Currencies stay within their currency zone. Transactions denominated in dollars, euros, rubles, etc. transpire within that currency zone, where prices are denominated in that currency.
If someone holding dollars, for example, wants to participate in another zone, they exchange the dollars for that currency. The buyer of the dollars holds them and has the option of saving them or using them for purchases in the dollar zone, or eventually exchanging them for another currency. Foreigners don't "bring dollars home."
Foreign Exchange
To use funds across currency zones it it necessary to exchange one currency for another, e.g., exchanging euros to obtain dollars in order to operate in the dollar zone, or vice versa. The world is running on a nonconvertible floating rate monetary regime. Currencies in demand are higher in value relative to currencies less in demand. This determines rates. Relative demand for currencies fluctuates based on a variety of factors. FX trading is about getting handle on this. Don't try this at home unless you are an expert. There are a lot of knives in the air.
The foreign exchange market is a huge market that is highly liquid, and all transactions clear easily with minimal volatility, unless there is a currency crisis, which is a relatively rare occurrence. Currency stability and exchange liquidity are required for international trade, so it is in the interest of nations to keep their currencies stable. This leads to the need for countries to maintain adequate foreign reserves to defend their currencies against excessive volatility, which would disrupt trade and ultimately the country's finances. Countries also use foreign reserves to neutralize inflation that might result from a strong net export position.
For example, one reason that China saves the dollars it receives from export sales is that it doesn’t want them exchanged for yuan for use in the Chinese economy, which they fear would drive up inflation at home. See Michael Pettis, What the PBoC Cannot Do With Its Reserves. While some of the dollars China gained from trade in the dollar zone are used to purchase goods and assets in the dollar zone while others are exchanged for use in other currency zones, most are saved at interest in US Treasury securities for future use, saving being defined as postponed consumption.
Whatever China decides to do with its dollars eventually, they will stay in the dollars zone and be saved or spent in the dollar zone by either China or someone else. There is a lot of fretting over what China may do with its dollars and very little talk of what the options actually are. Whatever China does eventually, the dollars will stay in the dollar zone one way or another.
Reserve Currencies
Reserves currencies are currencies used for holding foreign reserves and to denominate international prices in global trade, e.g., oil is priced in US dollars. The dollar being the world’s reserve currency creates an incentive for holding it, but this advantage is relatively slight owing to floating rates and liquid exchange markets. There are also disadvantages to being the issuer of the reserve currency. The reserve currency is in demand and the issuer has to insure that enough is available. This may mean taking other matters into account in addition to national interests as a global leader.
Foreign Reserves
Other countries save dollars as the reserve currency to build foreign reserves to manage and protect their own currencies in exchange markets. When China decides to abandon its peg, as it must do if it wants the renminbi to become a global currency, it will need foreign reserves to manage and defend it. Other Asian countries save strong and stable currencies as foreign reserves, after having gotten burned in the Asian financial crisis of '97-'98. Most Asians countries are US dollar savers presently for this reason.
Uses of Foreign Currency
When a country receives foreign currency from a trade surplus, it can use it to 1) buy goods in the currency zone of the currencies of the surplus, or 2) purchase assets denominated in those currencies, or 3) save it for later use, or else 4) exchange one currency for another currency, either for use or in defense of one's own currency. Of course, after exchanging one currency for another one just switches the same options 1-3 with someone else. Someone exchanging euros for dollars as these options in dollars, and the counterparty has them in euros. All that changes is the players. Of course, the relative demand for exchange affects floating rates.
What the US Owes China
Let's take China as an example, since China's holding of US Treasuries is a current topic of interest. Chinese companies sold goods to the US. Instead of promptly purchasing goods in exchange, China presently is saving in dollars, which is tantamount to "deferring consumption," that is, preferring to postpone making any decision to purchase goods or assets denominated in dollars, or, alternatively, to exchange dollars for another currency.
What the US "owes" China is represented by the claims on ownership of US goods or assets in exchange of goods already provided. In other words, instead of a direct exchange, China has postponed use of dollars gains from export sales, preferring instead to save them at interest in U. S. government securities rather than hold them in its deposit account at the Fed. China provided real resources to the US for dollars, and the dollars represent financial claims on US real resources. China can exercise those claims when it wishes. That's just how trade works.
