The record needs breaking very soon!

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1. “The IMF has no legal authority to issue or limit the issuing of US dollars.”

   And even if it did have, there is no law without enforcement – as the UN resolutions against Israel have shown for decades.

2. Imagine if the cricket authorities decided to place a limit of how many runs a team could score in the current World Cup. You wouldn’t have much of a game. And then they decided to become austere about it and cut the available runs! Just like the runs on the scoreboard, the budget numbers (dollars) can be whatever it takes.

   This may be why Europeans prefer the FIFA World Cup. Nil all draws are more affordable. 🙂

3. “The conservatives claim that we need less public spending, more privatisation and more deregulation.”

   It’s not them that is concerning. It’s the conservatives in progressive clothing that are the real problem.

4. -“The reality is that the conservative parties are bank-rolled by the financial sector. ”

   -That is perfectly illustrated by a fund raising auction for the Conservative party where what was being auctioned were internships at hedge funds. Basically pay money to the Conservative party and the dark arts of appropriation will be revealed to your kiddies. Can we expect the Conservative party to be even handed when regulating them?

5. Bill, when will your econ book with Randall Wray be released? Amazing how an undegrad, MBA, and CFA leaves me w/no sense of a good education. Although my econ book was Int’l Econ by PK.

6. One chink of hope in the news about the UK economy is that apparently manufacturing is growing faster than it has for decades. Is that just a consequence of the weak pound? I don’t suppose laid off public sector workers have started manufacturing. IF the growth in manufacturing were to continue then it might rescue the UK economy. I’m no more keen on people making and then throwing away stuff for the hell of it than anyone else. But manufacturing does tend to create jobs across the country and across educational levels which is not true for financial services. Another growth industry in the UK has apparently been staging of fake road accidents to get insurance. Bill could probably extol the virtues of an economy entirely based on that with other countries (and/or migrant workers) supplying all the goods and (non-insurance) services in exchange for the financial assets of the “crash for cash” nation.

7. “Is that just a consequence of the weak pound?”

   Difficult to say. It’s not really showing up in the export figures yet.

8. I think the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money. Its so nice its worth repeating my quoting this earlier:

   Section 4. Convertibility of foreign-held balances

   (a) Each member shall buy balances of its currency held by another member if the latter, in requesting the purchase, represents:

   (i) that the balances to be bought have been recently acquired as a result of current transactions; or

   (ii) that their conversion is needed for making payments for current transactions.

   The buying member shall have the option to pay either in special drawing rights, subject to Article XIX, Section 4, or in the currency of the member making the request.

   (b) The obligation in (a) above shall not apply when:

   (i) the convertibility of the balances has been restricted consistently with Section 2 of this Article or Article VI, Section 3;

   (ii) the balances have accumulated as a result of transactions effected before the removal by a member of restrictions maintained or imposed under Article XIV, Section 2;

   (iii) the balances have been acquired contrary to the exchange regulations of the member which is asked to buy them;

   (iv) the currency of the member requesting the purchase has been declared scarce under Article VII, Section 3(a); or

   (v) the member requested to make the purchase is for any reason not entitled to buy currencies of other members from the Fund for its own currency.

   Explains an IMF author:

   By becoming members of the Fund, they have accepted these obligations and, to that extent, limited their monetary sovereignty. In exchange they have received certain benefits. One of them is that other members too have agreed to limit their sovereignty for the sake of international cooperation and for the common good of all. Another benefit is that in times of crisis they will have access to financial assistance from the Fund if they meet the required conditions.

   As most countries are now members of the Fund, it may be said that full monetary sovereignty exists only in those few countries that are not members of the Fund. In addition to being members of the Fund, some countries are members of regional monetary unions that have limited their monetary sovereignty even beyond the limitations imposed by the Fund’s Articles. For instance, in the European Monetary Union a common currency has replaced the national currencies. Similarly, the West African and the Central African Monetary Unions have their respective common currencies; the member states do not issue separate currencies. These African Unions are even more integrated than the European Monetary Union; for example, they have no national central banks and they have a common system of exchange controls for their financial relations with countries outside each Union. Accordingly, there are today different levels of monetary sovereignty.

   Non-members are nations such as Cuba, North Korea …

   And what about “not revenue constrained” ? No, fiscal policy is balance of payments constrained. Till date the only argument I have heard to counter balance of payments constraint is no, a sovereign government is not revenue constrained!

   So any arrangements – issuing debt maintaining current-account convertibility under Article VIII are voluntary and not intrinsic constraints of the fiat monetary system.

   …

   My prediction is that if adhering to the Article caused a major nation headache for a nation such as the US then the voluntary nature of the acceptance of the Articles would become quickly transparent. The IMF has no legal authority to issue or limit the issuing of US dollars. It cannot force the US government to provide Yuan in return for US dollars.

   Under the Articles of the IMF – a nation violating Article VIII – may be declared ineligible to “use the Fund’s general resources”, have its voting rights suspended or be forced to withdraw.

   “Not intrinstic” is a Giveaway. Anon – listening ?

   Plus there is not only current account convertibility, there is also “official convertibility”. Yes, China may be not be able to redeem its dollars. Neither am I claiming it will. However Russia trading with Turkey can do that. Article VIII Section 4 shows that this claim is not correct:

   First, the dollars never leave the country. Yes, an external holder of a USD income stream can use that stream to purchase goods and services elsewhere given the reserve status of the USD. But what is the problem? Ultimately, the holder of the USD can only realise these holdings by buying goods and services (or assets) denominated in US dollars.

   Its one thing to say China will likely not, but quite another to say it cannot. Anyway the US-China tension is a different case. So if the claim:

   From a ‘money’ perspective, the fact we can ship less and receive more (trade gap) reflects the fact that foreigners have a current desire to net save in $A financial assets. The only way they can realise this desire is to net export to us hold the net $A as cash or financial securities denominated in $As.

   is not right. Japanese can arrive in a ship and sell cars to the Aussies and have the $A proceeds exchanged for ¥ from the BoJ (indirectly through a bank) and BoJ can demand ¥ from RBA/Treasury. These debts are settled bilaterally.

   Any problem with that? None. Such an action would stimulate the US economy, reduce the budget deficit and increase local US employment.

   It will be good for the US but no! the Chinese won’t spend – and the US indebtedness to the rest of the world keeps increasing.

   Answer: they might try to sell the US dollar in the foreign exchange markets

   Good to move away from Chimerica. As of now, the US dollar is under no threat. The Federal Reserve understands this and even acted with supreme confidence and bailed out many banks in the world who faced issues in rolling their funding and these were banks of “sovereign” nations. Other nations do not have this exorbitant privilege. Their monetary authority/Treasury may be forced to settle the debt (as in “official settlements”) in the foreign currency or have to negotiate to sell other reserve assets to the IMF members they are indebted to.

   They can always pursue domestic policies which enhance welfare by spending their own currency – irrespective of …

   Yeah with devastating consequences due to deterioration of balance of payments. If they try too hard, they run into troubles. Hence they do not.

   A thorough understanding of the historical evidence supports that claim. I have not seen one example where a sovereign nation has been destroyed because they have run a continuous external deficit. I also live in such a nation that has large terms of trade swings accompanied by sympathetic exchange rate movements and our standard of living remains intact – budget deficit or not.

   Surely a tall claim! The causality is the opposite. Faced with deterioration of trade, nations deflate in some form or the other – in the sense, pursue demand management policies which keep in mind the external deficit. Australia is doing fine because its creditors have allowed the game to go on. Similar to the US private sector deficit story where the private sector deficit was allowed to continue by the banking system. There were a lot of claims that 60% (household debt to income) – when it was 60% – that it is “not a problem”.

   Plus I am not claiming here that governments run a surplus or balance their budgets! Also you cannot argue “standard of living remains intact” on one hand and worry hugely about the unemployment situation on the other hand. The worry about unemployment is a proof of the fact that the standard of living has not remained “intact”.

   There is no dependence on foreign bond investors. The US government does not require the Chinese or the Japanese to buy their debt in order to spend. It can always spend in US to satisfy its policy ambitions. The debt-issuance arrangements are logically separate from that function and ultimate operationally separate.

   The US Treasury has no overdraft at the Fed. So Japanese and Chinese have to purchase the bonds. Even if the US Treasury had an overdraft, its indebtedness to the rest of the world just keeps rising. Anyway the US is a bit different (though cannot keep pursuing this policy), but such a statement cannot be made about other nations. To make the net lending equal to the net borrowing at such a large scale, would require a depreciation of the currency or higher interest rates provided to foreigners – else the currency becomes depreciated to the point that it is unacceptable in international markets. To avoid this and run into potential balance of payments issues, nations do demand management. (No, hypeinflationista tags please). There is a definite bias for weaker nations which have higher interest rates.

   Fourth, the Article applies to “current account convertibility” which relates to “payments which are not for the purpose of transferring capital.”

   Current transactions – not just the difference between debits and credits, are huge. Its not just about currency convertibility but also about “official convertibility”

   When nations want to trade with one another, there needs to be treaties to <b>settle</b> debt. Of course the present system is far from perfect. But to suggest that nations can seigniorage from imports is chimerical. Imports are made on credit. The IMF is an institution created for establishing the treaties which have resulted after negotiations and power plays. Withdrawing from the IMF is a form of protectionist measure which is not consistent with “imports are benefits”. It also causes retaliation such as sanctions being imposed.

   The monetary system is not a non-system. Any form of doing international trade requires a system.

   At any rate, my interest in this is to point out glaring errors such as the implicit assumption (seen from one of the quotes above “$A”) that imports are purchased in the currency of the nation importing and to point out that even if imports are in $A (less than 50%) foreigners can redeem them through their monetary authorities.

   In economics, battles are rarely won and there are shades of grey .. doesn’t mean one uses the shades of grey to argue with inconsistent facts.

   The post is full of suggestions of breaking laws and treaties. As Maynard said:

   The problem of maintaining equilibrium in the balance of payments between countries has never been solved since methods of barter gaveway to the use of money and bills of exchange. During most of the period in which the modern world has been evolved … the failure to solve this problem has been a major cause of impoverishment and social discontent and even of wars and revolutions.

   Anyways done for a while on this.

   PS: the policy of advocating freely floating, no government debt in foreign currency please (contradictory to “official convertibility”) is backward. Only some nations which have been strong historically have been able to do it.

9. “As time goes by more readers are accessing my blog and those of my colleagues. Small beginnings are now becoming larger if size of audience is any guide.”

   I would also add that I see more and more comments at mainstream economic blogs referencing MMT. Keep up the good work, and thanks for your persistence.

10. The “official convertibility” Article VIII Section 4 reinforces Augusto Graziani’s concept of a monetary economy (1988):

    i) since money cannot be a commodity, it can only be a token money;
    ii) the use of money must give rise to an immediate and final payment and not a simple
    commitment to make a payment in the future; and
    iii) the use of money must be so regulated as to give no privilege of seignoriage to any
    agent

    Graziani’s idea was that settlement requires three agents, the seller, purchaser and a bank. Etc.

    Convertibility can be illustrated by how banks work in a closed economy. Banks’ liabilities are convertible to the State’s money or to other banks’ liabilities – as in one can immediately transfer deposits (transactional).

    Since banks’ liabilities are not settled in the sense which may arise in transactions between non-banks (three agents), they need to be convertible.

    Similarly, nations trading with one another require settlement of debt and that principle (iii) is not violated. So … “official convertibility” ….

11. Ramanan, is it true though that in practice the USA does always pay for imports with USD and exporters don’t insist on having the USD converted by the US into the exporter’s currency?
    Would things work better if in addition to each national currency, there was a universal global currency that floated freely against the national currencies, was used only for international trade and had a bad negative real interest rate to prevent people from saving in the global currency? The agency administering the global currency would make sure that the agency never built up stocks of any national currency. If say lots of global currency was purchased with USD then the agency would immediately exchange the USD for say yuan if people were wanting to sell the global currency for yuan. The point would be to have each nation saving in its own currency and not to have the tragic consequences of the current set up of USD as the global reserve currency.

