Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The US President is in Asia at present for the annual Asia- Pacific Economic Cooperation group summit visiting China today and with a cap-in-hand or some would have it. This is a talkfest where North Korea and Copenhagen are meant to be the official talking points. But the journalistic hysteria is all focusing on how the US banker (China) is the culprit for the World’s woes at present and how it should allow free market forces to work and rebalance world trade. The argument has reached the hysterical level in recent weeks and at its elemental level just reflects a failure to understand how a modern monetary system operates.
You can download the 2009 APEC Economic Policy Report, published for the Summit (November 2009) which provides an interesting discussion on regulatory reform. I will write about this in more detail at another time. I am still processing the ideas. They are very mainstream though.
The 16th APEC Finance Ministers’ meeting joint ministerial statement finalised yesterday (November 13, 2009) is also interesting.
Under the heading of Fiscal Stimulus and Exit Strategies, we read (in horror):
7. We agreed on the crucial role that supportive fiscal measures in the APEC region had played in avoiding an even deeper global recession and resolved to remain vigilant until the economic recovery gains traction. We recognised the need to reduce and stabilise public sector debt burdens at a low and prudent level. In many economies, this will require, beyond the mere phasing out of stimulus measures, a comprehensive strategy of sustained budget consolidation, growth-enhancing reforms, and measures to address long-term demographic challenges.
So they are conceiving their task is not just to allow the temporary measures to run their course but to engineer more fiscal retrenchment on top of that to cut back public debt. And note the goal is to address long-term demographic challenges. So the old flawed scaremongering about unsustainable future deficits as our populations age.
There is not a lot of leadership being envisaged here if these statements capture their vision of the role of government.
I wondered what the hell a prudent level of public debt might be anyway. How would they define that? In relation to what?
Given that most of the countries involved will carry high levels of labour underutilisation for years to come (including Australia) and the non-government domestic sectors in many of the countries are carrying huge levels of indebtedness, with very uncertain property market outlooks, how could any government anticipate not only withdrawing the stimulus but then further pushing their budget positions in a contractionary direction?
What they are saying is that they have to bring the debt down (why?) and so the budget position will have to be more contractionary than it was before they started their bailout programs. All I can say is good luck. If they try to do this anytime soon they will find they will generate higher (bad) deficits as they plunge their economies into further crisis.
The correct response by the Ministers would have been along these lines:
1. We will carefully monitor our respective economies to ensure that we understand trends in non-government saving so that we can scale our net government spending to ensure we “finance” that saving, We thus aim to ensure public spending fills the gap left by non-government saving (a consolidated position combining the private domestic and foreign sectors) and keeps aggregate demand growing at such a rate that it provides scope for the private savings desires to be realised without compromising our public purpose goal to ensure there is sustained full employment and inclusive income distribution outcomes.
2. We will resist all calls from vested interest groups to withdraw from this fundamental fiscal role.
3. We have learned from this crisis that our previous reliance on monetary policy as the basic tool of counterstabilisation and our concentration on inflation targetting has failed to deliver credible outcomes. In the current crisis, we have once again reminded ourselves of the effectiveness of fiscal policy and we will thus downplay monetary policy in the future – concentrating on maintaining a relatively constant overnight rate around zero.
4. We will also redesign our fiscal policy positions to ensure that the automatic stabilisation mechanisms are sufficient to generate full employment. We understand that the only way this can happen is if we introduce an employment guarantee to ensure there is a buffer stock of accessible jobs fluctuating (inversely) at all times with private demand for labour. In that way, even without any other discretionary policy changes we will guarantee a form of full employment that will at least allow a worker with an employment guarantee position to earn sufficient income to engage fully in the society they live in.
5. We will thus revisit the question of minimum wages to ensure they provide adequate living outcomes and represent the lowest wage that a private employer has to offer to operate in our nations.
6. We will continue to publish public data on government accounting but only because researchers in posterity will want a continuous time series. We will discontinue regular releases of budget aggregates and instead provide much more public information about well-being, happiness, and labour market and regional performance.
Then we might have relaxed tonight and agreed they were doing their jobs correctly.
