Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances
Posted by WARREN MOSLER on April 12th, 2011
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> (email exchange)
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> Hi Warren,
>
> Do you have any thoughts on Stiglitz calling for a new reserve currency?
> Is this something you see as a problem or is Stiglitz getting it wrong?
>
Yes, my advice for Joe is to stop talking about these things entirely.
He’s in it all way over his head.
Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances
By John Detrixhe and Sara Eisen
April 10 (Bloomberg) — The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.
He doesn’t seem to grasp the notion that imports are real benefits and exports real costs, nor that the national debt is nothing more than dollar balances in Fed securities accounts that are ‘paid back’ by debiting the securities accounts and crediting reserve accounts, also at the Fed. No grandchildren writing checks involved.
A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York.
There is no such thing as weakening the ability of the US to make US dollar payments. All that’s involved is crediting reserve accounts at the fed.
The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficitwidened more than forecast in January to the highest level in seven months.
“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire.
He just assumes there’s some problem with a nation running trade deficits, not realizing it’s a sign of success- improved real terms of trade- and not failure.
“Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”
The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.
Deficits per se obviously don’t drive up interest rates.
“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”
Doesn’t matter with a currency issuer like the US, Japan and UK.
Japan’s ‘debt’ is nearly 3x ours, has had multiple downgrades, and their 10 year rate just ‘skyrocketed’ to about 1.3%, for example.
The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said.
Agreed, because nations don’t realize that their taxes function to regulate their aggregate demand, and not to raise revenue per se. And seems Stiglitz doesn’t get it either.
It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”
It’s unfair for a lot of reasons, except that one.
April 12th, 2011 at 9:34 am
Sometimes people play stupid to get you over a barrel…………I hate being right all of the time and never getting paid for it but that’s what happens when you refuse to play the game by the rules……..
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April 12th, 2011 at 9:48 am
I would like to see a post one day about this “global reserve currency” thingamabob that many insist is this great advantage that the power elite conspirators in the US engineered.
Isn’t a reserve currency simply a means of settlement that countries agree upon for international trade? Bilateral trade can agree upon any settlement conditions they want (Euros, RMB, commodities). And nothing stops a group of nations from agreeing upon other settlement among themselves (I am talking structurally, not politically)
And if the currency freely floats, there is some counterbalance to overt manipulation. I have this feeling that the calls for a global reserve currency are an attempt to impose some gold standard or other operational constraint to global trade.
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Ramanan Reply:
April 12th, 2011 at 10:08 am
Deep question. Do you know why Gold Standard/Gold Exchange Standard/Bretton Woods came into place ?
Do you think the present system is a non-system ?
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beowulf Reply:
April 13th, 2011 at 3:47 pm
Deep question. Do you know why Gold Standard/Gold Exchange Standard/Bretton Woods came into place ?
Because if the US Government gave an award for achievements by a public official while moonlighting as a traitorous spy, surely it would go to Harry Dexter White.
The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes’s idea thus: “We have been perfectly adamant on that point. We have taken the position of absolutely no”… But Harry Dexter White ensured that the US could never lose. He awarded it special veto powers over any major decision made by the IMF or the World Bank, which means that it will never be subject to the Fund’s unwelcome demands. The IMF insists that the foreign exchange reserves maintained by other nations are held in the form of dollars. This is one of the reasons why the US economy doesn’t collapse, no matter how much debt it accumulates.
http://www.monbiot.com/2008/11/18/clearing-up-this-mess/
NSA cryptographers identified Harry Dexter White as the source denoted in the Venona decrypts at various times under the code names “Lawyer”,”Richard”, and “Jurist… Other Venona decrypts revealed further damaging evidence against White, including White’s suggestions on how to meet and pass information on to his Soviet handler. Venona Document #71 contains decryptions of White’s discussions on being paid for his work for the Soviet Union.
http://en.wikipedia.org/wiki/Harry_Dexter_White
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MamMoTh Reply:
April 12th, 2011 at 10:21 am
The dollar standard is a constraint to everyone but the US.
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ESM Reply:
April 12th, 2011 at 10:46 am
There’s no constraint to anyone. Anybody can buy dollars on the open market in order to make purchases of goods and services denominated in dollars, and anybody who receives dollars in exchange for the sale of goods and services can sell those same dollars on the open market.
Any accumulation of dollar reserves is voluntary.
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MamMoTh Reply:
April 12th, 2011 at 11:14 am
Of course anyone can buy dollars in the open market.
That’s the constraint the US doesn’t have.
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Tom Hickey Reply:
April 12th, 2011 at 11:08 am
I suspect a fixed rate lurking in there. The issue seems to be imbalances resulting from floating rates through dollar depreciation. How do you address this other than a fixed rate or a much wider basket of floating currencies in which the USD plays a minor role? There is some suggestion of making gold part of that basket for stability.
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WARREN MOSLER Reply:
April 12th, 2011 at 1:19 pm
right, it’s the new keynesian fixation with keynes’s bancorp plan at bretton woods, or something like that
if it’s possible, the new keynesians are worse than the monetarists
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Roger Erickson Reply:
April 13th, 2011 at 8:11 am
Exactly. Behind every banking lobby argument it seems that all roads lead to the mythical Holy Grail of price & value stability .. which …. does …. not …… exist … in ….. a ….. dynamic ….. world.
