Recessions are always and everywhere a monetary (medium of exchange) phenomenon. Recessions are an excess demand for money (the medium of exchange). The demand for money is the demand for an asset. Since the demand for money, like the demand for all assets, depends very much on expectations, especially when interest rates are low, recessions depend very much on expectations too, especially when interest rates are low.Read it at Worthwhile Canadian Initiative
How much do expectations matter?
by Nick Rowe | Associate Professor, Carleton University
Warren Mosler: "All recessions are balance sheet recessions."
NR: "Recessions are an excess demand for money (the medium of exchange)." Another way of stating this is that recessions are due to a preference for liquidity that results in increased propensity to save.
The question is why this preference and this shift in propensity.
The debate between monetarists and fiscalists hinges on how to address the preference for liquidity. Monetarists say alter expectations by creating inflationary expectation that increase the cost of holding money, thereby reducing the propensity to save and increasing the propensity to invest and consume.
Fiscalists criticize this on two major counts, holding that monetarists are ignoring the why of liquidity preference, hence treating the symptom rather than the cause.
First, fiscalists assert that if the recession is due to the necessity to reduce borrowing, to deleverage, and to rebuild equity, then if monetary policy actually would work, it would just exacerbate the situation by increasing private debt, setting the stage for another perhaps deeper recession due to debt-deflationary effects. This is indeed what happened with multiple bubble blowing by increasing private indebtedness, especially coupled with large and persistent trade deficits.
Secondly, fiscalists add that when a recession is due to above ordinary accumulation of private debt, so that deleveraging is forced upon many people and the contraction of the real economy is so deep as to create above normal unemployment, then unless the sum of net exports plus the government fiscal deficits is large enough to offset the demand leakage to increased domestic private saving, the economy will not recovery until balance sheets are sufficiently restored to warrant more private credit expansion.
In this case, the result will be a stagnant recovery, and if monetary policy is too loose, it will exacerbate the situation by leading to asset appreciation, and with commodities now considered an asset class by money managers, this will lead to a rise in consumer prices. If one of these assets happens to be vital, like petroleum, then the effect of rising prices will spread through the economy resulting it consumers being squeezed by the need to pay down debt and pay higher prices for necessary goods, like food and fuel. The result of this will be stagflation.
So far, monetary policy has failed to create the expectations necessary in spite of massive departure of the Fed from normal policy. The latest suggestion from market monetarists is NGDP targeting. Not only are fiscalists skeptical but David Andolflatto is, too, even though he is willing to consider it.
45 comments:
What Nick and most other economists forget is that there are three ways to acquire money. They say "only one" - namely borrowing. Thus in their world view, interest rates become paramount.
To most of the "real" world, the only way to acquire money "or Graeber's 'Debt Obligation'" is to exchange goods or services for the money. In their world view, borrowing money is "foolish" for it always requires payment back in "monetary" assets -- which repayment therefore requires you to sell those goods and services you wanted to sell in the first place (in other words, I need a job, or I need to produce something "useful")
The third way is to sell goods and services to the community at large (the government) In other words fiscal policy, or a JG or BIG.
In the last two methods, interest rates play a very limited and traditional role, and "expectations" are nowhere to be seen.
If the government announced tomorrow that it was suspending FICA that might change people's expectations, perhaps?
Very good post Tom. I love Warren's take on It. I don't like the opinion of Richard Koo that there is something very special about this time around. Nick is my favored monetarist, way ahead of the rest. Way ahead of Krugman( I like Nick).
Kristjan,
I don't think Nick is correct in this. He is assuming, that the demand for money is dependent only on the interest rate.
See my comment above.
I am not saying he is correct Clonal. But hey, It's Nick Rowe. I think Warren is right. It is always about private sector net saving desires and this time the saving desire is just so much bigger. There is nothing special about It (other than the fact that It is bigger). If Richard Koo was correct, then how would he explain all the other recessions? This sounded so mainstream (the balance sheet recession stuff) when I first read It couple of years ago at Pragmatic Capitalism. His(Richard Koo) explanation sounds almost like liquidity trap.
Tom: chicken and egg. Did bad debts cause the recession? Or did bad monetary policy cause the recession and cause debts to go bad?
