There is no internal MMT rift on trade or development

I was going to write about Jamaica today but this topic emerged that I thought I should deal with before I write about the home of reggae. In fact, some of the material is input into a reasoned discussion about Jamaica so it logically precedes it. With the increasing profile of Modern Monetary Theory (MMT), social media activists are wont to talk about MMT in various ways that, in many cases, do not bear resemblance to our work. But that doesn’t stop them claiming things about what we have written or said and then proceeding to say how this is a ‘big problem’ with MMT that they cannot accept. Then their own local commentators chime in reinforcing the point. It is obvious that the original writer hasn’t read our work or if they have they haven’t grasped it (including the nuance and subtlety) but still feels privileged to hold themselves out as experts to wax lyrical about the technical flaws in the said work. This gets amplified by the responses from the readership who have probably read even less – to the point that we end up with MMT being constructed as something ridiculous and foreign to its original. Sort of like start by saying you are discussing 2, call it 3 and say it equals 4. It is a problem because it confounds people and also gives those who oppose our work ways to further misrepresent it in the public debate.

I expressed my concerns about this phenomenon in this blog post (with links to other posts embedded) – When two original MMT developers get together to discuss their work (December 13, 2018).

In May last year, after a particular Real Progressives segment, I wrote a three part series about international trade and finance:

1. Trade and external finance mysteries – Part 1 (May 8, 2018).

2. Trade and external finance mysteries – Part 2 (May 98, 2018).

3. A surplus of trade discussions (May 23, 2018)

There were earlier blog posts which also considered these questions in detail:

4. Gold standard and fixed exchange rates – myths that still prevail (May 28, 2009).

5. Modern monetary theory in an open economy (October 13, 2009) –

6. Do current account deficits matter? (June 22, 2010).

7. MMT and the external sector – redux (September 26, 2018).

These are among a host of blog posts I have written over the last 15 years which shed light on what the MMT analysis of international trade involves.

In the last 24 or so hours I have been bombarded with E-mails (and DM Tweets), some of which have announced that there are serious flaws in MMT (whoa! just discovered, after all these years), and others, from people keen to educate themselves on these matters who have become genuinely confused by the misrepresentations but do not know where to go from there.

The specific article they have held out was published in the so-called Progressive Pulse – which says it “is a centre-left blog seeking a fairer society for all”.

They “very much regret Brexit” and claimed that it was “the normalisation of anti immigrant and racist rhetoric is a stain on the country”.

So one wonders. Europhiles are not known for their reasoned judgement (-:

The article – Suggested requirements for a properly functioning Monetary system based on MMT in the UK (January 8, 2019) – which was written by one Peter May who has “many years experience in the food and drink sector”.

The intent was to ‘expose’ an alleged rift between an early MMT academic Fadhel Kaboub (who was taught by Randy Wray at UMKC) on one side, and, Warren Mosler and myself on the other side. Fadhel also worked as an intern in my research centre at the University of Newcastle for a semester while he was finishing his PhD.

Apparently, Fadhel Kaboub, who Mr May writes:

… is a great Modern Monetary Theory ‘MMT’ … and Job Guarantee Advocate, seems to be rather opposed to the Warren Mosler and Bill Mitchell idea that exports are like a household: such that what you export is going to make you poorer, simply because they used to be your resources.


Mr May continued:

To me this idea not only jarred because sovereign monetary systems are not like a household, but also because I’ve always thought that this was a rather simplistic point of view.

There was a link to an earlier article he wrote which gets things about as twisted as this one.

I will come back to the Fadhel Kaboub reference presently.

But, where, pray tell, have I ever written or said that “exports are like a household”.

The answer is simple. Never.

I think the author is confusing the ‘currency-issuing government is not like a household’ with something he wants to say about international trade.

Which then means that his assertion of knowledge “because sovereign monetary systems are not like a household” is just nonsensical.

Exports … sovereign monetary systems … what exactly are we talking about?

Further, when have we ever said that “what you export is going to make you poorer simply because they used to be your resources”?

The answer is simple. Never.

There appears to be a lot of confusion about the external economy in a fiat monetary system. Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system.

So it is no surprise that the general public struggles in this domain.

Now what Mr May was upset about, I think, is the basic MMT proposition that exports are a cost and imports are a benefit.

As I have said often – that should be undeniable.

For an economy as a whole, imports represent a real benefit while exports are a real cost.

Exports mean that we have to give something real to foreigners that we could use ourselves – that is obviously an opportunity cost.

Imports represent foreigners giving us something real that they could use themselves but which we benefit from having. The opportunity cost is all theirs!

Thus, net imports means that a nation gets to enjoy a higher material living standard by consuming more goods and services than it produces for foreign consumption.

Saying that an export is a cost is not the same thing as saying that the act of exporting makes a nation poorer.

Clearly, a nation that merely gives up material resources and gets nothing in return would be making itself poorer in material terms.

And certainly, the history of colonial nations is riven with examples of resource plunder from the colonial masters.

But that is not remotely what we are considering when we say an export of a good or service which contains real resources owned by the nation is a cost.

It should be undeniable in terms of material living standards that giving some real thing away is a cost. Getting some real thing is a benefit.

That doesn’t equate in a conclusion that MMT’s preference is for a nation to have a current account deficit.

It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use.

Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.

In a world where we produce to consume – not for its own sake – then receiving goods and services is better (real terms) than sending them elsewhere.

Now, I understand that we can have a spiritual debate about mass consumption. Is is really an appropriate path to happiness?