Strangely, the invisibile hand of the market was trying to keep that text from even issuing from a keyboard. Like most simple myths, this one’s not desirable either. Ask anyone if they’d really like to halt all change in the world.
Most people with a non-subliminal IQ consider & reject this ~age 14, after watching or reading some SciFi story that’s over 100 years old. How does this keep happening?
WARREN MOSLER Reply:
April 12th, 2011 at 12:51 pm
a reserve currency is nothing more than a foreign currency financial asset a govt. holds ‘in reserve’ for rainy days.
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pebird Reply:
April 14th, 2011 at 1:58 am
That’s great – so what does the US use as its reserve currency? The USD.
I don’t see any operational need for a global reserve currency – I see (above) lots of political needs – I don’t deny the reality of political needs. The statement “The USD is the world’s reserve currency” is a political statement, not an economic statement. So, what political program is Stiglitz lobbying for with his new global reserve currency scheme?
I vote for Martian zoltars as our new galactic reserve currency.
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April 12th, 2011 at 11:42 am
How about an HONEST currency?
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April 12th, 2011 at 11:43 am
Hey guys,
I wasnt sure where to post this. Im newish to MMT. Ive been reading your blog and Warrens for about 3 months now….plus other MMT writings, so I know some. I’m no economist or financial expert by any means. I’m a biologist a few years out of college but after coming across MMT, I’ve picked up a new hobby…arguing with non-MMT folks. I always suspected something like MMT to be true because my dad always made it clear to me that we arent on a gold standard. Anywho….I am currently arguing with someone and this is where we’re at. Im no expert so I figured Id ask you guys for any response to their question as it seems something you guys could answer. Thank alot and keep up the good fight guys…Im doing my best here in Jersey. :D
Heres their question/point to me:
“I’ve engaged MMTers before. And then they get into how deficits translate into private sector savings and that nonsense. But what I never had answered is if MMT was true, why is there no correlation between marginal tax rates and inflation? The argument I hear is that the government taxes in order to withdraw funds from the system and prevent inflation. But never has any connection been made between the tax rate and the inflation rate.”
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Tom Reply:
April 12th, 2011 at 11:43 am
And when I say your blog and Warren’s I actually mean, “reading your blog, and Mike’s” ha
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WARREN MOSLER Reply:
April 12th, 2011 at 1:21 pm
I wouldn’t expect to find any correlation between marginal tax rates and inflation. am i missing something?
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Tom Reply:
April 12th, 2011 at 2:31 pm
Thanks warren. Thats why I had to ask. I didn’t understand where you would expect to see that correlation.
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Ed Rombach Reply:
April 13th, 2011 at 9:42 am
I think supply siders would say that reducing marginal tax rates increases incentives to work, save and invest and thus brings forth supply which constrains inflation.
Of course the flip side of th argument in the demand model says cutting marginal rates leaves more currency in circulation which provides scope to unleash inflation.
Perhaps it depends on which force, supply or demand, is more dominant at the moment.
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WARREN MOSLER Reply:
April 13th, 2011 at 11:47 am
yes, but unfortunately they say decreasing rates brings in more revenue (which it might) which will reduce the deficit (which it might) implying that deficit reduction is a good thing, rather than what ends the cycle.
Tom Hickey Reply:
April 13th, 2011 at 2:17 pm
The relevant question is about demand. Will reducing marginal tax rates increase NAD or will those receiving tax relief save the bulk of it rather than consuming or primary investing.
The confusion arises over the ambiguous meaning of “investment,” real v. financial. Primary (business) investment involves expenditure and generates income >effective demand, while secondary (financial) investment is a form of saving. One financial assets gets exchanged for another. Unless expenditure on consumer goods or capital goods results, no effect on the real economy.
Ed Rombach Reply:
April 14th, 2011 at 8:32 am
WM: “yes, but unfortunately they say decreasing rates brings in more revenue (which it might) which will reduce the deficit (which it might) implying that deficit reduction is a good thing, rather than what ends the cycle.”
Right…so time to cut taxes again. BTW, supply siders I know, and I know a lot of them, seem more or less divided on the issue of balanced budgets and deficit reduction.
save america Reply:
April 12th, 2011 at 4:38 pm
“I’m a biologist a few years out of college but after coming across MMT, I’ve picked up a new hobby…arguing with non-MMT folks.”
NOOOOOOO! Turn back before it is too late! TOM NOOOO! The gates of hell are about to consume you! For years I have chastised Warren because we are all going to die from hayflick limits and cell death and other REALLY important stuff that we should be researching, debating, etc etc I have criticized him for investing in car companies and finance grads instead of biotech grads and genetics folks. I have ESPECIALLY chastised him because all this debate of MMT and money and finance back and forth is taking human borg AWAY from where thier minds need to be focused. You are PROOF tom of what I have worried about for a long time. Warren is in his 60′s now, he already had a heart episode requiring hospitalization, he is not going to be with us much longer relatively speaking, and I tell him perhaps if he had got more human brains on biology and such instead of monetary memes, maybe he could live forever. Tom, after we are all immortal, then lets turn all of humanity onto money stuff and allocation of resources and such, but to take a biology scientist like you doing really good stuff and spend a lot of your time now on MMT or any monetary meme, I have failed, please forgive me dear Jesus :( ;)
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Roger Erickson Reply:
April 13th, 2011 at 8:25 am
SA,
I’m a biologist by training too, and must encourage Tom. We need more people with real brains, perspectives & curiosity to be asking WTF is wrong with economic policy.