What Happens Behind the Veil
When China desires to use the dollars instead of saving them, the Fed will simply mark up China's reserve account and mark down its securities account. It's just a switch in asset composition in accordance with China's current portfolio preference. What began as an increase in China's deposit account (reserve account at the Fed) due to sales of exports was subsequently switched into a time account (Treasury securities) and then switched back into China's deposit account for use as desired.
This is simply a matter of changing asset composition from zero maturity to non-zero maturity (higher interest) back to zero maturity. Really nothing to see here, let alone get worked up about. China is not controlling US policy or holding the US hostage because it is saving its trade surplus with the US in US Treasuries. Or if it is, then the people in charge of US policy are dolts and don't understand what is actually happening.
MMT's description of monetary operations makes clear that China is not funding the US by purchasing US Treasury securities. As the issuer of its own currency, the US funds itself without needing to tax or borrow to do so. Rather, China is saving its trade surplus with the US, through which it earned US dollars, in order to postpone future consumption.
When China no longer desires to save in dollars, it may choose to spend in dollars in the dollar zone, or exchange dollars for some other currency to spend in another currency zone, or exchange dollars for yuan and repatriate the yuan. For example, China might use some of its dollars to purchase oil for its own use. In that case, someone else has the dollars, and they stay in the dollar zone. Saudi Arabia might receive the dollars and decide to spend them to add to its military capability by purchasing fighters from a US manufacturer, or to save them as Treasuries for future use.
Balance of Payments
Changes in the balance of payments result in changes of foreign claims on real resources owned by the country of issue. The US is the largest recipient of foreign direct investment. Not all of it is welcome. For example, when Dubai desired to exchange some of the dollars accumulated from US oil purchases for US real assets, namely ports, there was strong opposition. China has also been shut out of deals deemed unfavorable to US national interest. Similarly, when Japan bought Rockefeller Center in the '80's from proceeds from exports to the US, many Americans complained that foreigners were taking over. People are happy to enjoy the benefits of imports, but they they are shocked when foreigners exchange them for assets, or now, save them as Treasury securities.
Countries can control the distribution of foreign ownership of real resources by restricting purchases of certain assets or asset classes. The US has prevented China from acquiring assets that the US deems vital to national interest. However, restrictions placed on use of a country's currency by foreigners may lessen foreign demand for the currency and may affect trade relationships. Free markets, free trade and free capital flow exist within limits.
This is my first post here. Thanks to Mike for the opportunity to share. This post is cobbled together from pieces of comments posted elsewhere, so if some of it sounds familiar that's why.
— Tom Hickey
33 comments:
Hey Tom, welcome! Congrats on your first post!!
Tom, I would say that dollars held by foreigners don't necessarily even represent a "claim" on real assets. We are not obligated to sell them anything, even if they are purchasing in dollars. The Dubai Ports World deal is one example that you mention.
We are not obligated to sell them anything, even if they are purchasing in dollars.
Of course, that's true, MIke. But if a country is too restrictive that is going to affect demand for the currency, as well as "attitude" toward it.
The US doesn't really face this as a problem since it is the largest recipient of FDI. But it is a problem for a country like China that wants its currency to be not only a global currency but also a reserve currency. In fact, I recently posted a comment elsewhere regarding the suggestion that the renminbi is about to replace the dollar as the global reserve.
My comment was to the effect that China's currency is pegged to the dollar, China has all kinds of internal controls, and is loathe to make the currency freely available for mercantilist reasons.
The fact is that a currency does represent claims on real resources although these can be restricted by, e.g., capital controls. Emerging nations like Brazil are concerned (rightly or wrongly) about increased FDI — "buying up assets"— due to the increased liquidity provided by QE, for example.
I intend to discuss these issues in future posts on international trade and finance. For instance, how can one support free markets, free trade and free capital flows and then deny that one's currency is a claim on real resources of the country, such as broad swaths of assets, if and when government decides it is? Isn't this talking out two sides of the mouth, especially when one criticizes other countries for essentially the same thing?
Wow. Hickey is excellent. Great post. I feel like I'm in college again. You guys and Warren and Randy are enlightening. I'm hooked!
Tom,
Both you and Mike are gifted with both Mathematical Maturity and the ability to communicate effectively. This is rare (to have both imo).
Along the lines of your post, one thing Ive noticed with the external sector, and to focus on China, is how the Chinese central bank apparently cooperates with the Chinese exporters in changing their exporters out of their foreign currency.
