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Saudi Arabia in talks to boost oil output

Posted by WARREN MOSLER on February 24th, 2011

Right, as swing producer/monopolist that’s what they necessarily do- set price and let quantity adjust.

But if quantity demanded exceeds their ability to pump they lose control of price on the upside.

>   
>   (email exchange)
>   
>   On Thu, Feb 24, 2011 at 9:43 AM, Greg wrote:
>   
>   Just like you say about the Saudi’s…..
>   

Saudi Arabia in talks to boost oil output

By David Blair, Jack Farchy and Javier Blas

February 24 (FT) — Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.

Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity.

Oil traders said the talks signalled that Saudi Arabia realised that the political crisis in Libya was now an oil supply crisis and that the kingdom needed to act quickly and decisively to stop oil prices hurting the global economic recovery.

“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. “Saudi Arabia needs to respond.”

The kingdom is considering two options for increasing supplies. The first would be to boost Saudi production and send more crude through the kingdom’s East-West pipeline, which links the Gulf region with the Red Sea port of Yanbu, for shipment to Europe.

Another possibility, which is currently only being “studied”, would be a swap arrangement, whereby West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply the Asian customers.

West African oil, such as Nigerian crude, is very similar to the gasoline-rich Libyan oil, traders said, noting that West Africa is geographically closer to Europe than Saudi Arabia.

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase its output in response to Libya’s crisis, the official added, saying it would depend on the requirements of European oil companies.

If it proved necessary for Saudi Arabia to produce more, “then that will happen, there’s no problem at all”, he added.

Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.

The move by the world’s largest oil producer comes as Eni of Italy, the most active foreign oil company in Libya, said on Thursday that oil production from the North African country has plunged to just a quarter of normal levels.

Increasingly panicked buying drove the price of Brent crude futures, the global pricing benchmark, up 6.7 per cent to a peak of $119.79, the highest since August 2008. Traders and investors feared that the near-total shutdown of Libya’s oil industry would leave the global oil market with little supply cushion should the political crisis spread to another major Middle Eastern oil producer.

Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.

“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.

The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.

Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.

The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.

289 Responses to “Saudi Arabia in talks to boost oil output”

  1. Mr. E Says:

    “Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.”

    If they are lying about this right now, they will die. We also will have another Great Depression. They need to pump oil until nobody can store another drop and then keep pumping until people die from drowning in oil.

    I hope they are not lying. But it is possible. They tried to play it cute, and they might find themselves on the chopping block. They behead people in Saudi Arabia.

    “Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.”

    This is true. I am shocked they didn’t already start pumping last month during the Egypt crisis and have it in storage facilities near the port for immediate loading. It doesn’t make sense to me that they waited this long, although the king is said to be in bad condition.

    I dont know why they are in discussions. It may be the “discussions” involve informing the oil companies to expect lots of ships full of oil showing up – and to gear up their own production and storage capabilities. This would make more sense than a “to be or not to be” discussion about quantity from the Saudi “We want to stay alive and in power” perspective.

    I bet there are some dudes who’s dad’s have this awesome satellite setup who can tell what is going on at specific ports. For example, BP and John Arnold. Maybe you should get one! ;)

    Reply

    Matt Franko Reply:

    Mr E;

    “They need to pump oil until nobody can store another drop and then keep pumping until people die from drowning in oil.”

    Why do they ‘need’ to do this?

    Resp,

    Reply

    WARREN MOSLER Reply:

    the saudi’s pump as much as their refiners want to buy.

    the reason they didn’t start pumping more sooner is they didn’t have any extra orders from refiners sooner

    Reply

  2. Mr. E Says:

    Because they (or their cronies) will be beheaded by their own people if they don’t.

    The food inflation that is facing the world right now is largely speculative. It is based on oil being at $90 and gold at $1400. If oil goes to $60, it is hard to justify $7.00 corn.

    Reply

    Matt Franko Reply:

    E,
    To look at the Saudis Mbpd:population ratio:

    8Mbbl/d x $80/bbl x 365 days = $233B/ yr.

    Divided by their 25M population = $9,000 per capita.

    This is probably higher than Egypt but to your point not bulletproof. I think this amount may help them keep this going for a while longer but the writing is on the wall.

    They may be looking at this mathematically, trying to optimize their production:price curve to achieve maximum period revenues over time given the current market backdrop. ie 8Mbbl/day at $90 has higher revenues than 10Mbbl/day at $60….

    It looks like they will cooperate until the the Libya problems are past though… Resp,

    Reply

    Mr. E Reply:

    I think this is more about keeping power than about money right now. But I take your point, and agree that they are a more secure regime than Egypt. Still, they had 40% unemployment for young men. That is why they announced that jobs program.

    My calculations for oils impact on U.S. GDP are a bit higher than DB’s, but they are in the same range. But for the emerging markets, this impact must be gigantic.

    Every revolution makes the next one more likely, and starving young guys without jobs is textbook revolution demographic. They are thinking that passing up 5 months of higher profits is worth keeping the regime intact for the long run big money.

    Reply

    Tom Hickey Reply:

    They are thinking that passing up 5 months of higher profits is worth keeping the regime intact for the long run big money.

    Might be somewhat more pragmatic than that. They are fighting for their lives with money instead of bullets.

  3. Tom Hickey Says:

    Brent touching $120 in London.

    Reply

  4. mario Says:

    this is insane. we need oil independence and we need yesterday (like 1970′s inflation yesterday). WTF can we do about this bullshit other than sit back, watch, and wait!!!

    If the USA were to revamp ALL GAS STATIONS as a national expenditure into electric grid plug-in “pumps” for electric cars THAT would not only be a step in the right direction for our economy and for full employment, it would also really set the stage (or the red carpet) for the electric car to really ride across America. I’d buy one then eh!?!?!

    Let’s hope and pray Obama is going to think a bit farther and less “compromising” sooner than f-ing later!!!

    Reply

    ESM Reply:

    I disagree. We do not need oil independence any more than we need clothing independence or car independence. It’s a free market, and if the supply of oil drops, the price will go up and demand will drop to match. Oil consumption represents only 5% of our GDP, so these fluctuations are not such a big deal.

    I’ve mentioned this before as a weird blind spot of Warren’s. Imports are benefits — except when it’s oil??

    Reply

    JKH Reply:

    imports are a benefit doesn’t mean real terms of trade can’t move against you?

    Reply

    ESM Reply:

    Sure, and if there was a revolution in China the real terms of trade would go against us in a whole range of goods. The price of socks would shoot up, as well as the price of GI Joe with the Kung Fu Grip.

    WARREN MOSLER Reply:

    right.

    so if we don’t mind the foreign monopolist raising oil prices continuously as well as now and then destabilizing them on the downside to discourage investment, etc. not to mention the trading they do knowing what they are going to do to oil prices, we don’t have an oil problem. If if monopoly isn’t a problem we should also drop our domestic anti trust/monopoly rules and regulations.

    heck, maybe the govt should go back to the old brit system and sell rights to monopolies?

    just a guess, but doesn’t seem like your the type to support cases of imperfect competition as beneficial?

    JKH Reply:

    not following – what’s the blind spot on oil?

    ESM Reply:

    Warren thinks energy independence is something we should strive for. He even recommends establishing lower speed limits in order to discourage people from driving (hence voluntarily lowering our standard of living to further the goal of reducing imports of oil). It’s completely out of sync with the rest of his economic views.

    WARREN MOSLER Reply:

    I have stated that the way most major commodities work is with long term contracts, and not mainly in the spot market the way we do with crude products.

    So, for example, our govt could negotiate a long term contract with the likes of Canada and Mexico, with a predetermined pricing schedule for maybe the next 20 years, and both sides would likely be better off, and prices would be relatively stable.

    and my lower speed limit option was to both save fuel as slowing down saves a lot of fuel, and to drive public transportation which would have the advantage of speed.

    WARREN MOSLER Reply:

    right, which means reduced imports for a given quantity of exports

    ESM Reply:

    Warren @ February 25th, 2011 at 6:15 pm

    Monopolies come and go, except for the ones that are sustained by government. Pricing power comes and goes. The Saudis have some pricing power, but they do not have a monopoly. I’m not sure what the elasticity of the price of oil is, but their ability to swing global production by 5M bpd out of 87MM bpd doesn’t seem to me to be anything to obsess over. Can they move prices by $40/barrel in the short-term? Perhaps. But I doubt they can do that in the longer-term (>1yr).

    “just a guess, but doesn’t seem like your the type to support cases of imperfect competition as beneficial?”

    Given that perfect competition, where all suppliers and purchasers are price takers, is unattainable in the real world, I guess I do support imperfect competition. It’s better than the alternative, and certainly better than a world where one hundred years of advances in personal motor vehicle technology are thrown out the window by government fiat. Despite the existence of a cartel and government oil companies run by dictators, the oil market is still relatively free and competitive. Nobody is putting a gun to my head forcing me to buy a certain amount of oil after all, or any of the products that the price of oil feeds into. And we’re not even talking about a particularly large fraction of US consumer spending. The cost of depreciation and wear and tear on my Subaru Outback is still far greater than the cost to fuel it.

    Ironically, your beef seems to be that the Saudis keep the price of oil too high. But if the price is too high, how come we need to use government regulations to lower import demand artificially?

    WARREN MOSLER Reply:

    it’s not a beef.

    it’s that part of economics is about maximizing real terms of trade.

    and what I’ve been pointing out is that we are subject to a foreign monopolist, or, at the very least, a nation with substantial pricing power, optimizing its real terms of trade at our expense, as it plays us for the complete fools we are in this case.

    and that we do have options to get out from under this external influence.

    and that some of the options that are under discussion won’t work as anticipated.

    Also, it does not follow that recognizing that perfect competition is unattainable means one supports less competition than otherwise attainable.

    And it was government by fiat that created the interstate highway system, along with other incentives by govt. fiat, that subsidized the marginal cost to the individual of automobiles. Markets working within this institutional structure subsequently caused people to favor living hours from work and commuting daily, etc. etc.

    So now, even if people would much rather walk to work and walk to shopping, the institutional structure is such that it’s functionally impossible, to the point where most people have to own and operate at least one car per family and drive thousands of miles a year.

    Again, for all practical purposes, markets work only within institutional structure, and the choices we make defining that structure are critical to the outcomes.

    macrosam Reply:

    Another aspect of trade that confuses me so would appreciate any thoughts. US corporations have appeared to prefer a “build local, sell local” model over an export model. Looking back at 2008 (the time I can find a more complete set of data for this statement), sales of U.S. foreign affiliates exceeded $5.8 trillion. Sales of affiliates of foreign companies were around $3.5 trillion. The U.S. trade deficit was around $(698 billion). Also, around 50% of U.S. imports can be attributed to intercompany-like transactions involving foreign affiliates and the U.S. parent. How reliable a measure is trade accounting in a post-WWII global economy for assessing who is winning out in real terms if export data aside from food and commodities can often blur what transactionally is activities within the parent corporation’s virtual walls?

    Tom Hickey Reply:

    US corporations have appeared to prefer a “build local, sell local” model over an export model.

    Tax advantage?

    Oliver Reply:

    Being at the mercy of a foreign monopolist is rather different from having the option of producing the stuff (cars, clothes, etc.) yourself, no? I don’t think Warren is questioning the real benefits of oil, just the drawback of not being able to come up with substitutes should the need arise.

    I’m also still waiting for the Arab revolutionary spark to catch on in Saudi. Wonder what that would do for oil prices?

    Reply

    Neil Wilson Reply:

    That’s why the Saudis have announced a big fat bribe for their population. $36bn worth according to reports.

    ESM Reply:

    We’re not at the mercy of the Saudis. Oil has many uses, there are many substitutes, and the decision to buy or not at a certain price is made freely. The Saudis may be able to influence the price within a wide range, but they are not monopolists. Is there any industry where there isn’t a swing producer? Doesn’t Apple have the power to set the price of an Ipad within a certain range?

    Oliver Reply:

    Substitutes for oil? Transportation, chemical, packaging, plastics and all the industries that depend on them (most others) would drop dead instantly if oil flows stopped. Not that that’s about to happen, just saying.

    Neil Wilson Reply:

    Shale Gas is the current rumbling-under oil killer.

    ESM Reply:

    Oliver,

    We’re talking about reducing global oil production by a few million bpd out of 87MM bpd. Obviously, going to zero would be very disruptive. Although, to tell you the truth, the country would still survive. It would just be unpleasant for a few years while we adjusted.

    WARREN MOSLER Reply:

    my point is that it will probably take a 5 million bpd net supply increase to dislodge the saudis as swing producer and influence price.

    Neil Wilson Reply:

    The one thing about having oil priced in a foreign currency (from my point of view) is that you don’t see it as a benefit.

    Discretionary imports paid for in your own currency are a benefit. Then the market power is with the importing country.

    Reply

    MamMoTh Reply:

    I agree, and raised this issue a couple of times here and there.
    I tend to think Warren’s analysis is correct when applied to the US (which is his intention I think) but you can’t generalize it to every country with a free floating fiat currency.
    Maybe a condition for a country to be fully sovereign in its own currency should be that it pays for its imports in its own currency? (Most of the countries don’t)

    Oliver Reply:

    Talk to Ramanan about that one. His favourite topic :-).

    MamMoTh Reply:

    I know… but I can’t follow him, he’s way out of my league when discussing economics. But I am not sure we are talking about the same thing. As far as I can understand, his concern is with trade deficits whilst mine is simply about what are the consequences of a country that is not sovereign wrt its external sector.
    I mean, there must be a difference when the US buys and sells in US dollars but Chile has to do it too.

    WARREN MOSLER Reply:

    yes, but china is free to buy and sell in its own currency.

    Neil Wilson Reply:

    I think the necessary and sufficient condition is that you export as much as is required to pay for needed imports not priced in your own currency.

    Beyond that any imports you can buy with your own currency effectively put the foreign producer in your currency zone. That’s has a similar effect to immigration but without all the public infrastructure headaches.

    WARREN MOSLER Reply:

    agreed

    MamMoTh Reply:

    “I think the necessary and sufficient condition is that you export as much as is required to pay for needed imports not priced in your own currency.”

    I agree. For a country that cannot buy any imports in its own currency that would mean not running a trade deficit. Maybe that is where my point is related to Ramanam’s.

    But I admit I don’t know much about this subject and I would love to see it addressed by someone more knowledgeable than myself in a way I can understand (that excludes Ramanam).

    Ramanan Reply:

    Yes of course favourite topic Oliver :-).

    Francis Cripps was Wynne Godley’s partner in their singing blues about the UK economy in the 70s and the 80s. They got the reputation of being right almost always. The also wrote a book – perhaps the most original book – in Marcoeconomics in 1983 where they show how stocks and flows evolve through time and how the government sector, the private sector and the external sector interacted with each other and how balances move in time.

    Francis Cripps wrote a nice article here.

    Whats Wrong With Monetarism (1983) –
    http://books.google.com/books?id=Yjibex0odUMC&lpg=PA55&dq=francis%20cripps%20monetarism&pg=PA55#v=onepage&q&f=false

    Page 61 says that closed economies have an institution called the Government which has virtually unlimited powers to create credit by borrowing. However, in the international context – the one we inhabit – there is no such thing as a State and is sufficient to explain the state of the world economy then.

    He also explains how Keynesians completely failed to understand this point and it came at a time when Monetarists were gaining power. He also explains how there is a failure of communication between people working in the Government and the Keynesians and how the currency markets forced governments to behave in a certain way.

    Plus he also goes into how to convince nations about enjoying the benefits of trade (instead of saying one doesn’t need to worry about trade deficits) :-) Subtle difference.

    Most nations – any regime – have faced balance of payments crises. More than once.

    The United States ?

    Firstly free trade / imports are benefits etc are valid only at full employment. One should always add this qualifier. In the real world we live in, there is no full employment.

    Here’s a way to analyse the US.

    Closing Stock of Net Overseas Assets = Opening Stock + CAD + Revaluation Adjustments

    Take values out from the BEA -such as CAD = $500b. Make some assumptions – build different scenarios. Ask – if indebtedness to foreigners is $20T – is that a problem ? Isn’t that a license for the ultimate speculation (on the dollar) ?

    Ramanan Reply:

    Minor correction. Should be minus sign in CAD.

    beowulf Reply:

    Cripps and Godley wrote an article in in 1978 with the wonderfully counterintuitive title, “Control of Imports as a Means to Full Employment and the Expansion of World Trade”.

    the original idea, put forward by Godley and Cripps.. is that of NONSELECTIVE PROTECTIONISM, combined with fiscal relaxation (…a combination of import tariffs/ quotas
    with tax relaxation / expenditure expansion that would lead to increased output). I.e. it is not an issue of protecting some industries that may be non competitive because of particular inefficiencies, but to protect an entire economy against its failure to ensure employment and against the
    exhaustion of reserves.

    http://www.mail-archive.com/pen-l@galaxy.csuchico.edu/msg59545.html

    Tom Hickey Reply:

    The thing to remember about foreign trade is that export gains are denominated in a foreign currency that can only be used through consuming, saving, or investing in that currency zone. The only other option is exchanging the currency in the fx market.

    What to look at is changes in these flows that increase or decrease the respective stocks, as well as fluctuations in the fx rate. Currency issues show up in the fx market.

    For an overview see Wikipedia – Balance_of_payments, , Washington_Consensus, and Seoul_Development_Consensus

    Essentially the problems of trade and BOP arise from the current model of neoliberalism (free markets, free trade, and free capital flow). The assumption is that the invisible hand will automatically adjust imbalances. The problem with this assumption is that it presumes conditions that don’t exist in the real world, like perfect competition.

    A lot of the problems that arise are political in addition to economic. Often ends in war.

    WARREN MOSLER Reply:

    the currency of denomination is just a numeraire and of no consequence per se.

    Ramanan Reply:

    “the currency of denomination is just a numeraire and of no consequence per se.”

    Which precisely makes money credit not “fiat”!

    WARREN MOSLER Reply:

    huh?

    the dollar is the dollar for what it is. even if the saudis denominate oil in paper clips. doesn’t matter

    Ramanan Reply:

    “The thing to remember about foreign trade is that export gains are denominated in a foreign currency that can only be used through consuming, saving, or investing in that currency zone.”

