I am still catching up after being away in the UK last week. I will…
Right for wrong reason equals wrong
I read two articles in the last few days which tell me that the bond market traders generally do not understand the intrinsic characteristics of the monetary system and that IMF economists have even less of a clue. The bond traders attribute to themselves an air of importance that it not a reflection of their real role in the monetary system. However, my own profession continues to disgrace itself and is nothing more than a propaganda machine. The mainstream economists are too stupid to realise that their models and frameworks do not explain anything that we are interested in. But such is their position of dominance in the policy space that their neo-liberal grandstanding is given credit. It is embarrassing but worse it is dangerous. Anyway, sometimes a journalist comes to the correct conclusion but for the wrong reasons. While the conclusion is correct, the erroneous reasoning does as much damage by way of misinformation than if the overall conclusion was also wrong. It is a case of being right for wrong reason equals wrong.
I considered the views of US House speaker John Boehner in this blog – Employers have too much power referring to them as bone-headed. I note that the expression “boenality” is emerging from the Internet. His views are banal but they are much more than that.
In my view, having a senior politician having such a poor technical grasp of major topics (macroeconomic policy) that he pontificates about is a danger. His statements are just plain wrong in a technical and operational sense. To then push for policies that are based on these statements amounts to vandalism.
In a recent speech that Boehner made he really set out the scale of his ignorance on such matters. The speech was made to the Convention of the National Religious Broadcasters on February 28, 2011. As a non-American I found the religious references – that God basically motivates, creates and determines everything – to be sort of unreal. But then I know Americans get off on that sort of stuff.
But the tone of the speech apart, when he tried to articulate his understanding of matters macroeconomic the wheels really fell off.
Consider this statement:
You have fulfilled the Scripture’s call to be not just hearers but doers of the Word.
“I come here tonight because we are called together to be doers.
“Right now, freedom and free expression are under attack by a power structure in Washington populated with regulators who have never set foot inside a radio station or a television studio.
“We see this threat in how the FCC is creeping further into the free market by trying to regulate the Internet.
So apparently the “free market” (a textbook construct not seen in the real world) is the exemplar of freedom and free expression. But in that construct who is free? Answer: those with dollar votes (capacity to buy) – the more dollars the more votes. If you have no dollars you are coerced.
I am not about to stamp out a person’s right to believe – no matter how kooky the belief is – and Christianity is about as kooky as it gets. But I find it insidious in the extreme when the religious right try to tie their theological belief system into neo-liberal structures that pervade mainstream economics.
There is no basis for it other than to gain political legitimacy for invoking economic policies that favour the power elites and damage the disadvantaged and poor even more. There is nothing virtuous about a “free market”. Regulation is not a scourge against our inalienable rights. It is a response to the abuse of power that coerces and steals from others.
But that is an aside. Boehner then made the following macroeconomic-moral philosophy pronouncement.
In my view, America’s ‘Sputnik moment’ is our shocking national debt.
Now surpassing $14.1 trillion, our national debt is on track to eclipse the size of our entire economy this year. In other words, we’re broke. Broke, going on bankrupt. Just as a bankrupt business has trouble creating jobs, so does a bankrupt country.
Italy, Spain, Greece, Ireland – even France – face sovereign debt crises and social unrest. Much of our debt has been bought up by China and Japan. Gas prices are rising.
Economists have laid out the nightmare scenarios we may soon confront. One is known as ‘capital flight.’ This occurs when businesses stop investing and investors lose confidence, causing interest rates to rise, the debt to skyrocket, and the standard of living to fall.
But we are now at risk of losing a much more potent source of capital. That is the moral capital we gain from having a society that honors freedom and opportunity, and protects these values for our children and grandchildren.
Consider that a child born on this night will immediately inherit a $45,000 share of our national debt. By the time that newborn is getting ready to visit colleges, Medicare, Medicaid, Social Security, and the interest on our debt will consume all government revenues.
Here we must speak the truth. Yes, this level of debt is unsustainable. It is also immoral.
Yes, this debt is a mortal threat to our country. It is also a moral threat.
It is immoral to bind our children to as leeching and destructive a force as debt. It is immoral to rob our children’s future and make them beholden to China.
No society is worthy that treats its children so shabbily.
That is about as manic (and wrong) as it gets. It almost reads as a parody on the deficit terrorists. The way Boehner starts with technical errors then leads up to the revelation that running a budget deficit is immoral and a “mortal threat” is breathtaking.
All the errors are there to see:
1. “Shocking debt” – the public debt for a sovereign nation (that is, one that issues its own currency) cannot be “shocking”. It means that the manifestation of non-government financial wealth held as bonds is shocking. Financial wealth is one measure of success in a material society. But, it makes no sense to be “shocked” by the outstanding public debt. As it matures it is paid off. A guaranteed income flows from it while it is outstanding. It is risk free. What can be shocking about any of that?
2. Erroneous conflation of household/private sector budgets with government budgets. There is no valid analogy. Households use the currency, governments issue it. Households have financial constraints, sovereign governments do not. The US can never become bankrupt in the sense that the US federal government is unable to meets its obligations denominated in US dollars. It is a lie to say otherwise.
3. Erroneous conflation of monetary systems – the nations mentioned are in the EMU and surrendered their currency sovereignty and face the risk of insolvency. The US government runs a fiat monetary system which it controls as a monopoly – and has no insolvency risk. It is a lie to say otherwise.
4. What gas prices have to do with a nation’s capacity to run an independent fiscal strategy is beyond me. Presumably, he is trying to link the public deficits to inflation. That argument will not hold in the current environment.
5. Productive capital finds it very difficult to “take flight”. Machines and buildings are bolted to the floor. If private businesses won’t invest and households are trying to increase their savings then the only way the economy will grow and renew the confidence of the private investors is for the government to fill the spending gap.
6. Budget deficits put downward pressure on interest rates. The interest rate structure in place is largely the result of central bank decisions. The rising public debt is supporting the US standard of living and preventing its from collapsing. If the US federal government had not intervened fiscally the economy would have headed into depression with much more serious losses than have already been sustained. The fiscal intervention was too small.
7. There is no burden on the future generations from the rising public debt in the US. Taxes are not raised to pay back the deficits. There has never been a time in the 100 years when the US government has paid off its debt by running surpluses equal to all past deficits. It is a lie to say otherwise.