It looks like the Chinese exporters come over here and sell products to us in USD (of course), and then these companies "take these USD back to China" (so to speak) where their central bank just exchanges the USD out for them into the Yuan at the fixed exchange rate.
The Chinese companies then have retained earnings in Yuan, and the Chinese CB of course keeps the USD at the US Fed or looks like mostly puts the USD in Treasury securties and they go do more business.
But it appears the US Fed will not do the same for US exporters. Imagine if a US exporter went over there to sell in Yuan (food, lumber, etc), and then when they made the sale, they could just come back here to the US and have the US Fed change them out of their Yuan into USD at a pre-determined exchange rate.
I think US domestic companies could do better competing globally (thus helping to sustain US output and employment) if the US govt supported them in this way, ie the US govt would take large amounts of foreign currency off of the hands of US exporters at a pre-determined fixed exchange rate and just held them in our US CB account indefinitely.
I dont know if I would support this policy (have to think some more about it) but I just noticed that it is a big "imbalance" that is out there.
Resp,
Matt, Michael Pettis lays out the operations of the PBoC with respect to its USD trade surplus at the link above in the section entitled "Beijing is not Washington’s banker." His point is that China has to save in dollars to maintain its peg; it has no choice. So, yes, the PBoC helps its exporters by maintaining an undervalued currency through intervention by saving in USD.
This is the "Asian savings glut" that the Fed has been complaining about since Greenspan surfaced it. Janet Yellin just reiterated it as the most significant cause of the subprime crisis that led to the GFC. You see, she explains, this savings glut forced Wall Street to become irresponsible and do things it never would have done in the absence of the glut. NOT.
The US is reluctant to do anything about the trade imbalance for several reasons. First, US business is profiting from it wildly through labor arbitrage aka exporting jobs or off-shoring, as well as opening new markets. GM is now selling more vehicles in China than the US.
Secondly, cheap imported goods keeps inflation down in the US along with depressed wages, and the cheap goods dampen the social unrest that would occur otherwise. In return,
In return, China gets US investment, entry to the lucrative US market, and access to US technology in uses to leapfrog. So this is a symbiotic relationship that neither party wants to disrupt.
The downside is that China imports inflation by importing capital while the US imports deflation — falling prices and wages — and leaks jobs.
What can the US do to reverse this leakage by increasing exports when it cannot break the peg? The US could create a dual exchange rate, one rate being the market-determined exchange rate and the other, a preferred exchange rate for some trade that undervalues the USD wrt the market rate (like China). I can't recall now who made this suggestion.
This is not my preferred solution. As Warren observes, imports are a benefit in real terms of trade. The problem for the US is job leakage. The US can rectify this by using MMT to fashion a full employment with price stability policy. Then the US could create enough demand for optimal domestic performance with room to import.
Tom, excellent topic. The external sector aspects of MMT seem to get asked about a lot (e.g. the interesting debates initiated by Ramanan). The topic certainly interests me. Your posts on this and other issues will be a welcome addition to Mike's already fantastic blog.
great topic to choose to talk about Tom...hit it out of the water I'd say.
For me this article definitely "ties up" some loose ends in my own head regarding international trade and currencies.
thank you!
"The problem for the US is job leakage. The US can rectify this by using MMT to fashion a full employment with price stability policy. Then the US could create enough demand for optimal domestic performance with room to import."
Tom if you are referring to the ELR (employer of last resort), do you think an always available $8/hr job with the government will close that deflationary gap? It just seems like such menial work and low wages (but still better than UE of course)...I just can't help but think of the retardation our aggregate work force would experience???? In other words...what evidence do we have that shows an ELR will create more HIGHER LEVEL jobs as well? Is the argument solely that ELR's will create more consumption (demand) and therefore more business? Is an ELR really the "holy grail" MMT makes it out to be and if it is how do we know that?
I also wonder/suspect that many people would feel rather uncomfortable to say the least with such a "government sponsored" program don't you??? I mean surely that's communist right? ;)
I like what you're saying Matt about currency swaps at the CB...wouldn't you say it's kind of a sneaky way of getting all the revenue that an import tariff would offer but without the cons in decreased trade? Would the CB just kind of "set" a rate of exchange on their own or would the rate be "market driven"?
Cheers
"In other words...what evidence do we have that shows an ELR will create more HIGHER LEVEL jobs as well?"