    That is treating money as a commodity.

    The Chinese exports to the US increases the stock of foreign reserves held by the Chinese (acquired some way or the other by the PBoC) and leads to higher income of the private sector of China. They consume more domestic products.

    WARREN MOSLER Reply:

    yes, for purposes of analysis currencies and commodities share the same framework.

    but that has nothing to do with export gains being denominated in fx. Nor does the rest of that statement follow as far as I can tell

    Ramanan Reply:

    I think the necessary and sufficient condition is that you export as much as is required to pay for needed imports not priced in your own currency.

    Beyond that any imports you can buy with your own currency effectively put the foreign producer in your currency zone. That’s has a similar effect to immigration but without all the public infrastructure headaches.

    That is like saying my expenditure is $500,000 per year and I will do a job to get the $500,000.

    Unfortunately you need to compete in foreign markets and you cannot say “I can export”. The decision to purchase your export is made by the foreigner, not you.

    WARREN MOSLER Reply:

    yes, in general decisions to sell require a buyer

  5. beowulf Says:

    Of course, as both trade policy and energy policy, an oil import fee isn’t a bad idea (assuming other taxes are cut at the same time).

    Kahn wrote, in a passage [Gov. Mitch] Daniels read from Thursday, “One fully justifiable tax would be on imported oil. Any large importation of oil by the U.S. raises security problems. There are, in effect, external costs associated with importing oil that a tariff would internalize”…
    http://climateprogress.org/2010/10/19/mitch-danielsgreat-right-hope-supports-imported-oil-fee/

    Reply

    Ramanan Reply:

    Thanks for the link at 12:52.

    Here is the quote from Cripps.


    The conclusion which has to be drawn is that, if a modern economic system is to function properly, a mechanism is required for the management of aggregate demand. Now it happens that the need for management of aggregate demand within a closed national economy can be met rather easily. It is easily met because national economies have an institution called the state which is unique in that it has virtually unlimited powers of credit creation or borrowing (or would have within a closed national economy). Keynesians gave up at this point, thinking that once the need for demand management had been pointed out, and the possibility for demand management by a national government had been understood, the problem of demand management was solved once and for all. Unfortunately, there is no such thing as the state in the contemporary international economy at the international level and the absence of the state as such at the international level is, I believe, a sufficient explanation of why the world economy has run into serious problems of recession.

    Reply

    beowulf Reply:

    Right, and the solution would be either:

    1. Global Keynesianism (Keynes’s Bretton Wood proposal):
    If bancor were to circulate as a parallel currency, but in a dominant role in place of the US dollar, then as in the SDR-based system described above, current account imbalances that reflect today’s situation – namely, surplus countries pegging to bancor with deficit countries floating against it – would adjust more symmetrically, and perhaps more automatically than the current or SDR-based systems since the deficit currencies would be expected to depreciate against the bancor”.
    http://janelanaweb.com/novidades/keynes-revival-the-%E2%80%9Cbancor%E2%80%9D-proposal-of-the-1940s-%E2%80%93-useful-for-today/

    2. Keynesiansism in one country (Crips & Goodley or the similar Warren Buffett plan):
    importers would be required to obtain certificates proportional to the amount of non-oil goods [though adding oil wouldn't be a bad idea b.]… they brought into the country. These certificates would be granted to firms that exported goods, which could then sell certificates to importing firms on an organized market… They also consider an alternative version of the plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes.
    http://www.levyinstitute.org/publications/?docid=1077

    Reply

    beowulf Reply:

    Sorry for misspellings, “Bretton Woods” and of course “Godley”.

    Since we Americans do like to shoot from the hip, politically the second option would be preferable than negotiating a 2nd Bretton Woods agreements. What’s more, we could scale it up globally while maintaining the dollar’s place as reserve currency (and buying new friends along the way) by offering at the UN to perform the same service gratis for any UN member running a trade deficit. After all, since international trade is conducted dollars, the New York Fed could simply auction off each country’s ICs and credit their reserve accounts.
    http://www.marketskeptics.com/2009/01/trade-deficitssurpluses-around-world.html

    Ramanan Reply:

    Yeah they may be useful in a way but I do not think they really believed in a “market solution” or reliance on the “markets”. I believe Godley thought of doing it in a practical manner where such things are negotiated at a political level while simultaneously engaging in coordinated fiscal expansion. Such things require rewriting international trade policies and active intervention.

    It is inconceivable that such a large rebalancing could
    occur without a drastic change in the institutions responsible for running the world economy—a change that would involve placing far less than total reliance on market forces.

    http://www.levyinstitute.org/publications/?docid=1109

    beowulf Reply:

    Ramanan, its always fun trading Godley quotes with you. I agree that he didn’t believe in “market solutions” per se. What he and Crips proposed, import controls, were an example of “force majeure” (in this context, an act of government that enjoins a free market transaction).
    …I have reached a point when I am prepared to make a declaration. I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is. In particular, I do not believe that there exists a market in which goods in aggregate and labour in aggregate can be exchanged for one another provided only that the price of each is right in relation to some given stock of ‘money.’”
    http://www.stephenkinsella.net/2010/05/22/more-on-wynne-godley/

    It is not legitimate to assume that the external deficit will at some stage automatically correct itself; too many countries in the past have found themselves trapped by exploding overseas indebtedness that had eventually to be corrected by force majeure for this to be tenable.

    There are, in principle, four ways in which the net export demand can be increased: (1) by depreciating the currency, (2) by deflating the economy… (3) by getting other countries to expand their economies…, and (4) by adopting “Article 12 control” of imports… which was creatively adjusted when the World Trade Organization came into existence specifically to allow nondiscriminatory import controls to protect a country’s foreign exchange reserves.(pdf p.9 of 16)
    http://www.levyinstitute.org/publications/?docid=602

    Before Warren issues a fatwa against you and me both, I’ll point out that while I agree with you that other countries face balance of trade constraints (and would do well to look to Article 12 controls), the United States could simply fill its output gap (foremost, the $500 billion demand leakage created by our trade deficit) and tell the rest of the world, in the immortal words of Nixon’s Tsy Secretary John Connolly, “the dollar is our currency and your problem”.

    WARREN MOSLER Reply:

    Wynne, and Paul Davidson as well, always agreed with me that with today’s institution arrangements the US and pretty much any other nation can sustain domestic full employment with a fiscal adjustment, without regard to national solvency or the resulting trade deficit, and that such a policy would optimize real terms of trade.

    However, they both firmly believed, and Paul still does, that ‘we’ were never going to convince govts. to run the appropriate size deficits. I recall responding to one of Wynne’s pieces, where he said the trade deficit had to adjust or there would be a recession, saying that all we needed was a 9% budget deficit. He agreed, but said that was politically impossible, to the point of not even wanting to suggest that option. So instead he and Paul continued with what I continue to call their ‘global rebalancing’ nonsense. I told them, and still tell Paul, that they are academics, and as such I strongly disapproved of their approach, which I consider that of a political advisor of sorts. Or worse.

    Ramanan Reply:

    Currency markets to the State:

    “My foot is on your tail”

    Ramanan Reply:

    “So instead he and Paul continued with what I continue to call their ‘global rebalancing’ nonsense. I told them, and still tell Paul, that they are academics, and as such I strongly disapproved of their approach, which I consider that of a political advisor of sorts. Or worse.”

    Now that is not the best thing to say especially given Wynne’s background on openly attacking Mrs Thatcher’s policies in leading UK newspapers and also his own role in practical matters such as deciding on the critical devaluation of the Sterling in 1967.

    The “Global Imbalances” are real. They added to the internal imbalances (private sector debt) in the previous decade to create such a big recession.

    It will get embarrassing to MMTers when they actually come to understand the seriousness of the issue and it will get embarrassing to them when they understand this, to say the least.

    WARREN MOSLER Reply:

    yes, the ‘imbalance’ did exist, and is real in that sense. one number was higher than another.

    and they are residuals, and not causal.

    and it was only a problem in that someone errantly believed it was a problem, or someone has a vested interest in a speculative or investment position, or someone wanted to defend a fixed fx policy, etc.

    ‘they’ don’t cause recessions. aggregate demand falls off due to being over taxed for a given size govt at any particular point in time.

    i more than understand the seriousness of the growing world unemployment that’s being sustained by out of paradigm thinking

    Ramanan Reply:

    Yes Beowulf always fun.

    Here is another from the same article in the first quote – Wynne Godley (1993) “Time, Increasing Returns and Institutions in Macroeconomics: Essays in Honour of Paolo Sylos Labini”, in Market and Institutions in Economic Development (ed. by S. Biasco, A. Roncaglia and M. Salvati), St. Martin’s Press.

    What is NCP [Neoclassical Paradigm] anyway ? I think the best way is to start by considering the market clearing, full employment macroeconomic equilibrium … namely as the intersection of an aggregate demand curve with a vertical aggregate supply curve …

    I am convinced that this concept of general equilibrium in a monetary economy constitutes a primal scene[footnote] – the primitive imaginary vision of the world – out of which the whole mainstream macroeconomics now flows. At one extreme end are ‘monetarists’ of various hue who believe that the classical version of this simple model does, or should or can somehow be made to describe the real world …

    [footnote]‘The Primal Scene’ is a technical term in psychoanalysis; it is the imaginary perception, postulated by Freud, by the infant of its own parents’ intercourse.

    Talking of trade … According to the balance of payments constraint paradigm, all nations’ growth rates have been closely approximated by the growth of exports divided by the propensity to import. The US and Japan seem to be the only exception – Japan because it has not made use of the success in international trade to the fullest and the US because the dollar is the reserve currency. Another thing about the US is that since it had been historically rich – a creditor – it has taken so much time for this to become the problem while all the three sectors – US government, the US private sector and the rest of the world collectively planted the seeds of destruction.

    The ‘free trade’ doctrine created by the US is now working against it. So I disagree on the US. The hegemony status is now a burden. The G-20 http://www.g20.org/Documents2011/02/COMMUNIQUE-G20_MGM%20_18-19_February_2011.pdf seems to make some progress but their views are primitive or a primal scene.

    Reply

    JKH Reply:

    Ramanan,

    Isn’t Bill Mitchell still waiting for you to document a case where a “currency issuer” has gotten itself into mortal danger on its CA deficit?

    BTW, Roubini spent a good part of the last decade predicting CA deficit doom for the US, and it never happened.

    The Herbster said “something that can’t go on forever will stop”. But timing of these things is so difficult that the world changes while waiting for the predicted demise.

    WARREN MOSLER Reply:

    or, something that can go on forever might

    JKH Reply:

    “something that can go on forever might”

    :)

    first time I’ve heard that one – excellent!

    complementary and fundamental

    Ramanan Reply:

    “or, something that can go on forever might”

    Yes Ben Bernanke also said that in 2003/4 when talking of the “great moderation”. And “experts” on Wall Street talked the same of the credit boom.

    Tom Hickey Reply:

    Yes, but Minsky showed why that was nutz.

    I’m not sure you have made a comparable case wrt current and capital accounts.

    As I’ve said before, I’m agnostic on this point so far. I see and Bill and Warren’s argument, but I also see a global system that is not working economically or politically. Unlike a monetarily sovereign government that has control over money and flow, there is no comparable international body and the invisible hand seems to be either not existant or crippled.

    Ramanan Reply:

    Tom,

    Agnostic about ? Francis Cripps said in “What Is Wrong With Monetarism” in 1983 that there is no State at the international level (see my comment @February 25th, 2011 at 8:43 pm) Also,


    The important point is rather that in an international economy the possibilities of national demand management are strictly limited. They are limited by problems or balance or payments adjustment and international finance. Governments that wish to regulate national demand so as to sustain full employment run into problems of increasing trade deficits and, in economics with liberal exchange regimes, loss or confidence and outflows of capital. It is actual or potential balance of payments crises which have been decisive in breaking the habit or Keynesian demand management at the national level. Many national governments are still trying but they are trying under difficulties and they are frightened of balance of payments problems that would result if they tried too hard.

    Now, it is too big a claim that one cannot run into troubles in the external sector. Prove it! If you think you have proved it be ready to sell insurance in the markets.

    Sergei Reply:

    Ramanan, there is no economic equilibrium in any sense. We all live in disequilibrium regardless of neoclassical dreams. Disequilibrium is .. well … *dis*. The nice part here is how this “dis” can be managed in such a way that economy moves from one disequilibrium into another without breaking down its order. Yes, you might say that your definition of breaking down is very tight and therefore any such move will mean a break down. But this does not move us forward and many other people might not agree with your definition. I personally agree with you that more attention should be paid to imbalances and I think it is a weak point of the MMT. However I also believe that claims like “economy will eventually break down regardless” (i.e. foreigners will eventually dump your currency) are not founded and sound more like scaremongering.

    Ramanan Reply:

    Sergei,

    Never said there is an “equilibrium”.

    No its not scaremongering. The perceived threat itself prevents most of it and do some finding – currencies do adjust painfully.

    Increased fiscal action increases national income but also increases indebteness to foreigners. Now MMTers can do some writing such as putting “indebtedness” inside quotes but doesn’t help.

    The point is that one simply needs to do some basic analysis to see how the external debt grows.

    I haven’t seen any analysis on this from MMTers instead, one hears “imports are benefits”.

    Nations have repeatedly faced issues and this is why they end up making some sort of arrangements – not because they are “silly”.

  6. Lorne Marr Says:

    The question is what will the future of Saudi Arabia look like since the king has announced his plans to provide benefits for the Saudi Arabian people. I think these plans are only a temporary solution that won’t solve the problems that are out there and the revolution is about to come to Saudi Arabia as well.

    Reply

  7. Ramanan Says:

    JKH,

    I have mentioned several times about plummeting in floating exchange regimes. Mexico did it in 2008 and I mentioned to Bill Mitchell and he replied describing fall in the previous decade. I asked him to talk about the 2008 event and didn’t get a reply.

    Mexico had to go to the IMF to get a bailout and had to agree to their terms and conditions on fiscal withdrawal. The point is not that the IMF is morally corrupt. That is a sideshow. The point is that this way keeps the demand low and it is hoped that the external situation is improved because imports reduce because imports are demand-dependent.

    Turkey collapsed. And MMTers wrote Turkey’s current account is “not a problem”.

    Korean Won collapsed and Brazilian Real also collapsed in 2008. Note Korea had surpluses but bad NIIP.

    Now you can come back and say “foreign currency government debt”, but did they default on that ? Anyways if you go to the central bank and Treasury websites of those nations, you will find that the central bank had sufficient foreign reserves (more that government debt in foreign currency) and is simply a minor issue to change the topic. Even Iceland around 2008 had foreign reserves level close to foreign currency government debt. The analysis presented in the blog has 2010 data and includes domestic indexed debt.

    Yes Roubini talked of the US current account. The issue is that it since is connected to the sectoral balances, he was indirectly right. The US current account deficit is hemorrhagic to demand at a massive scale due to ‘multiplier effects’ (ref: Harrod trade multiplier) and was counteracted by the demand injections by increased private sector borrowing.

    Of course, MMTers appreciate this, but the other way to inject demand due to leakages from the current account is outright “road to ruin” – no government practices that and the US government boosted demand around 2003-2006 massively without anyone making a noise. Result: Fail.

    The problem with such a strategy is that injections of demand from the government leads to further leakages from the current account because the trade deficit depends – amongst other things such as competitiveness – on the demand changes at home and abroad.

    The trouble with depending to devaluation on market forces is that it doesn’t happen automatically and when it happens one needs to make painful retrenchments.

    Try following Turkey. It has seen growth but not full employment and how much is the unemployment – 10% ? This growth has contributed to the weakening of the external sector and there is constant talk either from the media or “experts” or the government officials that demand needs to be managed. Which means painful policies. Its currency already has had troubles.

    “The Herbster said “something that can’t go on forever will stop”. But timing of these things is so difficult that the world changes while waiting for the predicted demise.”

    Okay – but thats like saying I am driving at 100 – look nothing has happened so I drive at 400.

    Its good to be empirical. Instead here it is claimed that Geithner worrying about the Chinese peg is silly.

    The Chinese usage or the misuse of the free trade doctrine has been huge. The (useless?) Chinese consumption because of its super massively devalued exchange rate has given it tremendous price competitiveness. In turn this leads to deflationary pressures in the US, if US producers want to sell their products to US consumers.

    Well one can argue that there is no reason why a nation cannot purchase all the output it has produced and also purchase what foreigners want to sell them is about going into a hypothetical situation in which full employment has already been attained. Its Nirvana and nobody has attained that state of Moksha.

    Till then, attempts to mock governments for “sillyness” looks like moral policing to me to be perfectly honest. No, governments are not revenue constrained – they are balanced of payments constrained. The “will” doesn’t exist and not the best “will” to have.

    “Government can” sounds like “Yes we can”. The US needs an ordered devaluation instead of any sudden fall. Believing in free markets to do the trick is like chasing a mirage.

    Reply

    Ramanan Reply:

    “but the other way to inject demand due to leakages from the current account”

    Sloppy. Should mean …

    The strategy to inject demand from the government sector to counteract leakages from the current account is a road to ruin.

    Of course, that doesn’t mean governments should tighten fiscal policy as the neoclassicals may put it or demand, but the strategy to do it for continuously long will fail.

    Reply

    WARREN MOSLER Reply:

    how is cutting taxes ‘injecting demand’?

    so let me use the phrase ‘remove fiscal drag’ instead:

    “The strategy to REMOVE FISCAL DRAG to counteract leakages from the current account is a road to ruin.”

    I’d say it’s the road to full employment and optimal real terms of trade

    Reply

    Ramanan Reply:

    “The Herbster said “something that can’t go on forever will stop”. But timing of these things is so difficult that the world changes while waiting for the predicted demise.”

    The predicted demise doesn’t happen because it is prevented by creation of unemployment.

    Reply

    JKH Reply:

    thx for your thorough response

    Reply

    WARREN MOSLER Reply:

    JKH,

    I have mentioned several times about plummeting in floating exchange regimes. Mexico did it in 2008 and I mentioned to Bill Mitchell and he replied describing fall in the previous decade. I asked him to talk about the 2008 event and didn’t get a reply.