And what do creditors do with the money they get repaid in a deleveraging? Sit on it, or spend it on real assets? Their demand for money matters too.
Clonal: The standard textbook answer is that the demand for money depends on: the price level; real income; the rate of interest. If I could ignore the rate of interest, then I could simply write down: MV=PY, assert that V is independent of the rate of interest, and I could ignore expectations.
BTW, David Andolfatto is very sceptical of all Aggregate Demand theories of recession, and of both monetary and fiscal policy. That's because David doesn't believe prices are sticky. David's a good guy, and a very good economist, but he's more into Real Business Cycle theory. So it's not at all surprising that he doesn't think that NGDP targeting will do much good.
Nick asks: "Did bad debts cause the recession? Or did bad monetary policy cause the recession and cause debts to go bad?"
Depends on whom you ask. Monetarists and Austrians generally that say low rates too long lead to malinvestment and a left-wing policy of forcing unqualified buyer on mortgage lenders lead to deteriorating quality of loans. Now the market is just clearing normally, and there are a lot of people who have decided that this is a good time to voluntarily prefer leisure over work.
Others like Bill Black say that regulators permitted a criminogenic environment to develop on top of moral hazard that resulted in systemic breakdown with short term credit markets failing to clear. Given the level of private debt overhang, the US experienced "a Minsky moment" as millions of people found themselves underwater when the housing market collapsed, and they are still trying to come up for air before they suffocate.
"And what do creditors do with the money they get repaid in a deleveraging? Sit on it, or spend it on real assets? Their demand for money matters too."
Looks like they are either sitting on it and/or using it to leverage prop trading, since there is a lack of creditworthy customers demanding loans due to lack of demand for their goods and services, since people in the middle are saving/deleveraging and those at the bottom are struggling to make ends meet.
Moreover, since those in the middle who are on the edge or underwater are fearful of losing their jobs, they either can't get credit or aren't asking for it. Those at the bottom don't have credit anyway. So that leaves the lending going to leveraging asset purchases and student loans.
Tom,
It is going to student loans only because of "The Student Loan Scam"
I think the debt caused the recession. But also, a bad - or rather nonexistent - national income policy caused part of the debt.
People are not brilliant and prudent calculators. They are animals with wants, with modest and very fallible reasoning faculties for managing the wants. There will always be some people who borrow more than they should because they want more in the near term and don't responsibly calculate the long-term effects. And there will always be people who lend more than they should, because they are greedy exploiters who want more interest and don't responsibly calculate the ability of the debtor to pay.
This wouldn't be a systemic problem if the imprudent and reckless were a small minority, or were isolated from the rest of the economy. But the fact is that imprudence and recklessness are widespread, and we are all entangled in the webs of debt and credit that bind us all together in a modern economy. So when the bad debt collapses, we all go down.
This problem of human nature can be addressed somewhat by well-governed regulation of credit. But it is also exacerbated when we adopt a system in which the owners of the means of production are permitted over time time to apportion to themselves larger and larger proportions of the national output. There is an inertia to household living standards, and people whose incomes are falling will borrow more to maintain existing standards of living. Their masters will at first encourage that process, since they can then extract even more from the workers in the form of interest on credit, without directly lowering their wages, and because some of the debt is collateralized, so if the borrowers default the owners get something anyway.
Once the whole scheme unravels, however, some of the real gamblers will lose a lot, but most of the owners can count on the government to rigidly enforce property rights and debt obligations. In our country, not only has the government enforced these debt obligations, they have even abetted the creditors in the illegal robo-expropriation of collateral without due process. So there is no reason to think the extraction scheme won't be re-started again, since it is lucrative for most of the people who actually run things.
The economics profession, which is extremely conservative on the whole, and committed to the preservation of existing power and property relations, can think of nothing else to do in these circumstances but offer various behavioral suggestions for encouraging the indentured class to save even less than they do now, and adopt an easier attitude toward spending and additional borrowing.
I hope monetarists are held accountable for the next civil war, revolution and starvation they create oversees because of their stupid policies and playing with people's life.
Economic profession is so morally rotten, that in their effort to preserve the status quo they will enforce any policy necessary even if it impoverish 90% of the world population and is potentially a disaster.