12. IMF: By becoming members of the Fund, they have accepted these obligations and, to that extent, limited their monetary sovereignty.

    If the GOP ever finds this out, the US is out of the IMF overnight. 🙂

13. Ramanan,

    I am not sure what you want to prove. That the American Government is fiscally constrained due to the need to reduce the current account deficit because the stock of public debt owed to overseas institutions is rising?

    “the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money”

    To me nothing is blown in the Neo-Chartalist Theory. I might have found some gaps in your reasoning though even if I may agree with you that there are serious and real problems and tensions in the global economy which manifest themselves as trade and capital flow imbalances.

    NB it would be nice to provide the references. The paper you mentioned is: “Current Legal Aspects of Monetary Sovereignty, Francois Gianviti General Counsel, IMF”
    LINK_http://www.imf.org/external/np/leg/sem/2004/cdmfl/eng/gianvi.pdf

    Your reasoning seems to be as follows:

    1. The NCToM (MMT theory) states that sovereign governments can spend as much money as they want (they are not fiscally constrained for example by the unwillingness of bond investors to “finance” deficits) however:
    a. if excessive spending leads to breaching the productive capacities barrier by the aggregate demand – inflation will rise
    and
    b. if as a result of increased government spending current account deficit also rises, the long term consequence may/will be an adjustment in exchange rates

    2. You are saying that Mr Gianviti stated that countries which are in IMF are not fully fiscally sovereign and that they have certain obligations in regards to currency convertibility hence the “Neo-Chartalist theory of money” is incorrect.

    3. You give an example of Russia and Turkey or Australia and Japan:
    “Japanese can arrive in a ship and sell cars to the Aussies and have the $A proceeds exchanged for ¥ from the BoJ (indirectly through a bank) and BoJ can demand ¥ from RBA/Treasury.”

    Fine. So you think that the Japs can get yen from RBA and if they won’t get enough yen, Australia will be forced to deflate. I have doubts but anyway…
    there’s a lower hanging fruit in what you’ve written.

    (I can see the ghost of Plato in the reasoning above… there is an ideal Money and real money is merely a shadow of the real Money. We just have proven by deduction and application of legal rules that a certain feature does not apply to the Ideal Money and therefore real money must not behave in a certain way…
    Let’s get back to Earth and Functional Finance – let’s examine the way the system works not what is in “human action axioms” and “legally binding international Treaties” I would say. – anyway this rant is borrowed from Dawkins, it’s not mine)

    You said that this “rule” doesn’t apply to the US. “Yes, China may be not be able to redeem its dollars.” At least NCToM’s claims could be valid in the case of the US.

    So what is all the fuss about? You have contradicted yourself and nullified your arguments. I don’t care how the IMF rules do apply to some weak African or South-American countries. The discussion was specifically about the US.

    Even worse…We all know perfectly well that it is China who does not allow foreign entities to accumulate yuan. Do they conform to the relevant rules of IMF? Can I go and buy yuan and speculate on their currency? The Chinese are accused of sterilising the foreign currency reserves and maintaining a peg. So how can we imagine such a situation in which the Chinese can demand a foreign Central Bank to give them back non-existing yuan?

    The pressure mechanism often applied by the so-called “markets” (Mr Soros and the others) is to drain foreign currency from a country and then when that country is unable to import anything, to force such a country to accept a bailout, foreign currency – denominated loans from IMF and implement an austerity program. A side-effect is a deep devaluation of that currency what gives a golden opportunity to gobble real assets often sold at fire-sale prices by the government to lure foreign investors.

    Now the most interesting thing. You have quoted the IMF document selectively. I can do the same:

    “As a change in the value of a currency is not a breach of international law, a state is not liable for its consequences on holders of its currency, or on creditors or debtors with respect to obligations denominated in that currency.”

    What does it mean? That the Americans can legally stuff up the Chinese as long as other countries accept USD as a means of payment.
    (even blaming them for the outcome, what I’ve already mentioned – see the document – “Under the present Articles of Agreement of the IMF, there are certain limitations on members’ right to determine or change the value of their currency: … a member may not manipulate exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members” – this is exactly what the Chinese are accused for, I am not saying that I agree or disagree with that statement)

    Otherwise the whole global financial system collapses because USD is the global currency. This is the “lose-lose” scenario in the game. I simply can’t see that this threat may push the American government to reduce deficit spending.

    “Deficit hawks” are the enemy within. They simply want to dismantle the state institutions by denying their funding because they think that private sector will have higher profits then and the wealth will trickle down. They also believe that laissez-faire will always win a competition with state capitalism and mixed system (this is where I think the neocons are fundamentally wrong).

    Now let’s list the issues where I might agree with your intended point of view (if I interpret it correctly)…

    I agree that there are other problems related to the current imbalance which cannot not be solved by just increasing (G-T) e.g. by reducing tax rates for the richest (what is incredibly stupid in my opinion). Money must be spent wisely. The problem facing the US not just lack of aggregate demand. The problem is much deeper and it may take days to describe it in detail.

    As a non-economist I disagree that the trade imbalance is always good for the country receiving the “free cargo”. The Chinese are using the trade imbalance to strengthen their productive sector – this is the real benefit from their mercantilist policy (think about Germany under Bismarck and Kaiser Wilhelm) . If there is a global political conflict looming, the surplus countries can use their USD reserves to buy up commodities from exporters and damage the American/ Western economy by triggering cost-push inflation – this is a real threat. A violent adjustment in exchange rates (if the Chinese sell their USD-denominated assets) can also lead to an instability if the Americans are stupid enough to target inflation rate (we can safely assume that they are due to the vested interests mentioned above).

    However the most serious long-term problem in my opinion is related to a rising rate of government investment in research and development in China compared with the US. When the Chinese overtake the Americans in R&D especially related to energy-efficient technologies the American Global Empire is done. So the last thing the West should do facing that threat do is to introduce austerity programs. The “fiscal breathing space” provided by the MMT has to be used wisely to cure the social malaise related to unemployment and to foster scientific and technological progress. But I am afraid that the real “Sputnik” moment has arrived and nothing is going to change… the wise will win, the stupid will lose but it will take time… 10 or 20 years unless there is an awakening in the West.

    So in my opinion there are no fiscal constrains but there are every real and serious physical and political constrains facing the American economy and society. But this is not the same as saying that the Neo-Chartalist theory of money is wrong.

14. If I can break away from the anti-blog for a moment…..

    the entitlement that I prefer to focus on is what our children should expect from their parents and government: the tools with which to compete in a world where highly populated emerging nations are crossing the divide into developed and sophisticated, in a way that wasn’t a feature of previous decades. My (our) children will enter a completely different workforce than I did, and need to enter it in 10-20yrs equipped to be able to compete with increasingly vast numbers of highly educated Chinese and Indian students (just to pick the two most obvious candidates). I don’t see how this can be achieved by scrimping and saving on education (and RnD for that matter), which is just about the best returning asset we have, and oing so ubder the cloak of ‘fiscal rectitude’. It’s only problem is that it doesn’t have ‘immediacy’ of return, which is why the focus on it is inadequate, and ultimately to the nation’s detriment. And that is why the shambles that is the youth labour market is such a concern….and just think about all this (faux?) concern about ‘dependency ratios’. Does it not make sense to invigorate (an stimulate) this sector for dependency reasons as a first iteration? Yes it does, but it makes more business sense to equip them for it in the first place.

15. “So what is all the fuss about? You have contradicted yourself and nullified your arguments. I don’t care how the IMF rules do apply to some weak African or South-American countries. The discussion was specifically about the US.”

    Adam,

    I will come back to you due to shortage of time. But had to reply to two points.

    Yes its about the US and not about the US. What I have repeatedly pointed out that one cannot mix-up the US’s higher ability to run trade deficits compared to other nations as a core example to establish a theory.

    About redeeming the dollars – that decision will be of international courts not the decision of a theory.

    Rather, its important to look at trade between one non-US nation and the rest of the world and look what is going on and apply it to the US, instead of doing the opposite. Its like saying Ayrton Senna can drive his F1 at superspeeds so everyone can do that.

    On the reference, I just quoted the IMF author to put a point across nothing more.

16. “I think the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money”

    I’m sure you believe it does in your world.

    However in the real world Nixon dealt a devastating blow to Bretton Woods and the National Socialist dealt a devastating blow to War Reparations.

    “About redeeming the dollars – that decision will be of international courts not the decision of a theory.”

    On that point I refer you to UN security council resolution 446. Words are meaningless.

    “Its like saying Ayrton Senna can drive his F1 at superspeeds so everyone can do that.”

    Are you sure you’ve got this straight up? The US ability to drag real goods out of the rest of the world is unusual.

    The default condition for the external sector is one of balance – the world will only allow you to import what you can pay for in exports. However there is a disequilibrium there you can take advantage of if people in other countries of the world choose to inhabit your currency zone because they believe your zone offers better options than their own.

    In reality what is happening is that people are trading currency risk backwards and forwards. The optimal position is that the currency risk is always with your counterparty – the position the US takes due to its dominance. It no doubt can export in dollars and import in dollars with abandon.

    Which leads to the obvious conclusion – you should try to export in your own currency. If you’ve got something the rest of the world wants then give them the currency risk. And it makes sense – if you’re giving something real away you want a temporal money token you know you can use.

17. Ramanan,

    “its important to look at trade between one non-US nation and the rest of the world and look what is going on and apply it to the US,”

    Please re-read what I wrote about Plato. This is the core issue in the current dispute and one of the most important problems with the neoclassical and Austrian economics as well. You must not make an attempt to deduce anything from the first principles. This is not maths or theoretical physics. Economics is a social science and it is based on induction. Of course the system has to obey certain rules (boundary conditions) like GDP accounting but the rest is determined by the behaviour of the agents acting in the society. We cannot deduce from the first principles whether households will start deleveraging or ramp up the debt level. This depends of the “behavioural” factors.

    Also – I would be very careful in stating that “one cannot mix-up the US’s higher ability to run trade deficits compared to other nations as a core example to establish a theory” since the ability of other nations to run trade deficits is determined by the willingness of the surplus countries to accumulate debt of the debtors. In the Australian case the most of the debt position is against the banks rather than the Government. There is nothing wrong with the theory which says that governments are not fiscally constrained in buying products and services available on the domestic market. The theory doesn’t guarantee that there will be no leak of aggregate demand as the marginal propensity to import is greater than zero. The theory even explicitly states that there will be adjustments of the exchange rate. What needs to be highlighted is that there are 2 separate phenomena –
    1. Somebody (the government of country A) is buying something on the market. It is virtually impossible to discriminate between products made locally and overseas in the county B (this is the principle of globalisation)
    2. People living in the country B are not willing to buy an equivalent amount of products from the country A and as a result choose to accumulate debt of A (financial assets) instead. This may be aided by the Central Bank in B by sterilisation of the foreign income and suppressing the appreciation of the exchange rate.

    Country A cannot do anything about the trade deficit with B (unless they impose tariffs) but country B cannot do anything about the budget deficit in A as well. Debt and money (financial assets) are like 2 parts of a tally. It is not true that “debt is money”. Money is created when liabilities and assets are created – money are the assets and debt are the liabilities. They live separate lives and can only be joined together when money is extinguished, when the debt is repaid. But government money is a very special type of liabilities of the government which does not need to be extinguished and it is the Government which decided whether they want money to be extinguished by levying taxes.

    I do not want to say that we won’t hear any arguments of deficit hawks that the Government has to reduce the deficit because foreign debt holders may do something bad. But this is just plain propaganda to me. In the worst case scenario an exchange rate may fall and the Central Bank may need to limit the currency convertibility (like in Malaysia in 1997). Also – when foreign entities are no longer interested in accumulating financial assets from the country A, the current account balance must be close to zero. Of course there may be some political forces which hate such an outcome as they like receiving free lunches. This should explain why the topic has recently been “discussed” or rather obfuscated in the media.
    We also should clearly distinguish between economics (we may try to call it science) and the political reality. In my opinion it is not a part of any economic theory that some European countries are less politically sovereign than some other. Iceland did not fully accept the poisoned chalice of EU/IMF “bailouts” while Greece and Ireland did exactly what they were told to do. Does the proximity to Turkey or the UK invalidate the MMT and reduce the fiscal space available to the Governments?