    WHAT SPECIFICALLY DO YOU WANT TO KNOW?
    2008 SAW COMMODITIES COLLAPSE AFTER CRUDE COLLAPSED, AND CURRENCIES THAT HAD BEEN SUPPORTED BY THE COMMODITY RUN RETREATED.

    Mexico had to go to the IMF to get a bailout

    NO, THEY JUST THOUGHT THEY DID. LIKE THE EU.

    and had to agree to their terms and conditions on fiscal withdrawal. The point is not that the IMF is morally corrupt. That is a sideshow. The point is that this way keeps the demand low and it is hoped that the external situation is improved because imports reduce because imports are demand-dependent.

    Turkey collapsed.

    NO IT DIDN’T, AND THE SLOWDOWN CAME ONLY AFTER THEY DECIDED TO ‘TIGHTEN UP’ FISCALLY TO GET INTO THE EU.

    And MMTers wrote Turkey’s current account is “not a problem”.
    IT ISN’T AN ACTUAL PROBLEM. IT IS A PERCEIVED PROBLEM

    Korean Won collapsed and Brazilian Real also collapsed in 2008.

    RETREATED IN RESPONSE TO A GLOBAL DEFLATIONARY ENVIRONMENT.
    THEY DIDN’T GO DOWN TO THE POINT OF SERIOUS ‘INFLATION’

    Note Korea had surpluses but bad NIIP.

    Now you can come back and say “foreign currency government debt”, but did they default on that ? Anyways if you go to the central bank and Treasury websites of those nations, you will find that the central bank had sufficient foreign reserves (more that government debt in foreign currency) and is simply a minor issue to change the topic. Even Iceland around 2008 had foreign reserves level close to foreign currency government debt. The analysis presented in the blog has 2010 data and includes domestic indexed debt.

    RIGHT, WITH FLOATING EXCHANGE RATES RESERVES AREN’T AUTOMATICALLY INVOLVED.

    Yes Roubini talked of the US current account. The issue is that it since is connected to the sectoral balances, he was indirectly right. The US current account deficit is hemorrhagic to demand at a massive scale due to ‘multiplier effects’ (ref: Harrod trade multiplier) and was counteracted by the demand injections by increased private sector borrowing.

    Of course, MMTers appreciate this, but the other way to inject demand due to leakages from the current account is outright “road to ruin” – no government practices that and the US government boosted demand around 2003-2006 massively without anyone making a noise. Result: Fail.

    NOT THE REASON FOR THE FALL. FIRST, MUCH OF THE DEMAND WAS COMING FROM THE SUB PRIME EXPANSION, WHICH ALSO DROVE DOWN THE FEDERAL DEFICIT VIA THE AUTOMATIC STABILIZERS. WHEN THAT COLLAPSED THE DEFICIT WAS FAR TOO LOW TO SUPPORT DOMESTIC DEMAND

    The problem with such a strategy is that injections of demand from the government leads to further leakages from the current account because the trade deficit depends – amongst other things such as competitiveness – on the demand changes at home and abroad.
    THAT’S A GOOD THING. IMPORTS ARE REAL BENEFITS, EXPORTS REAL COSTS.

    The trouble with depending to devaluation on market forces is that it doesn’t happen automatically and when it happens one needs to make painful retrenchments.
    OTHER TROUBLES AS WELL.

    Try following Turkey. It has seen growth but not full employment and how much is the unemployment – 10% ? This growth has contributed to the weakening of the external sector and there is constant talk either from the media or “experts” or the government officials that demand needs to be managed. Which means painful policies. Its currency already has had troubles.

    IT USED TO HAVE VERY STRONG REAL GROWTH AND MUCH LOWER UNEMPLOYMENT, EVEN WITH 100% TYPES OF INFLATION RATES, BEFORE TIGHTENING UP TO TRY TO GET INTO THE EU.

    “The Herbster said “something that can’t go on forever will stop”. But timing of these things is so difficult that the world changes while waiting for the predicted demise.”

    Okay – but thats like saying I am driving at 100 – look nothing has happened so I drive at 400.

    Its good to be empirical. Instead here it is claimed that Geithner worrying about the Chinese peg is silly.

    The Chinese usage or the misuse of the free trade doctrine has been huge. The (useless?) Chinese consumption because of its super massively devalued exchange rate has given it tremendous price competitiveness. In turn this leads to deflationary pressures in the US, if US producers want to sell their products to US consumers.

    ALL A GOOD THING FOR US, IF ONLY WE KNEW HOW TO MAKE APPROPRIATE FISCAL ADJUSTMENTS.

    Well one can argue that there is no reason why a nation cannot purchase all the output it has produced and also purchase what foreigners want to sell them is about going into a hypothetical situation in which full employment has already been attained. Its Nirvana and nobody has attained that state of Moksha.

    IT CAN BE DONE OVERNIGHT BY ANY NATION THAT GRASPS MMT

    Till then, attempts to mock governments for “sillyness” looks like moral policing to me to be perfectly honest. No, governments are not revenue constrained – they are balanced of payments constrained. The “will” doesn’t exist and not the best “will” to have.

    THEY ONLY THINK THEY ARE BALANCE OF PAYMENTS CONSTRAINED.
    AND OBVIOUSLY THE NOTION THAT THERE IS NO BALANCE OF PAYMENTS CONSTRAINT ISN’T ALL THAT EASY TO GRASP, OR THIS EXCHANGE WOULDN’T BE HAPPENING.

    “Government can” sounds like “Yes we can”. The US needs an ordered devaluation instead of any sudden fall. Believing in free markets to do the trick is like chasing a mirage.

    THE US NEEDS A FULL PAYROLL TAX SUSPENSION, PER CAPITA REVENUE DISTRIBUTIONS FOR THE STATES, AND A FEDERALLY FUNDED $8/HR JOB FOR ANYONE WILLING AND ABLE TO WORK.

    Reply

    Zaid Reply:

    Warren, check out the list of government bonds for Turkey, Brazil, and South Korea in your Bloomberg. Look at the currency denomination of all these outstanding bonds, mostly USD and some EUR.

    This doesn’t even include the foreign private sector, which borrows heavily in USD. The world’s debts are mostly donominated in USD. It’s all horizontal money that creates its own demand. When the private sector in Asia rushes to pay off its USD debt (as in 1998 and more recently during the crisis), they sell off local assets and convert local currency for USD to pay back their creditors. This is the reason most of the world’s Central Banks don’t want to get rid of their USD reserves.

    Reply

    WARREN MOSLER Reply:

    true. lots of things driving savings desires, thanks!

    Zaid Reply:

    Just checked Mexico… it also borrows in foreign currency: USD, EUR and JPY. So, I’m not surprised there about their currency being unstable.

    Reply

    WARREN MOSLER Reply:

    right, much of the world got caught short dollars in 2008, which led to the higher libor settings which triggered the $600 billion of Fed swap lines which were unsecured dollar lending to the CB’s. See the posts from back then on this website

    macrosam Reply:

    I’ve been a bit confused about sovereigns borrowing in foreign currencies. I understand why they have a demand for these currencies (the reasons already stated amongst others) but can central banks just not buy those currencies to bolster reserves while at the same time contributing an offsetting weakness to their own domestic currencies to presumably aid their export competitiveness?

    Ramanan Reply:

    No… EU is separate from the Euro Zone. Britain is also in the Euro Zone.

    Good to be empirical – any nations growing faster than exports could allow ? Exception – the US…. in deep recession not being able to do much.

    More generally the ‘free trade idea’ has ruined nations instead of doing anything good to them.

    Mexico WAS bailed out by the IMF and the Mexican central bank website says that.

    Please see the letter to Domininque Strauss Kahn here:
    http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/mexico_-arrangement-under-the-flexible-credit-line/%7B05AAFDB1-73B9-F6C3-C27D-16BC99D0BBD6%7D.pdf

    (Mexico: Arrangement Under the Flexible Credit Line—Staff Report; Staff Supplement; and Press Release on the Executive Board Discussion)

    (page 31)

    “They only think they are balance of payments constrained” looks like Milton Friedman making a statement that “central banks do not control the money supply but can if they want to”

    “IT CAN BE DONE OVERNIGHT BY ANY NATION THAT GRASPS MMT”

    Assuming MMT applies to open economies.

    Governments know constraints caused due to the external sector.

    “THAT’S A GOOD THING. IMPORTS ARE REAL BENEFITS, EXPORTS REAL COSTS.”

    Again no mention of what happens to the exchange rate and the troubles it can bring in.

    ” recall responding to one of Wynne’s pieces, where he said the trade deficit had to adjust or there would be a recession, saying that all we needed was a 9% budget deficit.”

    You are confusing his honest approach. The problem is both political and INTRINSIC.

    Here is a suggestion:

    Take the BoP/IIP data from the BEA and make some assumptions on how imports change with demand and how exports are going to do and what happens to the international indebtedness and create scenarios.

    Then ask questions on how so much T-bills/bonds picked up by foreigners at increasing rates will have an effect on the dollar.

    Seriously, governments have pressures on winning elections. If things were so simple as “Modern Monetary Theory” makes it out to be, there wouldn’t be problems.

    No wonder there is a divorce between governments and central banks and overdrafts are not allowed or are limited.

    Reply

    Ramanan Reply:

    Sorry I mean “Britain is also in the EU”

    WARREN MOSLER Reply:

    mmt necessarily applies to open economies.

    check out the umkc buckaroo for an extreme example.

    or any other currency

    i think it’s more like you don’t like the operational realities than don’t agree with them.

    we’ve seen lots of currencies ‘adjust’ substantially in the last 20 years- we all agree that happens.

    and you know free trade has ruined nations only because they don’t sustain domestic demand with fiscal policy.

    i’m confusing the honest approach? strange response.

    Zaid Reply:

    Ramanan, all the countries you mentioned had a problem with paying debts denominated in USD and not their local currencies. All these countries, as far as I know, continue to fund private and public expenditures by issuing USD-denominated debt.

    Reply

    Ramanan Reply:

    Zaid,

    Their central banks had reserves to simply credit bank accounts of their foreign currency debts.

    Moreover these debt instruments were not overnight to worry about paying off immediately.

    Reply

    Zaid Reply:

    Still, not all Central Banks were able to meet the demand for USD without having a negative effect on the FX.

    Even if they weren’t overnight, the private sector has to pay long-term debt when they want to offload their collateral, and we all know the fear that gripped the markets back then with everyone panic selling every asset in sight.

    Ramanan Reply:

    “Still, not all Central Banks were able to meet the demand for USD without having a negative effect on the FX.

    Even if they weren’t overnight, the private sector has to pay long-term debt when they want to offload their collateral, and we all know the fear that gripped the markets back then with everyone panic selling every asset in sight.”

    Not sure what you mean here.

    The whole thing looks so backward to me.

    Nations which have almost no foreign currency debt on the government’s books are typically the stronger industrialized nations who have been successful in international trade and hence have had exchange rates more stable.

    Now if the suggestion is that international trade is not something to worry, then you should take the examples of nations who haven’t been good in international trade.

    WARREN MOSLER Reply:

    and a big part of the 2008 dollar squeeze was the private sectors around the world were short $, not the public sectors, though the banking system got caught up in it which is the public sector

    Zaid Reply:

    In an asset liquidation episode like the one we witnessed in 2008, the value of collateral was being marked down everywhere. It didn’t matter that the liquidity crunch began as a USD-centric asset liquidation. Eventually, the whole world was selling everything to get their hands on USD to pay back USD liabilities of all maturities. This was the case even in countries with trade surpluses and plenty of official USD reserves because it was the non-government sector leading the liquidation. I’m saying this because I witnessed it firsthand in such a country as you describe.

    MamMoTh Reply:

    That is the case of most countries if not all but the US.
    How could you finance your trade deficit otherwise if no one takes your sovereign currency to buy imports?

    Reply

    Zaid Reply:

    Yes, the US has an advantage. If no one desires to save in your currency, you can still issue local debt/currency if you are the sovereign issuer. The floating exchange regime will take care of rest of the non-government saving desires. It will not move as violently as you imagine. The examples given above were all countries that had foreign currency debt.

    WARREN MOSLER Reply:

    you wouldn’t have a deficit if no one saved in your currency

    MamMoTh Reply:

    so long as someone lends me the dollars to run my trade deficit there is no problem. that’s how countries become
    indebted in US dollars, euros or yens.

    WARREN MOSLER Reply:

    right, the actual problem is not the borrowing of dollars, it’s taking measures to service them and pay them back

    Tom Hickey Reply:

    Right. This is the basis of debt slavery.

    Ramanan Reply:

    Also I believe Australia was bailed out by the Fed.

    Australian banks were under pressure during the crisis and its exchange rate plummeted due to a “flight to quality” when the markets came to the conclusion that the crisis has spread to the rest of the world.
    http://research.stlouisfed.org/fred2/series/DEXUSAL

    Australia has a large negative net overseas assets position because of its trade imbalance historically and banks have to refinance their positions on the part of external financing not financed by FDIs/FIIs etc.

    Of course one can come up with an excuse that the Fed was trying to control the LIBOR, but it was beneficial for Australian banks as well.

    And how much was the resuce – $30b ? – huge for Australia considering its numbers such as poplulation, GDP are 10-15 times lower than the US.

    Reply

  8. Ramanan Says:

    “you wouldn’t have a deficit if no one saved in your currency”

    Like the neoclassical economics statement there wouldn’t be output without input of resources its trivially true. Exception below. This fact hardly enhances understanding. However from PKE we know that economic processes are demand-led not supply-led.

    Trade imbalances are financed by various inflows such as FDIs/FIIs etc. There are important items in the Financial account of the BoP such as FX swaps. And one can hardly say that the foreigner is “saving in your currency”

    At any rate, doesn’t mean foreigners can continue to be impressed by your running continuous deficits and can trash your currency. Now one can come up with something like “but there is another foreigner purchasing” or something but it doesn’t say the impact of the exchange rate move and the effect of the depreciation caused. At any rate, the foreigner can sell currency to a domestic sector in exchange for foreign exchange in which case the trade deficits are being financed by sale of assets rather than the other side of accounts.

    If I hold swap positions with banks and government bonds in the foreign nation, I can sell the bond off at the expiry of the swap and the foreign banking system is forced to look for funds in the foreign currency.

    So “saving in your currency” doesn’t have too much meaning in the BoP/IIP compilation context. There are important items such as “bank flows” and derivatives. During periods of stress in the external sector, these items become important and the fx markets and the central banks observe them closely.

    At any rate, the causality here is so backward. Imports generally signify a weakness of the domestic production sector compared to foreigners. There is no telepathy which makes the importer buy the import because foreigners want to save in your currency.

    A large inflow of foreign funds into a nation – which can be volatile – doesn’t give rise to higher imports. Foreigners sell their currencies to local banks to purchase assets and this doesn’t cause any import. Banks don’t consume the foreign currency for imports. Instead they play an accommodative role in these transactions.

    The whole thing looks like making accounting identities relating the three financial balances into one of causality. It is suggestive but it tells you nothing about causalities.

    Reply

    JKH Reply:

    “There is no telepathy which makes the importer buy the import because foreigners want to save in your currency.”

    that’s exactly what they do operationally unless they offset spend in your currency – just accepting payment is evidence of it, and can be viewed as accepting the “risk” of saving in your currency – until they “hedge” that risk by spending it

    Reply

    Ramanan Reply:

    The act of importing is a due to a decision made by the importer to choose a foreign product over a domestic one. The foreigner is just marketing it and if successful, able to set up a local unit to continue doing so.

    The decision to import says something about the local production sector versus the producers in the rest of the world. Locals purchases of local products plus foreign are constrained by their income. Also, because of this, local producers produce less and it goes into a cycle of demand drain.

    Also the argument which says “foreigners wishing to save in your currency” seems like saying “hence not a problem”. A couple can marry but need to stay with each other forever.

    No nation has been successful in doing the trick of injecting demand via fiscal policy to counteract the demand leakage due to trade imbalance.

    The “operational realities” say nothing about the exchange rate dynamics and the reaction of movements of the exchange rate on the local economy. These can be sudden and the fear of this makes governments deflate demand.

    Reply

    Neil Wilson Reply:

    “The act of importing is a due to a decision made by the importer to choose a foreign product over a domestic one”

    And having the appropriate scrip to pay for it.

    It doesn’t matter how much you desire an item in dollars. If you can’t get dollars for whatever you have in exchange for dollars, the point is moot.

    If the foreigner accepts your scrip then I don’t see what the problem is. The foreigner then has the exchange problem, not you. From your point of view it is just the same as buying from a domestic source.

    It strikes me that your argument is simply dealt with by ensuring that foreign currency transactions are paid for – ie run a foreign currency trade balance.

    Why won’t that cure it, and why can’t you achieve it operationally.

    WARREN MOSLER Reply:

    right, except I wouldn’t use the word ‘cure’ as that implies a problem that needs curing, or something like that.

    same with the word ‘imbalance’- with floating fx there is continuous balance at indifference levels
    there can’t be imbalance by definition. that’s all taken out in the level of the currency.

    WARREN MOSLER Reply:

    “At any rate, the foreigner can sell currency to a domestic sector in exchange for foreign exchange in which case the trade deficits are being financed by sale of assets rather than the other side of accounts.”

    ???

    “If I hold swap positions with banks and government bonds in the foreign nation, I can sell the bond off at the expiry of the swap and the foreign banking system is forced to look for funds in the foreign currency.”

    ??? when you sell the bonds and get paid in the foreign currency that deposit is in the banking system

    “A large inflow of foreign funds into a nation – which can be volatile – doesn’t give rise to higher imports. ”

    ???

    If I buy pesos, my dollar account gets debited and my peso account credited.
    and jose’s, my counter party in mexico, see’s the reverse in his accounts.

    if neither of us do anything further there is no influence on trade, or anything else.

    what’s your point?

    my point is that on any given point in time/day, if you (the rest of world) net export to the US, you get paid in $ financial assets which show up somewhere on your balance sheet,
    you can only rid yourself of dollar financial assets on your balance sheet before the end of trading that day by buying something from the US, in which case trade is balanced.