I wrote a bit about that in this blog post – The mass consumption era and the rise of neo-liberalism (January 7, 2016) – so my views are known on that issue.

That exports are a ‘cost’ suggests the motive to export.

The ‘cost’ is incurred to generate benefits – to enhance the material prosperity of the nation.

There is only one reason a nation would want to relinquish access to its own real resources – and that is to get other real resources that it desires from other nations through trade.

That is to generate a higher rate of return.

Why else?

Which means that the cost is best considered as an investment in generating benefits, which in this case, might be an increased capacity to purchase imports.

But it could also be for different motives – to accumulate financial claims in the currency of the nation.

One might argue though that there is an irrationality in the second motive. Why would a nation, once it has satisfied its penchant for imports continue to pursue a strategy that generating ever increasing external surpluses?

If that is the government’s strategy (and one could suggest Germany fits that bill) then they are deliberately depriving their citizens of a higher material standard of living. They are either working too hard, being paid too little and underconsuming.

But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal with trade.

In general, a nation hopes the costs of using our resources as exports will not become terms of trade losses – in real terms.

A trade deficit is a sign that the real terms of trade are working in favour of the deficit nation. That is standard MMT and, in my view, unassailable.

Unless you adopt the view that imports are not beneficial. And good luck running that line.

Further, I have written extensively about:

1. The problem of foreigners who have built up local currency reserves selling all their currency holdings in one fell swoop and destroy the currency and the role capital controls can play.

2. The claims that external deficits automatically lead to a hollowing out of the industrial sector and the nation ends up a consumption unit (consuming junk) and sedating its population with a Job Guarantee, once all the skilled jobs shift to Country X?

There is nothing in MMT that supports a deindustrialisation process and perpetual current account deficits.

There is nothing in MMT that precludes a very forward-thinking industry policy being developed and implemented to expand domestic industry, spawn innovating research and development, upskill the workforce, build export capacity and all the rest of it.

A nation can do all of those things if it has available real resources or can get them from abroad.

MMT tells us that in those circumstances, there would be no financial impediment for a government building national industries, funding research and development, providing first-class universities and apprenticeship training and the rest.

If a nation with its own currency slides into oblivion by closing its manufacturing sector, cutting career public sector jobs and relying on low-paid and precarious service sector jobs for employment creation, then that has nothing much to do with enjoying a positive real terms of trade (that is, running external deficits).

It has a lot to do with the political choices made by the legislature.

So all of those MMT ideas have been on the public record for years. They are completely at odds with Mr May’s conception of MMT.

What about developing countries?

The alleged rift between Fadhel Kaboub and Warren and I apparently emerged in the excellent article written by Fadhel Kaboub (January 7, 2019) – Why Government Spending Can’t Turn the U.S. Into Venezuela.

In that article, we read that:

For developing countries, the problem begins with trade deficits and resulting debt owed in foreign currencies … Those deficits are the product of fundamental economic shortcomings, themselves often a legacy of colonial rule. Postcolonial countries are typically unable to produce enough food and energy to meet domestic need, and they face structural industrial and technological deficiencies. Because of this, they must import food and energy, along with essential manufacturing inputs.

This is entirely consistent with what I wrote in this blog post – Ultimately, real resource availability constrains prosperity (February 11, 2016) and Bad luck if you are poor! (June 25, 2009).

There are external constraints on governments who seek to maintain full employment and generate material prosperity for the citizens of a nation.

For less-developed countries, a currency-issuing government faces different issues to that of an advanced nation, especially where essentials like food and energy have to be imported.

While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention.

In the case of less-developed countries, specific problems cannot be easily overcome just by increasing fiscal deficits.

That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population.

A totally general statement about the capacity of a currency-issuing government that applies to any nation and is a fundamental principle of MMT is that a government can always use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.

That is, such a government can always, without exception, ensure there is full employment.

There is no financial constraint on such a government who desires to achieve that desirable policy goal.

While that might sound salutary, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.

A second totally general statement, which complements the first is that the worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.

If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be materially poor.

The ultimate constraint on material prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.

Thus, even if the government productively deploys all the resources a nation has available, it will still be materially poor if its resource base is limited.

Enter international trade.

In his article, Fadhel Kaboub notes that imported resource dependencies drive trade deficits, which place downward pressure on the exchange rate of the nation and make imports (benefits) more expensive to purchase.

This impacts on the overall price level, eroding real wage equivalents and is often “the real driver of … social and political unrest”.

This is the classic scenario where the IMF turns up to provide bailout loans to meet the shortage of foreign exchange in the nation but undermines the benefits of that assistance by imposing “painful austerity measures” and debt dependency.

Then the quest is on for activities that will generate foreign exchange to repay the IMF debts and stop the austerity.

And further problems emerge – for example, the shift from sustainable domestic agriculture to export-led cash crops kills the traditional community organisation and livelihoods – which “decreases self-sufficiency and reinforces the dependence on foreign goods that caused the debt in the first place.”

I have often written about this vicious cycle (see blog posts cited above). The Structural Adjustment Programs (SAPs) that are the hallmark of the IMF (and World Bank) approach to ‘development’ actually ruin sustainable ‘development’.

Fadhel Kaboub then outlines what he called the “MMT-informed solution … to help developing countries regain monetary policy and their ability to spend on domestic priorities”.

This is the section Mr May (Progressive Pulse) quotes as being in contradiction to my own writing (and Warren’s work).