Reality is that every process is too important to be left to the presumed process-owners. Yet that’s what we’ve done too much of in this country. If you ask most specialists in other domains, you’ll find a naive faith that people with advanced degrees & Nobel prizes & holding endowed university chairs ACTUALLY KNOW WHAT THEY’RE DOING!
If anything, however, biology is well positioned to examine why the heck we don’t enforce logical consistency across all sub-domain strategy & policy. We obviously cannot afford to leave nationwide coordination of net policy to the likes of Larry Summers & the Harvard Dept of Suicidal Economics.
You better pray – for your kids & grandkids – that more people from other professions step in & demand higher professional standards from their cohort politicians, economists & citizens.
Because what we have been seeing sure as hell doesn’t make any sense at all.
Please do NOT be defeatist. What Warren started has to proceed.
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save america Reply:
April 13th, 2011 at 9:04 am
Defeatist? The future is so bright, I gotta wear shades. At the convention, they have this group GOOOH – get out of our house, to replace current politicians, you can GOOG them. I asked them about this:
http://www.fcpp.org/publication.php/1134
Which states basically that we have not scaled our democracy properly, and need 5000 US congressmen instead of roughly 500, I got literally laughed out of the room.
I asked the guy running GOOOH why is it so funny, that there are too few people in US congress – what 535? being influenced by money and power. He said we need term limits, no one can serve more than 1 term.
Judge napolitano said we need to stop direct elections of US congress and let state congresses vote in US congressmen, that would create a better checks and balances system.
We got US States like alaska threatening succession.
So let me ask you Biology dude, to really FIX what is broken in the USA, how likely do you think in the very near future we are going to have term limits and an expansion of 500 US congress to 5000 US congressmen, and voting on them by the states instead of by the people? If you are honest, you will admit that aint gonna happen, it would require a TOTAL reset and change of our US government in ways that current forces will “automatically stabilize” against! :) So the titanic carries on towards the iceberg.
In Weimer Germany, the biologists and rocket scientists who kept plugging away at thier fields and being innovative got offered jobs by the conquerors (USA and europe giving jobs to nazis)
But Thyssen, the guy that funded hitler and then got locked up by him, he didn’t have a big role after the downfall of german government from what I read.
So I would advise to you, be the best biologist you can be, because if/when the financial system blows up, that you are good biologist will ensure your employment in the future with whatever government is in place, whatever conquerer (china?) takes us over, or whatever financial system (soros/inet/gold) is instituted, no one will give a flip that you spent a lot of time worrying about a fiat system or a gold backed system, that won’t get you a job in the new world order ;) I love the USA, a lot of good came out of her, but like the last episode of star trek, all good things must come to an end, and a phoenix rises up out of the ashes somewhere else. You think the titanic can be turned, I think we have to take some lifeboats and make a few new titanics somewhere else.
save america Reply:
April 13th, 2011 at 9:09 am
PS, the founding fathers didn’t go back to europe and try to fix from within, they fled that oppression and started anew somewhere else, so I got history on my side. Warren aint in Washington DC trying to fix from within, I have told him to move there years ago and start being seen all over the beltway, nope, he already abandoned the titanic and is down in his pirate cove in the USVI sailing his pirate yacht ;)
April 12th, 2011 at 12:00 pm
[...] Imports are real benefits and exports real costs April 12, 2011 TC Leave a comment Go to comments What does Warren mean when he writes: [...]
April 12th, 2011 at 12:30 pm
Tom,
To correlate the tax rate with the rate of inflation requires a few other variables. What is the unemployment rate? Are we net importing or exporting? What is GDP doing? Are we running a surplus or a deficit? Is the economy bulling along or is it stagnant? That is why you do not see a direct correlation.
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Tom Reply:
April 12th, 2011 at 2:25 pm
Thanks, and thanks warren
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April 12th, 2011 at 2:04 pm
Warren,
I think the constraint is mainly that oil is priced in US $. After ’71 the whole bretton woods idea went ka-put b/c no more gold was involved.
How do you feel about oil being priced in a different currency?
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WARREN MOSLER Reply:
April 12th, 2011 at 4:04 pm
doesn’t matter what currency it’s priced in. just a numeraire
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Mario Reply:
April 12th, 2011 at 7:14 pm
right but what about the fact that china needs to spend more of its own dollars to use oil? Doesn’t that create more inflationary pressures on any currency less valuable than the US $?
What if oil was priced in Euro’s for example? Wouldn’t we here in the US find gas even higher b/c our currency is less valuable than the Euro currently…wouldn’t this cause ripple effects via cost-push inflation here in the US? Couldn’t this happen in other countries now?
I heard that this was one way we took down the USSR by jacking oil prices up and basically inflating their currency into destruction b/c they needed oil too of course.