    Reply

    Neil Wilson Reply:

    Surely you could buy something from Ecuador as well.

    How do they fit into the system. Are they just like another US state but without the transfer payments?

    Reply

    WARREN MOSLER Reply:

    pretty much.

    ESM Reply:

    “you can only rid yourself of dollar financial assets on your balance sheet before the end of trading that day by buying something from the US, in which case trade is balanced.”

    Of course I completely agree with your point, but it is also possible for ROW (rest of world) to rid itself of dollar financial assets by exchanging them for foreign currency financial assets of a US resident. Trade for that day remains unbalanced, and US holdings of foreign currency assets has dropped.

    This can only work as long as US holdings of foreign currency assets are greater than zero, for if a US entity has to go short and borrow fx from a different ROW holder (“fx lender”), then that creates a different dynamic. In a floating rate currency regime, however, it is never necessary to go short and borrow fx. The US entity can always just liquidate dollar assets or borrow in dollars and exchange them in the fx market.

    It is only in fixed (or managed) exchange rate regimes that domestic entities are incentivized to borrow in foreign currency, which obviously has led to trouble on many occasions.

    Reply

    Scott Fullwiler Reply:

    Exactly.

    MamMoTh Reply:

    “you can only rid yourself of dollar financial assets on your balance sheet before the end of trading that day by buying something from the US, in which case trade is balanced.”

    No way, your dollars are accepted pretty much all over the world. You can get rid of them buying a house in Quito or Buenos Aires whenever you want.

    WARREN MOSLER Reply:

    yes, if those guys want to hold dollar financial assets. which is still a case of non resident accumulation of dollar financial assets. just different non residents

    Ramanan Reply:

    ““you can only rid yourself of dollar financial assets on your balance sheet before the end of trading that day by buying something from the US, in which case trade is balanced.”

    Incorrect. I can retire an fx swap with a US bank instead of rolling over.

    The US bank is now left with looking for funding.

    Ever heard of “Other Investment” and “Derivatives” in the balance of payments.

    Typically when there is a capital flight, banks have to quote something on fx even if they are not able to cover the position. Hence when someone is trashing a currency, “bank flows” become a bigger item.

    Lot of capital flight happens via fake import invoicing as well.

    WARREN MOSLER Reply:

    all entirely different points.

    WARREN MOSLER Reply:

    the foreigner buying his own currency from a US resident was the same as selling the products to the US for his own currency.

    this is an example of the US buying imports by reducing its savings of fx, either by reducing a long position or by going short fx.

    So yes, you can import by reducing your savings of fx, or you can import by the row increasing their savings of dollars.

    That is, the world can export to us only via increasing their dollar financial assets or via us reducing our fx financial assets.

    And it’s a case of either

    1. the US residents get their fx by exporting and saving it, and then spending their fx on imports, which is the case of paying for your imports with exports, which is a ‘worst case’ scenario when the rest of world doesn’t want to accumulate your dollar financial assets

    2. the US residents borrowing fx to buy imports, with the promise to pay back those fx borrowings to come from future exports.

    Anyway, it’s all the same thing, just looked at from different angles and different starting points.

  9. JKH Says:

    Ramanan,

    A budget deficit where the interest rate is less than the growth rate, both ex post, can go on forever.

    Same applies to CA deficits I suspect. US experience with a favorable cost of carry for the net international investment position for example.

    Reply

    Ramanan Reply:

    The debt sustainability calculus when applied to closed economies is not an issue at all. It is usually said that the interest rate has to be less than the growth rate, else a primary surplus needs to be aimed for.

    Godley and Lavoie have shown that its not needed. Even if the interest rate is higher than the growth rate, no discretionary attempt is needed to target a primary surplus.

    In the case of open economies, it is a bit backward. Imports are demand-dependent and exports are dependent on demand overseas.

    The debt sustainability equation should be seen as one on restriction. i.e. You cannot say for this current account, my external debt will be sustained at this percent such as 150%. Its the opposite. One should ask, for a given upper limit of external debt how much current account can be tolerated.

    Now nobody knows what this “upper limit” is. According to Wynne Godley, it can go on as long as foreigners allow it to go but usually restricted to 20-40%.

    With these numbers, the trade deficit that can be run happens to be quite low. I.e., for a given assumed limit on external debt, interest rate and growth rate you try to find what the trade imbalance is tolerable.

    For the process which can go on for a long time such as 150% or so .. which is not an exaggeration considering the numbers on imbalances, there is always a risk of falls in currency etc.

    For lets say, that the fx market agrees that the external debt can sustain till 135%. Now as we move forward in time, lets say it is reaching some value but still “sustainable”. But during this while, foreigners become more competitive and the trade deteriorates further – in which case, the original assumption turned out to be incorrect.

    The US is not in the best position. Its income elasticity of imports seems to be close to 1 and has deteriorated as foreigners have become more competitive.

    Why is public debt looked with suspicion ? Well the markets do not know how the numbers change but usually when trade deteriorates, to achieve demand increased fiscal deficit increases public debt. Usually these times are not the best for nations and hence people look at public debt.

    Reply

    Ramanan Reply:

    “you try to find what the trade imbalance is tolerable.” should be “you try to find what the tolerable trade imbalance is”

    Reply

    Neil Wilson Reply:

    Ramanan,

    You’re really going to have to work on the pithy and succinct form of expression. I just can’t follow your argument.

    It strikes me that the only trade imbalance that matters for a sovereign nation is one that is in a non-domestic currency and therefore you should target balanced trade solely at that.

    So the policy rule would be ‘export sufficient items to pay for needed imports not priced in your own currency’.

    Beyond that it is somebody else’s problem if they don’t follow the same rule.

    WARREN MOSLER Reply:

    and fx debt only hurts when you work to service it and pay it back.

    if you just make sure you only get a difference check for ‘new money’ with each refi you keep winning.

    and if the time does come to service it with net payments you have the option to walk.
    it’s unsecured and non recourse.

    Ramanan Reply:

    “You’re really going to have to work on the pithy and succinct form of expression. I just can’t follow your argument.”

    Well, some other commentator told me to write less as well :-).

    I did drop you a comment on imports in foreign currency but will do that again soon.

    To the comment to which you replied, which part do you have trouble with ?

    WARREN MOSLER Reply:

    Marc Lavoie is still alive and we agree on all this kind of thing, along with Mario, Marc’s cohort.

    Reply

    Ramanan Reply:

    I talked to him some time back (as in email) and quoted a para from Godley and Cripps and he agreed with me.

    There are more than 25,576 issues here to agree/disagree.

    For example he may have agreed that the US trade deficit can go on a longer time though the same may not be true for other countries.

    Anyway Wynne is clear.

    “In this paper we argue, as starkly as we can, that the United States and the rest of the world’s economies
    will not be able to achieve balanced growth and full employment unless they are able to agree upon and implement an entirely new way of running the global economy.”

    “At the moment, the recovery plans under consideration by
    the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies. But, however well coordinated, this approach will not be sufficient.”

    MMTers are making the same simple mistakes which caught Keynesians by surprise in the 1970s.

    WARREN MOSLER Reply:

    “At the moment, the recovery plans under consideration by
    the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies. But, however well coordinated, this approach will not be sufficient.”

    as before, in private conversation he agreed that it could be sufficient operationally but that the political will wasn’t there.

    and not that it matters what Wynne may have written.

    (in an open economy) a fiscal adjustment can always support domestic aggregate demand at desired levels as a simple point of logic

    Tom Hickey Reply:

    “In this paper we argue, as starkly as we can, that the United States and the rest of the world’s economies
will not be able to achieve balanced growth and full employment unless they are able to agree upon and implement an entirely new way of running the global economy.”

    “At the moment, the recovery plans under consideration by 
the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies. But, however well coordinated, this approach will not be sufficient.”

    This rings true intuitively, since even in the best case the invisible hand would not work due to inherent imperfections. When we add national interests and managed affairs, it seems that imbalances are bound to occur that would become destabilizing.

    If these kinds of issues are not resolved spontaneously through competitive markets within nations without intervention at the macro level, why would they be spontaneously resolved internationally?

    This has been my feeling all along. Maybe that feeling is misguided and admittedly this is naive, but I would have to see why it doesn’t hold to remove my reservations.

    I don’t see how MMT is really clear about this. Maybe someone can clear this up for me.

    WARREN MOSLER Reply:

    what part isn’t clear?

    any nation can unilaterally support domestic demand at desired levels.

    Tom Hickey Reply:

    Warren: what part isn’t clear? any nation can unilaterally support domestic demand at desired levels.

    Where I see the problem is in the developing nations and especially the underdeveloped nations. Their economies are not sufficiently developed to grow without importing things like materials and energy. For this they need foreign reserves, specifically USD. This gets them in hock to the Western banks, and it eventually comes to tears when the get into difficulty with the terms and the IMF steps and forces austerity on them. This is pretty much a syndrome.

    Now China is moving into Latin American and Africa and cutting contract deals that greatly displease the neoliberal West as undercutting the market. This is becoming a geopolitical problem. and it is not necessarily good for the developing nations either, caught between Scylla and Charybdis.

    China’s African Front

    As Henry Kissinger said of Chile under Allende, “The US had to destabilize Chile in order to establish stability.” i.e., control.

    Stability, A Cold Code Word With the US

    I don’t see this working out through the invisible hand of neoliberalism. It looks to me more like a fist.

    WARREN MOSLER Reply:

    nations can achieve full employment and far more prosperity and well being than they have now even without imports.

    think about it this way, what if all the other nations vanished over night.
    should the people in the remaining nation just kill themselves and get it over with?
    can they not fully employ themselves?

    doesn’t even the worst of nation today have a lot more than ancient Athens had?
    they sort of did ok without electiricity, the world bank, and dollar hedg-e-fund-money?

    and what nation today doesn’t find itself loaded with cell phones and other bits of tech, in spite of
    no govt fx and no resources of substance to export? Somalia, etc. even has all that stuff.

    and show me one example of a nation that did make the fiscal adjustments to sustain full employment
    that didn’t have a happy population as a consequence, in any age?

    does anyone even know the trade gap between NY and Vt or any other state? Guaranteed that if you start publishing
    those kinds of numbers the fear mongering will spring up and actions will be taken to ‘restore balance’ and make
    things a whole lot worse.

    all i can do is use theory and practice and logic to keep hammering the obvious.

    seems that’s not enough for most…

    Ramanan Reply:

    “as before, in private conversation he agreed that it could be sufficient operationally but that the political will wasn’t there.”

    No I believe you haven’t interpreted him right. However that is my interpretation… and let’s keep his personal views separate as you mention.

    The only reason I bring it up is that he seems to be the only person (along with his old mate Francis Cripps) saying things along those lines and have continued to say so and I believe they really have a point and its not just a point – its how you look at the world economy.

    Scott Fullwiler Reply:

    “Even if the interest rate is higher than the growth rate, no discretionary attempt is needed to target a primary surplus.”

    That’s not exactly what they showed. What they showed was that a functional finance fiscal policy is “Ricardian” even if the rate of interest is higher than the rate of growth. I talked with Marc about that and he agreed. I think that’s a significant contribution on its own, but the point is that you can’t have just any approach to fiscal policy and have it be sustainable. The functional finance approach they modeled was actually running primary surpluses, but overall deficits.

    Reply

    Ramanan Reply:

    Our simple SFC model can, however, provide us with a more surprising result. It is usually asserted that, for the debt dynamics to remain sustainable, the real rate of interest must be lower than the real rate of growth of the economy for a given ratio of primary budget surplus to GDP. If this condition is not fulfilled, the government needs to pursue a discretionary policy that aims to achieve a sufficiently large primary surplus. We can easily demonstrate that there are no such requirements in a fully consistent stock-flow model such as ours.

    beowulf Reply:

    If interest rate was 0, primary surplus and total surplus would be the same since Tsy net debt service cost would be 0 (or at least de minimis). Of course, at zero interest, the Fed would no longer have its interest rate fiscal channel, but they’d still have their their OTHER fiscal channel, user fees on wire transactions, especially if transaction fees were based on value instead of volume.

    “The Monetary Control Act of 1980 (MCA) requires the Reserve Banks to recover fully, over the long run, the costs… associated with the provision of most financial services they provide. Currently, Fedwire transaction fees are charged to both the originating institution (debit side) and receiving institution (credit side)… In 2009, the volume-based transaction fees range from 8 cents to 26 cents per transfer, per institution. In 2008, Fedwire processed an average daily volume of approximately 521,000 payments, with an average daily value of approximately $2.7 trillion. T”
    http://www.federalreserve.gov/paymentsystems/fedfunds_coreprinciples.htm#Ops

    “Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.”
    http://www.ny.frb.org/aboutthefed/fedpoint/fed36.html

    Levying the tax on transactions going through the Federal Reserve Bank system (Fed) would be one of the most technically feasible implementation options for a
    broad-based transaction tax… at the nominal rate of 0.01%, the effective annual rate ends up at 5%, rendering many transactions useless.

    http://webcache.googleusercontent.com/search?q=cache:AcrA6x8O9WUJ:assets.opencrs.com/rpts/RL32266_20041202.pdf

    No reason for Congress to impose a transaction tax when the Fed already collects a transaction user fee. In terms of controlling inflation, it actually doesn’t matter if value-based user fee set by BOG (presumably more than 9 cents per transaction but less than 0.01%) collected ANY money since Quantity of money theory is P(t) = V*M(t)

    To control P (price level), targeting V (velocity of money) works just as well as targeting M (money in circulation). And nothing kicks the crap out out V like a transaction tax. :o)

    Scott Fullwiler Reply:

    You need to keep reading, Ramanan:

    “The (real) primary surplus to GDP ratio does achieve a positive figure in the steady state (here +4.8%), as traditional analysis would have it when the rate of interest is larger than the rate of growth. But this is not achieved in the model by the exogenous imposition of a large primary surplus. Instead, the only behavioral requirement that has been imposed upon the public sector is a high enough level of pure government expenditure, such that full employment output is verified in each period.”

    Thus, their simulation DOES have a primary surplus (as they explain, and as I said above), it’s just that the deficit stops growing at full employment (again, exactly as I said). It’s not mathematically possible to do it any other way with the interest rate above the growth rate. Again, they show that functional finance is Ricardian–that’s extremely important, but it’s not the same as showing you can avoid a primary surplus with the interest rate above growth without unbounded growth in debt service. That can’t be done.

    WARREN MOSLER Reply:

    so can a budget deficit where the interest rate is higher than the growth rate. or one that’s equal. (any other cases?)

    Reply

    Scott Fullwiler Reply:

    Right. Their actual point (though not said in the paper) was that as long as the deficits stop once full employment is reached, the fiscal policy is Ricardian and thus consistent with the neoclassical intertemporal budget constraint. But–to clarify my rather convoluted previous comment–the functional finance fiscal policy G/L simulated actually did run primary surpluses, but total deficits. The point wasn’t then that no attempt to hit primary surpluses need be made–they didn’t actually target them, but they did have them as a by-product of functional finance and a strong assumed propensity to consume out of bond interest income–but that functional finance can result in the primary surpluses necessary for a Ricardian policy.

    Reply

    JKH Reply:

    so then a primary surplus is required (one way or another) when the interest rate is higher than the growth rate, but not when the growth rate is higher than the interest rate?

    or is that overly simplified?

    WARREN MOSLER Reply:

    and the model under discussion itself is flawed

    Ramanan Reply:

    No *discretionary* attempts need be made in either case.

    JKH Reply:

    simple math version:

    if primary surplus grows at a compound rate g equal to the economic growth rate

    and deficit on interest payments grows at a compound rate i equal to the rate of interest

    and i>g

    doesn’t the total deficit eventually grow unbounded, regardless of the initial size of the primary surplus?

    is this simple math version wrong?

    or is this simple math too simple for the relevant model?

    Reply

    Scott Fullwiler Reply:

    Actually, that simple math version’s incorrect. See “interest rates and fiscal sustainability” for examples. There is a primary surplus as a % of GDP that will let interest/GDP converge to a finite number even if i>g.

    JKH Reply:

    thx

    I suspected I should have studied those examples more closely

    JKH Reply:

    Quick look at your paper suggests to me that my simple math is not wrong.

    Because it is not subject to your constraint:

    “In other words, bn cannot be increasing faster than its discount factor; this is represented mathematically by taking the limit of the left-hand side of (10) as n approaches infinity”

    Because I haven’t specified such a constraint, it seems right (i.e. illustrative of unsustainability on its own) to me.

    Or am I wrong (and too quick) again?

    Scott Fullwiler Reply:

    OK, maybe I’m understanding what you’re asking, but if you look at the tables that follow, there is a ratio of primary surplus to GDP that enables the debt ratio and debt service ratio to converge to a finite number. I thought that was what you were describing (??).

    Scott Fullwiler Reply:

    Oops . . meant to say maybe I’m not understanding what you’re asking.

    JKH Reply:

    not sure now …

    I think I just need to spend some time on your paper working through those actual numbers, until I get a better intuitive feel

    (the algebra there is quite challenging)

    Scott Fullwiler Reply:

    “No *discretionary* attempts need be made in either case.”

    OK.

    Reply

    Peter D Reply:

    OK, Scott/Warren.
    Can we have a “for dummies” post (here or at New Economic Perspectives) about “interest rates and fiscal sustainability”? Something with the main conclusions spelled out? Because, for example, the first thing MMTers usually say to those that claim that interest on debt will become unsustainable is that a sovereign govt does not need to issue debt and, also, that the fed can set the interest rate at whatever it likes by price targeting. But here you seem to be saying that even with debt issuance there is a great range of rates that are still sustainable? Would love to see some explanation.
    If there is already a post like this, I apologize. Anybody can supply a link?

    WARREN MOSLER Reply:

    paying rates by govt adds income and savings to the economy, which tends to add aggregate demand/spending power to the economy.

    that means, for a given size govt, the lower the term structure of rates the lower our taxes can be to sustain full employment levels

    and the larger the trade deficit the lower taxes can be as well.