The full quote is (Mr May edits his version):

The goal is to reduce imports, secure a favorable trade balance and pay off their debts, so countries would focus on the root causes of trade deficits: invest in sustainable agricultural practices (like aquaponics) to restore food sovereignty; build renewable energy (like solar) to secure energy sovereignty; and invest in education and research and development to increase productivity and gain the ability to manufacture more valuable products. Such development would also increase the real productive capacity of the economy, meaning that governments would have more room to spend before inflation.

Mr May’s zeal to find a rift in the work of the MMT academics just discloses his lack of attention to the body of work we have built up over the last several decades.

Some years ago, I did some commissioned work for the Asian Development Bank on Pakistan (and other Central Asian nations) which gave me a very good understanding of the problems that less developing nations which run external deficits face when trying to use their currency-issuing capacity to advance domestic welfare objectives.

I have written about this a number of times (even though the actual commissioned reports I produced for the ADB with Randy Wray and an ADB staff member were confidential).

As an aside, one day I will tell the story about those ‘official’ reports which culminated in an official ADB monograph being published by the ADB (complete with cover design and relevant ISBN data) on their WWW site.

However, within about 24 hours the document was withdrawn and replaced by a completely different publication not related to our work on Pakistan but which carried the same library details (publication number, etc).

The reason for the withdrawal by the ADB (which meant our report never saw the official light of day) was that the Pakistan media discussed our results (which were antagonistic to the IMF) in the morning press and the IMF complained to the ADB, which then bowed to pressure and buried our report.

The full story is very interesting and I have all the documents. But that will wait for another year! Peoples careers might be at stake.

I discuss some of the outcomes from that paper in these blog posts:

1. Defaulting on public debt as a way to progress (September 7, 2010).

2. Do current account deficits matter? (June 22, 2010)

3. Modern monetary theory in an open economy (October 13, 2009).

The relevant aspects focus on current account issues.

It is quite clear that the strain of servicing rising foreign debt obligations can lead to a depletion of foreign reserves.

The orthodox (mainstream) interpretation of an increasing current account is summarised as follows.

A burgeoning current account deficit is problematic because it indicates that a nation is ‘living beyond its means’ which means that domestic demand is excessive (perhaps driven by fiscal deficits) and boosting imports.

The excessive demand is also seen to fuel inflation that restricts exports.

Further, the mainstream claim that the current account deficit must be ‘financed’ by flows of foreign reserves, which for the most part must be attracted by high returns and a stable political, economic, and social environment.

So the worsening trade account indicates that the consumption of locals in such a nation becomes dependent on the whims of foreign lenders.

So you get the picture – living beyond their means -> currency attack -> depletion of foreign reserves … etc.

In the blog post – Modern monetary theory in an open economy (October 13, 2009) – I wrote that MMT will never lead us to conclude that a nation is “living beyond its means” and, should therefore, scale back government spending and private consumption, when there is substantial unused capacity and underutilised resources (particularly labour).

In those circumstances, the nation could not possibly be living beyond its means. As a consequence the mainstream policy recommendations are always likely to worsen the situation rather than improve it.

Further, MMT does not advocate net public spending per se. There are some growth strategies which will be unsustainable.

Overall, a model of long-run growth and sustainable development requires a careful balancing of internal and external forces.

Clearly, when an economy that experiences a depletion of foreign exchange reserves has to take some hard decisions in relation to its external sector, especially if it is reliant on imported fuel and food products.

In these situations, a burgeoning external deficit will threaten the dwindling international currency reserves.

In some cases, given the particular composition of exports and imports, currency depreciation is unlikely to resolve the external deficit without additional measures.

The depreciation, in turn, raises the relative costs of imports, and imparts an inflationary bias to the economy.

Moreover, depreciation leads to expectations of further depreciation and fuels the run out of the currency. There may be no interest rate that is high enough to counter expectations of losses due to depreciation and possible default.

The reality is that a nation facing a lack of ability to purchase imports, for whatever reason, has to either increase its exports or reduce its imports.

In the short run there is probably no alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.

For an advanced nation, similar constraints might apply and a sudden shift in international sentiment against the nation or other financial assets denominated in that currency are no longer deemed as desirable, then adjustments in the flow of real goods and services sourced from foreigners are required.

From the mainstream perspective the consequences of encountering balance-of-payments problems before short-term capacity utilisation is reached are straightforward.

Demand has to be curtailed, unemployment increased, and capital accumulation has to be reduced.

This leads, in the long run, to a relative deterioration of the country’s export potential compared with that of its main competitors. This situation tends to lead to a vicious circle with further balance-of-payments problems.

MMT recognises this problem, but doesn’t recommend the mainstream solution.

A sovereign government has more domestic policy space than the mainstream consider.

But it is also advisable that a nation facing continual external deficits foster conditions that will reduce its dependence on imports. However, the mainstream solution to external deficits actually make this more difficult.

The IMF approach to debtor nations almost always reduce the capacity of the government to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing the unemployed buffer stock. A policy strategy based largely on fiscal austerity will create unacceptable levels of socio-economic hardship.

There are also inherent conflicts between maintaining a strong currency and promoting exports – a conflict that can only be temporarily resolved by reducing domestic wages, often through fiscal and monetary austerity measures that keep unemployment high.

The best way to stabilise the exchange rate is to build sustainable growth through high employment with stable prices and appropriate productivity improvements.

A low wage, export-led growth strategy sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population.


I wrote all that sort of logic 10 years ago and before.

There is no rift. The original MMT developers and their students all understand these things with no disagreement.

What the Progressive Pulse article indicates is that Mr May hasn’t read and/or understood what I was writing.

It thus bears on the editorial integrity of Progressive Pulse and the standards of their Op Ed articles that are published.