It doesn't. But the alternative is the chase down to zero - and you can't live on zero dollars.
Then you get into the bit of neo-classical economics they never mention. That the wage is competed down to the subsistence level and those that can't compete at that level are expected to starve to death or die young.
If you look at the life expectancy in the sink estates, you'll find this policy playing out in a subtle manner. They are dying young.
All ELR does is redefine zero so that you can live on it. That prevents a complete collapse in demand and eliminate poverty from the society.
One other thing it does is that it allows an employee to say 'no' to a private sector job. And that levels the bargaining field - the private sector employer must offer better terms and better wages than the ELR to secure any staff at all.
Without the 'disciplining' force of unemployment employers are required to compete for staff to fill their jobs and that drives up values until it the excess marginal jobs that are eliminated.
you're right. Makes sense economically too based on supply and demand curves as far as I can see. That also will put upwards pressure not only on wages but on standards of work relations and employer/employee relations.
It also handles neo-liberal snifflings about "government interference" by setting a minimum wage and how that shifts the wage supply curve inward...blah, blah, blah. ELR sets a livable zero line like you say AND doesn't take away labor demand like neo-liberals want to think minimum wage does. Sometimes economics really is insane.
Okay so I'm in!!! ELR is on the books. Let's do it.
It also is noteworthy that employers are more likely to hire employed individuals versus unemployed individuals too...and that will create supply/demand for higher level jobs too I'd say.
It's all good in the hood. ;)
sorry I meant to say "doesn't take away labor SUPPLY" in that last post. ELR bids up excess labor demand. my bad...it's late over here. I'm going to bed. ;)
Where do Eurodollars fit into all this? I don't trust the non MMT explanations
Tom would also be so kind as to discuss any ramifications if oil was no longer priced in US $....
as far as I can see it really wouldn't matter for the US in real terms of trade b/c we are on a floating exchange rate system. Therefore we can "print" as many dollars as we need with no problem.
Shifting oil prices into Euros for example would however shift our entire currency downward nominally (on paper and charts) simply b/c it takes more dollars to get one euro. But the shift would be parallel so it's really NOT a shift in real terms of trade. Oil will still be as expensive (or cheap) as it ever was regardless of what currency you use to buy it (euro, US, new world currency, etc.).
Isn't that accurate or am I fundamentally missing something?
Thanks again and cheers!
MT :)
Tom Hickey:
".. As Warren observes, imports are a benefit in real terms of trade."
I have always wondered why China, or any other country, would like to save in US$$. I didn't get it. Why they would send us real goods and services in exchange of green non-convertible paper?
If the Chinese are smart, they will know that the winner in this game is the country, which makes so that it gets more real recourses in exchange of less. The ultimate winner would be the country which gets as more real recourses as possible in exchange of zero real recourses. I think Warren mentioned this somewhere.
The country which is the technological leader and innovator will be always in position to get more than it gives back in term of real recourses. USA has been and still is that country, and all the rest are trying to replace it if they can.
China knows that it can't receive any important and top of the line technological know-how, but nevertheless, they need to get closer to US businesses and buy some older technology or steal some. China is willing to give real recourses now so it can get technology which will help their own research in the future.
In order to surpass a vehicle you first have to approach it from behind, than go parallel, and at the and - go in front of it.
"The country which is the technological leader and innovator will be always in position to get more than it gives back in term of real recourses. USA has been and still is that country, and all the rest are trying to replace it if they can."
yes agreed...I only hope we can keep education and science and arts thriving in this country so we can keep it that way. I also think anyone that studies in an American University should be required to live here for at least 5 years post graduation so that we don't keep getting used to basically educate our competitors.
Hi Mario, the JG has been investigated in great detail by MMT economists, Bill Mitchell in particular, who has written may I say the definite work on employment, Full Employment Abandoned: Shifting Sands and Policy Failures by William Mitchell , Joan Muysken. There are many resources available at CofFEE aka The Centre of Full Employment and Equity.
Most of the objections have been anticipated and answered. I won't attempt to go into it in the scope of a comment, but suffice it say that Medicare and Medicaid work fine, so do food stamps and unemployment insurance. This shows that government is capable of administering similar programs. In addition, New Deal programs like the CCC and WPA worked well, too. I don't see any inherent obstacle to making a JG aka ELR work if there is the will to do so.