    Peter D Reply:

    Warren: “that means, for a given size govt, the lower the term structure of rates the lower our taxes can be to sustain full employment levels.”

    But this would be true only if we’re talking about slack demand and interest payments adding to it. If there was excess demand already, the interest payments would be even more inflationary and the taxes would have to go up. And this could happen if interest rates outstrip the growth rates, I think. Am I wrong?
    If interest payments are not really a problem then why do MMTers have the reflexive reaction of “the government doesn’t need to issue debt” whenever the issue of interest of debt is raised?

    Peter D Reply:

    Also, Warren, do you think that the Fed should raise rates right now? If the interest channel add to the AD, this would seem a good time, no?

  10. Zaid Says:

    “At any rate, the foreigner can sell currency to a domestic sector in exchange for foreign exchange in which case the trade deficits are being financed by sale of assets rather than the other side of accounts.”

    Ramanan, suppose in period 1 we have a trade deficit and the foreign sector does not want to save in our currency. What happens when the foreign sector sells the currency to the domestic sector in exchange for their desired currency? Well, the answer to me seems obvious: it would balance out through the floating exchange rate mechanism. The local currency FX value goes down to a level where imports become uneconomical, and the trade deficit disappears in period 2. This is why Warren says: “you wouldn’t have a deficit if no one saved in your currency.”

    Reply

    Ramanan Reply:

    Exchange rates adjustments are a poor way to achieve any balance.

    It gives you price competitiveness but not “nonprice competitiveness”. Neoclassicals believe price adjustments take care but if you look at the data, there is no support for it.

    The above can simply be put “I won’t buy something just because its cheap, I buy it if I like it”.

    Just because the US exchange rate adjusts doesn’t mean I (as a non-US person) buy an iPod. Of course price is one factor- but the niceness is more important. Of course, some amount of exchange rate adjustment is good but not the main factor.

    The Chinese on the other hand have actually used price competitiveness heavily. Of course thats an exception.

    This was a comparison between “price elasticity” and “income elasticity”. Both are important – the latter is more and is a proxy for competitiveness of local versus foreigners.

    As far as “saving in your currency” goes, show me some BoP/IIP stats where the saving is in the importers currency only – as in flows/stocks. Government is one sector but there are other sectors as well.

    Only the US has enjoyed this position till now.

    Reply

    Zaid Reply:

    Ramanan, sorry… I think lost you. Exchange rates are NOT a poor way to achieve any balance. What is poor policy is for countries to try and delay the FX adjustments by borrowing in foreign currency to beef up their foreign reserves. Turkey did that, Egypt did it, and so did Mexico. Let’s take Egypt as an example, since the consequences of bad policy is all over the news these days. Egypt has a floating exchange regime, but it borrows in foreign currency. Sure some rich Egyptians can afford to buy iPods and Egypt can still run a deficit as long as the poor can still afford to buy their daily bread. But we’re talking about demand for imports in the aggregate here, and the currency will continue to go down until there is a balance. Nobody wants to save in EGP. EGP has been a poorly performing currency for a good reason, and the only reasons it hasn’t been crashing is because of FDI and the former Egyptian government’s USD borrowing program to beef up their foreign reserves.

    Are there many countries that have the advantages of the US being the reserve currency of the world? Not to the same extent, but I can think of a few countries that enjoy a somewhat similar position because of a desire to save in those importers’ currencies, although on a smaller scale (like in the UK). Also don’t forget that foreign debt denominated in GBP creates its own demand (or saving desires).

    Reply

    Ramanan Reply:

    Zaid,

    Governments end up taking debt in foreign currency on their books because as you said, it beefs up the foreign reserves. But it also helps banks and takes some stress off their funding in foreign currency. Here is a link on how huge “bank flows” in the balance of payments can get.

    IMF on international capital flows http://www.imf.org/external/np/pp/eng/2010/111510.pdf see Figure 1 especially “bank flows”, “other investment flows”.

    The export to a foreign nation depends on the demand in the foreign nation. It also depends on the “propensity to import” or the income elasticity of imports. If my currency depreciates the producers in my nation get some advantage in price competitiveness. But price alone is NOT a factor for imports (except the case of nations with massively devalued currencies who get the advantage). There may be no price for which the foreign nation will buy the product.

    To put it more formally ….

    If you study Keynesian trade theory, you will notice two things – price elasticity and income elasticity. Neoclassicals just concentrate on the price elasticity and unfortunately the income elasticity wins out.

    While I understand that flexible exchange rates can be useful to reduce trade imbalances, I do not accept the “intuitive” conclusion that the trick is done completely.

    There is simply no proof.

    More importantly currency markets move in crazy directions and do not move according to trade balances very well.

    Anyway, its not really about balancing in this blog. The innuendo here is “trade deficit is not a problem” or that foreigners are silly to have sold their products.

    And, for such a country (even Turkey) both a budget deficit and a current account deficit are indefinitely sustainable. It makes no sense to argue that the USA (or Turkey) needs to borrow to ‘finance’ its trade deficit

    is the MMT stand.

    … which is different from the debate between you and me about reaching a balance or something along those lines.

    WARREN MOSLER Reply:

    agreed it makes no sense to try to use exchange rates to achieve anything.

    Reply

  11. Tom Hickey Says:

    Warren in #5 on February 27th, 2011 at 8:42 am:

    Wynne, and Paul Davidson as well, always agreed with me that with today’s institution arrangements the US and pretty much any other nation can sustain domestic full employment with a fiscal adjustment, without regard to national solvency or the resulting trade deficit, and that such a policy would optimize real terms of trade.

    However, they both firmly believed, and Paul still does, that ‘we’ were never going to convince govts. to run the appropriate size deficits. I recall responding to one of Wynne’s pieces, where he said the trade deficit had to adjust or there would be a recession, saying that all we needed was a 9% budget deficit. He agreed, but said that was politically impossible, to the point of not even wanting to suggest that option. So instead he and Paul continued with what I continue to call their ‘global rebalancing’ nonsense. I told them, and still tell Paul, that they are academics, and as such I strongly disapproved of their approach, which I consider that of a political advisor of sorts. Or worse.

    This is very interesting, and I would like to hear Ramanan’s response.

    I agree that academics have a responsibility to truth, not to political correctness or expediency.

    Warren, if the US took the lead and pursued this policy, what would be the likelihood in your view that it would set a precedent for the rest of the world to follow?

    It seems that if the US did this unilaterally, the dollar could depreciate significantly at first, giving the US a big edge in exports. Wouldn’t the rest of the world scream about this? Should the US just pull another Nixon/Connally and tell them its our dollar and their problem?

    Reply

    Mr. E Reply:

    I too am very interested to hear more about this.

    I don’t think it will happen either, but that doesn’t mean that people who think this should refrain from advocating it. People on the Right are thinking about how to move the debate Rightward by using extreme positions to redefine the extremes of the debate. They know that being extreme has advantages besides instant adoption.

    Just like a few outliers throw a standard deviation into uselessness, an extreme position can help to move the debate in that direction. If you’re fighting over the middle and believe that even moderate progress is better than no progress, then a concession of an extreme position moves the entire center of the debate against your original position.

    I also think there are other problems with running a deficit that high – I don’t think the response to the spending would be entirely linear.

    Reply

    WARREN MOSLER Reply:

    Likelihood near 100%

    and, though not that it matters, the stock market boom would likely make the dollar stronger as the automatic stabilizers did their job to tighten things up.

    Reply

  12. Ramanan Says:

    “This is very interesting, and I would like to hear Ramanan’s response.”

    Have written up something @February 27th, 2011 at 12:49 pm

    Like Paul Davidson to some extent but of course nobody else like Wynne.

    Here is a nice Guardian article “Apsotles of Apocalypse” on him from 1983. http://dl.dropbox.com/u/16533182/Apostles%20Of%20The%20Apocalypse.mht
    (opens in Internet Explorer)

    Actually his position and continuous attack on Margaret Thatcher and all UK governments in the Cambridge Economic Bulletin and in leading UK newspapers such as Times, Guardian, FT etc cost him his job at Cambridge, but later got him another as amongst the “Six Wise Men” of the UK Treasury. So he was not a mere academic in any sense.

    On the other hand, he seriously believed in the balance of payments constraint and continuously attacked other economists who had no clue about this which included people from Cambridge. He wrote a book in 1983 to show how stocks and flows of the “three sectors” move in time to make this case more explicit – later adopted by several people.

    His work has been about doing concerted efforts to doing fiscal expansion and reworking of international trade policies. The simple fiscal expansion solution does not work however BIG the deficit is. Its not a political problem only!

    More importantly, he knew the precise damage caused by trade imbalances and had worked hard to see this via macroeconomic modeling. Such as .. if there is a leakage in period, producers produce less. Since producers produce less, they hire less labour. Less labour means less consumption and another cycle of less production. Some of this is compensated by increased deficits (even if fiscal policy is the same) How much can demand leakage can this cause etc.

    A policy to relax fiscal policy to compensate this loss works to increase national income but deteriorates the trade even further and increases indebtedness to foreigners by a huge amount.

    Coming to the amateurish solution of relaxing policy to solve all your problems – What are you pretending – the currency markets will like your game ?

    Any example where this has been successful ?

    Reply

    Ramanan Reply:

    Also talking of political limits, Wynne’s approach was to take a given policy and then make projections based on that. That is different from saying that he didn’t believe politicians cannot be convinced.

    If fiscal policy is relaxed even more, that will deteriorate the imbalances even more!

    Only a few (hardly a handful) really know how open economy macroeconomics works.

    Reply

    Ramanan Reply:

    and that included Nicholas Kaldor who was involved around a Radcliffe Committee report in 1959(?) and also wrote a book

    “The Scourge Of Monetarism”

    http://www.amazon.com/Scourge-Monetarism-Radcliffe-Lectures-Kaldor/dp/0198771878

    directed at government officials.

    Reply

    Tom Hickey Reply:

    Coming to the amateurish solution of relaxing policy to solve all your problems – What are you pretending – the currency markets will like your game ?

    Theoretically, the currency depreciates and the exchange rate drops. Imports become more expensive and exports more attractive. The country then imports less and exports more, reversing the imbalance. Why does this not work?

    Reply

    Ramanan Reply:

    Any proof that this works ?

    The “price mechanism” is neoclassical. ”

    Its not about price, its about quality”

    Measures need to be taken to help the export industry.

    Also, any proof currency movements are smooth ?

    Reply

    Tom Hickey Reply:

    Then in your view, is the solution to close the economy with protectionism in order to focus on domestic unemployment without having to be concerned with current and capital accounts issues?

    If not, how would you handle the problem based on how you see it?

    Ramanan Reply:

    No protectionism leads to retaliation and is a chaotic way of doing things. “Protectionism” may mean different things to different people, of course.

    The G20 is on the right track except that they are looking for fiscal contraction instead of expansion! So not really there.

    However, only a concerted effort can do the trick. Also nations with surpluses and fast growing nations need to be incentivized to import more and those who are weak may be need some amount of protection from free trade so that they are able to reflate their economies. Thats like having a world government which makes fiscal transfers by negotiations.

    Not as simple as setting a tax rate.

    Reply

    WARREN MOSLER Reply:

    an absolutely not needed for anything other than window dressing for academic purposes

    if a nation wants to work and produce and send their stuff to everyone else and minimize what they get in return it’s their problem.

    Tom Hickey Reply:

    Essentially agree, Ramanan.

    What would Ram do? (Ramraj)

    beowulf Reply:

    Ramanan, any government can just cut the Gordian knot. Adopt the Cripps-Godley policy of nonselective tariffs matched with fiscal loosening, which is allowed under GATT Article 12. As Levy Institute suggests, every dollar (by which I mean, local currency) of exports creates a dollar’s worth of import certificates to be auctioned off by Tsy. This tariff revenue is then used to cut payroll or other regressive tax. If trading partners retaliate with tariffs of their own, it would lead to fewer exports which is automatically balanced with fewer import certificates going up for bid.

    There, you eliminated the trade deficit, cut taxes and plugged a big demand leakage, call it “the fair trade tax cut”. It will break Warren’s heart true, but chalk it up to creative destruction. :o)

    So why go for a pointless League of Nations-style global agreement when unilateral (Nixon-style!) national action would do the the trick? If nothing else, its a violation of the principle of Subsidiarity (“matters ought to be handled by the smallest, lowest or least centralized competent authority”).
    http://en.wikipedia.org/wiki/Subsidiarity

    WARREN MOSLER Reply:

    As you know, I’d just:
    unilaterally drop most all import restrictions (apart from safety standards, etc.)
    fica suspension
    fed revenue for the states on a per capita basis
    $8/hr federally funded job for anyone willing and able to work.

    If imports go up, all the better.

    The dollar may make a one time adjustment, as it pretty much does continuously anyway

    Neil Wilson Reply:

    Beowulf,

    There is a slight alteration that would also work. You restrict the trade certificates to items invoiced in a non-domestic currency.

    Imports and exports invoiced in your own currency don’t appear to be a problem for you. The problem belongs to some other zone.

    And as more and more countries adopt the same system then everything eventually balances out.

    WARREN MOSLER Reply:

    why bother?

    the point is to optimize imports/real terms of trade

    beowulf Reply:

    Ramanan, thanks for posting that old Guardian piece about Wynne, but its only Part 1! It ends with this cliffhanger…
    ”Tomorrow – For the past four years the Cambridge economists have been building a computer model of the global economy. Everyone who has seen the printout says “This means war.”

    Do you have part 2? Or are we left to imagine what this doomsday spreadsheet is all about? :o)

    Reply

    Ramanan Reply:

    No that was just an exaggeration … nothing about war – just about the stock-flow models.

    I will link up the article sometime .. having troubles uploading.

    Import certificates were just analyzed not recommended ?

    I think the article 12 bit was just for urgent usage I would imagine..

    The idea was to not usage such policies really but to run economies on fresh set of principles.

    Reply

    Ramanan Reply:

    Beowulf,

    http://dl.dropbox.com/u/16533182/A%20Model%20Revolution%20For%20The%20Old%20School.mht

    “A Model Revolution For The Old School”

    WARREN MOSLER Reply:

    do you think Wynne was any better at this than you are now?

    Reply

    Ramanan Reply:

    ??

    No comparison of him to anyone else .. such as Paul Davidson!

    … only one to get it right … and get it right first .. sorry!

  13. Ramanan Says:

    “You need to keep reading, Ramanan”

    Lets just iron it out. There is no usage of the word “Ricardian”.

    I have noted you saying many times about interest rate being lesser than growth rates – no such assumption is needed there.

    When I said no discretionary attempt is needed, I exactly meant But this is not achieved in the model by the exogenous imposition of a large primary surplus. and

    Finally, we are tentatively drawing two unconventional conclusions: that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not necessarily generate explosive interest flows, even if the government makes no discretionary attempt to achieve primary budget surpluses,

    My original statement you nitpicked on was

    “Even if the interest rate is higher than the growth rate, no discretionary attempt is needed to target a primary surplus.”

    Reply

  14. Ramanan Says:

    “”does anyone even know the trade gap between NY and Vt or
    any other state? ”

    Because the US Federal Government makes fiscal transfers without anyone noticing .. such as you :)

    As about people in other nations dying, imagine the rest of the world dies .. US producers will be able to sell more of their stuff to US households.

    However if you depreciate your currency and make purchasing of foreign products costlier, you will be accused of killing foreigners and with that killing foreigners selling you goods! To prevent such a scenario, nations cut demand and have others unemployed.

    Good to be empirical – successful nations have been successful in international trade!

    “all i can do is use theory and practice and logic to keep hammering the obvious. ”

    Neoclassical Economics is built on “intuitive” principles.

    Reply

    Ramanan Reply:

    Okay “you” as in a third person … apologies if offensive.

    Reply

    MamMoTh Reply:

    I agree Ramanan. That’s why I don’t buy that trade deficits arise from the desire of the “foreign” sector to save in your sovereign currency, even when they buy your products using your currency.

    Reply

    Neil Wilson Reply:

    There are non-domestic names on the currency and bonds at all central banks. That’s saving isn’t it.

    Reply

    MamMoTh Reply:

    Agreed, I didn’t say there were no non-domestic savings.
    I’m saying Greece’s trade deficit with Germany does not arise from germans who’d rather save greek euros than german ones. (Although greek coins are nicer.)

    Neil Wilson Reply:

    Are you baulking at the word ‘desire’? Perhaps ‘indifference’ would be a better phrase.

    The deficit occurs surely due to different desires for each other’s real stuff. Clearly the Germans aren’t as fond of Feta Cheese as the Greeks are of battleships.

    Ramanan Reply:

    Glad you agree.

    There is a huge amount of confusion around.

    In part, this is because of the hegemony status of the dollar.

    It is said that John Maynard Keynes did a huge disservice to the economics profession by not starting with open economy macroeconomics. Of course the genius got many things wrong though later he corrected himself. JMK really understood the external sector because he was convinced about his principle of effective demand and the contraints due to the external sector.

    Firstly, very few countries have the privilege of importing in their currency.

    Secondly, imports arise due to the *volitional* decisions of citizens of a country to purchase a foreign product over a locally produced one and says something about the competitiveness of local producers to the ones overseas and that of the export sector compared to competitiveness of local producers abroad.

    I can’t yet find a good paper on invoicing of imports, but most nations do not import in their currency. For them to sustain deficits, foreigners have to be induced to lend on a large scale – since the current account is a deficit and needs to be financed. So lot of nations end up with depreciated currencies or end up deflating demand to reduce imports (because imports are income dependent as well, C= mu times Y) and do a power play with foreigners on getting their exchange rates stabilized.

    For the case of the US, since the nation has been historically powerful in production and innovation, its currency has become a reserve currency for the world. So foreigners try to achieve competitiveness and sell products so that they get hold of the dollars.

    Since they keep their currencies depreciated, it affects the US producers because they have to keep wages low to compete on prices and creates a deflationary drag on the US economy.

    A trade deficit of $500B (latest, and it had gone higher before the crisis), cannot be said to be caused by foreigners wishing to save $500B .. they are in a mood to save higher and higher and higher.