Under the heading of Reforms to Support Strong, Sustainable and Balanced Growth our despair deepens. The Ministers pledged the following:
10. We are committed to maintaining and increasing the dynamism of our domestic economies. We agreed that, depending on individual economies’ circumstances, a combination of macro-economic policy adjustments and structural reforms was needed to achieve this, whilst supporting balanced and sustainable global growth. We discussed how structural reforms to improve economic flexibility, raise productive potential, develop financial markets and increase private demand can contribute to raising potential output growth over the medium- to long-term and narrowing development imbalances and reducing poverty.
11. In this regard:
* APEC members with sustained, significant external deficits pledge to undertake policies to support private savings and undertake fiscal consolidation while maintaining open markets and strengthening export sectors.
* APEC members with sustained, significant external surpluses pledge to strengthen domestic sources of growth. According to circumstances in individual economies, this could include increasing investment, reducing financial markets distortions, boosting productivity in service sectors, improving social safety nets, and lifting constraints on demand growth.
So even though they accept the need for “market oriented exchange rates that reflect underlying economic fundamentals” they still act as if they are operating in a fixed parity world where external deficit countries have to scorch their domestic economies because of trade “imbalances”.
Think about this for a moment. The first requirement under Point 11 is as follows:
(a) Countries with current account deficits are in some way unbalanced.
(b) They will have to “undertake policies to support private savings” yet also undertake “fiscal consolidation” (pursuing surpluses).
(c) At the same time, they will not place any restrictions on their external sectors and will introduce policies which will enable them to ship more resources away that their citizens (who will be suffering increased unemployment because of the domestic contraction) could use so that the rest of the world can enjoy them.
(d) Meanwhile the rest of the world is expanding their domestic sectors – enjoying higher employment and getting cheaper stuff from the deficit countries.
That is a policy mix contrived in hell. This is the ultimate neo-liberal con job.
First, as I explain in some detail in this blog – Modern monetary theory in an open economy, the idea that a current account deficit (CAD) is bad and a surplus is good is screwy in the extreme.
A CAD can only occur if the foreign sector desires to accumulate financial (or other) assets denominated in the currency of issue of the country with the CAD. This desire leads the foreign country (whichever it is) to deprive their own citizens of the use of their own resources (goods and services) and net ship them to the country that has the CAD, which, in turn, enjoys a net benefit (imports greater than exports). A CAD means that real benefits (imports) exceed real costs (exports) for the nation in question.
So a CAD signifies the willingness of the citizens to “finance” the local currency saving desires of the foreign sector. MMT thus turns the mainstream logic (foreigners finance our CAD) on its head in recognition of the true nature of exports and imports.
Subsequently, a CAD will persist (expand and contract) as long as the foreign sector desires to accumulate local currency-denominated assets. When they lose that desire, the CAD gets squeezed down to zero. This might be painful to a nation that has grown accustomed to enjoying the excess of imports over exports. It might also happen relatively quickly. But at least we should understand why it is happening.
Second, sustained growth can only come if the saving desires of the non-government sector are met. There are two sectors that can “support private savings” – the public and the external. In the case of Norway, which is, for a time, sitting on massive energy reserves, their external sector (net exports) can provide the aggregate demand growth to allow close to full employment to be maintained and allow private citizens to achieve their saving desires. The government sector can run small surpluses in this case and still maintain high levels of public amenities. The Norwegians live very well except for the cold weather. Although they are now discovering it is possible to surf up that way which might make things even better.
But ultimately, Norway’s resource wealth will decline and the only way the Norwegians will be able to continue living as well – high employment, private saving desires realised and excellent infrastructure – is if the government returns to deficit as net exports stop supporting aggregate demand at the level they do at present.
Clearly, not every country can be in Norway’s current situation. As a matter of accounting – for a country to have a CAD surplus there has to be at least one other country be enjoying a CAD deficit.
So for the rest of us, including Australia and the US, with the CAD deficit draining private saving (that is, subtracting from aggregate demand), the only other sector that can “support private savings” is the government sector – and in these situations it has to do that by running deficits – continuously for ever and a day.
That is not my opinion. It is rather a matter of national accounting. It has to be the case by dint of the way we account in our monetary system.
So if you then consider that these Finance Ministers have also committed to “fiscal consolidation” – cutting back on net spending – you soon realise that they must be dreaming a world where all of the APEC nations are going to enjoy (very) large CAD surpluses sometime soon. Because in the absence of that sort of major structural change in the region (particularly in Australia and the US), the fiscal consolidation will undermine private saving.
