target exports but the first step is curbing demand.

     Now my comments are to highlight the fact that doing the opposite is a highly unsophisticated solution. The only way is for everyone to come together and decide how to trade with one another. Fiscal policy will then be the winner.

112. JKH,

     All Australian state govts issue bonds and notes directly into the primary market. Some of them may also have credit lines at commercial banks (the smaller states perhaps) but I think this would be secondary to bond funding.

     The biggest two issuers are Queensland with AUD 61.5bn outstanding and New South Wales with AUD 43.5bn outstanding. For comparison the Federal govt only has about 165bn on issue.

     For these 2 state issuers, something like 30% to 40% (my quick estimate) is in lines which are guaranteed by the federal govt.

     I have put the question to Bill, but he has either missed it or chosen not to answer, perhaps you could hazard a try:

     What is the fundamental difference between debt issued by the state govts to debt issued by the federal govt? Why does MMT theory claim that a govt bond adds to NFA while a semi-govt bond does not given that:

     1) Semi-govt bonds are repo-eligible. They can be presented to the reserve bank in exchange for settlement funds exactly like govt bonds.
     2) Some semi-govt issuance is guaranteed by the fed govt anyway
     3) In the monetary system AS IT CURRENTLY STANDS neither the federal govt or the state govts are “sovereign currency issuers”. The currency issuer in Australia is the Reserve Bank of Australia, which is independent of government. All govts federal and state must borrow to cover deficit expenditure – this is a fact, like it or not.

     My view is this. There is not a hard and fast distinction between “sovereign” debt and “non-sovereign” in this case. It is more a matter of degree, than of fundamental difference. So therefore the theory that we can analyse the economy by looking at the level of NFAs (as defined by MMT) is flawed. The idea of “Net Financial Assets” as being something particularly useful to look at is a red herring.

     It tells us very little, and in fact actually masks certain things which are of importance, such as semi-govt borrowing and spending which it dismisses as less important because “it all nets to zero” (whatever this actually means) within the “non-govt sector”.

113. The only voluntary sustainable control over population growth is education.

     Actually, economic development reduces population growth.

114. Now everybody who knows one or two FX traders als knows that these guys are very often spectacularly wrong in currency valuation.

     I know fx traders that have done spectacularly well for a time, only to be spectacularly wiped out later. Their excuse is the same: Governments rigged the market. Of course, that is impossible to prove.

115. Gamma,

     I believe the MMT theory would be that the federal government can change the institutional mechanism for borrowing and eliminate it, effectively backing into the central bank for all “funding” (i.e. simply by “crediting bank accounts” and creating banks reserves in the process).

     The state governments don’t have the same flexibility, assuming they would be under commercial bank credit limit restrictions if they chose not to issue or could not issue bonds.

     Those same credit limits would apply if the commercial banks bought state bonds and repo’d them at the central bank. It isn’t the central bank facility that restricts credit availability in that case – its commercial bank credit risk to the state borrowers. And the state governments can’t come directly into the central bank for funds.

     But I agree that it’s a question of degree. If you group the federal government together with the states, it would seem both have the capacity to generate NFA based on that group definition.

     I think the distinction in degree boils down to my point on credit limits. The federal government is far less restricted and has more fire power because of both its size and its “currency issuance” potential. It effectively “owns” the bank – given its option to change the institutional requirement to borrow.

116. Dear Gamma (at 2010/10/12 at 2:59)

     First, the Australian government has chosen to impose the voluntary arrangements with respect to the conduct of fiscal policy. It can change them any time it chooses. The state governments can never change them and will always have to fund themselves in a way similar to a household.

     Second, you will say that the central bank (RBA) is independent whereas I will point out the facts that this is also by convention. The Australian government chooses the Board of the RBA, it can overrule any RBA decision and given the RBA is a legislative contrivance of the Federal government it could vote to collapse all RBA functions into the Treasury whenever it wanted to. The government could also order the RBA to credit any bank accounts it desired any time it wanted that to happen with no debt issuance at all. The state governments could never achieve that.

     Third, the Australian government can disband the Australian Office of Financial Management whenever it chose just like it set it up by choice. The state governments could never do that.

     The fact that the federal government behaves as if it is facing a financial constraint is purely political and can be altered any time it wanted. The state governments, by definition, will always be financially constrained. MMT demonstrates that fundamental difference and the implications of it. MMT shows that the financial constraints on the federal government are political and voluntary. The mainstream textbooks etc try to make out that the constraints are intrinsic and therefore misrepresent the facts.

     I did not ignore your point – I just thought the flaws in it were so obvious that I didn’t think I should respond.
     best wishes
     bill

117. JKH,

     So MMT theory asserts that a hypothetical possibility (the fed govt changing the present currency arrangements) mean that the two assets that share very similar characteristics (and investors) are actually fundamentally different.

     I don’t think it’s reasonable to seperate the federal and state govts and suggest that they are fundamentally different animals. In exactly the same way that the central bank would come to the aid of the federal govt (or the current arrangements would be abandoned/revised as you speculate) the CB or federal govt would come to the aid of the states if they were similarly threatened.