8. The descent into religious morality means Boehner has given up the economic argument (because his claims are not supported by an understanding of the monetary system or the facts on hand).
9. The US is treating its children very shabbily – but that is because the Government is running scared as a result of the pressure from the likes of Boehner and not creating the necessary jobs that are required. Children who grow up in jobless households inherit the disadvantage and take the losses into their own adult lives.
Anyway, it was interesting to read an article from a Bloomberg journalist (March 7, 2011) – Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech – which came to the right conclusion (US being “broke is a figure of speech”) but for the wrong reasons (what the “bond” markets are doing).
It is a case of right for wrong reason equals wrong.
The article (by David Lynch) said that:
Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.
It is categorically wrong and an outright lie.
Lynch quotes a “global head of currency strategy” type from New York who said:
The U.S. government is not broke … There’s no evidence that the market is treating the U.S. government like it’s broke.
Which means that neither understand the actual situation. The correct statement is that the US government can never be broke in terms of not being able to honour all obligations denominated in US dollars.
What the bond “market” thinks is irrelevant. They always want to subscribe more importance to themselves than they actually have.
Moreover, being broke is not about being able to borrow or not. It is about being able to spend. The US government will always be able to spend its own currency.
Yes, there might be a time (hopefully) that the economy is at full employment and further spending would be inflationary and have no further real effects. But even in that situation (mindless as the additional spending would be) the US government could still spend and drive up prices.
But the more realistic situation is that the economy has excess capacity (because of policy failure) and the US government spending supports real production and employment growth.
The US government can never be “broke” because it can always spend. End of story. What the bond markets do or think is irrelevant.
Why? Answer: the US government is not financially constrained and can spend whenever there are things available for sale in US dollars.
Lynch claims that things are okay because:
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
All statements are totally irrelevant if not technically in error.
The rate at which the US government has to borrow does not limit its capacity to spend. The US government does not need tax revenue to spend. So the so-called extra capacity because tax revenue is low is without meaning.
Lynch then claims:
To be sure, the U.S. confronts long-term fiscal dangers. Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.
I just love it when these journalists think they will have no credibility unless they repeat the “long-term fiscal dangers” worry somewhere in their articles – usually followed by some asinine statement about pensions not being able to be paid down the track.
What, exactly, are the “long-term fiscal dangers”? Insolvency? Impossible. Rising cost of borrowing? Irrelevant. What else? Answer: this is just mindless hyperbole without any substance.
Lynch building on Boehner’s erroneous analogy between family budgets and the budget of the US government says:
A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.
The correct statement is that the US government budget is not a super-sized household budget and all such comparisons are void of meaning. The further correct statement is that the US government can always pay its bill. What “investors” say is irrelevant.
The impossibility of US government insolvency is not dependent on the opinion of investors – it is an intrinsic feature of the fiat monetary system.
Lynch makes an interesting point:
Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the G20.
This amused me. It shows how the stupidity of the US politicians making statements based on ignorance as created a market for insurance that is totally unnecessary and just funnelling wealth into the hands of a few.
There should be no default risk insurance market for any sovereign government’s debt. Insurance is about risk. In this case default risk. If there is no default risk intrinsically then there should be no market. That certainly should be the case for the US federal debt.
But the default risk can be sold because of the way the US politicians behave and it is possible (though highly improbable) that the religious right zealots will go crazy one day and voluntarily default on public debt even though there would never be a technical reason to do so.
What a joke!
Another myth is also rehearsed in this article. Lynch quotes a “senior economic advisor” bank-type from London who says the low risk of US default is because the US dollar is the international reserve currency:
You have the reserve currency … You can print as much as you need. So there’s no question all debts will be repaid.
Yes, Yes, irrelevant.
Yes – the US dollar does play a global role as a reserve currency.
Yes – the US government can print as much as it needs whenever it likes.
Irrelevant – the two statements are not related.
The Australian federal government has no default risk. It can spend what it likes whenever it likes. It is not a reserve currency. All sovereign governments (which issue their own currencies under monopoly conditions) can repay all obligations denominated in the same currency whenever they arise.
Lynch repeats the point that the bond markets are lending “the U.S. money for longer periods at interest rates that are below long-term average” and cannot get enough of the public paper. He chooses to quote a “a finance professor at New York University’s Stern School of Business” (Edward Altman – be warned – students do not study in this school – you will be fed with nonsense rather than educated).
Altman “created the Z-score formula that calculates a company’s likelihood of bankruptcy” which has nothing at all to do with the US government’s fiscal capacity. Again, the erroneous conflation of household/company budgets and the budget of a sovereign government.
Anyway, Altman was quoted as saying:
You are never broke as long as there are those who will buy your debt and lend money to you.
As above! Being broke is about your capacity to spend not borrow.
We read more drivel from “a former advisor to President Bill Clinton” who claims:
… he saw how bond investors could determine the success or failure of economic policy.
That is an outright lie. Bond investors cannot “determine the success or failure of economic policy”. If the sovereign US government announced it would introduce a Job Guarantee overnight they would be able to start offering jobs and paying wages irrespective of what the “bond investors” thought.
Same for any spending policy. The Job Guarantee might fail because of administrative incompetence or no-one might turn up for a job but what the “bond investors” thought would be irrelevant.
Please read my blog – Who is in charge? – for more discussion on this point.
The nonsense goes on. So it is a case of the author having the correct overall conclusion – the US government is not broke (and cannot be) – but has arrived at those conclusions using aberrant logic.
Which brings me briefly to the second article (March 8, 2011) – Fiscal space in advanced countries – which demonstrates the poverty of my profession in spades. It was written by two IMF economists and a US academic economist.
I won’t provide a detailed critique as I haven’t the time. The essential story is the repetitive mantra that we hear from the mainstream macroeconomists every day:
Financial bailouts, stimulus spending, and revenue declines during the Great Recession have also taken their toll on the public finances in a number of other advanced economies such as Japan, the UK, and the US. At the same time, many of these countries continue to face public spending needs, including continued stimulus spending in the context of an uncertain recovery, making their available “fiscal space” a hotly debated topic and a pressing policy question.
The concept of a “toll on the public finances” for a sovereign nation is meaningless. What does a toll mean? Is a rising deficit bad and a falling deficit good? Answer: you cannot say anything about an economy based on these narrow financial considerations.