Further, this ambition – which is just mouthing the hollow neo-liberal mainstream rhetoric – conflicts with the earlier ambition that external surplus nations expand their domestic spending to suck in more imports.
Third, why would an electorate approve of a government that wanted to scorch the domestic economy, undermine our ability to save and then seek to put our national resources into ships and send them to some other nation for their benefit?
Fourth, what do they think “market oriented exchange rates” do anyway? They regulate trade back to the fundamentals unless there are huge non-productive speculative flows occurring.
Flexible exchange rates allow domestic policy to be freed to pursue full employment and equity a capacity that was lost under fixed exchange rates – you might like to read this blog for more on that – Current accounts and currencies.
It would be far better if they worked to outlaw any speculative flows that are not directly linked to the real economy via a hedging contract in the forward market. This position is explained in this blog – A global financial tax?.
The question that is always begged in these discussions of international rebalancing especially in the context of how the current crisis originated is: why do we want to allow destabilising financial flows anyway? If they are not facilitating the production and movement of real goods and services what public purpose do they serve?
It is clear they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects for disadvantaged workers in many less developed countries. I don’t see any public purpose being served by allowing these trades to occur and all governments should work together to make all financial transactions that cannot be shown to facilitate trade in real good and services illegal. This would largely wipe out speculative attacks on national currencies and the exchange rate movements would reflect underlying fundamentals and provide some semblance of trade balancing.
But, of-course, there is also real-politik going on at APEC, especially surrounding President Obama’s visit today to China.
Some are construing the agenda to be centred on “China’s fixed-rate policy, which has prompted central banks in India, South Korea, Thailand and Taiwan to accelerate dollar purchases to curb currency appreciation.” (Source)
Accordingly, China is bad because it has built up enough reserves which have allowed it to maintain a lower than otherwise currency parity against its trading partners (principally the US and Europe) and
The Bloomberg article claims that “Asian companies say Chinese rivals have an unfair advantage because of the yuan-dollar link.” The link is pushing the other Asian currency up against the yuan as the US dollar depreciates.
The China is bad argument has traction everywhere. Paul Krugman devoted a whole column to this on October 22, 2009 when he referred to The Chinese Disconnect. With reference to the depreciating US dollar he said:
But China has been keeping its currency pegged to the dollar – which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.
And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.
As I note below, the level of aggregate demand in any particular country can be easily managed by its sovereign government. If the trade contribution falls then the government has to divert demand to the domestic economy. Fiscal policy can always do that and prevent a major jobs massacre from occurring.
Workers in poor countries can always be employed if their governments take the right fiscal path. The problem is not that the Chinese are bad but the governments in the rest of the world are bad – they have bought the IMF line and think it is prudent to run contractionary fiscal stances relative to the desire of their non-government sector to save. That is the problem.
But everyone is now talking about the so-called G-20 rebalancing goal which is aimed to rid the world of “excessive U.S. consumer spending and Asian exports”. They don’t, however, say that this means lowering the standard of living for the US.
Why would they want to do that if the Chinese are happy to export low-priced junk to them? Why would a President of the US actively promote that agenda?
An Indian exporter is quoted as saying it “is unfair to compete with China in global exports when the rupee floats and the yuan is fixed.”
From a MMT perspective it is hard to construct the concept of fairness here. What – the Indians want to deprive their citizens of access to their own resources at a rate similar to the deprivation that the Chinese enforce on their citizens? Is that what they mean by fair? Because that is what they are seeking to do.
Certainly, the APEC Finance Ministers in their desire for “market-oriented exchange rates that reflect underlying economic fundamentals” are stating that this is how they see the pursuit of public purpose in the region. The underlying obsession with exports blinds them to the domestic opportunities that they themselves have the capacity to control.
China’s domestic spending (largely public) dominates its growth rate. If the other nations that compete with China for world trade cannot achieve their net export targets then their governments can divert resources to domestic use and increase local employment, income and standards of living.
But the China is bad argument has traction everywhere. Paul Krugman devoted a whole column to this on October 22, 2009 when he referred to The Chinese Disconnect. He said that
Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.
But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world – and, in particular, the United States – will do about it.
He then explained how the Chinese government control their currency to serve their national purpose. He doesn’t say that the Chinese government interpret that sense of national purpose as holding their exchange rate constant against the dollar and Euro and stimulating export sector productivity so they can flood the World with very low price goods.