P.S: I disagree, not all recessions are balance-sheet recessions, some recessions and depressions are cased by supply side and high prices, even if these are a minority, these are the worst kind of recessions/depressions because are the harder to solve (you can't solve them using helicopters or saving criminal banking systems). Apparently that's where the moneteratists want us to go (directly or indirectly) with their endless market manipulation by the FED.
But don't worry, their stock shares will go higher... or not. I suggest you look how stock market behaved during 80's stagflation, you may be shooting yourself in the food in your cries for market puts.
"…what do creditors do with the money they get repaid in a deleveraging?…"
It disappears into the ether from whence it came.
The bank only needs the liability satisfied - it doesn't need the money to do anything.
This displays a fundamental misunderstanding of monetary economics by Rowe and company.
you're only talking about banks there Paul. There are other creditors in the economy.
paul,
It looks like that they think this 'money' is stocked somewhere in the system. Most 'money' being credit when it goes back to banks to pay loans it disappears in the nothingness.
That's why you can see money aggregates can go down, this indeed would not make any sense in case of bills and coins (unless governments tax more than they spend off course, draining money from the economy) or reserves (unless central banks drain them by charging interests). But is very normal for credit and money aggregates which are, mostly, composed of counterparts of various credit and shadow money things. If you want to look like how does this happen you have to look at Europe right now, some periphery countries had decreasing money aggregates for months (without significant leverage in core countries to offset it, which are now again in the deflationary path).
We live then in a system where there is intrinsic competition for scarce non-disappearing money printed by governments, just guess what happens when all this money ends up in the pockets of a minority of the population. Then an increasing share of the population gets to live in an artificial scarcity of money state, having to go into debt to offset their decreasing living standards, all good for bankers (and monetarists with their market efficiency hypothesis of how banks will allocate resources appropriately). Then you find 80% of that debt ends in real estate, and an other 10% for consumption (mostly cars), not like its being directed to productive things, given that all the human population could be fit in the state of Texas, we end up competing for this 'real estate' thing (because it's not like that 80% of credit ends up buying agricultural land or land with exploitable resources, just 'real estate' land which is useless for anything else), where just like banks, is full of people trying to extract rents from others work. And let the ponzi continue!
Back to topic... that's one of the indirect reasons in a deflating environment government 'debt' does so well, being the only asset were fixed income of fresh money in is mostly guaranteed (unless 'political default' path is chosen, which is nonsensical if a sovereign can avoid it) by someone who has the control of the printing machine, and free of risk.
The disease money creates on some people's minds (this 'lust' identified in other thread) makes us worry about all this useless stuff instead on focusing in the real thing (resources, production, etc.). As long as this disease continues to pollute minds we will continue to hear about 'efficient markets' and '1:1 representation between finance and real economy'. These myths will be continued to be perpetuated with to feed into the lust and the status quo, and we will continue to neglect the real economy in favour of financial shenanigans and unnavigable 'net of contracts' (network of liabilities-assets).
you're only talking about banks there Paul. There are other creditors in the economy.
Credit created by credit institutions is the only thing that matters here because is the only thing which has similar, almost identical, features to fiat money.
The net of liabilities between other private parties net to zero, is only credit institutions which have the ability to leverage fiat money. You can see how this plays in disasters like the ones on LTCM, if it weren't by the leverage facilitated by credit institutions (investment banks), LTCM failure could have been managed like any other company default. But because the credit facilitated by banks, that leverage couldn't be 'cleared' by standard procedures.
You have to understand that leverage builds 'wealth' without a backup, there are trillions on unfunded liabilities, and necessarily this will trigger a deflationary trend within the system. However if the liabilities are funded at aggregate level, this problem is non-existent and you can let 'market forces' purge theirself without creating a complete system failure and a decent into a depression while maintaining adequate levels of demand. Companies will fail and the world will keep moving on. But when you enter absurd ratios of systemic leverage then it all will fall apart unless the monopolist steeps in and prints fresh currency to plug the blackhole.
Leverage,
One additional thing happens with bank "created" credit. Interest gets paid on it. The principal disappears into the ether. But the interest remains, and it is transferred from the debtor to the creditor - impoverishing the debtor and enriching the creditor - unless the debtor has used the loan to create NEW wealth over and above the principal plus interest.