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MamMoTh Reply:
April 12th, 2011 at 10:09 pm
It does matter. The US can buy imports through seigniorage. The rest of the world can’t.
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Mario Reply:
April 12th, 2011 at 11:09 pm
what do you mean by “seigniorage” exactly? We are a huge consumer so of course people are going to come to us to sell their stuff first. I don’t understand.
MamMoTh Reply:
April 12th, 2011 at 11:27 pm
printing US dollars.
WARREN MOSLER Reply:
April 13th, 2011 at 11:42 am
aka, deficit spending
WARREN MOSLER Reply:
April 13th, 2011 at 11:42 am
lots of countries run trade deficits and don’t have debt denominated in external currencies- Australia, UK, etc
MamMoTh Reply:
April 13th, 2011 at 11:54 am
I think Ramanan mentioned Australia’s debt being partially in dollars.
in any case there is only a handful of countries that can do it, maybe about 10 out of 200.
Ramanan Reply:
April 13th, 2011 at 12:08 pm
“I think Ramanan mentioned Australia’s debt being partially in dollars.”
What I said was the Australia’s imports are priced more in USDs than AUDs.
The more general statement about debt is difficult to make since banks use derivatives for risk management related to currency.
Ramanan Reply:
April 13th, 2011 at 12:09 pm
“lots of countries run trade deficits and don’t have debt denominated in external currencies- Australia, UK, etc”
I would imagine you are talking of the UK government sector.
Both BoE and the Treasury have liabilities in other currencies.
WARREN MOSLER Reply:
April 14th, 2011 at 7:15 am
the govt. doesn’t ‘run a trade deficit’ per se.
any trade gap is the net of the macro economy.
yes, the govt may have some foreign liabilities for a variety of reasons
but they do their spending in local currency.
Neil Wilson Reply:
April 13th, 2011 at 12:22 pm
The amounts of UK foreign debt are not material
They are held solely as part of swap transactions or notional liability of Special Drawing Rights and there are more than covered by the UK’s foreign reserves.
MamMoTh Reply:
April 13th, 2011 at 12:32 pm
Ramanan: What I said was the Australia’s imports are priced more in USDs than AUDs.
ok, my mistake. sorry.
Roger Erickson Reply:
April 13th, 2011 at 8:37 am
Right. If every country could buy oil using it’s own currency, Warren would be right. The fact that they MUST first get $US before placing an order for oil puts a bookkeeping requirement on them that bankers can consistently milk pennies out of.
If buyers are nimble & smart, that’s not much of a burden, but it can get sizable to the extent that oil buyers are a day late & a dollar short (pun intended). All depends on how freely Fx rates float, and what worldwide supply of $US is.
The Saudi’s, understandably, prefer the simpler accounting of doing all their transactions in $US. I would too. Seems to me, however, that they could make world markets a bit more stable by simply taking payments in any currency whatsoever.
That would have removed much of Bernanke’s desire to do the massive currency swaps of the last few years. Those currency swaps, alone, make a total mockery of the current “balanced budget” debate. It’s proof positive that the entire economic policy process is a complete sham.
Actually, we need everyone’s granmama to go down to DC, slap their Congressperson, and say “Don’t you EVER try to pull that kind of idiotic crap on us again! We sent you down there to serve the people of your state, not parade around like a mindless peacock.”
Where the heck is AARP when their country needs them?
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WARREN MOSLER Reply:
April 13th, 2011 at 11:44 am
most all countries can buy all the oil they want with their own currency
Ramanan Reply:
April 13th, 2011 at 12:03 pm
“most all countries can buy all the oil they want with their own currency”
Any proof for this ?
WARREN MOSLER Reply:
April 14th, 2011 at 7:13 am
foreign oil companies continuously sell gasoline and other products all over the world in exchange for local currencies.
the dollar prices are the posted prices, instantly translated into a price for most every country in the world via the fx markets.
in fact, if the saudis are ‘pricing in dollars’ it means they will take any currency at the current fx equiv. to dollars, net to them from their bank.
Mario Reply:
April 13th, 2011 at 12:23 pm
“lots of countries run trade deficits and don’t have debt denominated in external currencies- Australia, UK, etc”
yes but they still need more of their own currency to purchase oil priced in US $ assuming their currency is less valuable.
“most all countries can buy all the oil they want with their own currency”
well it’s not so much which currency they PURCHASE the oil in, it’s the currency that PRICES the oil. If oil is $100 in US $ that’s a big difference than $100 in pounds or euros for example. They can still pay in their currency or at least at the proper conversion…that’s not a big deal other than the exchange fees which Roger brings up…but my point is more that countries with a less valuable currency than the US $ like Brazil, China, India, Russia, Australia 1 year ago, etc. find that oil being priced in US $ causes cost-push inflation in their own economies. It’s the pricing mechanism.
Don’t you agree with this? And if not why?
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MamMoTh Reply:
April 13th, 2011 at 12:54 pm
That’s not the problem. Brazil and Australia had their currencies revalued wrt the dollar. So the cost-push inflation has been less in their case than for the US.
The question is whether you can buy imports with your own currency that you can print or not.
WARREN MOSLER Reply:
April 14th, 2011 at 7:20 am
and the answer is that everyone does, so you must be able to?