    For let us say that there is a huge technological boom in the US … really big one … US citizens will purchase those products, being impressed by the producers and the export sector will also gain from this productivity bringing the trade into a lesser imbalance or a surplus. Which means the desires of foreigners may not be satisfied.

    In the simple case consider me desiring to save $1T per year, does that mean my desire is satisfied ? The US citizens may not even buy my product even if I offer them for 2 cents.

    Reply

    Neil Wilson Reply:

    ” For them to sustain deficits, foreigners have to be induced to lend on a large scale”

    No they don’t. They have to fund their imports with equivalent exports.

    “imports arise due to the *volitional* decisions of citizens of a country to purchase a foreign product over a locally produced one”

    And have the scrip to pay for it. If you can’t obtain it with what you have to exchange then you don’t get the import. Period.

    “Since they keep their currencies depreciated, it affects the US producers because they have to keep wages low to compete on prices and creates a deflationary drag on the US economy.”

    Only because the US doesn’t stimulate its domestic demand sufficiently to absorb both the domestic production and the imported production.

    The solution for the US (and all countries) is surely to wind up the imports in their own currency and drag as many citizens of the world into their currency zone as they can.

    The solution for the rest of the world is to do the same.

    WARREN MOSLER Reply:

    Like your blog, by the way

    MamMoTh Reply:

    “Firstly, very few countries have the privilege of importing in their currency.”

    Good to see I am not the only one thinking this is an issue, at least with the way MMT analyses international trade.

    I think I’ve heard or read somewhere a year ago or so that Argentina and Brazil (two relatively large economies and neighbouring countries) were having talks in order to reduce their dependence on dollars to trade with each other.

    There is another reason to import when you don’t have any of the natural resources necessary (oil, minerals, etc.) to build-up your productive capacity.

    WARREN MOSLER Reply:

    they aren’t dependent on dollars to trade with each other. just a bunch of confused politicians mixing it up. at very expensive hotels.

    Oliver Reply:

    Bill Mitchell once wrote something to the extent of:

    Nobody needs to drive a Mercedes.

    I think much of the discussion regarding the CA here boils down to this (moral) judgement.

    In deciding who should bears the brunt of a downturn – employees (unemployment), debt holders (hair cut) or everyone (depreciation) – MMT sides with the employed and declares that currency depreciation is fairest means to adapt because it is most equitable, and also proposes fiscal policy keep employment full thus also maximizing domestic output.

    I’m not trained to get into the mathematical discussion on sustainability so I’ll stay out of it. But it seems to me that making employment and domestic output the centrepiece of its approach, while very laudable and absolutely right in my own opinion, is also latently at odds with actual consumer preferences in most countries which are heavily dependent on foreign luxury goods of the sort declared superfluous by Mitchell.

    I remember Hong Kong in the ’80s (when it was still more emerging rather than emerged) most people lived in rat holes and interior decor was an alien concept, but the absolutely first thing everyone had to have, was a Mercedes (and things like a Rolex watch, French perfume, etc.).

    I think one shouldn’t underestimate the will of consumers (voters) to force their leaders to keep purchasing power up, even at the expense of their very own (un)employed. I think MMT has a long way to go to first make that connection apparent and then to convince consumers to question their own priorities.

    WARREN MOSLER Reply:

    Keynes constraints were generally in the context of a gold standard.

    Neil Wilson Reply:

    I don’t see it as a big deal. The policy rule has to be that you export what you need to to pay for needed imports not priced in your own currency.

    If a particular state goes beyond that then it becomes an effective province of whichever currency zone it becomes indebted to. So Ecuador is effectively a US province due to the dependency on the US dollar. Ireland, Greece, etc are provinces of the Euro issuing machine (ie Germany).

    To maintain control you have to avoid the Faustian bargain of foreign debt. That makes you a currency user, not a currency issuer.

    MamMoTh Reply:

    “the policy rule has to be that you export what you need to to pay for needed imports not priced in your own currency.”

    then you are advocating for some form of central planning wrt to imports/exports. this is not how a free market economy works.

    also if country A tries to sell X to country B before buying X from B, what happens if B implements a similar policy?

    Ramanan Reply:

    “Keynes constraints were generally in the context of a gold standard.”

    The Keynesian principle of effective demand is one of the most important principles in macroeconomics.

    The gold standard anti-analogy doesn’t work … in the Gold Standard growth was high and economies ran at high employment. It was truly a golden age.

    Not a fan of the Gold Standard … but the Gold Standard worked in a completely different mechanism than the one advocated by the Chartalists.

    Coming back to Keynes .. he has emphasized … the balance of payments problem has led to huge impoverishment

    beowulf Reply:

    And have the scrip to pay for it. If you can’t obtain it with what you have to exchange then you don’t get the import. Period.

    That’s an excellent point Neil. At the micro level, its a negotiable contract term which currency is used. Everything is negotiable and whichever side picks the currency, the other side assumes the currency risk–and can always hedge via financial markets– until the letter of credit clears once the shipment gets to its destination (or if a rogue wave takes out the freighter, when the insurance check comes in).
    http://www.winebusiness.com/wbm/?go=getArticle&dataId=36178

    At the macro level, if a nation’s imports chronically exceed exports AND are priced in exporter currency, inevitably the its currency will devalue. The US is in an interesting position– our trade deficit is caused by two kinds of imports– oil and China and both are priced in dollars..

    The day OPEC switches out of dollars is the day to put the King of Saudi Arabia in your dead pool because he’s not long for this veil of tears. And if China stops using dollars, not only will it crush their manufacturing sector (as outsourced US production shifts to other developing countries), the more immediate effect of a dollar crash would be to destroy the value of China’s dollar reserves. The United States exemplifies the point Keynes made, “Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed”.

    Tom Hickey Reply:

    Neil: If a particular state goes beyond that then it becomes an effective province of whichever currency zone it becomes indebted to. So Ecuador is effectively a US province due to the dependency on the US dollar. Ireland, Greece, etc are provinces of the Euro issuing machine (ie Germany).

    Right. This is the basis of neoliberalism > neo-imperialism > neocolonialism known euphemistically as “global stability.”

    WARREN MOSLER Reply:

    Yes, I suspect I’m vastly outnumbered globally on this issue.

    And most of the world also thinks federal deficits take away from savings.

    Story of my life

    Reply

    Ramanan Reply:

    No .. nobody is saying here that the federal deficit takes away from household savings :)

    Greg Reply:

    Well it may be true that the initial purpose for initiating a trading position with someone that makes you net exporter is NOT because you desire to save their currency but the only reason you would MAINTAIN such a position over several periods would be for that reason….. or that they have a gun to your head and you believe they will use it. Those are the only two reasons it could be.

    Reply

  15. Ramanan Says:

    Neil Wilson @February 28th, 2011 at 12:23 pm

    My god. I think I have to patiently go through on how to do Balance of Payments and International Investment Position with you.

    “” For them to sustain deficits, foreigners have to be induced to lend on a large scale”

    No they don’t. They have to fund their imports with equivalent exports.”

    Okay, I do not know which branch of economics you espouse, you cannot say “I will export”. You have to sell the product!

    Confused causality here. As if I can “chillmax” and export at pleasure.

    “And have the scrip to pay for it. If you can’t obtain it with what you have to exchange then you don’t get the import. Period.”

    Thats proof by triviality. I mean its like a neoclassical saying there cannot be production with land labour and capital, so production depends on these factors, forgetting the Keynesian principle of effective demand.

    When a nation is running into balance of payments problem, the government deflates the economy … Period ? The task of macroeconomics is to improve demand in the world and reduce suffering. Saying period doesn’t do anything.

    “Only because the US doesn’t stimulate its domestic demand sufficiently to absorb both the domestic production and the imported production”

    Yeah nice story. I do not know any nation which has been successful in doing that.

    “The solution for the US (and all countries) is surely to wind up the imports in their own currency and drag as many citizens of the world into their currency zone as they can.”

    Nice strategy. The goal of macro is to improve demand in the world not market dollarization strategies.

    Reply

    Neil Wilson Reply:

    you cannot say “I will export”. You have to sell the product!

    Correct, and you can’t import anything until you’ve done that because you won’t have the scrip, or the access to the scrip. The scrip constrains you regardless of the demand.

    You have to fund your imports if its not your currency. Just like an individual has to do a days work before he can buy his bread.

    The alternative is to borrow in a foreign currency, which is the Faustian bargain that dooms the country to slavery.

    The credit card is not the way to prosperity.

    All countries have natural resources in terms of labour, so there is no reason at all why they can’t earn foreign scrip if they need it, or make do with what they have domestically.

    As Warren has pointed out imports are always discretionary. I would say that ‘needed’ imports in another currency are ultimately constrained by the areas export capability.

    The task of macroeconomics is to improve demand in the world

    Now we see the issue with your viewpoint. The goal of macro is surely to improve demand in your currency area – because that is all you have control over. Everybody else’s currency area is their problem to manage.

    However if all manage according to rational game theory rules then you will get an improvement in demand in the world via the standard fallacy of composition. Everybody trying to stitch everybody else up means nobody does.

    You’ve been found out Ramanan. You’re in the big hug club with Will Hutton, et al. :)

    You have to be an awful lot less cynical about human nature than I am to believe in big hug ideas.

    Reply

    Ramanan Reply:

    Oops .. Will Hutton .. tagging and all .. seems like an ongoing strategy :-)

    “All countries have natural resources in terms of labour, so there is no reason at all why they can’t earn foreign scrip if they need it, or make do with what they have domestically.”

    The trouble is that some regions are structurally weak and it doesn’t help anyone.

    Again, as if exports are under your control! Some nations have been successful in exporting because they have been stronger and have gained advantage of mercantalism policies before others try to catch up.

    Tell me if a poor African nation wants to export, is it that easy ? Also it is restricted by demand in the rest of the world and its own weakness.

    “Everybody else’s currency area is their problem to manage.”

    Well this attitude has actually created a lose-lose situation.

    “You have to be an awful lot less cynical about human nature than I am to believe in big hug ideas.”

    .. Whatever.

    Anyways – I have made you worry about imports invoiced in a foreign currency. Till now nobody would even go into that direction .. in spite of my writing so many times.

    Happy worry.

    Reply

    ESM Reply:

    Allow me to resolve this dispute by saying you’re both wrong.

    As long as a country has a freely floating currency, it can import as much as the people want (up until their price indifference point), and it doesn’t have to borrow or steal or even export.

    This is a tautology. If somebody wants to import, he just takes his local currency, exchanges it on the fx market for some of the trading partner’s currency, and then purchases the product. Easy as pie.

    Might the local currency go down over time? Perhaps. It depends on whether or not the country has something of value that the ROW needs local currency to buy. Exports of goods is one example, but certainly not the only one. There’s cheap labor too, or production resources or natural resources. Even tourism or charity.

    The penalty for a country that is relatively unproductive for whatever reason is that the average standard of living for its people will be relatively low. That will be the case no matter what trade policy you choose. But the standard of living will be highest if you allow free trade and a floating fx rate.

    Reply

    WARREN MOSLER Reply:

    right, not to forget you can just as easily say the other currency is going up as yours is going down.

    best to measure the value of your currency by what it can buy, as a point of reference.

    Neil Wilson Reply:

    “If somebody wants to import, he just takes his local currency, exchanges it on the fx market for some of the trading partner’s currency, and then purchases the product. Easy as pie.”

    Correct in the general case. But then in the general case you don’t need taxation to provide ‘demand’ for currency either. It’s just a theoretical underpinning.

    Pragmatically currency exchange is not a problem that needs to be worried about in the real world. The FX market provides the intermediation.

    But the theoretical edge case does inform policy – in that foreign currency invoiced trade should tend to balance in some way and that state borrowing in a foreign currency is very dangerous.

    WARREN MOSLER Reply:

    the currency of invoice shouldn’t matter. it’s just a numeraire

    ESM Reply:

    “Correct in the general case. But then in the general case you don’t need taxation to provide ‘demand’ for currency either. It’s just a theoretical underpinning.”

    Of course you need taxation to provide demand for the currency. Without it, or without the state standing ready to exchange real resources it has acquired through taxation for the currency, the currency will literally become worthless.

    With taxation, it is literally impossible for the currency to become worthless.

    It doesn’t matter how little resources a country has, or how desperate its residents are to import goods and services, the currency will be worth something, and the country will be able to import up to its price indifference level.

    It might be the case that foreigners would rather buy up productive assets and natural resources in the country than goods and services. If the government believes this is undesirable, then as a sovereign entity, it can disallow it to a lesser or greater extent. This just means that in the short-term the currency and the standard of living will be lower than it would be otherwise.

    What is dangerous for a government is to tie any of its liabilities to an index that moves inversely with the value of its own currency. Mathematically, that is what creates risk of an inflationary spiral. Committing to a fixed exchange rate or borrowing in a foreign currency or issuing inflation-linked debt are examples of this.

    Reply

    JKH Reply:

    How is it that the Chartalist tax effect can be pure binary?

    What is the mathematical effect of moving from no taxes to tax revenue of $ 1 total?

    zanon Reply:

    JKH:

    I think it is binary (or mostly binary) because fiat currency is fundamentally manifestation of sovereign power. the ability to demand and collect tax is what seperates those who have power from those who do not.

    ESM Reply:

    JKH,

    I think we’re getting a bit pedantic, but let’s explore the following scenario. The Obama administration creates a parallel currency called “Carbon Credits.” It creates a plan to issue 100B of them annually to favored constituencies like “green” entrepreneurs and labor unions, and draws up additional plans to institute a Carbon Credit tax in order to create demand and value. The Republicans take over and just to be snide make the tax equal to 100 Carbon Credits per year.

    Everybody decides the Carbon Credits are worthless. But you and I form a company — ESMJKH partners — and go around to the different holders of Carbon Credits and bid $0.0000000001 for each Carbon Credit. Not a bad deal, they all say, since our bid is greater than zero. We buy all of them for $10 total. Now, the annual tax comes due, and some entities realize “Holy crap. We need to come up with some Carbon Credits to pay our tax. Who has them?” ESMJKH has a monopoly on Carbon Credits and can name its price, which perhaps is $100 each or maybe even $10,000. Depends on what the penalty is for not paying the tax on time.

    Now you might complain that we wouldn’t be able to buy up all of the Carbon Credits for $0.0000000001 each, since the price would rise as we cornered the market. So maybe we should bid a little lower at first so we can bid a little higher later. But arbitrageurs like us will bid at some positive value initially because of the potential for a squeeze and a hefty payoff at the end of the game. The government could also bid of course if the price goes too low.

    Getting back to your question about what is it really worth, the value depends on what the penalty is for being delinquent on tax. If it is very high (e.g. death penalty), then people will be willing to pay a little bit more just to avoid being squeezed out and held hostage later.

    I think that the Carbon Credits would trade for at least $0.0000000001, if the scheme above were implemented.

    WARREN MOSLER Reply:

    I had a value discussion with Charles Goodhart years ago, while discussing the euro currencies of that era (marks, francs, etc.)

    I made the point that if, for example, when you got paid by a govt if you had to get an electric shock at the same time, the govt would have to pay more than the private sector, or something along those lines.

    Charles them mused about how Europe would be divided into the high voltage and low voltage currencies.

    JKH Reply:

    thanks, zanon – power and potential is key

    thanks, esm – pedantic, yes. it happens as compensation when my brain goes through seasonal lows, which is often; but very good answer – looks like it has something to do with acting/betting on a view of taxation risk at the margin

    beowulf Reply:

    ESM, still trying to wrap my brain around your carbon credits as currency hypo, but I had three thoughts:

    First, if the government created a carbon credits market, credit holders would accrue a property interest so anything (or “almost anything, as we’ll see) a successive government does to make it “worthless” would trigger inverse condemnation lawsuits (“inverse” meaning that since the government took the property without going through the eminent domain legal process, the property holder must initiates legal action).

    Second, even if Congress imposed a tax payable in carbon credits, it would have to repeal the legal tender law at the same time, otherwise a tax payer could discharge his tax liability by paying the dollar equivalent of 100 carbon credits a year.

    Third, so how do you shut down the carbon credit market without the govt having to pay off the credit holder? With the tax code. Imposing a punitive tax on carbon credits would drive their value into the dirt with no one entitled to payment… except the IRS. Even before New Deal court decisions dramatically widened Congress’s authority to regulate interstate Commerce, Congress already had a free hand do so on a de facto basis via the tax code.
    An agreement, the Berne Convention, was reached at Bern, Switzerland, in 1906 to prohibit the use of white phosphorus in matches.[8] This required each country to pass laws prohibiting the use of white phosphorus in matches… The United States did not pass a law, but instead placed a “punitive tax” on white phosphorus-based matches, one so high as to render their manufacture financially impractical.
    http://en.wikipedia.org/wiki/Match#Re-formulation_to_remove_white_phosphorus

    Bonus pedantic legal point: “Conjecture” is what makes opposing counsel rise to say, “Objection! Assumes facts not in evidence.” :o)

  16. Tom Hickey Says:

    Warren: all i can do is use theory and practice and logic to keep hammering the obvious.
    seems that’s not enough for most…

    I am articulating objections from the left that if one uses FF to correct sectoral imbalances domestically or and leaves trade imbalances to the markets to resolve, then what has happened in the past that the extra funds created flow to the super-class, unbalancing both national politics and geopolitics. Without addressing this, I don not think that MMT solutions will be accepted by the left, even by those who understand them, based on feedback I get to my comments elsewhere.

    Bill Mitchell seems to recognize this and addresses it:

    My preferred indicators which address the “persistently large imbalances” across and within nations would include:

    1. Gap between full employment and the current official rate of unemployment (where I would measure full employment to be around 2 per cent but only include frictional unemployment – that is, people moving between jobs). These should be available at regional, national and international levels. There are “persistently large imbalances” in this area across nations.

    2. Extent of underemployment – many nations are now also enduring rising underemployment as demand-deficient economies fail to produce enough hours of work to match the preferences for hours by the willing labour force. Underemployment means loss of income and loss of potential output. There are “persistently large imbalances” in this area across nations.