The only way the balance can be restored is by the governments fiscal policy (deficit spending) or potentially by a debt jubilee.
Dan: " I think the debt caused the recession."
I think that a lot of conditions came together and trying to pin point a "cause" without considering these conditions is rather futile, since it is difficult to prove that any one condition was necessary and sufficient.
The amount of private debt was a necessary condition for a recession of this magnitude and length. Many economists still haven't figured out why it isn't an ordinary recession and why it's taking so long to clear markets. Minsky's explanation seems best, especially in the absence of other credible explanations.
The proximate cause in the US was the Lehman bankruptcy that froze short terms credit, preventing large institutions that had long term commitments and short terms obligations from financing short term, and that was just about all of them. The ensuing meltdown due to less that ideal response from authorities lead to a crisis, exacerbated by the widespread use of derivatives, especially MBS based on subprime drek.
Low interest rates may have played a role in the scenario, but I don't see them being either a necessary or sufficient condition.
Once liquidity preference shifts that much and is grounded not only in lack of confidence, which can be stored, but also private debt overhang much of which cannot be repaid out of income, savings or asset sales, then the die is cast for debt-deflation, where an increased desire to save/deleverage along with a persistent trade deficit whose flip side is external sector saving can only be corrected by a fiscal deficit large enough to offset the demand leakage to saving.
Anonymous: "you're only talking about banks there Paul. There are other creditors in the economy."
When GM sells a vehicle and GMAC finances it at a low rate, where does GMAC "get the funds." By risking its capital, just like a bank.
Very little credit is extended by loaning existing assets. In the above example, GM is loaning the vehicle not "money," and it holds a lien until the loan is extinguished and title transferred.
Tom,
GMAC now Ally Financial is and used to be an acceptance corporation that operated as a bank owned by GM. Today it is 73% owned by the US Treasury!
@Leverage, Tom, at least one anonymous…
You guys get it.
The thing is - it doesn't seem that complicated. Why don't Rowe and company get it? These are by all appearances very smart people.
I've lost patience with giving them the benefit of the doubt.
More funerals please.
Clonal "GMAC now Ally Financial is and used to be an acceptance corporation that operated as a bank owned by GM. Today it is 73% owned by the US Treasury!"
Right. That's what happens when you risk capital by extending credit and it doesn't work out so well for you.
I wonder if the US Treasury is going to repossess all those vehicles to "save the taxpayers money"? :o
@Clonal
"…The only way the balance can be restored is by the governments fiscal policy (deficit spending) or potentially by a debt jubilee…"
Yes. Credit creates more liabilities than assets (nominal) over time, so fiscal is a mandatory requirement for the system to be sustainable or stable. Unfortunately even then the system is biased towards a transfer of wealth to the financial sector which in real terms doesn't produce anything except poverty for the masses.
The fact that anyone believed the Eurozone system would work leads us to question the wisdom of our "betters" and rightly so.
It leaves us with stupid or evil as the choices.
The folks that believe we can borrow from Peter to pay Paul to get around this are delusional (obviously I'm not talking about public debt).
"…You have to understand that leverage builds 'wealth' without a backup, there are trillions on unfunded liabilities…"
Yep. But the morons want to cut deficits.
The stupid, it burns.
reducing deficits is possible without negative consequences if the current account deficit shrinks enough.
"Yes. Credit creates more liabilities than assets (nominal) over time, so fiscal is a mandatory requirement for the system to be sustainable or stable. Unfortunately even then the system is biased towards a transfer of wealth to the financial sector which in real terms doesn't produce anything except poverty for the masses."
That why there have to be write downs and if not, cram downs. Fiscal is a band-aid and maybe even a tourniquet, but it's not surgery, and that is what is needed when debt-deflation threatens.
"But the morons want to cut deficits. The stupid, it burns."
The problem is that they have convinced the bulk of public, for whom the government as big household analogy is just common sense. It also the government as big firm analogy, which give Romney credibility as another CEO president, even after George W. Bush, MBA, crashed and burned the economy.
Right, and lowering the trade deficit results in domestic price rise. The old rock and hard place.