Mario Reply:
April 13th, 2011 at 2:12 pm
“That’s not the problem. Brazil and Australia had their currencies revalued wrt the dollar. So the cost-push inflation has been less in their case than for the US.”
so is it just as simple as “revaluing” your dollar to the US $? How does that work though? If so then oil could be priced in any currency and all we would need to do is “revalue” our dollar to that currency assuming we wanted to do that.
But what does that mean to “revalue your currency”? What actually happens in that process?
“The question is whether you can buy imports with your own currency that you can print or not.”
why couldn’t you? Isn’t that just a decision of price points that the seller determines? If you want to buy it for $5 in your currency, I’ll either charge you $5 in your currency or the $5 equivalent in my currency. I thought this is what goes on day in and day out…am I missing something?
pebird Reply:
April 14th, 2011 at 2:29 am
Ramanan:
Interesting point about North Korea and Cuba. Made me wonder why you can’t play the FX market in Cuban Whatevers and North Korean Bibbidi-bobbidi-boos.
Are those currencies not traded because the countries choose not to, or because their currencies would not be accepted by any FX trading exchange?
Is IMF or some other institutional blessing needed to place one’s currency on an exchange? I would think if someone had a pile of Cuban Whatevers, they could just make a market in it – I’m not sure.
I am a little embarrassed to admit I don’t know the answer to this.
But your point about convertibility made me think that if you don’t have access to FX markets, you aren’t globally convertible.
WARREN MOSLER Reply:
April 14th, 2011 at 7:57 am
the ‘worst case’ for any nation is that it has to earn the fx it needs to buy imports by exporting.
that is, exports are the cost of imports
WARREN MOSLER Reply:
April 14th, 2011 at 7:18 am
only if their currencies happen to be depreciating vs the dollar would their local price rise faster/fall less than the crude price in dollars.
that’s the case for prices in depreciating currencies in general.
and note that lately they’ve mostly had appreciating currencies and have been taking extraordinary measures to stop them from appreciating.
Ramanan Reply:
April 13th, 2011 at 1:16 pm
“The amounts of UK foreign debt are not material
They are held solely as part of swap transactions or notional liability of Special Drawing Rights and there are more than covered by the UK’s foreign reserves.”
No they are not immaterial if one keeps claiming that the UK has no liabilities in foreign currency.
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Neil Wilson Reply:
April 13th, 2011 at 1:27 pm
Ramanan,
That comes from the data at the Office of National Statistics, so if you wish to query the finding I think you need to come up with some facts to justify your position.
Otherwise it can be rightly dismissed.
Peter D Reply:
April 13th, 2011 at 1:40 pm
Ramanan, I asked you a question on interfluidity thread, which was probably the wrong place to put it:
why do you think the IMF treaty any different (in terms of refuting MMT validity) from all the other self-imposed constraints that MMTers discuss, such as no-overdraft etc?
Ramanan Reply:
April 13th, 2011 at 1:44 pm
“That comes from the data at the Office of National Statistics, so if you wish to query the finding I think you need to come up with some facts to justify your position.”
But the fact is in Liabilities, you have “Due To … ” in other currency.
I even know where to get the data …
Table 1.2I @http://www.statistics.gov.uk/downloads/theme_economy/fin-stats-apr-2011.pdf
…Liabilities in foreign currency …
which is different from saying NO debt in foreign currency.
WARREN MOSLER Reply:
April 14th, 2011 at 7:24 am
And I’d guess the non govt sector’s foreign denominated debt dwarf’s the govt’s.
And periodically causes all kinds of stress
Ramanan Reply:
April 13th, 2011 at 2:02 pm
Peter D:
“why do you think the IMF treaty any different (in terms of refuting MMT validity) from all the other self-imposed constraints that MMTers discuss, such as no-overdraft etc?”
Sorry didn’t check the thread after that .. almost forgot the post …
I do not understand what a self-imposed constraint is but it is highly important to distinguish between:
Prescriptive and Descriptive
Yes the external sector is a constraint … thats what I have been arguing … not even the United States is beyond the Balance of Payments constraint whatever one asserts.
Lets go into a deep question. Why do you think that nations took time to gather at Bretton Woods ? This is because in order for free trade to work, currencies should be made convertible. And this should happen at all levels including the official level. Thats why Article VIII, Section 4 is called “Official Convertibility” …
Try to ask what “settlement” really means. If I pay in my IOU – it is hardly a “settlement”.
Its true nations can become non-members of the IMF .. examples being Cuba and North Korea….
but leaving itself has laws on settling debts …
But once you leave you have to make your currency acceptable by hook or crook .. doesn’t mean that the Article VIII, Section 4 makes acceptability automatic, but it is something …
And in that case it becomes truly non-debatable that imports are on credit.