    “About redeeming the dollars – that decision will be of international courts not the decision of a theory. ”
    Which theory? A Marxist would say that the reasoning presented above is “a-historic”, that the political reality is ignored. Someone else may say that it is just naive. The American Government has shown repeatedly that they enjoy using legal instruments and applying concepts like “human rights” only if it suits them. Otherwise they have B-52 bombers or Predator drones or whatever they need even including nuclear weapons. I would like to recommend the books written by prof Michael Hudson – he openly discusses the American monetary and fiscal policy in the context of the global political domination. The whole global economic system has been designed (or allowed to evolve) in such a way that free lunches are delivered to a certain social group living in the US (and some other Western countries). Only recently the status quo has been challenged by the developing countries refusing to enter another Plaza accord . But going to an international court to request changes in the American fiscal policy is probably equally efficient as suing a Mafia boss in Southern Italy.

18. Ramanan: “Rather, its important to look at trade between one non-US nation and the rest of the world and look what is going on and apply it to the US, instead of doing the opposite.”

    So true. It definitely seems to me that MMT, as it is discussed here, it’s an economic theory that only applies to the US (and maybe a few other countries).

    Moreover, I am puzzled when some self-proclaimed progressive like Bill and his followers are in favor of the US keep abusing its privileged position conferred by the international status of the US dollar. Not to mention how this contradicts the bashing of the euro at every possible opportunity when the main economic reason behind the euro is for the eurozone to get the same benefits the US have wrt the rest of the world.

19. Adam,

    A lot to respond again.

    My objective in this post was to talk about the “State’s liabilities”.

    There are too many things here. Current Account Convertibility, Capital Account Convertibility, Market Convertibility and more importantly Official Convertibility. For this, the best reference is Legal and Institutional Aspects of the International Monetary System by Joseph Gold, International Monetary Fund, 1981. Some Post Keynesians refer to this text frequently.

    Sorry I couldn’t catch what Plato said and what connection there is here with Plato. Not sure Economics is based on intuition because neoclassical economics seems to have been based on “intuition”.

    Lets get this straight – a current account deficit is a weakness of a nation and highlights the inability of the producers to sell their products to the consumers to the fullest. A current account deficit increases indebtedness to the rest of the world and something needs to be done. Unfortunately, this is cured by a deflationary bias in demand through fiscal and monetary policy rather than taking some different action which is good for all.

    Its a bit surprising that this point has been missed – instead there is dancing around how others get it wrong.

20. MamMoTh,

    “So true. It definitely seems to me that MMT, as it is discussed here, it’s an economic theory that only applies to the US (and maybe a few other countries).”

    I will go further and say that it even doesn’t apply to the United States. Tim Geithner has mentioned at various international meets that the US will keep its fiscal policy relaxed for a while to help the private sector. But he also understands the deflationary pressure created due to China’s policies and is negotiating hard to do something. Ben Bernanke has mentioned on various occasions on how indebtedness to foreigners will keep rising. Of course his solution to the problem (discretionary attempts to hit primary surpluses on fiscal balance – not now – but a few years down the road – is bad as well)

    The Euro zone on the other hand has its set of problems – such as limited powers of the governments and which keeps worsening. The ECB has the powers to prevent governments from defaulting and keeping yields low. The problem there is a balance of payments problem as well! At a much more severe scale.

    The MMTers seem to think that since the US indebtedness to foreigners is in USDs, its not an issue worth worrying because the US is the “monopoly issuer of the dollar”. Well, if its constrained in doing so in the first place, then of course its a problem. But then the argument “not revenue constrained” … !

21. Neil: Which leads to the obvious conclusion – you should try to export in your own currency. If you’ve got something the rest of the world wants then give them the currency risk. And it makes sense – if you’re giving something real away you want a temporal money token you know you can use.

    This is what Michael Husdon is advising the Chinese – effectively having the US buy stuff in China instead of China selling its stuff in the US. But this creates demand for yuan, which China doesn’t want either. Then there is also the matter of a capital account surplus matching the US CAD in the absence of China saving in USD. Apparently China prefers to accept the currency risk in order to export favorably – and then grouse about the currency risk.

22. Dear Ramanan (at 2011/03/13 at 3:07)

    Your views are virtually indistinguishable from the deficit terrorists these days. That is a disappointment.

    Some months ago as you descended into orthodoxy, you promised to produce empirical evidence to support your view that the current account could wreck a fully sovereign nation. You are still to produce that evidence yet you seem content to ramp up the unsupported claims.

    In recent days, you seem to have become transfixed on Article VIII of the IMF Articles, which you have claimed renders MMT void. You don’t seem to have a feel for history at all and the way these Articles have been interpreted and violated often without recourse. You seem to be believing that the IMF is a more powerful institution than what it actually is. Only foolish politicians would ever let the IMF bully their nation around. There is no sanction enforceable in international law that places the IMF above a sovereign nation’s polity. I am sorry you cannot see that.

    Further, you claim in an earlier comment (at 2011/03/13 at 2:52) that – in the interests of “Lets get this straight” that:

    … a current account deficit is a weakness of a nation …

    This is pure orthodoxy and plain wrong. A current account is an accounting record that records voluntary exchanges between a local economy and foreign buyers and sellers. All exchanges are made on the basis of an equivalent exchange of value – by choice and preference. The use of the term “weakness” in that situation is inapplicable.

    For a nation running a current account deficit it is enjoying material benefits (real goods and services) and giving financial claims (usually in its own currency) in exchange. Both parties are happy with that. Yes, it can turn ugly if the foreign entity who has been willing to accumulate financial assets denominated in the local currency, changes their mind and no longer is willing to run the real terms of trade in favour of the local economy. If that decision is rapid then there will be pain because the basket of goods and services being enjoyed locally becomes more expensive and/or unavailable. But the cases where that happens is rare and exchange rates adjust to attenuate the consequences.

    So it is a case of enjoying the material advantage while it lasts. Australia runs permanent current account deficits and enjoys the real benefits that that brings.

    But whatever, none of this constrains fiscal policy for a sovereign government. They can always purchase local goods and services available in the currency of issue and ensure full employment. There is no constraint on the government purchasing idle labour and providing it with a stable income. The balance of payments swings may alter the real value of the stable income but that is another issue and in no way represents a financial constraint on the sovereign government.

    Such fiscal freedom applies to all governments which issue their own currency, allow it to float freely and do not issue debt denominated in a foreign currency. You are plain wrong to assert otherwise.

    Given your views, I am surprised you still read my blog and participate in the discussion. Your input these days is by way of mis-information verging on hysteria.

    best wishes
    bill

23. While I agree with Bill that in and of itself a CAD does not pose any risk to a country, Ramanan might be better of to point out that a CAD may be emblematic of an economy that has deindustralised and moved toward …”Ponzi” activities… property speculation, asset bubbles and other “non-productive” enterprises. Switzerland, Austria, Germany and Norway actually produce things (or in the case of Norway oil) and have current account surpluses; Australia, America and the like are increasingly deindustrialised (i.e. have an eroding manufacturing base, tendency toward higher property prices). CAD might be just one indicator that things won’t be too bright in the future.

24. Bill,

    Let me post this comment, I started writing it earlier. I believe the questions Ramanan asked are valid and the real value of participating in this discussion is that it forces us to revisit these issues again and to do our own research to produce arguments.

    Ramanan,

    On which planet do we live? One inhabited by lawyers, philosophers and rational agents or one inhabited by shrewd politicians, greedy bankers and ordinary people who are often brainwashed? So we have the second economy in the world (China) which is also at the centre of the controversy in regards to trade balance, which is a member of IMF but whose currency is not fully convertible. This only shows how relevant the principles of global financial systems are. If your country is strong, nobody will dictate anything. If your country is weak, forget about any justice.

    Unfortunately I have to address a few much deeper issues to put the whole issue of current account imbalances in the proper context.

    The global economic order and the global financial system are not based on the rule of law which leads to the best possible outcome for everyone – the “win-win” scenario. The global economy is a mess and to some extent is a zero-sum game (at least in regards to limited natural resources). There is a Polish proverb saying that you catch the biggest fish in murky water…

    An imbalance in trade may or may not itself be a problem for the countries which receive “free cargo”. In this context the pricing structure of international trade should also be considered. The wealth of West has been built on these imbalances. So we have the most important source of energy, oil, which is not renewable and running out fast, which is still cheaper than so-called “drinking” water (sold in bottles made from that oil). This should rise our suspicions that we do not necessarily live in a system which is in a long-term equilibrium.

    We do not only have raw commodities, we also have labour, applied in China or India to produce goods which are then sold to rich countries. “Total labour costs in India’s formal manufacturing sector are expected to average US $2.68 per hour in 2010 compared to China’s US $2.51.” source_http://press.ihs.com/press-release/country-industry-forecasting/ihs-global-insight-study-finds-indias-manufacturing-labou
    I could not find the data for the US what itself is kind-of funny and says something about what we are not supposed to discuss but we can easily assume a factor of 5-10. Obviously we may need to include the productivity factor to fully understand the impact of this data but I don’t want to build a numerical model of the global economy (yet).

    The usual IMF policy recommendation for developing countries having currency exchange rate and capital account issues (e.g. in Latin America or East Asia in 1997) was to further reduce the cost of labour (by currency devaluation and austerity programs involving rising interest rates) and compete in the race to the bottom. Do you see what I mean?

    IMF is just a tool in entrenching these global income inequalities. The idea of the post-colonial era global order was very simple – rich countries were selling expensive highly sophisticated goods to the poor countries while poor countries were supposed to make cheap basic goods using cheap and abundant raw materials. I think that you should interpret “theories” invented by IMF in that context. These “theories” are just elements of propaganda telling the serf that serfdom is good for him. (Remember that serfdom was only abolished in Poland in 1864 so I know what I am talking about).

    The capital account imbalances are just artefacts of this big global struggle. They are marginally relevant. Foreign debt in foreign currencies can be very dangerous but the level of the foreign debt in a domestic currency isn’t something we should be overly concerned.

    The key issue is whether a country which runs a CA deficit and has agreed not to impose tariffs should enter the race to the bottom by running austerity programs or rather keep moving forward knowing that there may be jitters related to the exchange rate changes but the real economy will grow anyway. The neo-classicals say : self-mutilate your body, maybe you’ll feel better afterwards when you recover. I disagree.

    Unfortunately (for the US and the West in general) and fortunately (for the Chinese) the scientific and technological abilities of China (and other developing countries) has grown enough to remove the basic vulnerability and dependency on the West. This is the only practical way to turn the tables on the neocolonial masters of the universe. This is the real dimension of mercantilism in China (and other developing countries) – to build productive capacities while raw materials are still cheap and abundant – at any social and environmental price. I believe that the Chinese and the Indians have every moral right to succeed even if this means a smaller piece of the pie left for the Western countries but I may not fully agree with all the methods used to achieve that goal.

    The Chinese may also want to create a critical dependency the other way around. It is not about killing the American industry but about exploiting the features of the American “Greatest Democracy Ever in the World” where money rules and everything is for sale. Everyone knows that it would take at least a few years to rebuild factories in the US should the Chinese stop delivering the “free cargo”. The critical vulnerability of the West lies not in the fact that the Chinese may want the American debt repaid or may even sacrifice the value of their debt holdings and destroy the global financial system based on USD by dumping all the USD holdings. This would be counter-productive and I fully agree with the MMT here. The critical vulnerability lies in the dependency of profits of the American corporations on importing cheap products from China. The American plutocrats lobby very hard for reduction of budget deficits. The real reason is that they want the money-from-the-thin-air making machine to run for a few more years and they don’t want any competition from the state in hiring workers. They also fret about the exchange rates. So the state institutions and trade unions need to be dismantled. Coincidentally the Chinese will also be happy to see the power of the American state greatly reduced…

    We in the West should simply mind our own business and accept the rise of the East. We should forget about maintaining the current status quo (strong currencies and the post-colonial trade imbalances) because it is not only unjust but no longer serves the long-term interests of the Western societies. Functional finance-based policies should be deployed to increase investment in education, science and R&D to win the next round of the real global struggle – not against the Chinese but against the forces of the Nature which we have unleashed against ourselves. Functional finance-based policies should also be used to stop the rot in our societies caused by the high unemployment.