     There is a very good reason they are called semi-govt issuers – there possess an implicit “sovereign” guarantee, which is perfectly well-founded. In fact, some of their bonds (as I mentioned above) actually have an explicit guarantee.

     I guess I would agree with you that state govts do effectively face a tighter credit limit (to use that term) than the federal govt, but in my experience it is effectively a very small difference.

     Perhaps the Australian situation is unusual. During the 90s and 00s when the federal govt was running budget surpluses and retiring debt, the states were running deficits and issuing debt. So state debt began to replace or augment govt debt in many ways. In fact the fed govt wanted to retire ALL govt debt, and it was only because they were convinced by the financial markets that we needed enough bonds to support a liquid futures market that they did not.

     Therefore I would suggest that for the idea of using NFAs as any sort of useful metric, you would have to classify much/most of the semi-government debt as NFAs (at the very least, the explicitly guaranteed lines).

     Then you would have to start questioning whether you should include other assets in the economy which are also explicitly guaranteed by the federal govt. In Australia there is a lot of bank-created assets which are guaranteed – bonds and deposits. Therefore you probably need to include these as NFAs. If not, why not?

     At this point the previously neat and appealing concept of a binary distinction between “assets which net to zero” and “NFAs” is starting to crumble and become less and less useful considering all the exceptions we are making.

     At this point, you might come to the conclusion as I have, that it is actually a graduation rather than clear distinction.

     Therefore it is more useful to consider assets on the basis of how much default risk they carry on a sliding scale between the two extremes, not whether they are “net positive” or “net to zero” which I think is actually quite an ill-defined distinction to make.

118. Bill,

     “The state governments, by definition, will always be financially constrained. MMT demonstrates that fundamental difference and the implications of it.”

     2 quick questions:

     1) Do you consider semi-govt bonds which have an explicit federal govt guarantee to be NFAs? The existence of these lines suggest that that the “financial constraints” facing the states are perhaps not as strong neatly-defined as you make out.

     2) Do you think there is any significance in the fact that all semi-govt bonds are repo-eligible at the RBA?

119. Gamma October 12, 2010 at 6:52,

     Interesting line of thinking, thanks.

     There’s more than one way to split the atom.

120. Ramanan, you several times made this claim: \”What I am saying is that nations want to be a creditor to the rest of the world rather than a debtor.\”

     I am sorry but you are making an false aggregation here. I, as an arbitrary citizen of arbitrary country living in another arbitrary country, want to have higher income and lower prices. That is all I want in material sense and will ever want. Your claim above is completely false. If you ask a nation about what it wants I am sure-sure you will get the answer I gave above.

     What comprises cheap prices is pretty clear and if imports can provide cheaper prices so let it be imports. However what comprises higher income is an open question where some issues with aggregation and distribution might arise. You claim that intentional lowering of living standards by shipping goods produced locally abroad in exchange for financial income is a more prudent way to get financial income when compared to government\’s fiat capacity. You next claim that it is true because there might be a point in time in the future when the latter option can threaten something without specifying what. So playing along your argument and assuming that it is really not \”if\” but \”when\” then in order to get any credibility you have really specify what it is that will happen whenever it happens. You might have a proper worry and I believe many people here would by empathic to your worry but a worry does not make an argument. Pretty much like the fact that some people are worried to fly does not make an argument that flying is dangerous. On the contrary flying is one of the safest means of transportation.

     And please also note that once you outline what might happen there is nothing that can stop you from getting ready for such scenario.

121. Sergei: the average Joe in the nations receiving USD in exchange for real goods might not be quite so delighted with the terms of trade as the elites who call the shots and all ready have so much that money means more than real goods to them. That average Joe might fly a plane into a sky scraper- just a hypothetical example of the kind of things that might happen if there is a blatently inequitable system.

122. Sergei: I guess the way to get ready for such a scenario is to invade any nation that quibbles with accepting USD for oil.

123. Sergei,

     “I am sorry but you are making an false aggregation here. I, as an arbitrary citizen of arbitrary country living in another arbitrary country, want to have higher income and lower prices. That is all I want in material sense and will ever want. Your claim above is completely false. If you ask a nation about what it wants I am sure-sure you will get the answer I gave above.”

     I thought Obama wants an export-led growth. Other nations too are in the “currency wars” – because they want to be net exporters.

     Your claim is true but doesn’t contradict my claim.

124. Ramanan, Obama etc. want to be exporters because they still live in the gold-standard mentality where exports were a critical ingredient required to grow money supply and economy. The world has changed. So do no stick to history. Every nation with floating currency can grow its economy without any need to export.

     Some people are scared to fly but it is an extremely safe and fast way to get to the destination.

125. “What we need to do on a multi-lateral basis is to curb the financial sector and force it to correspond only with the needs of the real sector. This would require large policy shifts which would outlaw most of the current trading behaviour and would require speculative behaviour to be advancing the stability of the real economy.”

     I do like the way you tack this on the end like an after thought. Since we have a credit system with a stunted fiat system attached like a withered appendix, surely MMT is subordinate to the financial system. All MM theorising is moot, without addressing exponential credit creation first.