Perhaps Mr May should stick to food and drink for the time being.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 36 Comments

  1. One real resource constraint is the ability to add more CO2 to the atmosphere with out digging our own graves even deeper. Once economists recognize that they are going to have to admit that the entire planet, every single “soverign” nation is BANKRUPT. The question for economists then becomes, is a chapter 7 or a chapter 11 bankruptcy proceeding appopriate. Since the entire planet has never been bankrupt before I can imagine why there would be some confusion about this issue. After all it is not like there are alien debt collectors at our borders trying to reposses our national parks. That is simply because they will not show up until there is no one left here to give them any back talk.
    What I recommend is a planetary chapter 11 bankruptcy proceeding. An appropriate alien will need to be found to serve as the trustee for the reorganization of the planet. I am a certified alien. So if no other alien applies for the job I will reluctantly accept the position.

  2. I think we can be happy with the way MoneyMonopolist is carrying the ball in comments over at Progressive Pulse.

  3. Sadly, Bill, the tendency exhibited by Progressive Pulse can be seen in other publications. Either the authors have been influenced by the mainstream narrative and thus find some MMT principles difficult to understand or accept or they, for one reason or another, harbor a prejudice against one or another of the principles of MMT, which leads them to question or reject the theory in whole or in part. Pointing out their errors merely leads them to double down on what they wrote or said. I have rarely seen anyone admit that they misunderstood something about MMT, even were they were able to do so without looking bad in some way. In addition, shoddy scholarship and journalism in this respect seems to be expanding to fill the available space rather than shrinking in the present competitive marketplace, which tells us something is poisonous about our present cognitive environment. I would contend that, while not the entire story, neoliberal policies play a prominent role in this and related behavior, such as can be found in the work place, and they have done so for some time.

  4. As larry observes (and I agree), “something is poisonous about our present cognitive environment.” Has neoliberalism polluted the human mind as pervasively as it has polluted the rest of the planet? The niceties of MMT can be a little dicey, especially with regard to the foreign sector, and thus Bill’s weekly quizzes are challenging, educational, and fun. The essential principles of MMT, however, what I like to call “the axioms,” are duck soup to grasp merely by spending an hour, for example, with Stephanie Kelton’s “Angry Birds” video. So why aren’t more people getting these axioms? I suspect that the reason goes back to larry’s poisonous cognitive environment. The virtually self-evident fundamentals of MMT reveal a rather expansive (though not unlimited) scope of federal agency for a developed currency-issuing government. But after the citizens of such governments have been told for decades that their countries are broke and can’t afford to meet this or that crying need, MMT comes across, at first blush, as too good to be true. And most people stop thinking at first blushes.

  5. is it not true that the uk has to import food and energy?
    why do we have ample access to food and energy through our
    floating[sinking a bit) currency while poorer countries do not?

  6. Kevin,

    The UK currency may be sinking, but it is still buoyant enough; and we are still ingenious enough to meet many of the challenges to our (relatively declining) fairly sophisticated and affluent society.

    Apart from the need to maintain our industrial/service sector competence, we also have a hugely powerful economic presence in the NHS – it is capable, with proper clinical direction and technological creativity to transform itself into a dynamic component of prosperity; export prowess is even within its future scope.

    I am pleased Peter May stimulated Bill to write this piece, it has helped clarify issues that he wrote about before my introduction to MMT.

  7. Gogs – the exporting capacity of the NHS is already in existence – complete with a global marketing arm. It’s not a question of future scope. Whether or not it’s a proper use of its resources depends on your politics.

    Bill – I have an issue which you may have addressed already, but I have missed (apologies, if so). You alluded to it in passing at the Gower launch. The real problem that arises from large accumulations of sterling in foreign hands when we run a persistent and large trade deficit is that eventually the holders of that sterling want to spend it. And in recent years they have spent it in the UK buying up land and building monuments to their excessive wealth – whether as vanity projects, somewhere to sink their cash at low tax rates (our local taxes are pitifully inadequate on buildings of very high value) or to launder their money. This is predominantly a political problem as the accretion & spending of these sterling holdings within the UK gives their owners rather a lot of clout. My own Labour council falls over backwards to accommodate the ‘investment’ in such monstrosities as The Shard (ok..that’s my personal view on architecture there…) and is prepared to bend planning rules, allow the demolition of Grade 1 listed Victorian architecture (this is the borough of Chaucer, Shakespeare and Dickens) in order to change the demographic profile of the area. It’s always been rather poor and now it has patches of great wealth and some of the most highly priced land in the country. There’s been a fair bit of social cleansing to accommodate the changes, too. I appreciate, as I said, that this is a question of political decisions but the power to do it lies in that accumulation of sterling from a prolonged imbalance in external trade.

  8. Although not a currency-issuing nation with considerably less policy space, Greece was also told to reduce imports (as it had lent “too much”) and the European Commission together with the IMF destroyed 25% of its productive capacity.
    And so-called economists in my country defend that kind of policy as being sound and rational.

    History will not be kind to them.

  9. Dear Bill

    You write that exports are costs because, when a country exports something, it gives up something that it could use itself. That’s not necessarily true. Often what is exported is a surplus. Suppose that a country with 5 million inhabitants produces 10 million tons of bananas. Obviously, it can’t consume all those bananas itself, so it exports most of them. True, the resources used to produce all those bananas could be used for domestic production, but if suddenly it were no longer possible to export bananas, that would be very bad news because a lot of the resources used in the banana sector would then become worthless, and expensive structural changes would be required.