    Now to address your specific point – what happened when somebody in a developing country (Malaysia) did not follow the recommendations of IMF? I am not endorsing the views of the author, I just want to show that there is an alternative to the IMF-endorsed policies:

    “Malaysia was more lucky than other countries affected by the crisis, like Thailand, Indonesia and South Korea. We were not in a debt default situation, and thus did not have to turn to the IMF for loans. Those countries had to obey the IMF, and lost their policy autonomy.
    The result was high interest rates, continued currency depreciation, and deregulation of foreign ownership that led to the foreign takeover of many local assets.
    Initially Malaysia also voluntarily took on IMF-type policies. But this did not work, as the high interest rates added to the corporate and banking crisis; the flexible exchange policy enabled the ringgit to depreciate (at one time almost touching five ringgit to the dollar); the freedom of capital mobility allowed funds to flow out; and the cutbacks in government expenditure added to recessionary pressures.
    In 1998, a year after the start of the crisis, the Malaysian model was introduced. This package comprised:
    The core macroeconomic measures of interest rates, monetary and fiscal policies. Interest rates were significantly reduced, allowing firms and consumers to breathe again and then to borrow, thus improving investment and consumption conditions.
    The statutory reserve requirement was reduced to increase liquidity, and banks were encouraged to increase lending. And government boosted its spending, to get the economy moving again when the private sector was in the doldrums.
    These measures are consistent with the policies advocated by the great English economist John Maynard Keynes and are an integral part of Economics textbooks. They are taken by the US administration when the US is in recession.
    But they are forbidden to countries borrowing from the IMF, which has insisted on a combination of high interest rates, tight money flows, and government expenditure cuts. Thus ironically the Malaysian economic policies were seen as “radical” when they should be considered as standard Keynesian anti-recession policies.”

    source_http://www.twnside.org.sg/title2/gtrends1.htm

25. Your views are virtually indistinguishable from the deficit terrorists these days. That is a disappointment.

    Some months ago as you descended into orthodoxy, you promised to produce empirical evidence to support your view that the current account could wreck a fully sovereign nation. You are still to produce that evidence yet you seem content to ramp up the unsupported claims.

    Aah .. the moral trump card and all!

    I told you .. Mexican Peso plummeted in 2008 .. you changed the topic and started discussing 1994.
    .. so did the Turkish Lira and the Korean Won … whereas MMTers kept saying “not a problem” … need links ? Humongous depreciations!
    (clarification – Korea had indebtedness to the rest of the world in spite of doing well on the external sector because of historic reasons).

    Even the Australian Dollar plunged when banks were facing funding issues .. did the sovereign government bail them out? .. no the help of the Federal Reserve was needed 🙂

    In recent days, you seem to have become transfixed on Article VIII of the IMF Articles, which you have claimed renders MMT void. You don’t seem to have a feel for history at all and the way these Articles have been interpreted and violated often without recourse. You seem to be believing that the IMF is a more powerful institution than what it actually is. Only foolish politicians would ever let the IMF bully their nation around. There is no sanction enforceable in international law that places the IMF above a sovereign nation’s polity. I am sorry you cannot see that.

    Yes it is a powerful institution. Its role in this crisis has increased a lot. Its the lender of the last resort to Governments. Which world are you talking of ? I thought the IMF writes many nations budgets. Here is one from your previous blog I could manage to quick search.

    “The IMF did not only fail to see the crisis coming. They forced policies on nations and pressured governments everywhere to introduce policies which directly contributed to the crisis. The Evaluation Report fails to identify that.”

    The Article VIII Section 4 is an agreement or a treaty.

    Anyways, proves MMT’s position on “State’s Liabilities” wrong doesn’t it ?

    The use of the term “weakness” in that situation is inapplicable.

    There is an amazing confusion regarding an accounting identity which has been promoted to the status of a behavioral relationship here.

    A current account is an accounting record that records voluntary exchanges between a local economy and foreign buyers and sellers.

    Yes CDOs of CDOs of CDOs were also voluntary exchanges. Even in the Argentinian case it was voluntary. Of course I understand you distinguish “out-of-paradigm” versus in-paradigm but these transactions were voluntary nonetheless. And yes it an accounting record which feeds into the stock of international indebtedness by increasing it. Accounting!

    Australia runs permanent current account deficits and enjoys the real benefits that that brings.

    Yeah right. With persistent problem of unemployment and not being able to use its resources fully.

    Lehman Brothers was writing in all quarterly reports and reporting on investor calls that it is doing fantastic with all the leverage and investors continued to like the stock!

    The balance of payments swings may alter the real value of the stable income but that is another issue and in no way represents a financial constraint on the sovereign government.

    Assertion in reply to a what you claim is an assertion. Any example of a nation which has reached full employment with guzzling imports ?

    Such fiscal freedom applies to all governments which issue their own currency, allow it to float freely and do not issue debt denominated in a foreign currency. You are plain wrong to assert otherwise.

    So clearly Australia is not included in this definition because it still has $7m of debt in foreign currency right. Okay one may object “too small” .. but where does it stop .. for I can argue $15m is small, $150m is also small … $1.5b ? $150b ?

    Even the Bank of England has some €-denominated liabilities.

    For a nation running a current account deficit it is enjoying material benefits (real goods and services) and giving financial claims (usually in its own currency) in exchange.

    Own currency ? Sorry RBA says imports are invoiced more in USDs than in AUDs.

    The confusions here around here on balance of payments is a rich cousin of the confusion – “if loans make deposits why do banks need financing”

    Given your views, I am surprised you still read my blog and participate in the discussion. Your input these days is by way of mis-information verging on hysteria.

    I am trying to get across correcting a supreme misunderstanding here … for public purpose ! Thank you for the blog, for some commentators point out very interesting points which forces me to think.

    PS: I have taken special care to not make the exchange acerbic. But a bit of aggression from the other side has led to some from this side.

    PS2: The Article VIII Section 4 goes into the fundamental problem of settling international debt. It cannot be otherwise.

26. Hi Bill!

    I would appreciate it a lot if you could comment sometime on Athanasios Orphanides’ (who is the head of Cyprus’ central bank) claims regarding output gap estimations. They seem to have become very popular in academic discussions

27. Dear Bill,

    Ah, its grand to see the petards hoisted! And funny because the doors are wide open!

    From what you have mentioned in passing, I would bet that on your first student day (or soon after) intro to economics, something inside of you felt uncomfortable with the presentation – and from that day onwards you placed yourself outside of the mainstream body of thought.

    If mainstream economics were a mist in the valley, you were the guy that climbed a little higher up the slopes. There’s a lot of ‘clever’ people swanning around down there in the mist who have no idea what you are talking about, because (to me at least) it’s not really a conceptual thing but actually a ‘vision’ thing! A simple matter of perspective down to elevation. I think the word ‘intelligence’ needs redefinition along these lines.

    It’s the snarky ones that make me laugh – I don’t think they bite at you or MMT with any less gusto than they would bite at anything. It’s hard to imagine a better world when you are conditioned to believe that the fog is the only reality – ever!

    I would also bet that you are still very attached to the mist: you keep on blowing on it trying to clear a little away! This is highly commendable and useful to people like me – but the only way that fog is going to disappear is when the sun comes out!

    I could mention what this means to me but am sure it would be like drawing a line in water. As a poor alternative, maybe if all of the constellations came together and spelled out in the night sky:

    ‘Ahhh – austerity for the poor while the rich get richer?’

    Well yes, we can run out of resources – but how pray tell, can our $printers$ run out of ink?

    – might generate some discussion down in the fog! But I doubt it. Miasma, fiasco and concepts rule the waves.

    Meantime, the world lurches from one absolutely avoidable disaster to another, and wonders what happened! People don’t question anything about the vulnerability, temporality or even integrity and honesty of their social systems, even when the tectonic plates rock – which you would think would at least wake them up!. The first thought is how to restore the status quo! Win battles in the fog. Manipulate the dream – above all, precious concepts must not be disturbed!

    Even Rama had to ditch the social order to win back Sita!

    Which means besides blowing on the mist and being incredibly useful to others, I do hope you find some time to play and enjoy yourself Bill. Turn around twice and blink a few times and it’s time to go!

    Cheers,
    jrbarch

28. Ramanan, when you say I think the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money. you are making an elementary mistake. An economic theory can not be invalidated that way. At best what could be shown is that an international agreement has such and such consequences, that the IMF agreements dictate that nations follow policies that the Neo-Chartalist theory of Money considers suicidal.

    Suppose there were an IMF article that said: Any nation using functional finance, modern monetary theory, Keynesian stimulus, modern antibiotics, attempting to grow economically, have greater equality or lower unemployment or in any way improve its own lot will be punished by economic sanctions, cutting off its petroleum supply, trade wars, etc for trying to thwart the plan of our mutant interdimensional reptiloid masters to turn Earth into their cattle pen.

    This article doesn’t make functional finance etc theoretically invalid or an intrinsically bad idea for humans. It just means that surprise, surprise – our mutant reptiloid masters didn’t have their cattle’s best interests at heart when they wrote the IMF treaty.

    The IMF for the last 40 years or so has been nothing but an international criminal organization, dedicated to wreaking economic destruction and destabilizing global finance. Anarchy, no such treaty or agreements would work better for the human race than having an IMF around its neck. Specialized international courts and trials to try this criminal organization’s membership would be a fine idea, notwithstanding that most of its economists etc would successfully plead not guilty by reason of insanity by pointing to their Harvard or Chicago educations.

    Don’t have the time or energy to read the treaty and your comments in more detail now and write a fuller reply. But in spite of the above, it does not seem to me that the IMF treaty provisions are correctly interpreted as such demands from mutant reptiloid masters. That correctly interpreted legally, let alone in practice, they do not seriously restrict nations, most especially the USA, whose puppet the IMF has been since its inception.

29. “The Article VIII Section 4 is an agreement or a treaty.”

    yes , so was the munich agreement 😉

    “international law”

    these two words are almost a contradiction in terms,

    the IMF can have all the rules we like about international payment terms and conditions, but they are vestiges of a by gone gold standard age.

    the sovereign and incorporated and non encorporated entities under the soveriegn determine payment terms and conditions not some extra national body.

    as bill alludes to, in an age of floating exchange rate mechanisms, the less time spent listening to the IMF the better, and that includes the mexicans and their penchant for accumilating US dollar denominated debt, a stupid idea if there ever was one.

    yes,adjustments to current account shocks can be difficult, for some sectors of the economy

    but thats why you have a sovereign floating exchange rate to absorb part of that shock.

    “Own currency ? Sorry RBA says imports are invoiced more in USDs than in AUDs”

    so whats the problem, locals just draw down there local currency reserves and convert to USD. doesnt stop the government from re stocking those reserves through spending in the local currency

    “Even the Australian Dollar plunged when banks were facing funding issues .. did the sovereign government bail them out? .. no the help of the Federal Reserve was needed ”

    term funding mismatch and rollover risk is a major risk for our banks, but that doesnt stop the government from setting up a funding vehicle in the local currency if it chose to do so .

30. I followed this discussion about some obscure IMF rule only loosely but for me the statement “I think the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money” borders on the absurd. It’s like Ramanan reading an ancient book finding the rule

    That, if a straight line falling on two straight lines makes the interior angles on the same side less than two right angles, the two straight lines, if produced indefinitely, meet on that side on which are the angles less than the two right angles.

    and then walking over to Bill’s department telling him: Listen I’ve found this age old rule which delivers a lethal blow to all your theories. Can you please stop with your nonsense and play by the rules set-up thousands of years ago and agreed on for centuries by all the wise men in the world.