Moreover, a permanent JG/ELR is part of the MMT policy program because it provides a price anchor for achieving price stability. The JG/ElR — I prefer "employment assurance" — is key in achieving full employment (everyone who wants a job has an offer) along with price stability.
While it may seem that this crams people down to the lowest denominator, this is what actually happens. When people lose jobs en masse, then underemployment drives lower knowledge and lower skilled workers to the bottom. These comprise most of the people that would be picked up by employment assurance as a buffer of employed instead of a buffer of unemployed as we have now due to the crisis and throughout the cycle under NAIRU.
As you note, such a program woud have to be sold, since there is already so much neoliberal propaganda out there. But if high unemployment persists, changes will have to made or the current crop of politicians, regardless of party, will face "regime change." I don't thing that middle class voters are going to stand idly by watching themselves be crammed down due to the overreach of the elite and their rented politicos. The people are starting to get it.
This is just the beginning and it will not be resolved politically in '12. This is going to be a dominant trend for some time, if not the dominant trend. It's a struggle over who is going to control America's future. So there is hope that progressive change can happen, even in the face of seemingly overwhelming odds now.
I like what you're saying Matt about currency swaps at the CB...wouldn't you say it's kind of a sneaky way of getting all the revenue that an import tariff would offer but without the cons in decreased trade? Would the CB just kind of "set" a rate of exchange on their own or would the rate be "market driven"?
This is all hypothetical and I don't think it is the way to go, so I'll leave it at that. I am planning more posts on international trade and finance that will explain where I think we need to go. Briefly, the problem is global demand. World leaders need to recognize this and consider the world as a closed system in order to balance supply and demand effectively and efficiently, not only economically, but also socially and politically. The alternative is continued conflict and eventually wider wars.
Where do Eurodollars fit into all this? I don't trust the non MMT explanations
As the issuer of the global reserve currency, the US has to make its currency sufficiently available to meet global demand for it. As I said in the post, this means that the US has to consider external factors as well as internal and is not completely free wrt to domestic policy. As a global leader, the US has enormous responsibilities beyond its borders that not only affect national interest but also global order.
The problem is that usually there are not enough USD to meet demand, because of the desire to save in them. ("Eurodollars" are dollars saved in time deposits anywhere outside of the US.) This means that the dollar is chronically overvalued, and US exporters are placed at a disadvantage. While the US would like to see the dollar adjust downward to accomodate more exports, net exporting countries defend their currencies to prevent this from happening, since it disadvantages them.
The Neoliberal Washington Consensus is breaking down. The recent G20 Seoul Development Consensus for Shared Growth is an attempt to upgrade it to meet contemporary challenges. It is a step in the right direction. We'll see how it works out.
The internal contradictions of neoliberalism are coming to the fore and the EM's (emerging nations) are complaining that they are being disadvantaged by the DM's (developed nations). But the DM's are also feeling the pressure of deflation, so they are concerned, too. Maybe we'll see some serious cooperative attempt at coordination among the EM's and DM's. But don't celebrate just yet; there are a lot of powerful entrenched interests. While neoliberalism may be dead as an economic theory due to the GFC; it is still a zombie stalking the earth.
thanks Tom. I completely agree with all you say about ELR and yes I too like employment assurance too. ;)
An ELR program is really the kind if "new deal" initiatives obama should be under-taking and promoting not "shovel-ready" jobs. I also have been asking him to do an initiative where the government installs multiple electrical outlets in EVERY SINGLE gas station in America for electric cars. That's the kind of infrastructure we need to build up that industry otherwise producers will sit and wait for buyers and buyers will sit and wait for a car they can drive all day, anywhere, anytime, and always get home or where they want to go. The government needs to step in and help.
Obama is failing at his "new deal" for the 21st century it seems to me. Maybe we expect too much of him as you say, it won't be handled by 2012...still he could be a bit more vocal and strong.
Thanks again.
"it is still a zombie stalking the earth"
creepy
any ramifications if oil was no longer priced in US $....
Not really with a nonconvertible floating rate regime. The US beng the issuer of the global reserve currency affords scant advantage in a fiat system. What it means is that countries desire to save in USD instead of gold. USD replaces gold as the numeraire, so to speak.
All the talk of the USD crumbling, for example, if it no longer the reserve currency or oil is not denominated in USD, is just nonsense. The US is the world's largest economy, and the US is the world's only superpower.