    Exports are costs, yes, but it is rational for a country to avoid a sudden, sharp decline in its current level of exports because such a decline would entail heavy dislocation costs.

    Regards. James

  10. The IMF approach to debtor nations almost always reduce the capacity of the government to engineer a solution to the problems of inflation and falling foreign currency reserves without increasing the unemployed buffer stock. A policy strategy based largely on fiscal austerity will create unacceptable levels of socio-economic hardship.
    There are also inherent conflicts between maintaining a strong currency and promoting exports – a conflict that can only be temporarily resolved by reducing domestic wages, often through fiscal and monetary austerity measures that keep unemployment high.
    The best way to stabilise the exchange rate is to build sustainable growth through high employment with stable prices and appropriate productivity improvements.
    A low wage, export-led growth strategy sacrifices domestic policy independence to the exchange rate – a policy stance that at best favours a small segment of the population.

    I couldn’t agree more. I look forward to the blog on Jamaica, a member of my Caribbean community.

    I wonder if the “exports are a cost” phrase, is not often misinterpreted. An explanation devoid of ambiguity, can be found in “Reclaiming The State”

  11. I was not doubting the ability of uk access resources from the rest of the world.
    But wondering why poorer countries with floating exchange rates would not have similar access with similar potential for currency depreciation?

  12. @ James Schipper,

    “Suppose that a country with 5 million inhabitants produces 10 million tons of bananas.”

    Harry Belafonte would be immensely proud of that country, and its unbelievably astonishing banana productivity!

    In 2017, only India (pop.1.34 billion, banana production: 27.6m tonnes) and China (pop.1.4bn: 12.08m tonnes) exceeds 10m tonnes of annual banana production!

    The Philippines (pop. 104m) produces 8.6m tonnes, whilst Brazil (pop. 209m) manages 6.9m tonnes, and Ecuador (pop.16.6m) just 6m tonnes.

    One could argue that your country might be better off not devoting so much of its resources to cash crops, but then it would be a shame to spoil the wonderful example that it sets the rest of the world! : )

  13. Deborah – the housing/land issue, as I’m sure you know, has a long history in the UK. The present grotesque housing bubble goes back to the early 70;s when credit controls were loosened and there was an immediate housing min-bubble. This continued in phases until there was a mega-bubble under Blair (Labour In Name Only!).

    Without Government legislation, credit controls, Land Value Tax we have now reached a point where the genie is well out of the bottle and there is massive wealth transfer to property owners which destroys communities, reduced social mobility and disenfranchises for generations to come ultimately creating social instability.

    The Right Wing have used the housing issue as a way of channeling the discontent against immigrants and the politicians (Labour as well!) have been appallingly bad at explaining the long history of this problem. We now have a seriously divided society and as Bill so often points out, a lot of hot air and misinformation around the EU.

  14. The statement that exports are a cost and imports are a benefit appears too simplistic without some further elaboration or explanation of the circumstances. For example if we assume that exports and imports are the essence of “trade,” then we should assume that the transaction is a zero sum game. When I export something I receive something in return i.e., money or the ability to buy goods at some point in the future. Of course the country doing the importing could default on its exchange promise by devaluing its currency. If there is no such promise or exchange, then an export becomes foreign aid. In the case of the U.S. importing oil from OPEC, the U.S. is better off, yes? Well the initial exchange, oil for dollars results in the consumption of oil–so the asset is gone–while the dollars continue to exist outside of the U.S. contributing to economic growth when OPEC uses those dollars to import food from Europe and then Europe uses those dollars to buy steel from Russia and on and on. The dollars are assets just like the oil but one continues to exist until it is used to buy goods and services from the U.S. From 1980 through 2010 or thereabouts, Japan ran a continuous trade surplus suggesting that, under this theory, the country should be an economic basket case selling enormous amounts of goods and cars to the rest of the world. But Japan seemed to have flourished even though they had to import oil during a time when OPEC was raising prices.

  15. There must be some intellectual local mimimum that someone falls into when discussing real resources (export being a negative to your nation’s resources).

    When you made a blog post about trade last year, one commentor simply couldn’t accept that simple fact. =)

    Great explanation in the post.

    I have to got through it again in a slower pace because thats the first thing people raise when i talk about MMT stuff — they talk about dollars becoming worthless.

  16. It’s not that simple Tom. I was one of those who could not accept “that simple fact” either- because while that “fact” might be simple and true, it does not necessarily translate to the overall well being of a nation. It is easily confused with saying that a nation that exports more than it imports is necessarily worse off for that situation. Or that a nation that imports more than it exports is necessarily better off because of that. Neither of which is always true.

    Bill explained this very well in his post “A surplus of trade discussions” and again, here in this post. Where he specifically says that it is NOT “simple”. I have a lot of sympathy for Mr. May. It is very easy to read quite a lot about MMT and the overall MMT approach to trade without finding the relatively rare discussions of the “nuances” that are recognized by MMT on this subject. I know that from personal experience.

  17. Bill,
    On a discussion sit I post on there is a new thread about the advantages/disadvantages of the EU. It starts with a discussion of the supposed lack of democracy. I expect it will move on to the economic problems.
    I know you have strong negative feelings about the value of the EU. I wonder if you’d like to post there or if not then what are the main points you’d make?