31. Keep it up guys ….

    To me it sounds like everyone trying to come up with something – no it doesn’t matter kinds …

    Looks like everyone is going through a denial stage here …

32. “For a nation running a current account deficit it is enjoying material benefits (real goods and services) and giving financial claims (usually in its own currency) in exchange.”

    So are we back at agreeing that this doesn’t apply to countries that pay for their imports in foreign currency?
    How true is it that countries usually import in their own currency? I would say the opposite is the case.

33. Ramanan,

    I do not understand what you want to prove. If you are interested in a serious discussion about political and economic choices between the austerity and fiscal intervention and factors (not)limiting the size of the intervention then please respond to the arguments rather than try to assess the state of my consciousness.

    The main argument in the current round of discussion is that the voluntary obligation to provide full convertibility of the currency which is included in the IMF Treaty is not enforceable if the country is in a financial crisis and therefore it is not a factor limiting “a priori” the set of policies available to a sovereign state. Even if it was a factor it would be an exogenous political limitation on the functioning of the monetary system not something what defines it. The rule I mentioned was not enforced in Korea, Malaysia, Argentina and Russia during the crises. None of these countries was expelled from the IMF. But if too much pressure is applied, the country which is in a trouble can always leave the IMF and this is perfectly legal.

    Articles of Agreement of the International Monetary Fund
    Article XXVI – Withdrawal from Membership
    Section 1. Right of members to withdraw
    Any member may withdraw from the Fund at any time by transmitting a notice in writing to the Fund at its principal office. Withdrawal shall become effective on the date such notice is received.

    There is an interesting legal issue closely related to what is in the IMF Treaty. Certain countries such as Poland have the maximum level of public debt and in some cases the size of the deficit written into their constitution.

    (Polish Constitution)
    Chapter X – PUBLIC FINANCES
    Article 216
    …
    5. It shall be neither permissible to contract loans nor provide guarantees and financial sureties which would engender a national public debt exceeding three-fifths of the value of the annual gross domestic product. The method for calculating the value of the annual gross domestic product and national public debt shall be specified by statute.

    Does it mean that C + S + T is not equal to C + I + G + (X – M) in Poland?
    Does it mean that the Neo-Chartalist Theory of Money does not apply in Poland?

    No, it only means that the Government in Poland has limited fiscal powers to intervene when a fiscal intervention is needed and the Parliament may need to amend the Constitution and possibly remove Poland from the EU (or ask the Government to renegotiate the Accession Treaty) if such a need arises (Government spending by “emission” of money is forbidden somewhere else). NB there is obviously a lot of problems with the debt ceiling right now while unemployment is rising again (13% ) that’s why I mentioned this issue.

34. Ramanan has some deep seated bias. If I remember from previous posts he was beating a drum about India needing to run a trade surplus, or avoid excessive foreign held public debt. Sounded like he had lost objectivity and got a bit nationalistic to me. Though I don’t even know if he’s Indian.

    Difficult to understand his posts, he is very thorough and detail oriented, but not such a good holistic thinker. Bill is a lot more plausible.

35. ak,

    I am NOT arguing for fiscal austerity and know the tremendous power of fiscal policy and the tag ‘deficit terrorist’ is a giveaway – a Mea Culpa.

    Governments are frightened of potential balance of payments problems and its a moral play to ask them to go on an expansionary phase. Relaxing fiscal policy increases national income but comes with an increase in indebtedness to the rest of the world because of deterioration of the balance of payments.

    (digression: there is a hiding here from this, and a post was written called ‘twin deficits myth’ or something of the sort, which effectively had the innuendo that fiscal expansion doesn’t lead to a deterioration of the balance of payments. Read Randy Wray’s “Seigniorage Or Sovereignity” and you see him talking of scenarios where Japan can expand fiscally and turn its trade surpluses into deficits).

    Lets be clear – fiscal expansion, if the rest of the world is not expanding leads to a deterioration of the balance of payments. Now one can think of many ways in which this doesn’t happen – for example … exporters gain competitiveness abroad etc, there is a mining boom etc but note fiscal expansion itself doesn’t led directly to increased export competitiveness).

    Will assert this for the (n+1)th time – fiscal policy is effective only as long as the external sector allows it.

    Statements mixing up imports with increase in claims of foreigners (such as reply to me above) mix up causalities – rather have no commitment to the causality.

    The way you have been talking – citing cases where the rules were not followed well – am aware of them. However that doesn’t mean that you go breaking the “Articles of Agreement”. People break traffic rules – sometimes intentionally, sometimes not intentionally and they are excused sometimes. Doesn’t mean everyone goes around breaking the traffic rules.

    Yes one can withdraw from membership – not sure what the consequences are and have to come back on settlement of debts with other members. Few non-members are Cuba and North Korea and I guess they run currency board arrangements to make their currencies acceptable in international markets.

    Andrew,

    Not sure what I talked of India. The last time I mentioned was the nation accepting to import US goods with no cribs attached so the ‘nationalistic’ tag doesn’t help.

    As far as foreign debt is concerned .. not necessary to think of just the foreign held public debt – the whole of international investment position has to be studied.

    Also talking of holistic thinking – here is a claim – I am supremely clear on these things and hence have taken so much effort to point out the confusions on the other side.

36. When Spadj wrote -a CAD may be emblematic of an economy that has deindustralised and moved toward …”Ponzi” activities… property speculation, asset bubbles and other “non-productive” enterprises. –

    -that really struck a chord with me because before I had heard about MMT or chartalism my crude grasp of how things worked was chartalist but I thought that our system was specifically devised to facilitate CAD driven by Ponzi activities within the nations running the CAD.
    MMTers say that it is a free choice to exchange financial assets for real goods and services but it is worth remembering that it is a often only unrepresentative elites who are doing the choosing. The immensely rich already have all the real goods and services they can consume. For them, financial assets really are what they want. It is easy to get into a mindset where no amount of money is ever enough. That isn’t true for anything real.

37. Ramanan – your central claim is “fiscal policy is effective only as long as the external sector allows it.” Let’s focus on the UK, rather than worry about the Ayrton Senna / special case argument for the US.

    If the big exporting countries start invoicing UK importers more in their own currency (which they are entitled to do) and less in GBP, then this would mean that the trading partners are less willing to accumulate claims denominated in GBP. This would entail more selling of GBP than goes on at present, since China (in particular) is delighted to hold on to a portion of the GBP revenues and invest them as gilts rather than sell them for yuan. [I struggle to see how this scenario would differ from the exporters continuing to invoice in GBP, but subsequently selling the GBP revenues for local currency – without IMF rules having to be involved.]

    This selling would result in GBP depreciating. Subject to a J-curve, the depreciation would tend to move the UK’s CAD towards balance, and reduce the UK’s standard of living, etc etc. Due to sovereign claims being mainly denominated in GBP, there shouldn’t be any govt default risk concerns.

    I am failing to see what this has to do with the UK govt’s ability to run a deficit to narrow/close the output gap. Help me out here!

    I have to say, you might try articulating as clearly as Adam (ak) does above – the effort would be repaid by a shorter conversation – and perhaps some converts, rather than people rejecting your claims outright, often on grounds of unintelligibility!

    Cheers
    Anders

38. @ Some Guy

    Yes!

    The end of the ‘Washington consensus’ – For decades, the US was able to dominate Latin America with trade deals. Now China offers a new model of development
    

    Spadj: While I agree with Bill that in and of itself a CAD does not pose any risk to a country, Ramanan might be better of to point out that a CAD may be emblematic of an economy that has deindustralised and moved toward …”Ponzi” activities… property speculation, asset bubbles and other “non-productive” enterprises. Switzerland, Austria, Germany and Norway actually produce things (or in the case of Norway oil) and have current account surpluses; Australia, America and the like are increasingly deindustrialised (i.e. have an eroding manufacturing base, tendency toward higher property prices). CAD might be just one indicator that things won’t be too bright in the future.

    What this says is that there is a gap between the emerging world and the developed world that is creating tensions needing to be addressed. That is what the G20 Seoul Development Consensus was about, where the US was the odd man out, btw. Looking at this form the point of view of individual nations competing for scarce resources in a shrinking world is a recipe for disaster. What is needed is recognizing that the global economy is a close economy and the problem is lagging demand and unbalanced income/wealth distribution. What is required is a cooperative and coordinated approach instead of the neoliberal approach based on competition and control.

    There is plenty of capacity, plenty of workers either unemployed or underemployed, a great deal of need, and pent up notional demand globally. MMT’ers are asking, “What are we waiting for?” Neoliberals reply, “Capital required for investment is scarce and expensive. Competition directs its flow. And how are we to control the outcomes without a political authority?” MMT’ers respond, “There is no affordability problem, because sovereign governments have unlimited funds at no cost. Let’s get together and talk about how to organize and coordinate this so that we can take advantage of the huge lost opportunity that is mounting daily. The controls we need are ensure sustainability on all levels.”

    Ramanan: fiscal policy is effective only as long as the external sector allows it.

    Doesn’t MMT say that the ROW can decide not to save in dollars at any time, thereby cutting off exports to the US? The CAD is the problem of the ROW, since they created it and are perpetuating it. If they don’t like the game, they can take their ball and go home, and the US will just have call back its capital invested abroad to rebuild its manufacturing sector.

39. Anders,

    Its not to easy to describe it in a straightforward manner. A decision by a US hedge fund manager to purchase Brazilian equities does not lead to the widening of the trade imbalance of Brazil. There may be indirect effects such as appreciation leading to a decrease in prices of goods produced by the United States targeted toward Brazilians, but price is not the only factor.

    Its a huge neoclassical assumption that price changes lead to balancing of trade and ideas such as that.

    How does one think about trade balances and international indebtedness ?

    Take all the sectors of an economy and combine the stocks (of assets and liabilities) and flows (transactions). An identity is

    Closing Stock of Net Overseas Assets = Opening Stock + CAB + Revaluations

    So in the case of the US, for example, US sectors such as households, production firms, financial institutions, government/CB hold assets abroad. For example a fund holding stocks in Argentina. The rest of the world holds assets in the US which are liabilities of these US sectors. The difference is the Net Overseas Assets position.

    If you keep running a current account deficit i.e., a negative second term on RHS, the (negative) net overseas assets position keeps rising forever. A depreciation may help to reduce imports and increase exports and may be helpful but in general both fixed and flexible exchange rates have failed to do the trick.

    Even though I bring the invoice of imports in my comments, it is irrelevant. I only bring it in because there is so much dance around imports in your own currency – foreigners coming in a ship and going back will less and stories such as that and in the process accumulating claims in the currency. This story is not be best because imports are not necessarily invoiced in your currency. And then there is a dance around claims in your own currency etc so “not a problem”.

    Back to the net overseas assets position, there is no mechanism to prevent it from rising rather than going slow on fiscal policy which is bad for unemployment.

    A leakage of demand due to imports itself leads to unemployment which can only be improved by the fiscal route. So the demand management of governments reduces to managing the two. They cannot rely on the fx markets because the fx markets move on their own.

    But if the claim is that indebtedness to foreigners doesn’t matter… thats where I jump in. Its the same as saying that household sector indebtedness in the 2000s didn’t matter.

    On top of this government officials are themselves confused on these issues which makes the matters worse. But simply blaming them doesn’t help either. There is a claim here that there are political constraints. Yes true but its not just political, there are intrinsic constraints as well.

    I understand that the UK is overdoing the fiscal austerity, and has to maintain higher demand but that comes with increased indebtedness to the rest of the world because relaxing policy increases national income and demand and since imports are demand dependent, increases imports as well.

    The only way in the current crisis and maybe always is to take concerted fiscal action/expansion force surplus nations to expand. Imports can then be enjoyed as both imports and exports improve.