Cuba and North Korea run currency boards …
Of course .. nothing prevents a nation from stopping interacting with the world but that is not anyone wants to see…
A closely related concept is Graziani’s concept of money :
i) since money cannot be a commodity, it can only be a token money;
ii) the use of money must give rise to an immediate and final payment and not a simple
commitment to make a payment in the future; and
iii) the use of money must be so regulated as to give no privilege of seignoriage to any agent
MMTers get it backward … they say … foreigners sell you stuff for worthless pieces of paper .. its backward … you should ask .. why would they do that … and hence international trade cannot happen so easily … hence convertibility all the way to official convertibility…
WARREN MOSLER Reply:
April 14th, 2011 at 7:27 am
govts have made lots of silly monetary arrangements over the years.
and gotten a lot of things backwards.
and understanding what a self imposed constraint is should help your understanding a lot.
Peter D Reply:
April 13th, 2011 at 2:26 pm
Ramanan, thanks. That’s right, prescriptive and descriptive, agreed.
If I understand you correctly, you are saying that even if the IMF treaty did not exist, it – or something similar – would have to be invented. Otherwise international trade would grind to a halt or something like that.
This is a counter-factual that is hard to prove or disprove, I guess. At least with “no bonds” proposal (which is also a counter-factual) we have some evidence like QE (an approximation to total debt monetization) but with this we’d need some of the prosperous nations (Cuba and North Korea don’t count) to leave IMF and see whether they can trade as before… Seems to me that what other people on these forums (Billy, Neil Wilson etc) are saying is that even if US and others left the treaty tomorrow it would not change much.
Ramanan Reply:
April 13th, 2011 at 4:02 pm
Peter D,
Good points.
However my transfixation with Article VIII, Section 4 is to disprove the assumed (and explicitly stated) non-convertibility of the liabilities of the US Federal Government (or any other government). This assumption (non-convertibility) is aboslutely crucial in all the stands regarding external trade whether one realizes it or not.
Well, you are right about counterfactuals but the need to “settle” is very important.
I will try to think about withdrawal from IMF’s membership – it seems its really easy.
On the other hand, many nations’ debt sometimes contain an “event of default” clause – that withdrawal of membership from the IMF is an event of default. (though these bonds are in foreign currency).
the clause contains “…ceases to be a member of the IMF or ceases to be eligible to use the general resources of the IMF….”
Venezuela had threatened to withdraw from the IMF in 2007 but later realized that it would lead to an event of default!
However it proves an important point that the membership of IMF has some value, given that the IMF is the lender of the last resort… a recent experience was that Mexico was bailed out in 2008 by the IMF.
Independent of this, endemic current account deficits are disastrous … It has nothing to do with government not defaulting in its own currency (if one forgets the IMF convertibility clauses)… endemic deficits just provoke rapid falls in the exchange rate at some point making the currency less and less acceptable in international trade.
One has to go back to basics … which currency imports are being done etc … if you are not a member of the IMF, you have to fight hard to pay in your own currency.
WARREN MOSLER Reply:
April 14th, 2011 at 7:41 am
i’ve seen a lot of hard fighting over oil, but not so much over wanting to pay in your own currency
Peter D Reply:
April 13th, 2011 at 4:33 pm
Ramanan.
I guess the MMTers claiming non-convertibility should be careful and say that in general case fiat currencies are non-convertible while in specific cases that we have there is some theoretical convertibility involved (using Scott Fullwiler’s dichotomy). Again, seems to me, this is similar to saying that in general one does not have to issue bonds contrary to all specific cases.
Now, if countries like Mexico and Venezuela used the fiat currencies to their full potential and did not depend on foreign currency debt, I wonder whether they’d be as worries about “defaulting” on their IMF membership. Randall Wray touches on some of these issues here (e.g., starting from page 11)
WARREN MOSLER Reply:
April 14th, 2011 at 7:44 am
how about, for all practical purposes they are non convertible
Peter D Reply:
April 13th, 2011 at 4:36 pm
Also, Ramanan, I view CAD as a problem as long as it negatively affects domestic employment and I know of at least one MMTer who agrees -Marshall Auerback. In other words, all the talk about imports being benefits is contingent on full domestic employment, otherwise cost-benefit analysis needs to be reconsidered.
Ramanan Reply:
April 13th, 2011 at 5:19 pm
Yes Marshall agreed with me long back here ;-)
http://bilbo.economicoutlook.net/blog/?p=10389&cpage=1#comments
On convertibility, there are various levels, current account convertibility(“market convertibility”), capital account convertibility, and “official convertibility”.
I have enough references to show where it is asserted that “sovereign” governments does not promise to pay in anything except its IOUs.
Nations such as Venezuela run into borrowing in foreign currency because they have balance of payments problems. Because they can’t import in their own currency. Even if they import, capital outflows lead to banks’ foreign indebtedness becoming large, and the government reverse these flows by taking the debt on its books.
It is not correct to say that if someone sells your currency, another foreigner needs to buy it. Banks have to make the fx market and provide bids and asks and may not be able to cover their positions. They become indebted to their correspondents abroad in foreign currency.
Here check this – THE FUND’S ROLE REGARDING CROSS-BORDER CAPITAL FLOWS http://www.imf.org/external/np/pp/eng/2010/111510.pdf see Figure 1 especially “bank flows”, “other investment flows”.
WARREN MOSLER Reply:
April 14th, 2011 at 7:21 am
I didn’t say that, I said they don’t spend fx for imports. Just look at all the imports bought domestically in local currency. everywhere.