A rising deficit with falling unemployment and stronger economic growth is good. A rising deficit (driven by automatic stabilisers and discretionary inaction) associated with rising unemployment and recession is bad.
But the good and the bad relate to the real things – falling (rising) unemployment and rising (falling) economic growth rather than the numbers published under the heading budget outcome
The only “pressing policy question” relating to “fiscal space” is that there are millions of people unemployment who could be engaged productively generating income and feeling better about themselves.
Unfortunately, that is not the “hotly debated topic” and that is because economists like this lot have a completely warped sense of priorities and a mistaken understanding of how the monetary system actually operates.
They go on by “providing an operational definition of two key concepts”:
* the government’s debt limit (the debt ratio above which debt dynamics become explosive), and
* the government’s fiscal space (which we define as the distance between current debt ratios and the corresponding debt limit).
They then calculate “available fiscal space in advanced economies” using these definitions. Problem is they have not relevance to anything.
A sovereign government’s debt limit may or may not be finite. So it is possible (but highly unlikely) that the bond markets could stop lending to the US government. So what? Does that limit the US government’s capacity to spend? Answer: not by one dollar. The central bank could step in or the US government could legislate to outlaw bond sales in the future (the preferred solution).
Government spending amounts to crediting bank accounts electronically. The dollars come from no-where. The US government actually borrows the funds that have been created by its own spending. There is no financial constraint on US government spending.
So the definition of “the government’s fiscal space” is meaningless and has no operational relevance.
The fiscal space of any sovereign government is what it can purchase in its own currency in terms of real goods and services. The role of fiscal policy is clear – to ensure there is enough aggregate spending (demand) given the spending decisions of the external and private domestic sector to fully employ all available productive resources.
The more idle real productive resources there are the larger the fiscal space. What the deficit is or has been in the past is not a binding factor on the ability of any sovereign government to close that identified fiscal space.
They estimate that nations with the highest unemployment (typically) have “little or no fiscal space” and that their work is “a definite wake-up call” for such nations.
The concept of inflated ego bolstered by self-aggrandising statement comes to mind. The nations with the highest unemployment have the most
fiscal space.
The rest of the article is thus irrelevant.
Conclusion
My profession is an embarrassing disgrace. The financial journalists that feed off my profession are no better when they write this sort of nonsense.
No wonder the public are persuaded by misguided governments to vote for policy mandates that undermine their prosperity rather than contribute to it.
That is enough for today!
“Productive capital finds it very difficult to “take flight”. Machines and buildings are bolted to the floor.”
I don’t think that is not right. I am pretty sure there were workers in Ohio who had to unbolt the machinery so it could be sent overseas along with their jobs.
Dear Fed Up (at 2011/03/09 at 18:29)
I said “very difficult” not impossible. Maggie Thatcher sold textile machines to Italy and then Britain had to import what they used to produce.
best wishes
bill
One thing that could lead to confusion for USians is the distinction between “US government” and “US executive”. If congress says the executive is not allowed to spend more, then indeed the executive will be broke in a sense. Of course this would be a purely political decision, and amounts to the government as a whole simply deciding that it no longer wants to pay its bills.
The point is that it is probably a good idea to keep this in the back of your mind when talking with USians about the issue, because their perception seems to be often warped by those ridiculous “debt ceiling” discussions.
not so many moons ago, we had tom albanese lecturing the rest of us about sovereign risk, and that rio tinto might have to pick up its bat and ball and go elsewhere,
like to see him try it,
lets see how well these carpet baggers get on with third world dictators ,
mobile capital my arse
a hint to an article I read today on alternet
“People across the United States are losing trust in the dollar. Georgia, Virginia and 9 other states have considered so-called “Constitutional tender” laws that would require, in at least some cases, that state governments collect and make payments only in gold or silver. South Carolina and Virginia are considering creating their own currencies. Utah legislators just passed a bill allowing the use of gold and silver currency.
Animated by doomsday scenarios about crashing currencies and wild hyperinflation, speculators have sent the prices of gold, silver and other precious metals skyrocketing.
At the same time, a growing movement to establish state-chartered banks that could better serve the needs of their communities – and act as “mini-feds” to help stabilize local economies — is also taking hold across the country.”
http://www.alternet.org/news/149946/politicians_push_gold_standard%3A_have_americans_totally_lost_trust_in_our_institutions/
Bill, I think there is a distinction (which you miss) between sovereign debt owed to foreigners and owed to natives. Repaying the latter just involves a transfer of dollars between natives, which is no big deal.
In contrast, borrowing from foreigners involves a REAL, though temporary, boost in living standards for the borrowing country. E.g. China ships stuff to the U.S. which the U.S. does not need to pay for, at least not immediately. And should China choose to, it can withdraw its loan, buy real goods in the U.S., and ship them back to China. That reverses the process, i.e. it constitutes a real repayment of debt. Coincidentally, a namesake of mine, R.A.Musgrave made this point in the American Economic Review in 1939.
In short, where borrowing from foreigners is concerned, households and countries CAN be conflated.
It is true that the borrowing country can escape repayment of the debt by printing too much money and debasing the value of the debt. But any country doing this will have a “Greek style” reputation for the next generation. It will pay over the odds for future loans.
RE RELIGION, why are Americans less able to keep religion, politics and economics separate than Europeans? (E.g. Tony Blair had to keep quiet about his religious beliefs). Anyone know the historical reasons for this? Darned if I know what they are.
I hope you’ll bear with me, as I’m a relative newbie with MMT, but following on from Ralph’s comment – putting aside the appalling record of rating agencies and the evident truth about monetary sovereignty – governments, while they can always “print” more money, but they could also choose to default on their bonds. So the ratings agencies should be measuring that form of risk and pricing that into bond trades.
Then, as Ralph points out, there is the devaluation risk when operating across national boundaries. A greater risk to US economic hegemony is that China will spend their dollars buying out US businesses. This is an accelerating process here in the UK.
“And should China choose to, it can withdraw its loan, buy real goods in the U.S., and ship them back to China”
Only if the US lets them. It’s fairly easy to increase tariffs and taxes to stop that. It’s impossible for the Chinese to repossess the real stuff they’ve already shipped.
The alternative view is that by accepting US dollars, the Chinese have actual joined the US currency zone and are subject to their taxation regime but receive no Federal transfer payments in return. The US dollars and bonds are after all computer entries at the Treasury/Fed.