  18. Above, Bill wrote, “But being able to export is clearly particularly important for a nation that cannot feed itself or run electricity systems with the resources it has at its disposal with trade.
    In general, a nation hopes the costs of using our resources as exports will not become terms of trade losses – in real terms.
    A trade deficit is a sign that the real terms of trade are working in favour of the deficit nation. That is standard MMT and, in my view, unassailable.
    Unless you adopt the view that imports are not beneficial.”
    I must be ignorant. I wonder how he can say that about a nation like Greece?
    Greece has no way to pay for its imports except by seeing its supply of euros being reduced year after year. I don’t think that it is a good idea to keep borrowing euros to pay for imports. I include both Gov. borrowing from foreigners and people and corps borrowing from foreigners.
    . . . IStM, that this situation is a lot like having the Gov. of the US or Japan run a surplus and thus destroy the fiat currency, such a surplus an MMTer [Wray or Kelton I think] told me will always end with a recession [for example the dotcom bubble].
    I guess what I’m saying is that in order for Greece to import it must export euros and it needs those euros in its economy to keep it going. Right?
    So, Bill, where am I going wrong here?

  19. Dear Steve_American (at 2019/01/11 at 4:20 pm)

    You can decide whether you are ignorant or not.

    But I am surprised after all this time that you still ask questions like these.

    I considered what Greece could do in this blog post (among several) –

    Think about why Italy and Germany import olives from Greece rather than being processed within Greece as in the past.



    And high-value imports include buying second-hand military equipment discarded by the Germany military at high cost to Greece. They could just stop buying that junk which would reduce German exports and unnecessary Greece imports – win, win.

    There are many more examples that I could cite.

    best wishes

  20. @ Bill:
    In the part I quoted you said that imports work in favour of the deficit [importing] nation.
    Here your reply is that Greece needs to import less and earn more euros by various means.
    After I made the post I read the rest of your OP, and later you seemed to qualify it by talking more about nations with fiat currencies. So, maybe I posted too soon, or maybe you failed to put that restriction sooner.
    Anyway, if Greece can’t earn enough euros and EU rules make it impossible to restrict imports [except of military equip.] then are you still saying it is OK for Greece to keep importing stuff and exporting its euros to pay for the stuff?

  21. Thomas E Nugent

    You say that the statement “exports are a cost and imports are a benefit” is too simplistic. I think you’re making a category error. You’re conflating a simple explanatory idea (based on a simple observation of a simple process) with a necesarily simple system and therefore calling BS when you observe the reality of a complex economic system rather than the expected simple economic system.

    Yes it is a simple statement but it doesn’t necessarily lead to a simplistic model of the economy. Certainly MMT economists are not applying it in simplistic ways.

    Many systems are built up of a small number of simple processes or simple rules but achieve fantastic levels of complexity due to the repeated interaction of many instances of the same simple rules/processes. The complexity is an emergent property of many simple interactions and their associated feedback loops.

    Systems theorists draw a distinction between the notions of “complicated” and “complex”.

    The whole general thrust of science since the enlightenment has been to replace COMPLICATED religious and pseudoscientific ideas of how the universe works with simpler, empirically based and more accurate explanatory ideas. By discovering these more correct simple explanations for macroscopic phenomena we have been able to invent devices and build theoretical frameworks that have allowed us to detect ever smaller and more fundamental bits of reality and the simple rules that govern their interactions.

    The end result has been the realisation that the universe is far more COMPLEX than most of our ancestors ever imagined.

    Thus humans have been able to chase their ignorance all the way down to the subatomic level, all the way up to the maximum extent of the physically observable universe and all the way back to the beginnings of time (for our universe at least).

    Getting the simple parts of the system right allows us to understand the whole complex system that much better. So don’t knock simple ideas just because they’re simple or because they seem to fly in the face of conventional wisdom.

  22. Thomas E Nugent: just a clarification. External trade does not necessarily equate to a zero-sum condition. For it to do so, the gains and losses, so-called, need to balance out. They might not in any given case. If one took a country’s entire set of transactions, then there would be a balance. I don’t know as I would refer to such a situation as a zero-sum game as, in game theory terms, this would be indicative of what is called strict competition. Most social transactions are non-zero-sum in character as they are not strictly competitive in the game theory sense — one player’s gain is not thereby another player’s loss. It would be better to stick to balance sheet terminology without bringing in game theory, whose application to human affairs is highly controversial.

    I realize you were being informal in your presentation, but I thought it might lead to misunderstanding.

  23. Dear Steve_American (at 2019/01/11 at 6:32 pm)

    You are trying to put words into my mouth. I didn’t say that “Greece needs to import less and earn more euros by various means”.

    You asked me what could they export and I told you. I also added what useless imports they could cut back.

    The trade situation is not Greece’s problem. The euro is the problem – no nuance there. Abandon the euro and the world changes in Greece’s favour.

    best wishes

  24. @ Newton Finn:

    I think it’s relatively simple, the gospel of neoliberalism is one of individualism and exceptionalism and plays directly to some of our lowest instincts.

    To the richest and most powerful it provides the “higher moral justification for greed” they have always sought, as Galbraith brilliantly put into words, whereas everybody else is sold the (mostly theoretical) chance of becoming succesful by one’s own merits.

    Ultimately, the powerfult might not have the best arguments but they do have the louder voice. There is a quote by Schopenhauer that renders me mildly optimistic though:

    “Der Wahrheit ist allerzeit nur ein kurzes Siegesfest beschieden, zwischen den beiden langen Zeiträumen, wo sie als Paradox verdammt und als Trivial gering geschätzt wird.”

    which roughly translates to:

    “To truth only a brief celebration of victory is allowed between the two long periods during which it is condemned as paradoxical, or disparaged as trivial.”