April 12th, 2011 at 2:05 pm
Speaking of the famous and noted not having a clue, I sent I sent the post Letter to Politician as an Email to Laurence J. Kotlikoff.
In case you don’t know him, his web site says he “is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, a columnist for Bloomberg, a columnist for Forbes, and a blogger for The Economist. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977.” Whew!
His response was, “Paying our bills with new money will lead to hyperinflation at some point. best, Larry.”
This ignorance of Monetary Sovereignty, by even noted economists, together with the usual cop-out “at some point,” indicates why our nation is in such trouble.
Rodger Malcolm Mitchell
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Mario Reply:
April 12th, 2011 at 2:06 pm
wow
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pebird Reply:
April 14th, 2011 at 2:06 am
Yes, we must pay with old money only. Old, old grubby money.
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April 12th, 2011 at 2:06 pm
I personally think the IMF is a joke and more annoying than helpful. I’d CONSIDER a world currency where every nation…every nation…has equal weight in the currency’s value. If you want it…you can get it…and oil is priced in that currency. It’d be like a house of representative system for a currency. I do think that such a currency would require a central bank of course and THAT is where the issues come in…actually doing something like this would be an absolute nightmare and totally insane. I also agree with Tom’s point that if it’s not fixed then it’s just like the game we have now so what the heck is the difference? This idea that there is “stability” somewhere in the world is just insane. There is always risk and volatility in currency valuations b/c nations do stupid things b/c people do stupid things. How would that be any different in a “basket” currency? It’d only be a bit more smoothed out MAYBE…these days the whole world is connected particularly when crisis hits does it really make much difference?
The idea itself is worth considering but the reasons people are talking about this idea are false to start which likely means that it would pan out all wrong and erode more than contribute…kind of like the Patriot Act.
I see NO PROBLEM with countries interested and willing to put their dollars into another country’s bonds, etc. Who the heck cares when it’s in Japan or US or UK or AU, etc.??
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WARREN MOSLER Reply:
April 12th, 2011 at 4:07 pm
a world currency will work to promote world public purpose only if the new world monetary authority somehow spends more than it taxes by the right amount to regulate world aggregate demand. it could do that solely by funding a world jg or something along those lines, rather than by conducting other kinds of spending and taxing. and i’d put the hq in some miserable place to live…
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save america Reply:
April 12th, 2011 at 4:44 pm
When I was a boy, I watched a show called Blake’s 7. They had a jobs gaurantee program run by the leader Servelan. Everyone was happy and at peace, for some reason Roj Blake wanted to blow up the order and central government and bring chaos, Avon was just along for the money ;)
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Mario Reply:
April 12th, 2011 at 7:17 pm
“i’d put the hq in some miserable place to live…”
lol! exactly…I just cannot see how adding one more “institution” to the mix is going to do anyone any good. Great points about taxing and spending too. Good lord what a mess that would be.
Why don’t we just create a world currency ETF or something?!?! lol
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pebird Reply:
April 14th, 2011 at 2:08 am
“… new world monetary authority somehow spends more than it taxes …”
Arrragh!!!
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WARREN MOSLER Reply:
April 14th, 2011 at 7:56 am
the point was any currency issuer/monetary authority necessarily is the source of net financial assets of that currency for the rest of the world.
pebird Reply:
April 14th, 2011 at 10:12 am
Got it. I just reacted to the notion of a non-democratic entity being the source of net financial assets.
Not that the current situation in the US is all that democratic in reality, but it’s nice to have the theoretical possibility.
April 12th, 2011 at 4:50 pm
Anyone who wants to hold a basket of currencies is free to do so. The dollar isn’t special, it’s just the most popular currency.
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Mario Reply:
April 12th, 2011 at 7:15 pm
oil is priced in US $ so they are more valuable than other currencies as far as I can tell.
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WARREN MOSLER Reply:
April 13th, 2011 at 11:39 am
wrong, the numeraire doesn’t matter
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Mario Reply:
April 13th, 2011 at 5:27 pm
Warren,
then would it matter to the US if oil was priced in euros? Wouldn’t we experience cost-push inflation in the states?
April 12th, 2011 at 9:20 pm
In a new nationless reserve currency scheme, what does the new monetary authority do with the nation branded reserves brought in for exchange to their nationless notes? Are the forex markets used? Do they issue bonds? So many questions and so few articles with specifics. I suspect The Capital Controls crowd, free marketers and value Peggers certainly will have very different opinions on how this utopian monetary system shall work.
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save america Reply:
April 13th, 2011 at 2:54 am
“what does the new monetary authority do with the nation branded reserves brought in for exchange to their nationless notes?”
What did the euro boyz do with german, france, spain, etc etc nation stuff?
For that matter, I hear the SUCCESS of the USA is the ease of labor mobility between states, but the FAILURE of europe is the difficulty of labor mobility. So someone with a bigger brain clear it up for me, if we have this one world currency, is that going to make it easy for me to move to china and get a job? Or for a chinaman to move to mexico and get a job? Different languages, customs, religions. I think all those SOROS INET boyz up in their ivory towers about to get overrun by the barbarians. Even though I read hitchhikers guide to the galaxy and they had a babelfish that would instantly translate all the languages and we have smartphones now that will let us all talk to each other in various languages with the smartphone software translating, I just don’t see that fixin the labor mobility issues. What am I missing?