Holding a foreign country’s paper is extremely risky.
I have a question. Lets say the 14 trillion or so is not deficit or borrowings it is just spending to support growth and employment. The USA just printed the money as it needed to spend.
What is the state of America now if that was the reality?
God protects me from religion, he cant protect me from Neo-Liberals.
Cheers Punchy
no ones lending anything ralph,
those trillions the chinese have parked in US treasuries as a consequence of their trade surplus can be paid off in a blink of an eye by adjusting balances on a spreadsheet.
doesnt stop congress and treasury from getting of their arse and spending on the poor and offering those millions of poor americans a job and a decent wage
and yes the sovereign can adjust the value of those assetts, all that means is that i’d rather be in the americans shoes than the chinese.
far as im concerned the chinese are on a hiding . for 250 years they have been responsible for anywhere between 20 to 30 % of global manufacturing output. and if you want to know how badly things can go off the rails for the chinses when they get involved with global super powers, just have a look at their history from just before the mid nineteenth century till the advent of mao.
not a bed fo roses
as for your question about religion and economics, read max weber ” the protestant ethic and the spirit of capitalism ”
quite a parchment turner 😉
” The alternative view is that by accepting US dollars, the Chinese have actual joined the US currency zone and are subject to their taxation regime but receive no Federal transfer payments in return.”
yes , well if chinese busneses want to do business with US customers, they are dependent on the taxation power of the US sovereign, to confer value to the US dollar denominated assetts they are accumilating as a consequense of trade.
Holding a foreign country’s paper is extremely risky.
Neil, I would think that this is correct in principle, but the status of the dollar makes this much less risky for China [the status of the dollar is something that US governments have used mercilessly in the past]. As well as purchasing US assets, China can start purchasing other assets around the world.
Of course the risk to China (and the US) is that the dollar loses this status.
as for your question about religion and economics, read max weber ” the protestant ethic and the spirit of capitalism “
Isn’t the execrable Niall Ferguson now punting this in his new book?
I hadn’t noticed much evidence of protestantism in the economic progress of China or India.
I live in the middle of Baptist land and at one time I was a Baptist until I realized better. People in authority can force things on me, but they can’t make me believe what they want. I don’t read anybody’s bible.
But, religious people believe in authority. Their basic authority is their holy books and they believe in their religious leaders and their government. The religious people around me really don’t realize that they are being used by the people in authority and any comment that doesn’t fit in with what their preachers tell then is completely discarded.
The people I am around realize that obummer is no Christian, but they don’t see that republican politicians aren’t Christians either. Anybody who believes that John Bonner or Bill Clinton, and probably any politicain, are in any way religious is not reality based. I have
never seen any national figure, with the exception of Martin Luther King and Gahndi, that talked realigion who is in any respect honest. As
an example, the governor of Wisconsis believes he is doing God’s work in destroying the rights of the people in favor of big business.
Politicians in the US are a disgrace and John bonner and Barak Obummer tipify that disgrace.
The answer to Mr. Musgrave’s question is that there is supposed to be separation of church and state in the US, but crooked politicains
know that by useing either duped or paid off religious leaders they can sway public opinion to their side, which happens to be the side of
big business. Religious people are being used by politicains and their religious leaders.
Please don’t let John Bonner read this as he might cry. PS, I didn’t mention MLK because of race, I am white, I just think he was an honest
man.
I’m sorry about the previous post, I hit the submit comment before I reread.
I live in the middle of Baptist land and at one time I was a Baptist until I realized better. People in authority can force things on me, but they can’t make me believe what they want. I don’t read anybody’s bible.
But, religious people believe in authority. Their basic authority is their holy books and they believe in their religious leaders and their government. The religious people around me really don’t realize that they are being used by the people in authority and any comment that doesn’t fit in with what their preachers tell then is completely discarded.
The people I am around realize that obummer is no Christian, but they don’t see that republican politicians aren’t Christians either. Anybody who believes that John Bonner or Bill Clinton, and probably any politician, are in any way religious is not reality based. I have never seen any national figure, with the exception of Martin Luther King and Gandhi, that talked religion who is in any respect honest. As an example, the governor of Wisconsin believes he is doing God’s work in destroying the rights of the people in favor of big business.
Politicians in the US are a disgrace and John bonner and Barack Obummer typify that disgrace.
The answer to Mr. Musgrave’s question is that there is supposed to be separation of church and state in the US, but crooked politicians know that by using either duped or paid off religious leaders they can sway public opinion to their side, which happens to be the side of big business. Religious people are being used by politicians and their religious leaders.
Please don’t let John Bonner read this as he might cry. PS, I didn’t mention MLK because of race, I am white, I just think he was an honest
man.
Punchy, It strikes me that national debts have several different components, each of which has different effects.
1. There is debt or additional monetary base created just to get an economy back to full employment. Assuming that debt/monetary base needs to be left in private sector hands so as to maintain full employment, there is no reason for it to be withdrawn or repaid. That is the type of debt to which you refer, I think.
2. There is debt / monetary base increase that the Fed has created so as to counteract the effect of private sector deleveraging over the last two years. If the private sector leverages up again, presumably that debt / base increase will have to be withdraw or repaid, else we’ll get excessive demand and inflation.
3. National debt held by foreigners.
4. National debt incurred purely as a substitute for tax. Politicians can always win votes by holding tax down while quietly borrowing on the side. (And contrary to the claims by Tyler Cowen – referred to by Bill yesterday – it does not require a Nobel Laureate to work that one out.)
That element of the national debt achieves nothing: it might as well be repaid as soon as possible.
Mahaish, Turning government debt into dollars on your spreadsheet constitutes “debt repayment” in the sense that U.S.Treasuries are commonly regarded as “debt” whereas $100 dollar bills are not. But that’s just semantics. Both types of paper appear on the liability side of the Fed’s balance sheet (for what that’s worth). But more important is that anyone in the World holding U.S. dollars has the right to purchase goods in the U.S., and ship them out of the U.S. (or purchase other U.S. based assets, like shares in Microsoft). And that constitutes repayment of a debt (in a very real sense of the phrase) by the U.S. to whoever holds the dollars.
@GLH,
“don’t realize that they are being used by the people in authority”
Please consider that they don’t realize they are being used ultimately by the Adversary of God.