    3. Broader forms of labour market exclusion including the discouraged worker effect (so participation rate falling during recession) as workers give up looking for work that is not there. Then we know there are many marginal workers that could be productive in given circumstances. We need to measure that group and articulate the reasons so that if they are amenable to policy relief, such interventions can be designed. There are “persistently large imbalances” in this area across nations.

    4. Extent of disability in the labour market so that policies can be designed which enhance the workplace design to allow those who are willing to work and can achieve some active role in the workplace. There are “persistently large imbalances” in this area across nations.

    5. Extent of corporate welfare built into budgets – so there is no reason for the private firms to receive any government support (whether it be risk free income flows from bond issuance or other tax lurks and subsidies etc. These need to be flushed out entirely because they largely are drains on the expenditure system. There are “persistently large imbalances” in this area across nations.

    6. Extent to which private firms obey regulations. These indicators would allow the government to prosecute more freely the corrupt private corporate behaviour. There are “persistently large imbalances” in this area across nations.

    7. Extent to which real GDP growth is consistent with environmental sustainability. Companies that go into poorer nations and pollute would be identified (for example, the mining companies in Papua-New Guinea). Advanced nations would be judged in terms of “green-consistent” growth and firms/industries that failed to meet green growth principles would be first of all fined then rendered illegal. There are “persistently large imbalances” in this area across nations.

    8. Extent to which trade between nations is fair rather than free. These indicators could drill down to the firm level to weed out companies that exploit child labour and kill unionists. Major US companies like Apple could be heavily fined for breaches of a “fair trade” doctrine. There are “persistently large imbalances” in this area across nations.

    9. Extent of poverty alleviation at poverty levels that actually mean something rather than the puerile $US1 a day or $US2 a day benchmarks used by the World Bank and other international institutions. Relative and absolute poverty indicators should be publicly available and updated regularly.There are “persistently large imbalances” in this area across nations.

    10. Extensive information about which public officials are being paid by private firms for favours etc. There are “persistently large imbalances” in this indicator across nations.

    So in terms of resolving the “persistently large imbalances” within nations and between nations these are just a few of the new indicators the G20 might usefully develop to guide them in serving the best interests of the people.

    http://bilbo.economicoutlook.net/blog/?p=13585

    Michael Hudson addresses this from the vantage of taxing away economic rent.

    Others attack it by attacking the entire neoliberal paradigm as the basis for national and global economics, and geopolitical project based on it that has politically independent international institutions in charge of managing the world economy through a command system in the hands of vested interests.

    Reply

  17. Tom Hickey Says:

    Neil: No they don’t. They have to fund their imports with equivalent exports.
    “imports arise due to the *volitional* decisions of citizens of a country to purchase a foreign product over a locally produced one”
    And have the scrip to pay for it. If you can’t obtain it with what you have to exchange then you don’t get the import. Period.

    Neil, the problem of the developing nations is both effective demand and investment. They need investment to produce and for many countries that means obtaining foreign exchange either by FDI or borrowing. They cannot bootstrap themselves into the modern world.

    Neoliberals know this full well and take advantage of the situation by backing dictators that skim off rent, live in huge palaces, sock away gold bars, and keep large Swiss accounts in their own names. The West calls this situation “stability.”

    Consumer demand never grows, and the economy never develops, the country’s resource are shipped abroad, and in the end there is no money left to service the loans because it has been stolen, so the IMG steps and imposes austerity, squeezing blood out of stones.

    This scenario applies in a slightly different fashion within the developed countries themselves, as we are now witnessing.

    Reply

    Neil Wilson Reply:

    I appreciate the dilemma, however bootstrapping has to be done with bootstraps, not with foreign cash if the country wants to be free.

    Alternatively it needs to be done cynically – get the investment and then default early.

    Reply

    beowulf Reply:

    I’ll outsource this one to Old Man Galbraith–

    http://abridge.me.uk/doku.php?id=the_nature_of_mass_poverty

    Reply

    Tom Hickey Reply:

    Good one, but it makes a major mistake. It is formulated from the perspective of Western culture and institutions, presuming that to be “reality.”

    I have been “outback” in the Third World. I have never seen happier people, and by our standards they have “nothing.” Happiness is not a matter of material resources.

    The problems arise when development enters. This tears apart traditional cultures and introduces a whole new set of convention and institutions with which they are not only unfamiliar, but also these conventions and institutions are alien to their way of life. The people begin to get unhappy very quickly when they find out they are poor and looked at as being backward.

    They are then told that because they are “backward” they will have to give up what they have always taken for granted. I don’t say “owned” because they don’t think of private property at all in the same way we do. That’s one of the “institutional problems.” They don’t have the same legal institutions, like titles to property, contract law, etc.

    To think that this is going to change by giving people jobs, and their exporting their stuff for stuff off ours that they want is just insane. It completely simplistic.

    BTW, I am not saying that people who are not enjoying the benefits of modern civilization should be deprived of them. I am just saying that there are humane ways to do it and inhumane ways. The inhumane ways have predominated to a great degree.

    It’s similar for our own ghettoes. The people writing out articles and formulating program in government offices have no direct experience of the people involved and their culture. As a result programs guaranteed to fail are imposed, and everyone is surprised when they fail. The, the victims get blamed and the situation festers inter-generationally.

    These are not primarily economic problems. They are chiefly sociological problems of many dimensions that run deep in the psyche. Failing to understand and approach people as people will never work to solve the “problem” as we define it from our perspective in a humane way.

    A good example is the total failure of addressing the situation of tribal Native Americans who adamantly refuse to assimilate into white America and want to preserve their heritage and traditions. Ronald Reagan was the first president to appoint a Native American to head the Bureau of Indian Affairs. How many years did that take? And it still isn’t working because the push is still toward assimilation regardless.

    Same in the Islamic world. The West doesn’t want — really, fears — real Muslims in charge there.The West only wants Western clones and is willing to use its “influence” to make it happen. The US was fine with Mubarak and Qaddafi, and still is fine with the rest who deliver the oil on time — until they are falling, then we were with the people all the time. Does anyone think the people are going to be fooled by that spin?

    Same in Chile. After Allende was democratically elected, the US found it necessary to destabilize Chile in order to stabilize it (Kissinger). Right.

    Why am I bringing this up? Because there seem to be the idea that neoliberal principles will work internationally to make the world work smoothly economically if only …. That is just nonsense based on the evidence. Neoliberalism is a scheme for command and control, masquerading as “freedom.” Neoconservatism is the political side of that coin, whose goal it is to turn the rest of the world into consumers “free” to consume.

    beowulf Reply:

    These are not primarily economic problems. They are chiefly sociological problems of many dimensions that run deep in the psyche. Failing to understand and approach people as people will never work to solve the “problem” as we define it from our perspective in a humane way.

    You know Tom you’d have to to go pretty far to find a American economist or public official more sympathetic to non-Western cultures (and by extension, your point of view) than JK Galbraith. I think his concepts of “accommodation” and “escape” are pretty deep stuff, and touch on the issue you raise. He seems to have made an interesting juxtaposition of subversive (education turns you against your family customs) and conservative (and motivates to grow up to be the richest man in the village!). Or maybe that’s just my read on it. o)

    WARREN MOSLER Reply:

    what about me?

    :(

    Tom Hickey Reply:

    Beowulf, it’s good that people like Galbraith and Sachs turning attention to this, but it’s going to take a new crop of economists that come from other cultures — China, India, Indonesia and Africa, for example — to get their heads around the problems. Islamic economics is also a completely different things, because of religious considerations like no interest. These are huge population areas, and they are unlikely to adopt Western models directly.

    Check out PROUT for example. It’s an outgrow of P. R. Sarkar’s vision. Sarkar was Ravi Batra’s mentor.

    Batra, Ravi, Progressive Utilization Theory: Prout – An Economic Solution to Poverty in The Third World (1989)

    However, it is the big names in the West that will focus attention on it here. Jeff Sachs is out with this today.

    Need Versus Greed

    Oliver Reply:

    A good discussion with South Korean economist Ha-Joon Chang on many things global. And another, shorter interview with the same guy form 2009 on The Myth of Free Trade and the Secret History of Capitalism , including a dissemination of the origins of neoliberalism and his take on policy reactions to the GFC, also with regard to poorer nations.

    I find he has a fairly good grasp of some fundamental relations in our current world order.

    Reply

  18. Ramanan Says:

    ESM,

    “Allow me to resolve this dispute by saying you’re both wrong.

    As long as a country has a freely floating currency, it can import as much as the people want (up until their price indifference point), and it doesn’t have to borrow or steal or even export.”

    That conjecture has absolutely no empirical evidence.

    Reply

    vjk Reply:


    That conjecture…

    have you read law, Ramanan ;) ?

    Agree, by the way, with a lot of your worries, for what it’s worth.

    Reply

    Ramanan Reply:

    Good to find support.

    “Conjecture” is also used in mathematical sciences.

    Here is what the fx markets did when Mitterand tried to be adventurous with fiscal policy in the early 80s … http://research.stlouisfed.org/fred2/series/EXFRUS

    The huge relaxation of fiscal policy deteriorated the balance of payments provoking rapid falls in the exchange rate of the Franc.

    Reply

    Oliver Reply:

    I don’t understand your point. You’re the one who claims the adjustments aren’t always immediate but the graph seems to support just that. I don’t see any MMTer saying that any such an adjustment would be popular with consumers (which is what I was labouring on about somewhere above). Or did Miterrand immediately reverse the policy? If not, what happened to unemployment? Did the drop in the exchange rate not work to counteract leakages to the external sector as the MMT would predict?

    WARREN MOSLER Reply:

    you’d think all the nations trying to depreciate their currencies would pick up on this and use fiscal adjustments
    but instead they go the other way

    Ramanan Reply:

    “I don’t understand your point. You’re the one who claims the adjustments aren’t always immediate but the graph seems to support just that”

    Yes it can happen any time the market wants. You – as the government do not know. Anyways the fall was huge!

    The point is that a controlled depreciation is different from a sudden fall. This point is so hard to get across!!

    Ramanan Reply:

    Plus whats the pretense here ? You in control of the currency or the foreign exchange markets ?

    You the debtor or the international money market ?

    ESM Reply:

    Ramanan,

    As that particular statement is a tautology, not a conjecture, it shouldn’t require additional argument, let alone empirical evidence (do mathematical theorems require empirical evidence?).

    However, because the English language is involved, I probably need to be more specific about definitions. I am defining the word “want” to mean “desire to acquire at the market’s asking price.” Under this definition, I do not “want” a Mosler Auto MT900s. If someone were to give me one, however, I would gladly take it.

    When you have a floating currency, anybody can exchange as much local currency for foreign currency as he “wants.” With a managed currency, the government does not allow this.

    The statement is logically similar to the claim that neither shortages nor gluts can occur in a freely traded commodity because the price will always move to a point where supply and demand are in balance.

    Reply

    MamMoTh Reply:

    A conjecture is an unproved statement, believed to be true (that is no empirical evidence – counterexample – has been found). A tautology requires no proof, but adds no information. Anyway economics is not mathematics, it’s not even a science.

    But I don’t see a contradiction in what you are both saying. Ramanan’s point is that the external sector is a constraint on what fiscal policy can achieve. Maybe we should look at the other variables (growth, inflation, unemployment) to see what really happened at the time, if a loosen fiscal policy achieved something or not.

    Reply

    Ramanan Reply:

    A bit more complicated Mammoth … a fiscal expansion increases national income, reduces unemployment but deteriorates the current balance of payments unless net exports somehow improves .. maybe due to fiscal expansion overseas.

    Of course, the complicated thing in the debate is that the other side doesn’t consider it a deterioration! Or may not even accept this …

    There may be some who may think .. okay can be solved … and one can put many schools of thought. For example it appears “intuitive” that a current account deficit of 3% is small.

    To really argue that its a hemorrhage in the circular flow of national income is a different game altogether.

    To confuse the matter even further, there seems to be some assumption that if the currency of import is one’s own, then its not an issue. To give you a background, its after so much of my complaining that this issue (being invoiced in a foreign currency) has started getting some attention.

    I brought that into the game because the proof “not a problem” seems to somewhat depend on the assumption of currency of the import invoice – examples given where its appears self evident that the foreigner is assumed to sell in the domestic currency.

    So many issues here and lots of battles to be won!

    ESM Reply:

    Yes, a tautology is something that is trivially true, but I’ve found that when you point out to someone that something seemingly complicated and controversial is actually a tautology, it can do wonders for comprehension.

    I’ve heard the claim that economics isn’t a science many times. I’m not convinced, but if it isn’t a science, it’s because the intellectual honesty of economists is undermined by the high stakes involved in economic questions.

    There is a disagreement between me and Ramanan. He claims that free trade is unstable and can lead to the impoverishment of a country if it is managed carefully (i.e. made unfree trade). I believe that as long as a government maintains an open economy with a freely floating exchange rate, and, in addition, understands MMT and acts accordingly to sustain aggregate demand, that free trade can only help.

    WARREN MOSLER Reply:

    i agree with you. with a few exceptions for strategic purpose.

    ESM Reply:

    Sorry, I meant to write:

    “He claims that free trade is unstable and can lead to the impoverishment of a country UNLESS it is managed carefully (i.e. made unfree trade).”

    MamMoTh Reply:

    “A bit more complicated Mammoth … a fiscal expansion increases national income, reduces unemployment but deteriorates the current balance of payments unless net exports somehow improves .. maybe due to fiscal expansion overseas.”

    OK, I’ve already admitted I didn’t really understand your take on this issue ;) Maybe you are making several points related to trade deficits at once and I get lost.

    My main concern (for now) is still about trade deficits between two countries which trade with each other using the US$ instead of their own sovereign currencies. A point which you also seem to think is of concern.

    So far I can’t say this is more clear to me after the discussion in this thread, unfortunately. Opinions range from those, like me, who think it is a problem because it can lead to a country getting indebted in a foreign currency to those who think it makes no difference whatsoever as long as currencies float freely in the market.

    I would like to know if the latter is the standard MMT view
    on this matter, and if so, why does the explanation that imports are a benefit to the US because to chinese ship too many goods to them in exchange of pieces of paper (reserves or tsys)?

    Ramanan Reply:

    Mammoth,

    This subject involves just too many things for things to be put in a straightforward manner.

    But ..

    “My main concern (for now) is still about trade deficits between two countries which trade with each other using the US$ instead of their own sovereign currencies. A point which you also seem to think is of concern.”

    is not really my concern :-).

    However its an important point, as nations are moving away from using the dollar as a “vehicle currency” and speaks something about the United States and the hegemony of the dollar.

    Its like proving somebody who claims “Since I can’t be defeated at home, I can’t get defeated” wrong by taking the topic away to situations where that somebody goes out of home and show its possible to defeat him/her and then come back to the situation where the somebody is home and can be defeated.

    Poor analogy but something along those lines.

    Its like if you use assumption A to prove B and it turns out A is wrong … likely B is wrong as well, not necessarily though.

    Doesn’t matter .. currency of imports .. except a bit for the US.

    Ramanan Reply:

    Hmm .. now you are promoting a “conjecture” to a “theorem” !

    Theorems have proofs and some run into zillions of pages such as Fermat’s Last Theorem.

    Maybe you are mixing axioms with theorems.

    At any rate, Economics is not Mathematics.

    Don’t see the relevance of other things.

    Axiom (Merriam Webster):

    … a maxim widely accepted on its intrinsic merit

    … a statement accepted as true as the basis for argument or inference

    … an established rule or principle or a self-evident truth

    I know of no nation which does what you say, so its far from self-evident what you are saying.

    Aristotle also thought that his law was self-evident, but after a while Galileo overthrew his theory.

    Reply

    ESM Reply:

    I know what a theorem is. My point was that theorems are proved with logic, not “empirical” evidence.

    Ramanan Reply:

    Scientists do all kinds of things to verify.

    Economics is not even close to physical sciences … in part this is because in the former, one can hardly do controlled experiments.

    Economics is not Mathematics … even Pythagoras Theorem can be verified even though the theorem belongs to mathematics and can be derived using mathematical logic.

    Your claims are far from being verifiable let alone logical.

    WARREN MOSLER Reply:

    is accounting a science?

    BFG Reply:

    Dawkins vs. Tyson

    What is MMTs philosophy?

    WARREN MOSLER Reply:

    MMT doesn’t have a philosophy

    Ramanan Reply:

    “is accounting a science?”

    Am sure some central bankers will be the best accountants.

    Its simply not only about accounting.

    Tom Hickey Reply:

    @ BFG

    1. See the controversy between Dawkins and David Sloan Wilson, for example.

    2. “What is MMTs philosophy?” is asking about MMT as an idea in the sense of a logical construct. MMT is a general description of monetary economics and its implications for macroeconomic and economic policy. It’s claim is that its description of monetary economics is a more accurate explanation of reality than other attempts. If that claim is true, then certain things follow from that wrt to macro and economic policy options. The further implication is that if one does not understand what MMT is describing — monetary operations — then it is neither possible to get the macro correct, nor the policy implications.

    If I have expressed this correctly, these are strong claims that impact not only the study of economics but also government economic policy. The implication is that what is required is not merely changed minds but also broad institutional change.

    Tom Hickey Reply:

    Warren: Is accounting a science?

    It must be a science. UConn offers a masters of science in it. :)

  19. Jeff65 Says:

    I didn’t plow through the entire thread, but an obvious consequence of understanding modern money is supporting policies to reduce / eliminate imports that are life and death necessities of your citizens.

    If terms of trade turn against your country, your citizens can survive without imported coffee and Playstations. They cannot survive without energy to produce food.

    When citizens can survive without imports, these terms of trade concerns vanish.

    Reply

  20. Tom Hickey Says:

    Ken Rogoff proposes that China buy US equities instead of debt?

    Global Imbalances without Tears

    Doctors have long known that it is not just how much you eat, but what you eat, that contributes to or diminishes your health. Likewise, economists have long noted that for countries gorging on capital inflows, there is a big difference between debt instruments and equity-like investments, including both stocks and foreign direct investment.