40. “Lets be clear – fiscal expansion, if the rest of the world is not expanding leads to a deterioration of the balance of payments. Now one can think of many ways in which this doesn’t happen – for example … exporters gain competitiveness abroad etc, there is a mining boom etc but note fiscal expansion itself doesn’t led directly to increased export competitiveness).

    Will assert this for the (n+1)th time – fiscal policy is effective only as long as the external sector allows it. ”

    the government financial balance + the domestic private sector financial balance + foreign private sector financial balance = 0

    there seems to be an assumption that the fiscal position of the government is discretionary.

    if the external sector runs a surplus(nett saving in local currency denominated assetts) which manifests itself in the form of a CAD then either or both the domestic private sector and government sector needs to run a financial deficit,

    unless we want to deflate the economy, the government fiscal deficit is a endogenous function of the nett savings desires of the foreign and domestic private sector

    so it may not be a question of “allowing” as oppossed to causing.

    this all gets into the whole twin deficits debate, of which causes which, or if there is any link in the first place. but it may be that the external deficit forces the government to run a fiscal deficit, if it wants to maintain current levels of gdp.

41. Ramanan – I’m sure that everyone here would endorse internationally concerted action; but for the time being, it’s appropriate for MMT to focus on the limitations of fiscal policy in the current, unharmonised policy environment where countries have divergent approaches.

    I don’t recall MMT claiming that indebtedness to foreigners doesn’t matter, but I do continue to struggle to see how the foreign sector can restrain one’s fiscal options. I agree that a CAD represents a demand leakage – but this just means that a govt has an even larger output gap that it needs to close/narrow- necessitating an even larger budget deficit.

    Surely as you say, the relevant figure to focus on is Net Overseas Assets, or the net international investment position (NIIP) – rather than the CAD itself – and the NIIP surely has to improve following a devaluation. The parallel with household indebtedness and NIIP is probably important: a simple devaluation can quickly improve the NIIP, whereas there is no way to quickly reduce household debt/GDP, other than years of household deleveraging.

    Here are the UK’s recent NIIP/ GDP levels (source:ONS HBQC/YBHA). Whilst I can believe that significant negative NIIPs can precipitate sharp devaluations, seeing the recent swings, I find it hard to get nervous about the impact of such a correction, given our debt is generally denominated in our own currency.
    2005 (20.1%)
    2006 (29.0%)
    2007 (23.0%)
    2008 (7.0%)
    2009 (21.1%)

    I don’t know the Mitterrand early-1980s example well. but from afar it looks like the main “crisis” aspect was that he was trying to maintain an FX peg which MMT is opposed to in the first place. The three devaluations are seen as a disaster by the mainstream which seems to favour strong currencies, and Mitterrand’s u-turn may reflect his susceptibility to those arguing that devaluation proved his macroeconomic policies had failed. It’s not obvious from Google that this episode represents a counterexample to MMT – although I’m keen to explore such examples – France being a particularly good one since it would (I imagine) have had mainly FRF-denominated sovereign debt at the time. Perhaps it was an NIIP issue..

42. “Nine records were also set yesterday by junior athletes at the annual sport’s carnival held by the Charlestown Secondary School (Nevis, US)”

    Actually Bill, the island of Nevis isn’t part of the United States. Its easy mistake to make, it lies in the Caribbean just east of the US Virgin Islands and it does happen to be the birthplace of America’s first Secretary of the Treasury, Alexander Hamilton.

    However the Queen of Australia is also the Queen of Saint Kitts and Nevis.
    The country is an independent Commonwealth realm with Queen Elizabeth II as its head of state, represented in St. Kitts and Nevis by a Governor-General, who acts on the advice of the Prime Minister and the Cabinet.
    http://en.wikipedia.org/wiki/Saint_Kitts_and_Nevis

43. Ramanan, article VIII, Section 4 is meaningless so long as the US dollar is the world’s reserve currency— lets go to the tape.

    (a) Each member shall buy balances of its currency held by another member if the latter, in requesting the purchase, represents:

    (i) that the balances to be bought have been recently acquired as a result of current transactions; or

    (ii) that their conversion is needed for making payments for current transactions.

    OK, if the US dollar is used for exchange transactions then the US has to be either the country making or receiving the demand (since both buyer and seller of current transaction t had converted their currency into dollars to effectuate the trade). Since the US is content with having a monopoly on printing the reserve currency, it will never make such a a demand. On the other hand, the US Government will ignore any request that it exchange dollars for a foreign currency. The alternative is destroying the WTO. Since the US essentially controls the value of the SDR, it could easily tank value of SDR and then buy back, as is its right under Article 8, the currency obligation with the now worthless SDRs.

44. Tom, I also read that Venezuela got a 30billion dollars loan from China to be repaid in oil in the next 15 years.
    I fail to see how the Beijing consensus will be any better than the Washington one for south american countries.
    Governments just get indebted in dollars as they always did with loans from the World Bank or the IDB, they squander the money, and eventually face a debt crisis. Which will be financed by the chinese I guess. Good deal for them though.

45. Mahaish,

    Good point but I have said it many times here. The causality from current account deficit and budget deficit is from the former to the latter. However, budget deficit ≠ fiscal policy. The former is G – T, the latter is G&t, where t is the tax rate.

46. “Doesn’t MMT say that the ROW can decide not to save in dollars at any time, thereby cutting off exports to the US? The CAD is the problem of the ROW, since they created it and are perpetuating it. If they don’t like the game, they can take their ball and go home, and the US will just have call back its capital invested abroad to rebuild its manufacturing sector.”

    I have issues with such language.

    Analogy … thats like saying bank liabilities are not banks’ problem! Banks need to keep refinancing.

    Its accounting. The United States is the debtor and the rest of the world the creditors. Accounting.

    If they don’t like the game, the game may be cut off like what happened to Mexico in 2008.

    Rebuild its manufacturing sector .. easy ? If you allow policies which have devastating consequences for manufacturing, don’t know if its easy to rebuild.

47. Anders,

    The trouble with playing such a game is that the indebtedness to the rest of the world keeps rising.

    Current account deficits leads to a hemorrhage of demand and hence loss of employment and to prevent this fiscal policy needs to be relaxed. However this leads to a bit more widening of the trade deficit. No nation plays such a game.

    This debt is not “not debt” and Article VIII Section 4 reinforces this.

    I will come back on the Mitterand experiment. Fred2 graphs do not show any peg.

    About sharp correction, the attitude of people here is to call this alarmist. However I should start putting it the other way round and start asking them – “are you saying, there will be no sharp correction”.

    I agree with the correction of NIIP. Consider this scenario. UK holds assets in the rest of the world – in another currency and lets say most of the rest of the world is in Sterling. A devaluation leads to increase in the former (converted to pounds) without affecting the latter much because its in Sterling. So it is possible that the NIIP improves. Its a dream scenario.

    However, if you are a policy maker chasing the dream scenario is like chasing a mirage. Its wishful thinking.

48. Beo,

    The point (ii) is for the monetary authority which needs to pay the exporters. So the monetary authority can say “I need to pay my country’s exporters, hence I am making this conversion” for example.

    The Federal Reserve/Treasury hold less foreign reserves (balances) in the rest of the world and can hardly ask for conversion.

    SDRs are slightly different but related. Plus the amount of SDRs is very less for the US to purchase them all.

49. MaMoTh: I fail to see how the Beijing consensus will be any better than the Washington one for south american countries

    Yes, others have opined that its just exchanging one set of bankers for another set of bankers, and bankers will be bankers.

    Will Chinese bankers be any different? We’ll see. In my experience of dealing, the Chinese are shrewd and drive a hard bargain. But they are also forward-king and would prefer building long-term relationships with large accounts. They are also competing with the US and know they have to outperform.

    At any rate, there is now competition on the field and the US will have to take that into consideration instead of just dictating terms for access to the US is the global mall. Free trade doesn’t mean that there is no cost associated with access.

    Things will change a LOT more when China gets its own consumer market going. Presently, it is mostly shopping for resources. But even now, China is importing a lot of pieces from abroad, where labor is even less expensive then in China, as using Chinese labor to assemble the pieces. The US is going to have to come up with another game. And don’t forget that India is coming on line too.

50. Ramanan,

    I disagree that exchange rate has no impact on current account balance. You mentioned that large purchases of debt instruments by a hedge fund will not have an impact on the CA balance because the current textbook model is incorrect and there’s no negative feedback. This is not true as these purchases actually contribute to the balance as they provide a sink to the funds. This is an equivalent of “saving in the form of bank deposits” which may remove funds from circulation as well. (An alternative would be to use these funds to buy goods from the country what would recycle money and close the gap). Purchasing of debt/SB liabilities (money) has always some impact on the exchange rate. If the purchases are large they may trigger a positive feedback mechanism, further strengthening the currency and leading to an even larger CA deficit. Hedge funds can dramatically impact the exchange rate as George Soros proved in 1992 in the UK. This is the reason that the textbook model may not work – the volume traded by the speculators exceeds many times the volume traded because of the needs of the genuine goods-and-services trade so the negative feedback mechanism (a deficit leads to a depreciation what leads to stimulating export and suppressing import) is simply disabled by the noise generated by the speculators and the positive feedback introduced by them what makes the system unstable time-to-time.

    link_http://en.wikipedia.org/wiki/Foreign_exchange_market

    “According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4]”

    Let’s consider a middle-sized country whose government is not vulnerable to political bullying (not like Latvia, Greece, Ireland, to some extent Poland). The analysis is obviously restricted to debt in the domestic currency. What can be done to deal with a financial crisis manifesting itself by a falling exchange rate and a persistent trade deficit? The conventional response advocated by the IMF is to increase interest rates, restructure the debt (take foreign-denominated loans to maintain full convertibility) and then to deflate to stimulate export. This simply doesn’t work in most of the cases and the country is left crippled by the foreign denominated debt and is experiencing a recession due to high interest rates.

    But there is an alternative strategy and I am not aware of any cases when this alternative strategy has failed.

    The first line of defence which goes directly against the spirit of the IMF treaty is to impose capital controls. This was successful in Malaysia, is quite successful in China but may not work in some other countries like Brazil. Claiming that this is impossible or illegal as it “violates the IMF Treaty” is simply contradicting the facts. Quoting IMF documents doesn’t change anything as they have an incentive to present a warped image of the reality.

    Please read the following article about Malaysia during the Asian crisis – it gives a very powerful counterexample debunking the most of your claims. You may even not read the rest of my comment but please read this article. Obviously nobody at IMF would like to admit that the medicine they administered was actually a poison. If you just randomly search for papers describing the Asian crisis in 1997 it is very likely that you will find propaganda articles hiding what really happened there. But we are interested in analysing the facts, aren’t we?

    link_http://www.adbi.org/working-paper/2009/08/26/3275.malaysia.gfc.impact.response.rebalancing/the.19971998.crisis.a.review/

    The second line of defence against a financial crisis is actually running the fiscal policy consistent with the recommendations of Modern Monetary Theory that is to stimulate the economy if required. This is also mentioned in the paper I linked. NB the only significant disagreement with the MMT recommendations would be about pegging the currency in order to reduce the exposure of local firms to exchange rate gyrations. It is easy to push the exchange rate down (for example by sterilising the inflow of foreign currency) but defending the local currency may be very dangerous (as shown in the UK in 1992).

    If we know that the exchange rate is not driven by the needs of balanced trade and investment but by an influx of “hot money” it is better to prickle the bubble earlier, frustrate the desire of foreign investors to make any gains by purchasing debt and clean up the inevitable mess rather than to allow for a huge overhang of foreign debt to grow if the carry trade persists (like in Australia I should say). I hope that you agree that the speculators will leave the country once they discover that the government is filling up the spending gap, real interest rates are close to zero and nobody really needs their “capital”. This will obviously lead to an adjustment of the exchange rates (which can be sharp) and may wipe off the equity of some financial institutions which may then need help from the CB and the Government. Let’s pull the rotten tooth sooner rather than later (when the strong currency has already weakened further the local industry), the pain is unavoidable anyway due to the positive feedback I discussed above. Once the “buffer” or “overhang” of excessive savings/debt disappears, the time constant in the exchange rate adjustments may decrease, making the system self-righting again by reintroducing the negative feedback loop. (If there is a CA deficit – the currency depreciates – export is stimulated and import is suppressed – the CA deficit is reduced. This is pretty much the textbook model).