Wynne Godley (1999):
"If the balance of trade does not improve, there is a danger that over a period of time the United States will find itself in a "debt trap," with an accelerating deterioration both in its net foreign asset position and in its overall current balance of payments (as net income paid abroad starts to explode). Such a trap would call imperatively for corrective action if it is not at some stage to unravel chaotically.
The emergence of a debt trap is put forward as a possibility that must be taken seriously rather than as a forecast of what is most likely to happen. Policymakers are advised to ensure that adequate instruments are available should things start getting out of hand.
Whether the outflow of property income starts to accelerate depends critically on the rate of return earned on internationally owned assets and liabilities. The well-known condition for exploding payments on debt is that the rate of interest exceeds the growth rate. At present the United States' negative position is worth about $1,500 billion while the net foreign income outflow is only about $10 billion, so it might be supposed that there is nothing to worry about. But this is deceptive. The low rate of return overall, measured ex post, is the consequence of the extremely low return so far earned on foreign direct investments in the United States. However, the bulk of any change in the net asset position, in the future as in the past, is likely to take the form of financial investment, which has been earning a much higher rate of return and one that already slightly exceeds the growth rate. Also, the return on foreign direct investment in the United States may improve.
There have recently been extremely heavy direct investments by foreign firms in the United States, but a high proportion of these have been financed by exchange of shares and, to that extent, make no contribution at all to the financing of the deficit. The analysis of capital account flows and rates of return would be greatly facilitated if acquisitions financed by share exchange were identified separately in the accounts.
Policy responses in principle come down to:
a. Reducing domestic demand
b. Raising foreign demand
c. Reducing imports and increasing exports relative to GDP, preferably by changing relative prices
The danger is that resort (perhaps by default) will be had to remedy (a), in other words, that chronic and growing imbalances between the United States and the rest of the world come to impart a deflationary bias to the entire system, with harmful implications for activity and unemployment. Remedy (b) reads hollow when neither appropriate institutions nor agreed upon principles exist, but should not be dismissed out of hand. As for remedy (c), currency depreciation is the classic remedy. But, in view of the way global capital markets work, depreciation has ceased to be a policy instrument in any ordinary sense, and "floating" cannot be counted on to do the trick.
Policymakers should be aware of the possibility of using nonselective (nondiscriminatory) control of imports in extremis in accordance with the principles set out in Article 12 of the WTO. Such a policy is to be sharply distinguished from "protectionism" as commonly understood.
....
Notwithstanding the deplorable advertisement, and the awful danger that the principle of nondiscrimination might be breached by powerful special interests, nondiscriminatory control of imports must stand as a realistic policy in extremis. The great advantage of import controls, as Keynes once said, is that they do stop imports from coming into the country."
http://www.levyinstitute.org/pubs/sr/stratan.pdf
Godley seemed to think the threat of economic chaos posed by a currency crisis/balance-of-payments crisi/ 'debt trap' as the result of by an out-of control CAD far outweighed the potential problem of higher prices on certain goods in the short-medium term.
Godley seemed to think the threat of economic chaos posed by a currency crisis/balance-of-payments crisis/ foreign-creditor 'debt trap' (as the result of an out-of control CAD) far outweighed the potential problem of higher prices on certain goods in the short-medium term (as the result of retrictions on imports).
"Godley seemed to think the threat of economic chaos posed by a currency crisis/balance-of-payments crisis/ foreign-creditor 'debt trap' (as the result of an out-of control CAD) far outweighed the potential problem of higher prices on certain goods in the short-medium term (as the result of restrictions on imports)."
I believe that MMT economists disagreed with WG on this although I don't recall the details of the personal interaction as reported later. It's in the comments at Warren's somewhere, IIRC.
I'd like to know more about that, i.e. what they had to say against Godley's position.
The CAD strikes me as being a possible weak point in MMT, though perhaps I'm just missing something. Do you know where this subject is discussed in detail on an MMT site?
I read a back and forth on Mosler's site between him and a guy called Sergei (and N. Wilson), which seemed to miss some things out and struck me as being inconclusive.
By the way, Ramanan has another post on his site by an Italian professor on this subject. It's quite interesting.
Anonymous: Worrying too much about trade, current account deficits is worrying about the wrong thing, the financial. There is no, can be no superhorrendous, horrible financial problem like Greece has now, for a monetary sovereign like the USA or the UK.