    So, with policymakers and pundits railing against sustained oversized trade imbalances, we need to recognize that the real problems are rooted in excessive concentrations of debt. If G-20 governments stood back and asked themselves how to channel a much larger share of the imbalances into equity-like instruments, the global financial system that emerged just might be a lot more robust than the crisis-prone system that we have now.

    Reply

    Oliver Reply:

    Sounds like what Mr. Waldman has been on about for a while.

    Reply

    Oliver Reply:

    et voilà

    Reply

    beowulf Reply:

    “Ken Rogoff proposes that China buy US equities instead of debt?”

    Ha ha, that reminds me of the letter Hudson wrote to the Chinese Premier last year:

    “The wave of the future is to avoid a buildup of foreign exchange at all. The main way to do this is an option that European governments have discussed: to use their excess dollars to buy out US investment holdings in their countries, at book value… Obviously, US holders of investments in China would complain that their holdings are worth more than the book value they have declared. Indeed, this is a major reason why current investors in China are trying to prevent the US Government from engaging in more anti-Chinese protectionist policies.”
    http://michael-hudson.com/2010/07/dollar-hegemony-and-the-rise-of-china/

    Reply

    Ramanan Reply:

    Though Rogoff’s strategy may be confused, China’s CIC does purchase US equities.

    http://www.china-inv.cn/cicen/about_cic/aboutcic_overview.html

    It holds assets worth around $300b+ and holds shares of US companies such as Morgan Stanley. (not sure how much of it is in equities)

    Rogoff’s confusion is the one shared in Washington which considers equities held by foreigners as “not debt”. This can be seen in some “Economic Report Of The President” of the US.

    However they consider Treasuries as debt. And also consider corporate bonds and all kinds of private sector debt instruments, mortgage backed securities held by foreigners as debt. So requesting China to purchase equities in this “logical” framework seems to somehow reduce US reduce its indebtedness to the rest of the world.

    i.e., switching from non-equities to equities would make the US less indebted to the rest of the world.

    Reply

    Tom Hickey Reply:

    The misunderstanding seems to arise from the term “debt.” The fact is that a net importer is “beholden” to the net exporter as the net exporter has provided the goods, regardless of whether the net exporter hold reserves, government securities, other financial assets, or real assets.

    What is happening is an exchange of ownership that can take a variety of forms, whether assets or goods. Trade, of course, involves an exchange of goods. If the net exporter does not desire goods, then forms of capital ownership are options.

    It would seem that in a global economy mutual exchange of goods and mutual ownership of assets is beneficial as long as it doesn’t become “unbalanced.” Think Monopoly™.

    Reply

    Tom Hickey Reply:

    There are two primary causes for both poverty and war
    1. Plunder by trade.
    2. Property rights law, as applied to nature’s resources and technologies, denying others their rightful share of what nature offers to us all for free.
    Those fundamentals are the heart of the enormously violent and wasteful world monopoly system. Well over half of our labors and resources expended adds nothing to our quality of life. We suggest these links [see link below] for a quick initial understanding:
    1. An honest capitalist economy in 170 words (expanded in the books mentioned below)
    2. From Plunder by Raids to Plunder by Trade
    3. My Eureka Moment: Understanding the Causes and Cures of Poverty and War
    4. The simplicity of eliminating poverty and war will stun you
    These books build that foundation in depth. You can download them at no charge or purchase hard copies.
    We are a cooperative publishing house. If you can produce a high-quality book explaining this world in your unique way, and if you are ignored by major publishers, we can publish it.

    The Institute for Economic Democracy: Sustainable World Development — Elimination of Poverty and Wars

    ESM Reply:

    LOL. Trade and property rights law cause poverty and war. Funny stuff.

    Ramanan Reply:

    The problem of maintaining equilibrium in the balance of payments between countries has never been solved since methods of barter gave way 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.

    - John Maynard Keynes, 1941.

    Only in the hypothetical world .. where the governments compensate the hemorrhage created by trade imbalance without “any problem” can trade be called an advantage.

    Its a case of mixing up a proposed world to the world we live in (with the assumption that the proposed world can run without a problem – MMT removes business cycles is what I read somewhere.)

    Leave commenting on property rights to Tom.

    Tom Hickey Reply:

    I’ll pass the property rights thing to the Native Americans and other indigenous peoples whose lands were “discovered.”

    What a bunch of BS to justify stealing.

    ESM Reply:

    Ramanan,

    When you quote famous economists and then misinterpret or twist their meaning, is that an example of an argument based on logic, or empirical evidence?

    Ramanan Reply:

    ESM,

    Didn’t twist the meaning. Why do you think so ?

    Its an empirical fact that nations who have been successful in international trade have been successful overall.

    Now, the free market doctrine has actually destroyed nations who are unable to grow domestically because increased demand causes further deterioration of trade.

    Now you can come up with the “government is silly” argument, and “government can” .. but that describes a hypothetical world .. not the world in which we live.

    The confusing point is that fiscal expansion helps in the short run … only in the long run if there is success in trade.

    So it doesn’t help the structurally weak nations. There is no smoke without fire in economics and no wonder international treaties and meetings are so much reported in the media.

    Its about the basic underlying topic I have talking .. open economy macroeconomics completely changes the game…

    So whats LOL about trade causing poverty and war ?

    WARREN MOSLER Reply:

    “Its an empirical fact that nations who have been successful in international trade have been successful overall.”

    name a few?

    US?, UK? Australia?

    Tom Hickey Reply:

    So whats LOL about trade causing poverty and war ?

    Talk to the folks in your neighborhood that had their jobs outsourced.

    I was just listening to a program on NPR this AM while driving and there was a prof on reporting how previously large manufacturing companies in his area were now just shells with a few execs, with all the workers overseas.

    WARREN MOSLER Reply:

    with policy that allows full employment people leave those jobs for other jobs that, on average, are better jobs

    ESM Reply:

    I seriously doubt that Keynes believed that there was more poverty and war relative to the counterfactual where there was no trade at all. I assume he is merely claiming that the failure to solve problems of economic dislocation caused by trade has been a leading cause of war and poverty relative to a different counterfactual where those problems have been solved (say, using the tenets of MMT?).

    Think of a world where countries were not willing to trade with each other. Don’t you think more wars would start, as the only way to get access to spices and minerals and food in other countries would be to open up those countries (or simply take them) by force?

    I wrote “LOL” because the guy Tom linked to had things exactly backwards. Blaming trade for poverty and war is a little like blaming food for obesity or blaming traffic deaths on the invention of the car.

    ESM Reply:

    “Talk to the folks in your neighborhood that had their jobs outsourced.”

    I just did. They told me that they’re grateful that they can afford to drive their Hyundais to Target and buy everything they need really cheap. They spend most of their time relaxing on their leather couches at home, watching netflix movies on their 60″ HDTV (coming over their Verizon FIOS connection of course).

    beowulf Reply:

    So whats LOL about trade causing poverty and war ?

    The name floating through brain is “Elvis Costello”.
    http://www.youtube.com/watch?v=1XYFJUP84lE

    Peter D Reply:

    The name floating through brain is “Elvis Costello”

    Who could use a healthy dose of MMT, being a gold-bug :)
    http://www.colbertnation.com/the-colbert-report-videos/364514/november-04-2010/elvis-costello (check the 1:50 mark)

    Ramanan Reply:

    For me the counter-factual doesn’t exists but I should stop cribbing on that.

    “Think of a world where countries were not willing to trade with each other. Don’t you think more wars would start, as the only way to get access to spices and minerals and food in other countries would be to open up those countries (or simply take them) by force?”

    Yes protectionism leads to retaliation. So doesn’t solve the problem again.

    The website Tom linked to goes into international trade. It doesn’t say “trade is bad” and end it there. I don’t think they are making such a silly statement.

    Many non-orthodox theorists understand that trade imbalance reduces domestic demand. So … if the external world doesn’t capture your markets, consumers will purchase more of domestic products and seeing this producers produce more, hiring more labour in this process and there is more consumption and there is a nice cycle …

    The leakage of demand can only be taken care of by relaxing fiscal policy. However, that process itself cannot go on forever is what I have argued in many of my comments and it doesn’t matter fixed or floating.

    In fact, governments deflate demand – quite opposite of proposals here – when the imbalance starts worrying them. So imbalances are even worse.

    Why is the imbalance between two regions of a nation not an issue (not even measured)?. Because the government makes fiscal transfers and equalization payments without anyone noticing.

    In the international case, there is no world government.

    Nations run into troubles with further balance of payments problems if they try too hard (usually with their currency) and do not attempt to go in that direction.

    If international trade is managed, nations can enjoy higher imports and exports because of higher world demand – its more advantageous to world trade.

    (But to argue against many people here with the view “imports are benefits” is not the easiest thing to do)

    MamMoTh Reply:

    “Its an empirical fact that nations who have been successful in international trade have been successful overall.”

    name a few?

    Germany, France, Japan, South Korea, Taiwan, and pretty much every other country that has been lifted from poverty in the past 40 years.

    Name me a few countries that have achieved that running a trade deficit (and not rulingg an empire like the UK and the US).

    WARREN MOSLER Reply:

    No time to do research so will shoot from the hip, and please correct me if my memory fails me.

    Italy before the euro was more prosperous than Germany, and probably Greece too. And I recall France is a net importer.

    And Germany’s best years were probably right after unification when it converted east german marks at 1 for 1 which was a massive shot of deficit spending that supported domestic consumption.

    And Turkey had maybe a decade of strong growth with high deficits.

    Japan, south korea, and taiwan are active lots of transactions and high gdp’s, but when i look at how people actually live it doesn’t look all that successful considering the size of their efforts.

    Ramanan Reply:

    Good point Mammoth.

    US, UK, and Australia are bleeding from the constraints imposed due to the external sector.

    US was once a creditor of the rest of the world and this gave it tremendous power. US is indeed good at international trade.

    the UK lost the whole world due to tremendous loss of competitiveness to all… and also the reserve currency status of the Sterling.

    Australia waits for the rest of the world to grow and then grows.

    WARREN MOSLER Reply:

    the US and UK and Australia and other are bleeding from unemployment and output gaps due to overly tight fiscal policies.

    what, specifically, is ‘tremendous power’ in this context?

    ESM Reply:

    “Name me a few countries that have achieved that running a trade deficit (and not rulingg an empire like the UK and the US).”

    Israel, Ireland, Italy?

    Tom Hickey Reply:

    Warren: with policy that allows full employment people leave those jobs for other jobs that, on average, are better jobs

    The jobs that were outsourced were relatively good paying manufacturing jobs. The jobs that being created to replace them are lower paying service jobs, so far anyway.

    WARREN MOSLER Reply:

    right, that happens with policy that restricts aggregate demand and creates unemployment

    Tom Hickey Reply:

    This just in wrt above cited, “2. Property rights law, as applied to nature’s resources and technologies, denying others their rightful share of what nature offers to us all for free.”

    U.S. Launches Mission to Privatize Water in India

    The U.S. Water Trade Mission to India to secure the entry of U.S.-based corporations into the lucrative Indian water market has Indian water activists seething.

    Ramanan Reply:

    Surely Italy and Ireland cannot be used as exemplary cases to illustrate “not a problem” right ?

    ESM Reply:

    I think they can. They only got into trouble because they gave up monetary sovereignty. Before that, they were doing pretty well.

    Oliver Reply:

    I don’t know much about Ireland, but Italy certainly has problems that have nothing to do with its monetary system. So the question can only be whether it managed to live up to the potential inherent in its highly complex and heterogenous political landscape better before or after the introduction of the Euro. One would also have to discount EU transfer payments before and after. And one would have to measure the feedback of the new monetary system on its political and other shortcomings and compare that to the old. So the answer inevitably becomes murky. Goddamn reality…

    Ramanan Reply:

    Not the easiest analysis to do on blog posts…

    http://bip.bancaditalia.it/4972unix/homebipentry.htm?dadove=corr&lang=eng

    Italy had positive current balance of payments for a few years before it joined the Euro.

    WARREN MOSLER Reply:

    and an economy already on the decline

    Oliver Reply:

    Looks like someone was dressing up to look good before the executive club committee. Italy is quite a bizarre place as far as I can tell from across the border. Also, northern Italy is worlds apart from the south. And hey, they voted for Berlusconi 3 times. Analyze that!

    Ramanan Reply:

    “and an economy already on the decline”

    That is without checking facts.

    MamMoTh Reply:

    Actually didn’t Ireland run a trade surplus for the last 30 years?

    Israel runs a trade deficit but is financed by the US to a large extent. Moreover Israel faced a currency crisis in the 80s.

    Italy is not a good example of anything but coffee and pizzas. The lira had been more unstable than the italian governments throughout history. I don’t think it is a coincidence that only after adopting the euro has a prime minister been able to finish his mandate.

    Reply

    ESM Reply:

    I don’t have time to delve into Ireland’s history, but I thought they were in current account deficit because I figured they must have a huge capital account surplus. The trade surplus is apparently a fiction created by multinational corporations using Ireland as a tax haven.

    Israel is not financed by the US to a large extent. It is to a small extent, and most of that is military aid. Israel’s economy of course faces unique problems with its need to spend so much of GDP on defense, which does very little to improve standard of living (aside from keeping the population alive).

    The fact that the Italian lira was a high interest rate, high inflation currency is not relevant for our purposes. What matters is their standard of living, and I think the Italian people enjoyed a relatively high one even during those years of having an unstable currency.

    Mr. E Reply:

    Additionally,

    What is the relationship between inflation and real growth?

    this should be easy to answer…

    WARREN MOSLER Reply:

    last i saw studies showed no negative consequences from inflation on real growth at least up to 40% levels of inflation. And, if anything, the evidence would suggest inflation might be a positive. its fighting inflation that hurts real growth, not the inflation itself, again, up to the levels of the study.

    inflation is a political problem, not an economic problem

    Mr. E Reply:

    I don’t mean the obvious breakdown tthat NGDP = (1+ Inflation)*(1+RGDP)

    I don’t mean the relationship between inflation and the volatility of real growth.

    I mean the relationship between the level of inflation and the level of real growth.

    Does high inflation preclude high real GDP growth in general? It does not seem to do this from a cursory examination of the evidence. And the literature is lacking…

    Mr. E Reply:

    All I found was this:

    http://ideas.repec.org/a/oup/cambje/v17y1993i1p79-107.html#download

    The not surprising Abstract:

    Factual evidence for the seemingly universal belief that low price inflation is necessary for high GNP growth is curiously lacking, maybe even felt to be unnecessary. This paper takes what is thought to be all the, not very voluminous, postwar factual data that are relevant and treats this data in a number of ways to find whether any convincing demonstration of the truth of this belief is possible. The paper concludes that it is not. (c) 1993 Academic Press, Inc. Copyright 1993 by Oxford University Press.
    Download Info

    ESM Reply:

    I’ve always felt that it wasn’t inflation per se which would cause problems, but uncertainty in inflation. If inflation were stable, then all prices and interest rates should adjust accordingly. Uncertainty in inflation causes people to build in large inflation risk premia in investments and to spend a lot of time and effort trying to protect their wealth. It seems the uncertainty might increase as the absolute level of inflation increases. If inflation averages 10% +/- 2% that doesn’t seem so horrible. 100% +/- 20% is much worse. Of course, it’s not at all clear that uncertainty should scale up linearly like that.

    Turkey had 80-100% inflation for many years, and the economy seemed to function adequately — not a paragon of efficiency, but better than most emerging market countries with normal rates of inflation.

    Mr. E Reply:

    I havent’ been to Italy in a decade but southern Italy was shockingly poor when I was there. I think northern Italy may have enjoyed a high standard of living, but I never spent any time there…

    The lira was a high interest rate, high inflation currency for decades. Economic Miracle? I report, you decide:

    http://en.wikipedia.org/wiki/Economy_of_Italy#Post-war_economic_miracle

    ESM,

    Doesn’t the entire Euro area total up for the national accounts? Yes, yes, there is significant “stickiness” to the spending/country specific national accounts. However, because the entire area is one currency, in some very real manner the spending situation for individual countries should be irrelevant.

    it may take time, but Irelands problems should one day be solved by Greek spending.

    Reply

  21. Tom Hickey Says:

    MamMoTh: My main concern (for now) is still about trade deficits between two countries which trade with each other using the US$ instead of their own sovereign currencies. A point which you also seem to think is of concern.

    Trade in the contemporary world is in terms of currency zones, dollar zone, euro zone, ruble zone, for example. Smaller countries have to compensate, as R. has been saying.

    Reply

  22. Mr. E Says:

    ESM,

    Ireland’s wealth is most certainly a fiction. Most of it is due to tax transfers in and out of the country. I have been on the ground that much there, but I would eyeball it at lower than England proper levels 80% of the US.

    At some point this dang GDP measure needs to be fixed. It sucks

    Reply

    ESM Reply:

    Yes, it’s all very complicated. There are no clean examples, which is one of the reasons why economists are all over the map in terms of the prescriptions they recommend (politics is another reason).

    That’s why I tend to limit my predictions to accounting identities. They always seem to come true – like when the budget deficit gets really large, all of a sudden the private sector starts saving like mad. Or when the trade deficit gets really large, all of a sudden, foreign governments develop a miraculous appetite for Treasury bonds.

    Reply

    Ramanan Reply:

    “but I thought they were in current account deficit because I figured they must have a huge capital account surplus.”

    Capital account balance doesn’t lead to current account imbalance. The causality is opposite.

    Ireland has a current account deficit but positive balance on trade in goods and services i.e, a trade surplus.

    Its good to know the definitions properly.

    “Yes, it’s all very complicated. There are no clean examples”

    Ever heard of Thirwall’s law ? Its from the PKE school and the neoclassicals haven’t even discovered it. Krugman found it but confused causalities.

    “Or when the trade deficit gets really large, all of a sudden, foreign governments develop a miraculous appetite for Treasury bonds.”

    Which country’s trade deficit and which country’s Treasuries. I assume you are talking of the US Treasuries?

    During the recession, the flight to quality didn’t cause increased trade deficits but instead the US trade deficit reduced. Of course one can call it an outlier but highlights causalities.

    Reply

  23. Ramanan Says:

    Here’s the law http://www-bcc.imf.org/external/pubs/ft/aa/index.htm

    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.

    Reply

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