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WARREN MOSLER Reply:
April 13th, 2011 at 11:41 am
no interest rate support, no bonds, (0 rate policy like Japan and the US today).
just a server and two or three operators taking turns.
that’s all any modern monetary system is. the rest is all smoke and mirrors
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Mario Reply:
April 13th, 2011 at 5:32 pm
and all we need to live is food, shelter, and clothing.
I get your very valid point about the smoke and mirrors but I don’t see how this validates getting rid of the entire bond public national bond market. That’s very radical and almost insane. For what reason would we just “destroy” the bond market?
Note I am NOT saying that we need to continue Fed auctions with PD’s…that can stop and the Treasury doesn’t need to issue bonds to the Fed to offload every time the Treasury spends. But we can still have bills, notes, bonds that are available to the public. They are not a subsidy if they are not given away.
I can even see a scenario where there is no FFR either and bonds can still exist in that economy…just like they did before the Fed ever existed. However I see no need to get rid of the FFR myself even if it is a blunt instrument, it is still valid and functional.
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WARREN MOSLER Reply:
April 14th, 2011 at 7:48 am
the burden of proof is on those wanting the tsy to issue longer maturity securities.
that is, for what reason should we have it?
and ceasing to issue, unfortunately, doesn’t destroy it, it just matures away.
as we used to say, the difference between bonds and bond traders is that bonds eventually mature
Mario Reply:
April 14th, 2011 at 11:37 am
“as we used to say, the difference between bonds and bond traders is that bonds eventually mature”
that’s really funny. I know a bond trader and I must admit he is not the easiest guy to have a conversation with. lol!!
However the burden of proof for tsy with longer maturities is simple…it’s an investment vehicle and poses no danger or threat to anyone or anything and it’s long standing tradition for all nations including the US to issue bonds.
I fail to see the damages longer maturities create so long as they are not subsidies and they are open to the public.
Burden of proof is b/c it is a savings vehicle. Doesn’t Japan have longer maturities as well? Where is the damage?
WARREN MOSLER Reply:
April 15th, 2011 at 11:47 am
govt securities contribute to long rates higher than otherwise, and the long end is the realm of real investment.
in other words, govt securities drive up the price of real investment.
what public purpose is served by that?
Mario Reply:
April 15th, 2011 at 12:26 pm
hey warren,
yes I have been thinking about it and I agree with you. It skews everything upwards as well as marginalizes the rich into a wealthy corner. It is an insanely radical issue but still it does make sense.
Historically though, like during the World War 2 era and/or during the 19th century, what the longest bond issued back then? Did they have a 30 year? If not, when did that come into existence? How would mortgage rates be set if no 10 year existed?
Thanks again and rock on! :D
WARREN MOSLER Reply:
April 15th, 2011 at 12:46 pm
i think there were 30 year bonds back then.
and yes, they are high yielding govt annuities.
mortgage rates are set on a risk adjusted spread to the cost of funds for the competing lenders
won’t be a problem!
and thanks!
Neil Wilson Reply:
April 15th, 2011 at 12:17 pm
I can’t understand why the government chooses to *pay* wealthy people to avoid spending their money in the middle of a slump.
I can understand the backing for retirement payments, but that could be provided by offering direct government retirement annuities (like Freddie and Fannie in reverse – you give them a lump of money and they pay you a monthly amount).
Government retirement annuities would have the advantage of eliminating large chunks of the stock of net financial assets which would make the accounting look better.
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Mario Reply:
April 15th, 2011 at 12:29 pm
agreed. I still think social security could be done for people 70 or older regardless of their past work experience, as long as they are citizens born in the country.
“Government retirement annuities would have the advantage of eliminating large chunks of the stock of net financial assets which would make the accounting look better.”
when you say look better do you mean private sector nfa would be more distributed amongst a larger pool of people rather than highly concentrated in wealthy bond holders?
April 13th, 2011 at 2:08 am
Every time you or Cullen Roche critique an article or paper I try to send the critique to the author and or reporter. We have to stop letting people get away with incorrectly stating the facts.
Joseph Stiglitz: jes322@columbia.edu
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April 13th, 2011 at 2:51 pm
The question is what gives currency value internationally if state money gets value from the ability to tax. International agreement are to bridge this gap in cases where trade doesn’t involve final settlement in real terms, i.e., exchange of goods or real assets.
The question is, then, why would a country save in another country’s currency given the risk? That leads to the question of how to reduce that risk.
The answer in floating rate currencies is currency exchange. No one is forced to hold any particular currency.
Do countries have an advantage? Merely technical, because anyone can exchange currencies at will.
Creditor countries are like any other creditors. They have to assess risk. But they are better off than most creditors because of the liquidity of the fx market and the close relationship of cb’s and international institutions.
So where is the problem?
Some countries seem to be concerned about holding the dollar. Hold euros then, or Swiss franc, or buy gold.
Of course, is someone doesn’t fund the US capital account, then the current account will respond, and countries that are net exporters to the US will see imports drop and perhaps their own economies collapse. They should therefore be expanding their own consumer base instead of primarily their captial base.
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