“28 And according as they do not test God, to have Him in recognition, God gives them over to a disqualified mind, to do that which is not befitting,
29 filled with all injustice, wickedness, evil, greed, distended with envy, murder, strife, guile, depravity, whisperers,
30 vilifiers, detesters of God, outragers, proud, ostentatious, inventors of evil things, stubborn to parents,
31 unintelligent, perfidious, without natural affection, implacable, unmerciful:” Romans 1:28-31
The GOP does not test God, to have Him in recognition, rather they test Ayn Rand, to have her (and her Objectivism) in recognition. They test the so-called “free market”. They test Milton Freidman. They test neo-Liberalism. They test anything BUT God.
Hence the depravity. Hence the unintelligence. The above excerpt was written to the Romans 2,000 years ago, we still cant get it. Resp,
“And should China choose to, it can withdraw its loan, buy real goods in the U.S., and ship them back to China”
No they can’t, US declares whatever it want an interest of national security and can block any foreign purchase. the Japanese tried and there was whipped up racists propaganda against Japan despite that Europeans owned more in USA than the Japanese did. And as mahaish pointed out the bonds can be repaid by a keystroke, but that’s sort of a last solution it will probably never go that far then it would probably mean the collapse of the world economy. Chinese purchase of large quantity of assets in any country shipping it to China is by any standard an interest of national security.
There is not such a thing as any senior enforcement officer for global collection of debt, and if there is any it operate under helm of US military force.
The solution for China if they should take that route is to expropriate American assets in China at bookkeeping value, that I believe have some support in international law but I don’t think USA would care about international law, they usually don’t, but take as an hostile action like an declaration of war. de Gaulle threatened to do that when the dollar was piling up in the France and Europeans central bank vaults. de Gaulle was outmaneuvered and then as an heavenly strike (Gawd bless America) the oil price got sky high and the European vaults was emptied of their dollar excess in no time and moved to OPEC countries. There are indications that US had its hand on encouraging Saudi and OPEC to raise the oil price, US then self a big producer and Nixon concerned about foreign dependence wanted to encouraging alternatives at home. But much wants more and it probably got out o hand of US control. One should never underestimate the Americans despite how foolish they might look in the surface; they didn’t become the sole super power by foolishness.
Small countries where the private sector build up huge amounts of foreign debt seems to some way or the other be forced to nationalize these debts, the global capital have mighty friends and prefer nationalized debt then nations seldom die or in a real sense go bankrupt contrary to individuals that usually die sooner or later and firms go bankrupt as soon as their equity isn’t sufficient.
Bill/Anyone help
I still haven’t got the stock flow of funds straight in my mind in respect of the external surplus/deficit.
I think I’m clear on transactions, say imports, that are paid for in the home sovereign currency lets say sterling. The currency is either saved, re-spent on private consumption or used to buy UK assets by the overseas suppliers.
But what happens when the UK importer exchanges sterling for the overseas currency at a bank. His deposit disappears. The bank has a sterling financial asset and lets say a liability in the foreign currency.
Is this merely an exchange of sterling? i.e. no change in net financial assets in sterling but at the same time, a creation of liability in a foreign currency. I imagine all these transactions would globally net to zero.
Or is there somehow a reduction in reserves?
Sorry for the rambling but any help or guidance would be most appreciated.
When a country has a trade surplus they can either use it buy goods, or to purchase assets, or to save it for later use, or exchange it for another currency, which gives them the same options elsewhere.
China is saving in dollars, which is tantamount to preferring to wait to make a decision to purchase goods or assets, or exchange dollars for something else. What the US owes China is represented by the claims on ownership of US goods or assets in exchange of goods already provided.
China is not funding the US. It is saving in US dollars in order to postpone future consumption, either in dollars or some other currency if it chooses to exchange dollars. This is business, not finance, and it is pretty much the same as anyone else selling something and saving proceeds for future use.
What changes is foreign claims on real resources of the US in exchange for US ownership of the foreign country’s real resources gained through trade. Countries can control the distribution of foreign ownership of real resources by restricting purchases of assets, thereby directing purchases into goods.
There is a general myth floating around – almost everywhere that the present monetary system is a non-system. This view was held even before 1971, if some IMF authors are to be believed 🙂
This has to do with the “intuitive” notion that money was somewhat backed by gold or something or that sort and suddenly money became “fiat”.
This has led the MMTers and MMT fans to argue that foreigners as a whole to a nation cannot do anything with the balances they hold. Maybe they should consult IMF lawyers.
Its one thing to say that China won’t redeem its dollars, quite different to say it cannot.
The US indebtedness to China is NOT “not debt”.
What does the US owe the rest of the world ? Answer. around $4T. Repeat – Four Trillion Dollars.
Assets ≠ Liabilities in MMT it seems.
Tom
Thanks. So, as I understand it, when banks, or whoever, create these matching assets and liabilities in foreign currency perhaps as a result of import/export transactions by their customers exchanging their own sovereign currency, there is no change in the overall net financial assets /bank reserves in that sovereign currency
The external deficit /surplus in terms of sectoral balances refers only to actual movement of their own sovereign currency to overseas suppliers. There is no impact on that deficit/surplus if that currency is exchanged with a financial institution that migiht end up with liabilities in a foreign currency as a result.
Sorry to be so pedantic but I guess confirmation of this is really what I’m after.
“This has led the MMTers and MMT fans to argue that foreigners as a whole to a nation cannot do anything with the balances they hold.”
i’ve never seen this argument made.
Hi Bill.
Completely off topic but I thought you might be interested in the new Irish governments vision for dealing with the country’s awful situation.
http://www.labour.ie/download/pdf/towards_recovery_programme_for_a_national_government.pdf
I’ve only read a little of it, but what I have read doesn’t look all that inspiring. Seems to be largely re-arranging deckchairs with the focus still on cutting the deficit.
The question is also what has US bought, besides Barbie dolls, globally for its deficit dollars. What does American interests own internationally and what is the yield. I don’t know the numbers today but a decade ago US got about double yield on it’s foreign assets compare to what the world got in yield on its US assets.
bill, depends on how “very difficult” is defined in relation to bolted to the floor.
Thanks Ralph for your reply and help. I was just wondering how the US A’s economy would look if Bill was running it for the past 30 years and he had printed/stimulated the economy by 14 Trillion over this time to stimulate the employment of North Americans. Sort of back testing MMT.