    As a side note, I feel a lot of the people in the MMT forums have backgrounds outside the field of economics. This can be just random, laymen falling for a conman (in which case, Bill would be a hell of a conman and have me completely fooled) or just the fact that we are outside the groupthink in the field and in academia. Given the elevated level of discussion and arguments in this and other MMT related forums and the logical construction and lack of “inspired assumptions” in Bill’s writings and MMT theory in general, I feel inclined to disregard the second option.

  25. HermanTheGerman,

    You’re right IMHO.

    I’m a layman who didn’t feel like I properly understood what money is and spent a few years, on and off, reading up on all sorts of explanations from myriad schools of thought.

    I stumbled upon MMT quite late in the day but once I did I’ve stuck because it makes the most sense. I’ve read every criticism of MMT I can find and none of them hold water IMHO.

    Now it could be that my personality, personal philosophy and personal knowledge base predisposes me to liking MMT. I.e I could be biased and my feelings that MMT “makes the most sense” may have little to say about its veracity. However, if this were the case I would expect other adherents of MMT to be quite similar to me. What I actually see is a great deal of variety in the types of backgrounds and personalities of the people who believe MMT.

    What I also see is that many of those I’d expect to resist MMT for reasons of personal financial gain do exactly that.

    Then there are the exceptions that prove the rule: Warren Mosler and other bankers who have verified from their personal experience of the operation of the money system at the highest levels that MMT is correct DESPITE them being part of a group who benefit from the neoliberal status quo. The fact of their existence combined with their small numbers seems to support the validity of MMT.

    So although I’ve previously thought MMT might be just another fringe heterodox cult like Positive Money I’m now confident it is the most accurate model of macroeconomics that we currently possess.

  26. Thanks Bill for clarifying how MMT relates to trade matters, again. It seems to me many people are looking for easy solutions to resolve complicated issues. This was evident at the MMT conference in New York last September regarding the Job Guarantee. In fact I do sympathise as many social problems are difficult to solve and involve tough on the ground work over years. Even then success is not guaranteed. Unfortunately MMT fails on the magical solution front. While it does make clear the tremendous potential of a sovereign currency MMT does not instruct us how to overcome the impediments to social progress which are many. With respect to trade, Canada (my country) exports vast quantities of ”rocks and trees” as we say here, meaning wood pulp, lumber, paper of various kinds, and mining products such as minerals and metals. We also export large quantities of oil. Entire areas of the country are dependent on these exports. In terms of real resources these are obviously costs. We are exporting our forests so that others can blow their noses, wipe their bottoms and read newspapers, etc. So while we should transform more of these things into their higher value-added products at home and ultimately reduce the extraction of these things that is easier said than done. There exist all kinds of impediments. Most immediately are the large number business interests and jobs dependent on this extraction. Another is the colonial mindset that sees us as a supplier of raw materials to more advanced countries. The observation by MMT thinkers (and others) that exports are a real cost is a useful reminder of what the colonial (IMF) view of countries as suppliers of resources really means. However it does not exempt us from the well thought out strategies and political actions required to change colonial arrangements that have been in place often for centuries. My guess is our situation in Canada is similar to the one in Australia.

  27. Keith Newman,

    You’re expecting too much of MMT.

    I mean it doesn’t tell you how to build an internal combustion engine or perform brain surgery but presumably you don’t count that against MMT?

    What MMT gives you is a clear and accurate picture of the capabilities of your existing money system. That picture allows you to see that some of the impediments to change that certain political actors claim are insurmountable because of hard afinancial constraints are in fact political choices disguised as financial limitations.

    So what you do is take that knowledge of your money system and and use it to better inform your political process. It’s the political arena in which the big decisions you talk about are made and it’s the art of persuasion that will determine which decisions are made.

    If people don’t realise they can even ask for certain things because they’ve been duped by neoliberal propaganda – MMT can help open their eyes.

    If a government wants to implement certain policies but doesn’t know how to fund them or is running into sabotage efforts from political opponents – MMT can help see ways around these obstacles.

    If your government or the private sector in aggregate is trying to do something and it’s causing inflation or deflation, increasing unemployment or environmental degradation then MMT can help you work out what’s going wrong and elucidate the workable alternatives that are a available.

    If you want to know precisely what industries, technologies and ideas to invest in for the future and exactly practically how you get from here to there then, while MMT can help inform your discussions, it really is up to you and your compatriots to thrash it out and come to the best mutually acceptable decisions you can.

  28. Keith Newman,

    Sorry, by “you’re expecting too much” I mean “the people who are looking for simple magic MMT solutions” who you refer to are expecting too much of MMT!

  29. I think the difficulties of excepting exports are losses and imports are
    gains at the macro level is what that means for policy.
    As Bill says here it does not mean that de industrialization is the best policy
    loss of skills ,quality jobs, reliance on others etc etc.
    This is for me a wider problem between description and prescription.
    As Marx said philosophers have only attempted to interpret the world in various
    ways the point is to change it.Yet Marx’s prescription of the common ownership
    of the economy did not prove successful going hand in hand with tyranny.
    Yet the fundamental analysis of a conflict between wages and profit is sound.
    But there are other conflicts and co-operation among and between classes.
    The clarity of the MMT lens is in contrast to the speculation of the crystal ball.

  30. Consider the following three types of imports: caviar, CNC machines, and foreign exchange. (Importing foreign exchange is just another term for exporting something in exchange for that foreign exchange). Each type of import has its own advantages and disadvantages depending on the context.

    1. The caviar could be consumed for momentary pleasure (if you ask some people…), but once consumed it is gone. There is a real benefit to this, but how much of a real benefit is purely subjective for the person consuming the caviar. The caviar could also be re-sold for money, which becomes a claim of social power over other people. In this sense, a tradeable good like caviar has two aspects: its subjective utility, and its social power (monetary value). The classical economists used to call this subjective utility “use-value” and the social power “exchange-value.”