We ratify that policy by buying the goods and “financing” their accumulating of financial assets in our currencies. If it was so bad we would stop doing it. The bad part is that the Chinese government denies their own citizens the advantages of these resources and instead stockpiles foreign currency assets. But then they cannot vote on whether they like that over there.
I suspect Australia would want to do the same thing and then the Government would lie to us anyway – with some neo-liberal logic like that issued by the APEC Finance Ministers above – that is was good for us to net ship our wealth away and accumulate foreign currencies holdings instead. I suspect we would all think that was good and vote for them anyway. So I don’t see much difference between being able to vote and not being able to vote in this regard.
He argues that the Chinese government’s strategy has resulted in a:
huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.
… and denied their citizens of the resources that built the huge trade surplus. Does Krugman want to deny the US citizens of the imports that they clearly desire?
Of-course, the argument doesn’t go there … rather it blames “China’s asset-buying spree” on the US “housing bubble” which set “the stage for the global financial crisis.”
So China caused the GFC! It is crazy. Far fetched versions of this hypothesis consider that it was a communist plot to destabilise capitalism. The news for them is that capitalism did a pretty good job of stabilising itself.
The GFC was largely a Wall Street Inc. creation and could have been averted irrespective of what China was doing with proper financial market regulation in the advanced nations.
At least Krugman understands that the fears that the Chinese will liquidate its stock of US dollars is an idle threat (if there ever has been one made). He notes:
… Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive …
The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.
From a MMT perspective, the US should not be the slightest bit worried about China threatening to dump the dollar. The fact they are and the US Treasury Secretary is constantly making noises about targetting a strong dollar is the worry and the problem.
If the US Government really wanted the Chinese currency to rise to reflect its net export position then what they should be committed to is a weak US dollar. The rhetoric doesn’t accord.
If they really were worried about the trade deficit the US government would let its dollar fall and stimulate trade that way. It is highly unlikely that any import price rise that would result will cause any inflation, given the appalling state of the real sector anyway.
An exchange rate after all is a parity between two currencies – both of which are issued under monopoly conditions by a sovereign government (in this case anyway). Multilateralism is not required to alter that parity.
The US Government has the capacity to drive movements in its own currency parities even if the Chinese currency is not fully convertible at present. A good way to start is to increase its deficit by targetting the unemployed with a Job Guarantee. That should drive the US dollar down another little pinch.
Given the logic of the Chinese growth strategy it is clear they do not want the rest of the world, much less the US economy to be ailing. So they are hardly going to do anything to destabilise the recovery path.
Then you read the comments of Harvard Professor Kenneth Rogoff (quoted by Bloomberg):
The Americans have very little bargaining power at the moment … This is going to end when the Chinese decide they don’t want it any more, they want to have a more domestically oriented growth strategy.
Well the US Government has all the bargaining power in terms of the US dollar. At the end of it the fortunes of the US economy are in the hands of the Americans and its government. The Chinese are not instrumental in determining those outcomes.
But equally, once the Chinese citizens rise up and demand more access to their own resources instead of flogging them off to the rest of the world at ridiculously low prices then the game will be up. They will stop accumulating financial assets in our currencies and we will find it harder to run the CAD’s against them.
They will be better off and given that most of the stuff we get from them is junk anyway, so probably will we be.
Finally on this late Friday afternoon, consider this version of Obama’s Asian jaunt from conservative Bloomberg journalist William Pesek in his column this week – Obama Meets Asian Bankers Who May Call His Loan.
According to Pesek we should:
Think of this trip as a visit to America’s banker, and an unpleasant one. Asia wants assurances that the U.S. can repay its fast-mounting debt and prevent a dollar crash. The reality dawning on Asia is that Obama can’t offer them such a pledge — not with U.S. borrowing so out of control.
My initial response when I read this early today was – how bad can the business commentariat get? It seems to get worse as the days pass each so-called expert trying to come with a deeper (scarey) insight and sound as they know something about what they are talking about while doing it.
You can guess what a MMT theorist would say about this. Asia (China) does not finance US government spending. It might hoard US dollar financial assets but that is really their problem. The US Government is totally sovereign in its own currency and will always be able to repay its public debt – even if it is “borrowing so out of control”.
What does controlled borrowing actually entail anyway? It is vacuous concept reflecting a fundamental ignorance of the operations of a fiat currency system.
Best we move onto the weekend …
And tomorrow another Saturday Quiz to tempt and tease you.