Your point 4 is what is happening in Australia.
Japanese companies bought up huge amounts of commercial and Tourism assets in Australia in the 80’s at very high prices. To explain high prices The industry claim at the time was the Japanese were very long term investors. They largely sold out in the 90s at huge losses. As it turned out they cant take the land and buildings with them all they can take is the after tax profit from cash flow or capital gains or capital losses. Australia ended up with lots of big resorts thanks to the Japanese capital. If China buys up hard assets in foreign lands it is the foreigners who will benefit the most from the stimulation of the purchases not the Chinese.
Cheers Punchy
Andy, currencies stay within their currency zone. Transactions denominated in dollars, euros, rubles, etc. transpire within that currency zone. If a someone holding dollars, for example, wants to participate in another zone, they exchange the dollars in the fx market for that currency and the buyer of the dollars then holds them to save or use for purchases in the dollar zone, or eventually exchange them.
Currencies in demand are higher in value relative to currencies less in demand. That is what floating rates are about. Relative demand for currencies fluctuates based on a variety of factors. That’s what fx trading it about. It’s a huge market.
One reason that China saves the dollars it receives from export sales is that it doesn’t want them exchanged for yuan for use in the Chinese economy, which they fear would drive up inflation. Some of these dollars gained from trade in the dollar zone are used to purchase goods and assets in the dollar zone, some are exchanged for use in other currency zones, and the rest are saved in tsys for future use.
The dollar being the world’s reserve currency creates an incentive for it. Other countries save dollars to build foreign exchange to protect their own currencies in fx markets. When China decides to abandon its peg, as it must if it want the renminbi to be a global currency, it will need foreign reserves to defend it if necessary. Other Asian countries save dollars for this reason, after having gotten burned.
I was just wondering how the US A’s economy would look if Bill was running it for the past 30 years and he had printed/stimulated the economy by 14 Trillion over this time to stimulate the employment of North Americans.
The question is really what GDP would look like if the US had run at full employment with price stability for the past thirty years.
Studentee,
Surely a nitpick, considering the context I am talking (financial transactions as opposed to current).
Here:
i don’t know, you might think it’s a nitpick, but i was just reading what you wrote, and it was clearly wrong. the mmt thinkers focus on incorrect beliefs about china re: they’re funding our spending. of course, you know this is incorrect. but they always discuss the exact options available to china.
i still don’t have the external sector down perfectly in mmt, why does the fact that China holds various dollar-denominated assets in the current period give them an advantage at purchasing us goods in future periods? if they really wanted to buy our goods suddenly, for whatever reason, would not having reserves, treasuries stop them? even if they did, they would still have to make their purchases at market prices, from willing sellers. and all of this is hedged on the premise that there will be some point where china will wish to do this.
i guess i would like to know the scenario you find so frightening. why does the number 4 trillion demand repeating?
No, nothing frightening in the sense you mean.
Its debt nonetheless, unlike what is emphasized here repeatedly.
Now, “China doesn’t fund the US” is another catch-phrase here and I have written a lot here and do not wish to write more except saying the following:
All nations wishing to trade with one another have agreed on a set of principles on doing trade with one another. Since trade is done on credit, there needs to be a set of international laws governing how nations settle debt with one another. For this purpose, in addition to international organizations such as the WTO, governments established the IMF. The clauses of the IMF, in particular Article VIII talks of redeemability of balances.
International organizations have tended to establish the rules with the belief in the working of the invisible hand and there is a definite bias in the way the laws have been formulated.
There are some commentators here who seem to come up with novice ideas such as let us ban foreigners from doing this, put restrictions on imports invoicing in foreign currency etc as if its that simple.
The laws on international trade have been achieved though negotiations and diplomacy and it is not straightforward to just change some law.
Go tell China doesn’t fund the US to some IMF officials who understand the monetary system and they will have a hearty laugh. People at the IMF know things well.
are you disputing the fact that gov’t can spend without issuing debt?
i’m entirely unconvinced that the people at the IMF are a reliable source. what would their argument be?
i guess if you could link me to your past arguments, that would be appreciated
“The laws on international trade have been achieved though negotiations and diplomacy and it is not straightforward to just change some law.”
Go read the history of the rise of the Third Reich or the Russian Revolution. When a people gets annoyed enough they will empower somebody to do something about it.
If a country gets annoyed enough with ‘international law’ they will implement their own policies – and the rest of the world be damned. After all short of invasion and ‘sanctions’ there is nothing the rest of the world can do about it.
“Its one thing to say that China won’t redeem its dollars, quite different to say it cannot.”
It clearly cannot redeem any Treasury security until the date on the bond, and then it can only swap it for dollars.
And the chinese can only spend those dollars if somebody in the dollar zone wants the money more than the ‘stuff’ they have.
It takes two to trade.
I was just wondering how the US A’s economy would look if Bill was running it for the past 30 years and he had printed/stimulated the economy by 14 Trillion over this time to stimulate the employment of North Americans.
Tom Hickey says: in reply
“The question is really what GDP would look like if the US had run at full employment with price stability for the past thirty years.”
Oh I get that. A country with price stability and full employment. I will move there tomorrow, give me the Lat and Long of that Country! Thanks Tom, I wish I could communicate so much in just a few words. Cheers Punchy
“It clearly cannot redeem any Treasury security until the date on the bond, and then it can only swap it for dollars.”
It can liquidate Treasuries.
And about swapping for dollars – do you know the “Articles of Agreement of the International Monetary Fund” .. in particular Article VIII ?
Keep chasing me Neil .. you will learn a lot !
“It can liquidate Treasuries.”
There are no more extra dollars until the Treasury is redeemed.
“And about swapping for dollars”
OK. Where can you redeem a US Treasury for £s?
Punchy, Bill’s claim, and that of MMT’ers in general, is that if MMT had been used to direct economic policy over the past thirty years, the US could have had full employment along with price stability, which would have resulted in a different GDP than the policy actually pursued. The claim is that GDP under its regime would be higher than under the actual policy, showing that a great deal of opportunity was foregone by targeting inflation and using unemployment as a tool to do so.
This is a claim founded on what appears to be a reasonable justification with some empirical warrant. It is a counterfactual, of course, since an entirely different course was followed, with a well known result. Until the MMT claim is tested, it remains hypothetical. The way to call this claim into question is to formulate objections that can be addressed. This means attacking MMT’s logical pedigree (equations) or its empirical warrant (data). Scoffing doesn’t count.