    By spending money on importing caviar, an individual or a nation has given up claims of future social power in exchange for either:
    A: expanded claims of social power if the caviar is re-sold for a greater amount.
    B: diminished claims of social power if the caviar is re-sold for a lesser amount.
    C: momentary personal satisfaction if the caviar is consumed.

    Whether scenario A or C is more pleasing to the individual or nation in question is a matter of subjective preference, although we can definitely say, objectively-speaking, that no individual or nation would prefer Scenario B to Scenario A. Unlike with Scenario A vs. C, Scenarios A & B deal in the same qualitative benefit (social power), the same currency, the same metric; the only difference is Scenario A obtains more of it for the nation or individual. Here is a unique case where we can compare like with like, apples to apples.

    2. Now consider the CNC machine: like the caviar, it can either be re-sold (for some amount of social power) or used. But unlike the caviar, when used it does not confer immediate gratification. Instead, it produces commodities that have their own degrees of subjective utilities and social power.

    Instead of three scenarios, we now have five scenarios for evaluating the “benefit” of this CNC import:
    A: expanded claims of social power if the CNC machine itself is re-sold for a greater amount.
    B: diminished claims of social power if the CNC machine itself is re-sold for a lesser amount.
    C: expanded claims of social power if the products of the CNC machine are sold for a greater amount.
    D. diminished claims of social power if the products of the CNC machine are sold for a lesser amount.
    E. subjective satisfaction obtained from the products of the CNC machine in lieu of the opportunity cost of the social power either spent on the original CNC machine or the social power of the resulting products (whichever is greater).

    In the case above, Scenarios A, B, C, and D can all be quantitatively compared with each other since they use the same metric, and once we know how much money everything was sold for, we can objectively say which scenario among these is best. However, there is still no objective way to say whether Scenario E is still better than all of those.

    Where the output-commodities collectively command more social power than their inputs (including the social power spent on the CNC machine), we can confidently say that this import was better for the individual or nation in question than the counter-factual case where the import was not made…although we can’t say whether the nation would have been even better off (had more satisfaction) if the output-products had been consumed directly rather than re-sold. Note as well that, if we are speaking of a nation, in order for it to end up with collectively more social power than before, it would actually have to sell the output-commodities abroad for more than was spent on the CNC machine. This would register as a net-export of real goods (and a net-import of money) for the nation when compared to the initial import of the CNC machine.

    3. Now consider foreign exchange. Running a net-import of foreign exchange (like China does) means accumulating claims of social power on others. It is true that these are mere “claims” not automatically social power; the other nations have to actually agree to trade real goods in the future for those dollar bills. However, there are very strong incentives for nations to honor these promises, and very strong punishments on the world market if nations don’t honor these promises.

    The net-import of foreign exchange can be achieved by net-exporting real goods, but keep in mind that these real goods could be of two varieties: they could be like the caviar above, or like the CNC machine. (As an industrial machnery installer, I happen to know that China exports a lot of CNC machines to the U.S.). If the real goods exported would have helped bring in more social power than was obtained through their sale, then a country like China is actually foolish to export the CNC machines rather than run the machines themselves and export the resulting products for more social power…EVEN assuming that all they care about is social power and not consuming real goods for their own satisfaction.

    Even in the case where the net-import of foreign exchange and net-export of real goods results in more social power than the scenario where the real goods were kept in the country, that country must still decide whether the increased social power is worth foregoing the immediate satisfaction of consuming those real goods. For example, if China exports caviar and imports dollars, China has collectively gained in social power (and America has collectively lost in terms of social power, assuming that the caviar are consumed for pleasure and not re-sold for an even greater amount), but China has lost whatever satisfaction it has gotten from the caviar, and America has gained whatever satisfaction is has from consuming the caviar.

    This trade of immediate momentary satisfaction for lessened claims of social power is probably what people mean by saying that a country is “living beyond its means,” but this is only the case when the country consumes the real goods that it imports with nothing to show for it. A country like the U.S. that exports dollars and imports CNC machines is not “living beyond its means.” The U.S. probably comes out ahead in terms of social power, in terms of future net-imports of money and net-exports of real goods, when it imports that type of capital good…when it engages in what David Ricardo called “productive consumption” as opposed to “unproductive consumption.”

  31. “In the short run there is probably no alternative but to urgently restore reserves of foreign currency either through renegotiation of foreign debt obligations, international donor assistance or default.”

    This is an admission that there is a foreign currency/exchange rate constraint.

  32. As an historian with an interest in nineteenth-century Britain, I always think it’s instructive to look at its experience on these questions.

    There’s no doubt imports of raw materials (American cotton & Australian/NZ wool for example) and food benefited the UK enormously during the nineteenth century. The country would have never fed itself or sustained its ongoing industrialization without access to resources held outside the UK.

    Indeed the British became so dependent on imports that they ran consistent deficits on the balance of trade. Britain may have been the ‘workshop of the world,’ but it generally imported more than it exported.

    Remember devaluation wasn’t an option because Britain was on a gold standard at the time. So the British had to fund these trade deficits somehow. The British paid for the excess of their imports over exports with earnings generated through foreign investments and incomes generated from services like shipping and insurance.

    Nevertheless, the British knew instinctively that imports represented a net gain to their economy, which was why Chamberlain’s campaign to manipulate British trade through a policy of tariff reform ultimately failed.

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