The first thing to understand is what everyone understands before they study "economics" : imports, stuff you get are benefits; exports, stuff you give are costs. All these deficits mean is that people outside your country are saving up on your promises, your debt, your money, which you are exporting. This is a great benefit. It is the world saying you have a supergood credit rating. You, the country is being put in the position of the capitalist of the world, the professional debtor, as Schumpeter said. The rest of the world thinks you are a good investment, your debt is a good, reliable store of value. So be a good capitalist. Be a good store of value. Don't wreck your own real economy, your business.
IMHO, the last two chapters of Abba Lerner's Economics of Employment, written long before Godley, are irrefutable, utterly clear & unmatched on foreign trade. And are even very helpful in understanding MMT as a whole. Foreign trade simply doesn't exist in the eyes of a monetary economy - it is just another industry. An open economy is a special case of a closed economy.
As Lerner emphasizes, the thing to focus on is: how does the nation use the benefit of the trade deficit? Using it for cheap consumer goods as the US does to some degree is not crazy - as long as the deflationary effects of foreign saving are accomodated, as long as the government prints enough money to maintain full employment at home and account for all the externalities of trade, vulnerabilities to foreign monopoly power etc. There may be some real, immediate problems (like unemployment) caused by foreign trade & competition. Take care of them immediately, run the rest of your economy sanely, and no problemo. Neil's recent comments here are excellent. While Ramanan has been making things more complicated than they really are, falling into traps of confusion of his own devise (and unfortunately sowing unjustified doubt) for a long time.
If a thriving business has its credit rating improved, its credit line increased, its bond issues subscribed, should it fire its employees because it temporarily used its old, smaller credit line to pay them with? Even though the bank accurately thinks business is so good, so much money is rolling in that, it is giving it the capacity to hire more, invest in more new machines?
As always, the anti-MMT recommendations, ideas & views, translated correctly into household, firm or pre-monetary terms (something MMTers should do more) become things so insane one can scarcely believe anyone could say them. Or one can think of interaction with the foreign sector as interaction with a domestic "Rest of the World corporation". Why on earth should the USA care particularly about how much money RoWCorp is saving, or the dollar value of RoWCorp's company scrip? Take care of full employment, don't wreck your thriving business / country and everything else takes care of itself.
I agree that there's no risk of default in the case of a country like the USA. However, there is still the possibility of a collapse in the exchange rate value of the US dollar.
This is only a small possibility so long as the dollar remains the global reserve currency. But this situation is changing.
Personally, I'm concerned about smaller countries such as the UK. A collapse in the value of the pound could have really horrible effects on the UK economy. A persistant and growing CAD make this ever more likely.
For the US, it may take a while before people start seriously questioning the value of the dollar and wondering whether to 'dump' it. As the CAD expands and foreign debt balloons (exponentially at some point perhaps?) this possibility becomes more real.
If the dollar were to collapse, raising interest rates or taxes would probably have little effect. Intervention in foreign exchange markets might be the only way to control the situation, at which point Ramanan's scenario might come into play.
"…there is still the possibility of a collapse in the exchange rate value of the US dollar.
This is only a small possibility so long as the dollar remains the global reserve currency. But this situation is changing…"
This is nothing more than concern trolling. I don't mean any disrespect, it's just an observation. If you have such fears lay out the conditions that would cause such an event. Then they can be addressed. Just throwing out hypothetical events doesn't advance our thinking.
Bill Mitchell doesn't think the dollar losing it's reserve status would mean anything.
Look at Japan, their currency doesn't have reserve status and it holds it's "value".
Looking at this in a different way, the dollar is not a store of "value", it is a "measure" of how much wealth one holds. Mosler's scoreboard analogy.
Does a tape measure store length? Why store something that can always be produced at will.
I'm not sure there is any perfectly safe store of value. The closest thing I can think of would be U.S. Treasuries, but holding massive amounts of liquidity as wealth is pointless. That wealth may as well not exist as far as the 99.9% are concerned.
Wealth is what we can produce and use. How does one store productive capacity? It can't be done unless we could produce and store energy or natural resources for future consumption.