Neil,
No, not £ but Renminbis 🙂
Article VIII Section 4:
“There are no more extra dollars until the Treasury is redeemed”
Don’t know what this means.
The way you have worded seems like you are assuming that a foreign nation’s Monetary Authority/Treasury is compelled to hold government bonds of the foreign nation – as if it cannot sell them in the markets.
To my 4:05, I kind of know what reply is coming my way. Aah .. the lateral thinking and all that!
Ramanan – sorry to be missing your point, but please can you spell out this disaster scenario the US (and possibly the UK) should be worrying about?
It seems to me that all the creditor nations can do is – shock horror – start buying more of our exports (except they don’t seem likely to suspend their mercantilist strategy any time soon). For China to sell USD-denominated claims to other nations just devalues the USD; what’s the problem in that?
The illustrative contrast is surely with the 1997 Asian crisis: in that case, the more a country’s currency devalued, the greater the risk of default on the significant fixed income obligations denominated in foreign currency, which created a tipping point in terms of investors running for the exit. For the US or the UK, surely the FX rate is a self-righting ship: the more the USD devalues against the CNY, the less pronounced the imbalances become, and the lower the potential future losses (mainly FX, not credit losses) become – with the result that stability is preserved.
What am I missing here?
Are you seriously suggesting that the US could meet its economic downfall through some rules of a body headquartered in its capital city??
Food For Thought, Regarding fallacies of Orthodox Theory.
Recently this commentator has demonstrated mathematically the following proposition. Policy can be efficient even if units display rational behavior iff expectations are strictly sceptical.
Scepticism is a Greek philosophical framework which is a null hypothesis in a dialectical discourse. In other words, a thesis expression of an argument or decision of analysis can be equally/unequally negated by an antithesis of reaction or praxis expectation, leading to inaction.
Under conditions of uncertainty and complexity, an agnostic and complex behavior can make rational decisions that are neutralized by sceptical expectations leading to no praxis or even make attempts to escape from policy effects. In this case, expectations are both rational but also sceptical, allowing for policy to have a partial or full effect, while behavior of the policy counterparty remains partially /fully unaltered.
Rational decisions of policy counterparties subject to sceptical expectations approximate an optimum efficiency of policy praxis. On the other hand, rational decisions of policy counterparties with confident expectations approximate a policy of suboptimal efficiency with a complete shortfall of policy tactics which is equal to a behavioral praxis of escape from policy effects.
Obviously, an outcome based on sceptical expectations can be an equilibrium position which is as rational as the Lucas Critique Hypotheis based on rational expectations that reveal no scepticism but full confidence subject only to certainty equivalence.
Anders,
To be honest, I look at your comment as moral policing – no offence please.
The US has provided fiscal stimulus and unfortunately the leakage due to current account causes hemorrhage of demand everyday!
Provide more stimulus and it will deteriorate the balance of payments even more.
There is no disaster scenario which can hit all tabloids because that disaster scenario is prevented by importing unemployment.
Look, I really understand the supreme power of fiscal policy. But if one starts overdoing it without understanding some constraints then its important to point out the obvious fallacies.
Do you think Tim Geithner constantly pursuing China is a silly behavior ?
Its important to understand the limitations of fiscal policy. The US has been at an advantageous position because of historical reasons. To same doesn’t apply to other countries. None.
Also, as the phrase suggests, currency depreciation is depreciation. There is no automatic mechanism for trade to balance by “market forces”. Trade balances due to deflation of demand by government’s action instead of currency depreciation.
If you are suggesting that national income should be increased by a path which is accompanied by increase of indebtedness to the rest of the world, then it becomes difficult to argue.
More importantly, “not debt” misses the whole point!
The only way nations have come out of balance of payments troubles is by taking discretionary steps to improve their export position instead of leaving the fate to the invisible hand.
“with the result that stability is preserved.”
What stability ?
There was a post here on the G-20 communique quoting the leaders’ worries about “global imbalances” with the undertone “not a problem” 🙂
Some commentators have assumed that I am writing as if I think the crisis occurred because of imbalances only. Nope it arose out of internal imbalances as well. I know things such as “private sector deficit” well. Really well. Its the misunderstanding of external imbalances that I am pointing out here.
Am not suggesting China will dump Treasuries ;).
“- shock horror – start buying more of our exports”
Already happening. Obama has been travelling around the world. India agreed to purchase US products.
Only way to to put the world on a growth track, is for nations to agree on a fresh set of principles of doing international trade combined with a fiscal expansion. Both imports and exports will improve.
The deficit hawks and doves may miss the point, but same is true here.
Only way to to put the world on a growth track, is for nations to agree on a fresh set of principles of doing international trade combined with a fiscal expansion. Both imports and exports will improve.
I was under the impression that this is what I have been saying for some time in several venues. This has been my point of looking at the global economy as closed. For example, these kinds of things come up all the time in the US and are resolved by the relationship of the federal government and the states. Lacking a global fiscal authority and free flow of labor in addition to free markets, free trade, and free capital flow, the global economy is inherently skewed and distortions inevitably arise.
It does not require a world government to fix this. It just takes an intelligent and cooperative approach toward exploring options and coordinating operations instead of pursuing national interest in a way that beggars neighbors, undermines the global economy, and eventually becomes adverse to one’s national interest, too.
Anders,
Sorry if you want me to be explicit. A sudden fall in the value of the dollar as opposed to a controlled fall.
If it doesn’t happen, likely it won’t now … the international indebtedness of the US keeps increasing increasing the risks of a bigger fall.
Or should I pose it the other way round – do you think its “not a problem” ? Serious ? Willing to sell insurance to the markets ?
Mitterand tried it in 1979. Result: a plummeting Franc.
The Australian currency also had a crash during the crisis. The banking system was in funding stress in US dollars. The Fed did a swap line with the RBA to ease this pressure from Aussie banks.
It doesn’t pay to be indebted to foreigners.
Tom,
Links ?
Btw Tom,
I remember my exchange of comment where I asked something like “Do US authorities have no clue” and you said that Geithner has no clue about China etc .. giving the impression “not debt” and “not a problem” …
So lets agree that we disagree.