While the EZ is large, the euro is on shaky ground due to internal contradictions arising from Euroland not being an optimal currency zone. the euro could conceivably be gone next year, even though the odds may seem minuscule now.
The UK pound is passé without the British Empire.
The Swiss franc is already a reserve currency, but could it become the global reserve, i.e., the most widely held? The Swiss franc is strong and is a traditional safe haven, but the global reserve currency? Are the Swiss ready to make that many franc available when Switzerland is not a large trading country but rather a tiny country that is mostly a bank? Swiss bankers like their relative isolation too much, I suspect. It gives them many advantages with few headaches.
What else is there? The yen? Japan has had rocky financial history of late, rockier than the US. The renminbi? The renminbi is pegged to the dollar and the Chinese economy is essentially still a command economy. The ruble? Really?
Go back to gold? Love deflation?
@Mario and rvm
Yes, the US would be crazy to blow its lead by cutting back on vital factors, especially those that affect human resources — education, health care, employment opportunity, etc. Falling behind in basic research, infrastructure, and other factors is also myopic. But, incredibly, that is what is happening.
Our enemies never could have done this to us short of destruction through war. We had to do it to ourselves. That is what I mean by "internal contradictions."
I agree with you completely and that all makes sense to me.
And just for argument's sake...what IF some other super power were to take over as the world's reserve currency...would the US be affected at all in real terms by that? I mean we would still be able to exchange our dollar with other currencies just like we do now. Or would we find our dollar going up in value as people "cashed in" US $ and that would have a deflationary effect not just on our currency but also on our national economy too?
Mario, I think that we have to start seeing the world in a different light, as a closed system like the states in the US, which are integrated under a single political and monetary authority. The EU is now trying to work out something like that for Europe. The countries of the world do, too, and Seoul was a step in that direction.
We have to replace competition and control with cooperation and coordination, or humanity will not make it in its present form. There is a big setback looming.
Enormous challenges are coming down on our heads due to climate change, environmental degradation, resource depletion, and the winding down of the petroleum age. We can either take the attitude of its every man for himself or else recognize that we're all in this together.
Humanity is also in a phase transition politically as we move into a global economy that requires a global political structure. It's going to take a lot of coordination to deal with these challenges without taking huge losses and enduring severe setbacks.
wow I wasn't expecting a response like that. I can honestly say I agree with you and am quite refreshed by such a prospect. I'm all for it.
It's funny, b/c I always seemed to associate a "global system" as something that would be hegemonic and very distasteful to me...something akin to 1984 to put it in elementary terms.
But you know I think you're right on this one and I do not think it needs to be like that at all. It can be just as "free" and "individual" as the states in the US are, etc.
I like it. I am refreshed by it and find it invigorating thinking...something new to the table. And frankly I think we are seeing it happen already anyway with immigration from the ground up and corporations from the top down.
You're right...it's time to review our "fences" and get a new level of cooperation on set.
Of course I am still interested in what would happen with another world superpower but I think you're right...I think there won't be another one...not in the old "roman filter" we still view things through. It is all new and all different.
Cool! Cheers! :D
Mario, a global economy is going to involve the development of a new world order. It can be a democratic one, or something else. Right now the neoliberal dream is a world order controlled by independent central bankers and technocrats that are unelected and unaccountable to voters anywhere. This should be unacceptable to reasonable people everywhere. This is a clear and present danger.
Mario,
"not in the old "roman filter" we still view things through."
Re. "Roman Filter": You got it! Exactly! Going on 2,000 years plus....
Resp,
Tom, Congratulations on a great post and a terrific exchange. I really liked the way you explored the various implications.
On the FJG, I prefer a rate of $10.00 per hour for the median cost of living region in the US with adjustments up or down according to variations in the CPI to a flat $8.00 per hour rate. This would force private sector wages up and begin to give working people a bigger share of the productivity gains of the past 30 years.
I don't think this would have an inflationary effect; but if it did, then I'd be for restoring greater progressivity to the income tax system to bleed off the excess dollars.
I liked your comments on the need for a world political/economic order that is democratic. And I agree that is what we need and that we ought to agitate for it and present the vision.
However, I don't think our poor nationalistic populations and the power elites in each nation will be willing to let that happen. I think we may be a hundred years away or more from reaching that goal.