    It is plainly false to claim that Central Banks and Governments of mid-size countries are helpless against the hedge funds and IMF however acting against the vested interests of the “foreign investors” may not be easy. Very often government officials are offered “unconditional help” for the country in a trouble and even personal incentives (like a seat in the European institutions or even worse, commercial banks) for not diverting from the “straight and narrow” path of preservation of the interests of the creditors leading to the persistent debt servitude of the citizens of their countries. Obviously we cannot underestimate the importance of right-wing propaganda here. That’s why I think that these myths about the way the financial system works need to be exposed.

    You claim that something dramatic happened to Mexican currency in 2008 and that Bill ignored that.
    link_http://finance.yahoo.com/echarts?s=USDMXN=X+Interactive#chart1:symbol=usdmxn=x;range=5y;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
    The same happened to AUD and PLN – in fact this was quite irrelevant to anyone except for these poor guys in Poland who took unhedged mortgage loans in CHF/EUR. The so-called “financial commentators” keep telling us that we must not sleep at night because the inflation can exceed 4% or the exchange rate may change by 40% and I will not be able to buy another plasma to my bathroom. Nobody cares any more about 13% or 16% or 20% unemployment rate in Poland what really leads to suffering of people. I was subjected to a very aggressive form of neoliberal propaganda in 1990-2003 that’s why I am so much against it once I discovered how much “truth” it contains.

    N.B. If we assume full convertibility and no capital flow restrictions then it is irrelevant who has the position against the local borrowers as domestic investors can also choose to sell the debt instruments / withdraw deposits and convert them to a foreign currency if they feel threatened by inflationary expectations or even falling exchange rates. So we have fully arrived at the conclusions peddled by the mainstream economists that there is a ceiling on the safe amount of public debt and we are all the hostages of the “invisible hand” – “TINA”.

51. Adam,

    Thanks for engaging but you are bringing in too many things.

    “I disagree that exchange rate has no impact on current account balance”

    No I didn’t say that. Exchange rate moves affects the price of imports/exports and there are two things – price elasticity and income elasticity. Most people just tend to think of the former, as if the latter is not important.

    “it gives a very powerful counterexample debunking the most of your claims”

    what debunking ?

    Capital controls is a slightly different topic.

    “But there is an alternative strategy and I am not aware of any cases when this alternative strategy has failed.”

    which one ?

52. Ramanan,

    I am bringing in many things because we cannot just think about one sentence from the IMF Treaty without putting the whole thing in the historic context.

    I gave you an example of a country (Malaysia) which had had a current account deficit on the run-up of the financial crisis and they recovered swiftly exactly because they ignored the IMF recommendations, imposed capital controls to prevent draining of foreign currency reserves and then lowered the interest rates and ran a larger budget deficit in order to stimulate the economy.

    The result of this policy was also a reversal of the trade deficit.

    So it looks that in reality the government spending is not limited by the constant threat of foreign investors draining the currency reserves of a country which is indebted overseas in the domestic currency (and forcing it to borrow foreign currencies).

    The exchange rate risk belongs firmly to the creditor not the debtor unless the debtor can be bullied by applying pressure but this is just another political or military factor which has to be considered separately.

    The government can spend as much as is required to support a strong economic recovery and can ignore the rising level of foreign and domestic debt. This policy which frustrates the desire of foreign lenders to gain profits from holding the debt is the most efficient way of rebalancing the current account even if it brings forward the inevitable correction of the exchange rates. Then the government can always support the income of the households and compensate the poorest for the rise of the prices of imported food and other basic consumer goods. Of course the overall consumption level may drop but this is usually inevitable anyway and it may drop even further and for much longer if an austerity program is implemented.

    The sovereign government not the “markets” can always prevail. This doesn’t mean that the government cannot screw up badly when they’re fully in control of the economy (like in the Eastern Bloc) but this issue is not related.

    The interpretation of the IMF Treaty which you provided in regards to foreign account convertibility has very little in common with the historic reality not only in the case of the USA but also other smaller countries.

    I am referring to the following statement you made:
    “I think the article VIII, Section 4 gives a devastating blow to the Neo-Chartalist theory of Money”

    I claim that your statement has been debunked by showing that the Article VIII Section 4 is plainly irrelevant.

    If you are not happy with this example we can analyse a similar positive outcome of defying the IMF recommendations in Argentina.

53. Adam,

    Article VIII Section 4 is not about capital controls.

    Surely you cannot give examples of balance of payments crisis to prove me wrong, right ?

    Yes, devaluation helps. But Asian nations have followed Mercantilist policies and have taken measures to improve exports rather than relying on the markets to do the trick. The mechanism you highlight is not automatic.

    “The exchange rate risk belongs firmly to the creditor not the debtor unless the debtor can be bullied by applying pressure but this is just another political or military factor which has to be considered separately.”

    No, the international money markets have created enuf headaches for governments and central banks.

54. Ramanan,

    It would be an absurd for me to claim that a balance of payments crisis cannot happen. I remember very well what happened when Poland defaulted (but the outcome in Romania which repaid its debt was in fact much worse and Ceasescu paid the ultimate price for that).

    The main difference is whether the state has borrowed in foreign currency (like Poland in the 1970-ties) or merely sold bonds to foreign investors (USA) or allowed foreigners to deposit local currency in the banking system (Australia).

    In the latter case the instability related to capital flight may be mishandled by the government but there are examples of countries which did the right thing. A government has always means to stimulate the local economy and there are ways to curb speculation what would stabilise the exchange rate. But first there must be political will to do that – this is the precondition. Nothing is inevitable.

    China is a very good example of a country which was able to insulate itself from the international money markets but still encourage productive investment from abroad – even when they were much weaker than they are today (in the 1980-ties and 1990-ties). Please compare what happened in Russia and China in 1990-1997. Both countries implemented market reforms but only one scenario was successful.

55. Ramaman –

    You are trying to put the burden on to others to demonstrate that a BoP crisis cannot happen. This is illegitimate: you are the one claiming that we should be afraid of CAD/GDP >3% and that we should immediately rein in fiscal stimulus. The burden remains firmly on you!

    You have cited some interesting examples, but as far as I can tell, sharp corrections have pretty much occurred in countries which have ceded some monetary sovereignty by pegging or issuing foreign ccy debt. And where corrections have befallen ‘MMT-compliant’ govts, these have not been disastrous – certainly not negative enough to warrant not pursuing an MMT approach to full employment.

    “The trouble with playing such a game is that the indebtedness to the rest of the world keeps rising.” Surely the relevant point is whether the NIIP/GDP keeps rising. There is more plausibility to NIIP/GDP providing an effective limit to a country’s trade imbalances, but I think it is wrong to claim that a given level of CAD/GDP heralds disaster. Or are you in fact claiming that MMT’s policy prescription is flawed because in the US or UK it would result in rising NIIP/GDP? This seems an interesting challenge (albeit not one that’s obviously true – not least because of the typically higher returns capital in exporting countries vs importing countries).

56. that we should be afraid of CAD/GDP >3% and that we should immediately rein in fiscal stimulus.

    I make no such suggestions. Much worse tagged as a ‘deficit terrorist’. Anders, it helps looking at things as if you are not connected to the real world.

    Of course, if you read some international trade theorists such as Barry Eichengreen, you will hear “get your fiscal house in order”. However Eichengreen forgets that it creates more unemployment.

    Policy makers need to understand the consequences of their policies is what I am pointing to.

    You have cited some interesting examples, but as far as I can tell, sharp corrections have pretty much occurred in countries which have ceded some monetary sovereignty by pegging or issuing foreign ccy debt.

    Reversed causality here. Unless you try to understand policy makers’ minds, you will keep claiming this. Its like saying my new theory of psychology applies to non-drinkers only! Rather the psychologist should worry about what to do with the drinker.

    Surely the relevant point is whether the NIIP/GDP keeps rising.

    NIIP is related to CAB (current account balance) by identities connecting stocks and flows and revaluations. The identity is

    Closing stock of NIIP = Opening Stock of NIIP + CAB + Revaluations.

    This is at the net level – you have to do these things at a more detailed level.

    The original plans of the IMF did have suggestions of concerted action – it seems people have forgotten that. There is no way in my view for the world to go back in track without a concerted fiscal expansion and new ways of doing trade such as helping weaker nations.

    Of course, looking at debt as “not debt” completely misses the point.

57. “countries which have ceded some monetary sovereignty by pegging or issuing foreign ccy debt.”

    Members of the IMF accepting Article VIII Section 4 have ceded some sovereignty. Non-members such as Cuba/North Korea run currency boards.

58. There is no way in my view for the world to go back in track without a concerted fiscal expansion and new ways of doing trade such as helping weaker nations.

    That’s something I can agree with. The problem is not the trade imbalances as much as the massive foregone opportunity and the human consequences of a global economy that is woefully underperforming.

    To the degree that economics is positive and non-normative, it is chiefly about efficiency rather than effectiveness. Effectiveness is a matter of achieving goals, and goals are chosen iaw norms, which are called values wrt human society . Without values informed by ethics and decided by politics, hopefully through democratic choice, economics is just a sophisticated way of stating the law of the jungle. Nature is brutally efficient.

    The world is developing a closely knit and interconnected global economy as it life-support system. This can come about though the neoliberal “invisible hand,” which is really the invisible handcuffs imposed by the elites, or else it can design a system worthy of human intelligence, which accords with universal rights and values.

59. Tom Hickey, when you say that our economic system is efficient I guess we agree that that is only the case if it is viewed through the prism of money and that prism has an infinite capacity to be warped away from any connection to the real world. With our system; plumbers upgrade the hot tubs of the wealthy whilst much of the world does not have sanitation or access to safe drinking water. Aligning money gathering efficiency to real tangible benefit efficiency is the crux of economics and politics.

60. stone, safe drinking water has nothing to do with economic efficiency. Preferring something other than what happens through market distribution (positive economics) is normative and relates to economic policy, which is ethical (values) and political (non-market choices). Positive economics says nothing at about what outcomes should be. The neoliberal presumption is that what the invisible hand produces is the best (most efficient) we can do. If Nature is brutal, “so be it,” in (US House of Representatives) Speaker Boehner’s famous words. (Please notice that I am not arguing for this, but just articulating the position.)

61. Tom Hickey, when you say “what happens through market distribution” it has to be recognized that ANYTHING can happen through market distribution depending on how the market is constructed. That to me is the crux of it. The invisible hand will work out the most effective manner to gather money within the framework of laws, taxes, regulations, cultural sentiments and subsidies that it finds its self. In Sierra Leone, the invisible hand acts to cause those who sell diesel generators to sabotage electricity utilities. That is the invisible hand working its magic efficiency in a context of crap regulation. Anyone saying that we should stand back and leave things to the invisible hand is really saying we should stand back and leave them to make the rules as to how to rip us off.

62. Minor typo : “When China net exports to the US it acquires US dollars, which are accounted for in the American banking system somewhere.” This happens whenever China exports, period. Net-exporting is a subsequent arithmetical definition.

63. Stone, neoliberal micro presuppose an ideal competitive market that is free of any other influence and in which the participants are “rational: in the ideal sense of consistent, self-regarding, and knowledgeable, as well as presumably without emotion. Since all participants share the same essential qualities, they can be formalized in terms of a representative rational agent. This is a foundation of the rational expectations and efficient market hypotheses. Neoliberal macro holds that macro is essentially micro scaled up large, aggregates behave like the representative member (note the fallacy of composition), and any outside interference (like government) is disruptive (government as bully instead of monitor).

    Anyone saying that we should stand back and leave things to the invisible hand is really saying we should stand back and leave them to make the rules as to how to rip us off.