Ramanan,
1979 was the start of the ERM i.e. fixed exchange rates with other member states of the EC. Once they all joined, they all ran various fiscal policies with France expanding fiscal policy while others retrenched. It wasn’t until 1981/1982, that France followed suit by cutting back fiscal policy and devalutaion to stay in the ERM.
In 1960-73 average yearly economic growth was 5%. Then they entered the snake which lasted up to 1979, average economic growth fell to 3%. From 1980 to 87 growth fell to 1.5%. From 73-92, the number of unemployed had risen from 600,000 to 3million.
The following book written by John Mills(not that John Mills) Europe’s Economic Dilemma , recounts this period from the British perspective.
I do actually agree with MMT regarding the foreign sector and that imports are real benefits but I don’t think it is healthy without all countries following suit by maintaining domestic demand. The only reason the foreign sector wish to save in dollars is in the search for profits which are absent in their own countries by the high savings rate.
As an aside, I watched a documentary last night called Singapore Inc, and how they are portrayed as free market capitalists. They are no such thing, Singapore has a social contract with the people and in return they receive a good education, free health care and a house. Everyone owns their own home. If the people lose their job the state will find them a new one, it probably won’t be as good as the job you lost but if you refuse it you get nothing. When the economy starts to hit a bad patch, instead of the employers retrenching workers the state will pay 9/10ths of the workers wage and the business pays 1/10th. They have equality of opportunity but not equality of outcomes, that is up to you. They have shovel ready projects on the go with machinery, project plans all ready years in advance ready to go.
What also stands out is the discouraging of domestic credit with all import cars needing a permit which is over $100,000 so high that why would you bother. Their public transport system is second to none. They have a ban on chewing gum, when Ireland tried to put a tax on chewing gum to clean up the mess that it leaves on the pavements, Mr Wrigley got onto the ambassador to Ireland and they got it slapped down. Its the same thing with Japan, with Renault having a factory in Japan but the government putting a quota on the number of French cars that can be sold in Japan. I think the trade deficits will continue longer than you think not just for the US but for the UK aswell. Even Japan will refuse to allow a Japanese company invest in a country with a low corporation tax rate. These are not free markets in the conventional western term but it does seem to work for them.
I look at it from the perspective of the real economy not the exchange rate and the US is its own worse enemy. I was reading a book on magnets, Driving Force, where the author describes a brainstorming session at General Electric in 1966 where Gordon Danby and James Powell of Brookhaven National Laboratory put forward the idea of using the the high magnetic fields of superconducting magnets to levitate trains. In 1991, they were all ready to start building maglev trains when Congress authorized a $725m maglev program as part of the $151B IceTea act, but it got pulled going through congress by a congressman named Bob Carr because they are a threat to the auto industry. In the US everything seems short sighted, GE sold the patents to a Japanese company on rare eart magents 30 odd years ago for a quick profit, now who are the leaders the Japanese.
Ramanan: Links ?
I don’t keep a list of my comments so lost and gone as far I am concerned. But I am working up a post on this.
In addition, my strong impression is that the US would like to see the dollar decline about 15% to 20% so it can export its way out of this. Yes, the price of petroleum will increase but the US being rich in domestic oil reserves will do well with a price increase, which would make a lot of its more marginal sources suddenly viable.
My view is that the US been intentionally pursuing a weak dollar for some time and will continue to do so for the foreseeable future until the dollar corrects sufficiently, which will be shown by the trade balance. The feeling is that the US is importing too much because the dollar is way overvalued.
Of course, the US can always up exports pretty quickly by destabilizing the world, impelling other countries to significantly up imports of US military hardware.
“I do actually agree with MMT regarding the foreign sector and that imports are real benefits but I don’t think it is healthy without all countries following suit by maintaining domestic demand. The only reason the foreign sector wish to save in dollars is in the search for profits which are absent in their own countries by the high savings rate.”
Thanks for the ERM background BFG. I will try to find more on this. Anyway my point is fixed or floating doesn’t matter. Debt is debt both in fixed as well as floating.
As you say its beneficial provided others maintain or increase demand. Its not a benefit if others are not doing it. Not only that there needs to a be coordinated approach.
If you see my comment @4:05 on “official convertibility”, it effectively reduces the state’s liabilities as liabilities without quotes. It is incorrect to say that its “not debt” or go in that direction. A bit like equities where you cannot say that the corporation is not liable.
Ramanan,
And how many tanks does the IMF have to enforce its rules?
You’re very fond of rules. However there are no rules without enforcement – as the UN resolutions against Israel have shown for several decades.
Currency issuing is a monopoly situation. And the basic theories of monopoly apply – always.
Ramanan – it’s hard work trying to piece together your arguments – you don’t make it easy!
You seem to be saying that current account deficits are a constraint on fiscal policy. So whereas MMT says only take your foot off the gas fiscally when (demand-driven?) inflation rears its head, you say that trade imbalances kick in as a constraint first. It seems you are replacing MMT’s policy prescription – but with what? AFAICT, you aren’t proposing any given Reinhart/Rogoff-style threshold % of GDP at which the CAD becomes an issue. Without any threshold/rule of thumb, how can one treat your concerns as actionable?
I appreciate that FX rates don’t adjust to achieve trade balance. But it is the directional impact which is important: a USD devaluation should move the CAD towards balance, rather than increasing risk.
ok so there are leakages that flow to the foreign private sector as a consequence of larger deficits,
well,
then spend and regulate in a way that minimises those leakages,
and the problem is with somewhere between 10 to 17% unemployment in the US, running a neutral or surplus budgetary policy is only going to make those leakages worse in the long run,
government saving = private sector dis saving,
and if the government isnt going to help the private sector to repair its balance sheet position, then the private sector will try and repair it some other way, by those who can moving overseas.
as for depreciation,
well the internal value of the currency eventually determines the external value of the currency,
so i dont see how tighter fiscal policy leading more people on umemployment ques with less demand for the local currency is going to improve the value of the currency.
ultimately isnt the value of the currency going to be determined by the productive potential of the economy, and the wage level.
i think appropriately large and well targeted deficits are essential for maintaining both those factors and a strong currency.
the moral of the story is,
if we dont value ourselves, then how can we expect others to value us , our currency or anything else we do.
hey gastro george,
good old max weber, was definately taking a euro centric view,
as for good old nial ferguson, the less we listen to his pinochet defending/monetarist prattle the better,
he tells a good story , but its a total load of bs