In the meantime, we must stop the globalizing elite from consolidating power. What they're doing right now is coalescing through various meetings and co-ordinating around neo-liberal austerity policies that are depressing middle class and working people and gathering net financial resources and real wealth in the hands of a relatively few in each nation.
They are creating a feudal elite everywhere, and a global system in which the interacting feudal elites are dominant. The leaders of each nation see this happening, and the want to do what's necessary to retain and strengthen that system so that they can entrench themselves as permanent members of that elite.
I think this is at the bottom of Obama's motivation. He sees the model of Bill Clinton, a man of modest wealth, who was rewarded by the global elite with hundreds of millions of dollars after his presidency. Obama knows that you won't get those rewards if you take the big banks into resolution and create a rift in the global elite applecart. So he practices lemon socialism and saves and strengthens Wall Street so that the system can survive and he, Michelle, Sacha and Melia (sp?) can have bright financial futures.
We need to break the big banks and stop the global elite from consolidating their power. We need to have a much more egalitarian distribution of wealth in each nation than we have now. Only then will we be bale to reach toward the world political/economic unit you envision.
Well put, Joe. I agree with what you say.
The one thing I would change is naming a figure for the employment assurance program that sets the anchor price for labor. This is not only a key piece of the MMT program of achieving full employment along with price stability, but also a major contribution to social policy, and bears a closer look.
The major problem affecting economics today lies in failing to understand the relationship of economics to society. This failing leads economists to think of labor as a commodity instead of workers as producers. Then wages become viewed as costs comparable to the cost of materials, instead of viewing labor as a contribution similar to capital and in fact superior to capital because capital is derived from labor, labor being primary. This means that workers too often get treated as property instead of as the people responsible for production taking place at all.
Capitalists prefer labor that is unfree, that is, dependent on capitalists to provide subsistence wages. That way there is no negotiation over the price of labor. Owners are the price setters for what they buy, hence, control.
The great social advantage of the employment assurance is not only that it creates a buffer of employed, but also that those who are employed are free. They are already receiving at least a bare subsistence wage from the JG, so they are not depending on owners for their subsistence. That conveys economic freedom, albeit basic.
Those employed by the JG can improve their position by taking private employment. But they are not forced to accept any offer regardless, often at risk to health and even life. Employers become bidders instead, and free men and women have greater choice over their lives and futures.
This would make us a country of really free people instead of "free" only in an ideal sense in a society in which money is a requirement for exercising the right to life, liberty and the pursuit of happiness, and where money comes from income, which for most people means a job. This implies that everyone has a right to a job offer as a matter of survival if nothing else.
If we acknowledge "these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness," and "that to secure these rights, governments are instituted among men," it follows that government must address the situation of those left without an income because society has failed provide them with a private job offer.
I don't claim that an employer assurance program is the only way to deal with this. But it does seem to be a good option, considering the advantages and alternatives.
So rather than try to pick a figure, we should recognize that this figure is relative. I t may vary by locale, for example. If different countries institute the program then the nominal wage would presumably be somewhat different. The figure might be determined by a variety of factors.
However, the real wage in terms of purchasing power and benefits relative to necessities for maintenance should be figured on the same principle and adjusted for changing circumstances. I see that as the basic principle instead of any particular figure. This is significant because I see this as integral in an MMT international policy approach to creating demand in the global economy while achieving global price stability as well.
When you say China, do you mean the government of China?
What of countries that are not state capitalist. Would their trade and FX outcomes be determined largely from private transactions?
What of countries that are not state capitalist. Would their trade and FX outcomes be determined largely from private transactions?
China puts a lot more controls on its companies than Western ones, and the really big Chinese companies are owned by the state.
There is a lot of leeway in the West and there is also a lot of money laundering. A large % of foreign direct investment in China comes from "Latin America," specifically the Cayman Islands, a notorious tax haven.
So, when China decided to call in this "debt" and buy stuff, we just say, "Well, were having a sale on lemon aide for 1 billion dollars a cup. Or, you can buy two for $1.5 billion and we will throw in the shipping and handling costs for free.
Thanks, guys. There was something that was just bugging me about the whole "debt" thing that I just couldn't put my finger on.
I've always thought that importing oil was best because we want to be the last guy on the block with jet fuel for jet fighters. It just seems that being the only country that can fly our jet fighters means we can charge whatever we want for lemon aide.
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