Storing wealth per se does not produce anything for future consumption.
Anyway I'm just rambling now. The idea that the dollar would lose it's value is absurd to me. What conditions would cause such an event and who would step up and replace the consumption/production capacity.
I see every other country/economy in the world in the same predicament as us. We live in a closed system. We rely on each other. No one is in a position to make off with all the stuff at the expense of the other.
Unless we let them.
Look at Japan, their currency doesn't have reserve status and it holds it's "value"
Japan is not a net debtor to the rest of the world.
"The idea that the dollar would lose it's value is absurd to me. What conditions would cause such an event and who would step up and replace the consumption/production capacity."
Okay, if you can't imagine that happening to the US dollar, what about a smaller country, such as the UK?
Does MMT only apply (CAD not a problem) if you are
the world's greatest superpower?
Ramanan's blog has a post from an Italian prof. of economics about exactly this question.
"…there is still the possibility of a collapse in the exchange rate value of the US dollar."
Anything is possible, but how likely and in what time frame. Of course, we know from recent experience that "experts" can be very wrong about this.
However, the USD is the benchmark of the global monetary system much like gold was. When Nixon shut the gold window, the USD in effect replaced gold as the numeraire, as Treasury Sec. John Connally foresaw it would, since TINA.
The question to ask now is what the alternatives are. Unless there is some credible alternative, count on countries cooperating to keep the global monetary system operating. If the USD were to collapse, so would the global economy and that fact is not lost on anyone with skin in the game, like it or not.
That won't last forever, but there is nothing on the horizon that would suggest change is imminent, in spite of a lot of grumbling.
"…Japan is not a net debtor to the rest of the world…"
Neither are we. What do we owe the rest of the world? Interest? We could stop paying that at will if we had a competent Congress. The interest we pay is a favor we extend to those that choose to accumulate financial wealth. There aren't enough mattresses in the world to store that much money.
This is another insidious myth that beggars belief.
They hold our dollars. They didn't borrow them they earned them. Voluntarily. We didn't borrow them either. Spending them would be a bad thing?
"They hold our dollars. They didn't borrow them they earned them."
What people don't seem to get is that foreign saving in another currency is an expression of confidence in the currency rather than a sign of weakness.
Moreover the USD is a risk-off safe haven currency, and that is the way it is traded by anyone who understand the basics of fx markets, which are largely driven by portfolio shifting in terms of perceived risk. It's sort of like the pairing of utilities and growth stock used to be in hedging.
"What people don't seem to get is that foreign saving in another currency is an expression of confidence in the currency rather than a sign of weakness."
Until it isn't anymore.
Ok, just stop thinking about the USA for a second and transplant your MMT analysis onto a much smaller country with a persitent CAD. Start with the UK perhaps, then expand to other nations.
Does you analysis stand up to scrutiny in these more vulnerable cases?
This is what I'm interested in.
When we discuss MMT, are we simply talking about the ideal system for the preeminent economic and military power on the planet - or can MMT policies be successfully applied in other, smaller and less fortunate nations?
*persistent
The difference is that few are willing to save in "inferior currencies." That's the advantage that rich and powerful countries have due to their wealth and power. As wealth and power shift, so does relative willingness to hold currencies.
"…can MMT policies be successfully applied in other, smaller and less fortunate nations? …"
Of course. Math and systems based on it is true at any level. A closed system is a closed system. Are you wondering if the size of the state can change natural law?
Where did you read any qualifier by MMT on the size of the economy it pertains to? MMT is not based on reserve currency status.
It is based on the sectoral balances identity and an understanding of monetary economics.
Economies will run on that track regardless of the number of turns, crosswinds, participants or tactics. No one gets to pull a Rosie Ruiz.
What do you think makes UK different than the US in economic matters?
Why does reserve currency status matter?
Like the US the UK cannot run out of money, they are operating well below capacity and can afford to buy that capacity without causing inflation. Nearly all inflation that has occurred over the past 40 years can be attributed to the cost of oil.
I concerned about the possibility for a currency crisis/balance of payments crisis, as the result of an out of control CAD. I know the UK can't run out of money, but the pound exchange rate could potentially collapse.
"…the pound exchange rate could potentially collapse…"
Based on what evidence or series of events?
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