    Yes, that is the neoliberal intention. Neoliberals justify it as the outcome of the operation of free markets while they have their thumbs on the scale themselves in that their assumptions are unrealistic. Moreover, their doctrine of money neutrality allows them to separate off the financial sector and let it take its own course under supposed free market principles, as through historically demonstrated inherent financial instability had no consequences for the real economy based on goods markets.

64. Stone – I agree with your thrust here but the Sierra Leone example is a poor argument in favour of regulation: the one role neoliberals see for the public sector is policing of property rights – so they would say that the power plants should be privatised and that policing should prevent them from being sabotaged..

65. Anders, what I was trying to say was that when a neoliberal says they want the law pf the jungle it is very easy to point out to them that they do actually want to be protected from the law of the jungle. Sadly the whole history of the development of finance has been development of ways to exploit and repress by the type of people who would actually come out at the bottom under a law of the jungle scenario.

66. Re Ramanan Commments.

    I’ve been on vacation for a couple of weeks on a beach in Cuba so my comments are untimely.

    The central claim is “fiscal policy is effective only as long as the external sector allows it”. I agree with this for poor countries whose survival depends on imports of essential goods such as food, energy or capital equipment in the absence of import tariffs or import controls of some sort. However there is nothing counter to MMT in that.

    Ramanan, an article appeared in the December 2010 issue of the US socialist periodical The Monthly Review entitled “ALBA and the Promise of Cooperative Development” by Martin Hart-Landsberg which supports some of your concerns and provides a way to counteract the problem that the Europeans used after World War II. I think you’d find it interesting.

    I completely disagree that your concern is valid for wealthy countries. As I have pointed out in past comments Canada has experienced the various things that concern you with few harmful internal effects. We have experienced huge fluctuations on our currency. It has dropped by a third and risen by 50% at various times over the last 20 years or so and while that has had sometimes serious negative effets on one side or the other of foreign trade it has not been particularly damaging to the country as a whole. Yet Canadian exports make up a large part of our GDP. Bill has mentioned the same applies to Australia.

    Your examples of countries witth currency problems is unconvincing because you use 2008 as your example. As far as I recall almost all currencies dropped dramatically against the US dollar then due to the strong demand for US currency during the financial crisis. It simply illustrates the importance of the US dollar as the reserve currency. We already knew that.

    If you can’t find the article I noted above I could mail you a copy if you send me your address.

67. It’s at http://monthlyreview.org/101201hart-landsberg.php

    It assumes, without even mentioning them, fixed exchange rates, validly for postwar Europe, for which the EPU sounds like a it was a very good, even necessary idea. But invalidly for ALBA, which makes the postwar example less relevant. Of course in unity there is strength, and big countries can and do illegitimately push around small countries that haven’t banded together, so ALBA seems good. But contra Ramanan, the main thing then is to apply functional finance/MMT and use the “loaned” imports wisely.

68. Keith,

    Thanks for engaging.

    As far as I recall almost all currencies dropped dramatically against the US dollar then due to the strong demand for US currency during the financial crisis.

    Yes a lot of currencies had troubles. But the examples I provided were nations hugely indebted to the rest of the world. The weaker your external position, the more hard you will be hit. Indebtedness to foreigners appears in various places such as foreigners investing in equities of a nation, banks’ funding in foreign currency etc. There are corporations which issue debt in foreign currencies and may need to take out more and more of the local currency if things move in an undesired direction. So what I am saying is that your tone is still on the side “not a problem”. An analogy: there are a lot of good companies with low leverage and whose stocks were on free fall in the crisis. That cannot be used to prove that leverage doesn’t matter.

    Yet Canadian exports make up a large part of our GDP

    which shows that income elasticity of demand for Canadian products in the rest of the world is more important that price elasticity. Plus your description of the movement of the Canadian Dollar shows that exchange rates do not adjust to do any good.

    I completely disagree that your concern is valid for wealthy countries

    The US Treasury secretary Tim Geithner is worried about the external sector and surely not “not a problem”. Plus he understands to some extent the power of fiscal policy and has said on several international meets that the US won’t tighten fiscal policy for a long time – so he is not David Cameroon. The external position has hit the US really hard.

    Canada seems to have a good external sector in the period 1995-2009 so I do not know what your arguments are here. Canada is not running endemic trade deficits.

    I briefly glanced through the article you mentioned which mentions the currency “Sucre”. Is this some kind of Euro Zone type of arrangement ? If thats the case it will fly apart some day.

69. The US Treasury secretary Tim Geithner is worried about the external sector and surely not “not a problem”. Plus he understands to some extent the power of fiscal policy and has said on several international meets that the US won’t tighten fiscal policy for a long time – so he is not David Cameroon. The external position has hit the US really hard.

    R. you need a better “expert” to back your case than Timmie. Geithner also thinks that US banks are not big enough and need to get bigger. Tim Geithner is a shill – and a tax cheat. Who takes this man seriously?

70. Tom,

    Thats an argumentum ad hominem

71. Thats an argumentum ad hominem

    It was aimed as such. Following Geithner will blow up the world in the next (inevitable) financial meltdown, since he and his ilk have done everything in their considerable power to consolidate banking, stymie reform, increase moral hazard, and compound systemic risk.

72. Tom,

    “and a tax cheat”

    Please consider that he does not possess the Mathematical Maturity to be able to handle the Form 1040. It’s sort of “not cheating” if you simply do not not possess the cognitive skills to be able to understand the rules of the game.

    This reason why he could not understand how to do his taxes (ie fill out the Form 1040) is the same reason he will NEVER understand MMT.

    His major was Asian Studies and International Relations or some such thing. He has no Mathematical Maturity and/or the ability for critical thinking. You have more of each in the tip of your pinky finger than he has in his whole body.

    Resp,

73. Matt Franko, I’m not sure about the “lack of mathematical maturity being the reason MMT isn’t universally accepted ” story. To some extent MMT seems to be simply ignored rather than refuted in a manner detailed enough to expose whether those doing the refuting have some defective reasoning process. Billy blog seems to be mostly an MMT critique of neoliberal economics but their seems to be little reciprocal engagement. What are the best examples neoliberal economists giving coherent explanations of how MMT is mistaken? Economics is a new and weird way of thinking for me. The thing that I find so baffling is the wild divergence between economists. It is a bit like traditional Chinese medicine vs conventional medicine. I don’t comprehend why people currently follow traditional Chinese medicine (although I appreciate that the first description of blood circulation was in ancient China etc). If MMT was engaged with more, then, at the very least, it would clarify what parts of MMT need clearer explanation to get the message across. At best engaging of divergent viewpoints could cause a progression in understanding of reality beyond what either participant started with. To some extent I think people often so want an explanation that makes sense that they are willing to delude themselves about observable facts in order to hold on to the comfort of having an explanation. It often takes critical engagement to force such confronting of the facts that don’t fit the theory. As MaMmoth asked, does the 1990s Brazilian hyperinflation fit MMT?

74. Stone,

    Mathematical Maturity is just one path to Critical Thinking. I’ve corresponded with Tom about this, he doesnt have years of college math, but instead he basically “majored” in critical thinking (Philosophy). Tom has been trained to look at things from many angles, take many views, Geithner has not.

    Geithner has no Mathematical Maturity for sure (based on his areas of study), and apparently no ability also for critical thinking. If you have critical thinking abilities for instance, when you put policies in place to reduce unemployment, and then unemployment goes UP (as has happened recently here in the US), the critical thinker will go back to the drawing board and try to figure out where he or she is getting it wrong and go to Plan B.

    To talk about Geithners inability to do taxes, we here in the US have a Form 1040 you have to fill out. You put your pay on the top line and then subtract of few things from that top line number, come up with a net on the bottom and then look up the tax amount on your net from a published table. Yet many people here in the US (like Geithner) cant do it and have to get a service to do it for a fee. I help some of the people I work with do it to try to save them some money, and most are lost in this most basic Form 1040EZ. It may take me 5-10 minutes to get them thru it and then they still cant do it themselves the following year.

    Hey look, bottom line, economic policy is what we have technocrats for (or are supposed to). Geithner is not even an acceptable technocrat. His major was Asian Studies, they probably think he should be there because he understands the Asian culture and is probably perceived as being the best at smoothing things out with them so “they wont stop lending us money”! LOL!

    Hang in there Stone… good things are starting to happen but “Internet Time” takes a while…. Resp,

75. Ramanan,
    Regrettably I do not have time to properly engage. I was going to download several time series from Statistics Canada but it was going to cost $140 (!) which is more than I am prepared to pay for a blog discussion. In a nutshell Canada has run trade surpluses for some time due to resource exports but our currency has been all over the map.

    One of the main problems you evoke regarding balance of trade deficits is the negative effects of currency devaluation on a country. My point regarding currency fluctuations was that there have been large ones in Canada without large negative consequences.

    I pointed out the Monthly Review article because it did support your concern regarding trade deficits at least with regards to
    poor countries and indicated something several poor countries are trying to do to reduce those impacts. I thought you might be interested in how some countries were trying to grapple with the problem you have noted. The European program was indeed carried out under a regime of fixed currencies so it is perhaps more an example of the potential offered and the arrangements required by joint action.

    You may be interested in the following graph of Canada-US currency values, balance of trade and merchandise trade. Merchandise trade and currency value are very tightly linked in the period graphed but overall balance not very much. I believe you are of the opinion currency won’t adjust quickly enough to offset trade imbalances. Well in this case it did and it didn’t! http://petemurphy.files.wordpress.com/2010/07/us-can-rate-vs-balance-of-trade.pdf

    I remain unconvinced by your arguments regarding fiscal and the external sector. There may well be a price to pay for loose fiscal in the shape of a lower currency but that is not catastrophic in my opinion.

76. “The European program was indeed carried out under a regime of fixed currencies so it is perhaps more an example of the potential offered and the arrangements required by joint action.”

    The European program was carried thinking that since there is one currency, there won’t be balance of payments issues. One certainly doesn’t think of balance of payments between California and Texas kind of logic. Exactly the opposite. In the case of California/Texas, there is a US Federal Government making fiscal transfers without anyone noticing. On the other hand, there is no Euro Zone government which makes any such fiscal transfer. The Euro Zone balance of payments situation is really bad.

    “but that is not catastrophic in my opinion.”

    Yes, flexible exchange rates offer governments a chance to set a higher output. However the problems do not go away. If these worries are “not a problem”, you wouldn’t see foreign reserves in central banks’ balance sheets.

    “but our currency has been all over the map.”

    Yeah, but that shows that currency adjustments hardly do the trick. The “trick” is done by fiscal policy but at the cost of keeping growth and employment low. The trick is also done by having policies which help exporters. Asian Tigers generally followed this.

77. should correct: The “trick” is done by austere fiscal policy but at the cost of keeping growth and employment low.

78. Ramanan,

    Just to clarify, what are your examples re Bill’s point: “you promised to produce empirical evidence to support your view that the current account could wreck a fully sovereign nation. ”

    I assume that your examples are:

    1.Mexican Peso plummeted in 2008
    2.Turkish Lira
    3.Korean Won

    Perhaps we could have a greater exploration of these issues by either side?

79. mdm,

    To add, its a bit similar to asking someone to find a corner in a circular room!

    For example, one can always come up with figures saying that the official sector of a nation had a foreign currency liability. However most have. The Bank of England and Her Majesty’s Treasury have exposures. Australia has a minor legacy exposure but the RBA did cross currency swaps with the Federal Reserve during the crisis and the official sector of Australia too had liabilities in foreign currency – “Due to Federal Reserve”.

    Even the US has around $3b equivalent of foreign currency debt ?

    All nations have foreign currency liabilities. So not sure what “sovereign” means. By signing the IMF Articles of Agreement, in particular Article VIII, Section 4, nations have surrendered some sovereignty.

    Lot of nations had “Due to the Federal Reserve” in the balance sheet of the official sector when they used the swap lines.

    Even the Canadian official sector has debt in foreign currency such as in $, €.

    Also, if a nation has reserves worth $300b and foreign currency debt equivalent of $20b is that an issue ?

    One can certainly say that some numbers are small compared to national income but then on the other hand it is said that ratios are meaningless!