In this post, I will attempt to describe the dynamics of defaults and restructurings by going through some monetary economics of open economies.Read it at The Case of Concerted Action
The Monetary Economics Of Sovereign Government Rating
by Ramanan
Ramanan does publish comments at his place, and this is really a seminal post, so have it here.
68 comments:
Thanks Tom for linking but you had linked this post a few days earlier as well!
No harm, those who missed earlier will see it now.
Thanks.
Ramanan is tough to read. I think the point is, a country has to have some semblance of balance in trade to get away with running large deficits. The US cannot continue to import more and more and continue to grow a current account deficit without risk of default.
"…a country has to have some semblance of balance in trade to get away with running large deficits…"
If a country had a balance of trade it likely wouldn't need large deficits would it?
Deficits are a result of economic performance in systems that have automatic stabilizers in place. They are a trailing indicator.
Ramanan is wrong - the U.S. has no foreign debt - he continues to conflate interest we (voluntarily) pay on treasuries as debt.
He uses the term "debt" in much the same way he has criticized the MMT community for use of the term "savings" - serious cognitive dissonance going on here.
It seems as though he views (as many do) natural-world processes in semantic terms (h/t Matt) but isn't able to "see" the internal workings of mathematical relationships with clarity - they must appear as a black box to him as it does to many if not most - this is becoming quite apparent as the worlds "experts" keep trying to fix the wrong problem.
Without specifically critiquing Ramanan's post (which I do obviously have some, but not excessive, differences with), let's PLEASE once and for all recognize that the "extreme" position often attributed to MMT'ers is not in fact the position MMTers hold.
Wray is clear about this
http://neweconomicperspectives.org/2011/11/mmp-blog-26-sovereign-currency-and.html
Floating exchange rates providing "more" fiscal policy space, or "the most" out of the exchange rate options. Nobody has ever said it offers unlimited policy space.
And here:
http://neweconomicperspectives.org/2012/04/mmp-blog-45-the-jg-and-affordability-issues-with-special-considerations-for-developing-nations.html
Developing nations in particular may want to go more slowly implementing pure functional finance policies like JG, as he clearly explains there.
And note that in both pieces it is pointed out that an option to increase policy space--again, particularly for developing nations--all the more is to institute controls on capital flows. Kregel has suggested this several times, too.
This is a myth about neo-Chartalism or MMT that won't die, but it is a myth, so it would be appreciated if others would help counter it when it arises.
"
"…a country has to have some semblance of balance in trade to get away with running large deficits…"
"
who said?
"who said?"
from Chewitup's comment
Oh didn't appear when I read yours.
The point in Ramanan's post that most salient, I think, is the observation that eventually its the private external debt that becomes the issue, that is, the open position of the banking system in fx. This eventually becomes a problem for banks, which the government (cb or Treasury) has to deal with to protect its financial system. When it does, it begins to take on externally denominated debt, too, and that is unsustainable.
I posted this expecting that this key issue in Ramanan's construction of the problem would be addressed in the comments. I should have mentioned that in the post itself.
Yes, Tom, and I completely agree with Ramanan there. That fits perfectly into Minsky--and note that it's under a fixed or roughly fixed fx regime that the pvt sector is less likely to hedge itself against currency movements.
Let me also say that I don't want to make too much of my differences here with Ramanan. I have tremendous respect for his analysis and intelligence, and whenever we do disagree I take it seriously and necessarily spend time rethinking my position precisely because of my respect for him. We should also recognize that such disagreements make up only about 10% of our overall views of things; I would agree probably 9 times out of 10 with him.
Paul,
Appreciate your thoughts on a post I did that now Chinese govt is going to buy/own a us bank....
How does that work?
So if the Chinese govt has Treasuries at the Fed that is a "debt" of the US , but if they own a US bank that has treasuries that is an asset? Or is that still a "debt"?
maybe the Fed will just let them hold their treasuries at their new US bank and then the "debt" will be "paid off"?
Resp,
So, fx translates to private external debt?
This seems like a horizontal issue, not MMT per se.
I haven't spent any time thinking about this so an example would be helpful. One that illustrates some mathematical relationship that is known to be true. Otherwise, how would we know if it was sustainable or not?
This eventually becomes a problem for banks, which the government (cb or Treasury) has to deal with to protect its financial system.
What are the consequences if the government chooses not to address this by taking on foreign debt?
Is allowing the private defaults to happen and imports to contract towards balance with exports an option? While at the same time spending as necessary to cushion the domestic fallout from the defaults.
Thanks very much for your clarification, Scott. That is exactly what I was looking for.
Matt,
I'm kind of dumbfounded that the Chinese would be allowed to own a bank in the FRS.
What could possibly go wrong?
If a bank holds a treasury it would be an asset, regardless of who owns the bank. The Treasuries China holds now are assets so it doesn't seem like a big deal. The Gov holds the "debt" (which it creates out of nothing).
Question is if the bank abdicated its fiduciary responsibilities as some U.S. banks did and became insolvent would the Fed act as the lender of last resort?
btw, IANAE (obviously) - just off the top of my head thoughts.
paul So, fx translates to private external debt?
This seems like a horizontal issue, not MMT per se."
The horizonta probleml becomes a vertical issue, since the banking system and govt are joined at the hip. Govt has delegated a great deal of its money creation power to the banking system for the good reason that most people don't want govt involved in credit assessment and extension. So when the banking system gets into trouble it becomes a problem for govt, as we just saw with the crisis. Govt has two choices, either take over the banking system itself or let it stand and fix it as best it can.
"…We should also recognize that such disagreements make up only about 10% of our overall views of things; I would agree probably 9 times out of 10 with him."
I disagree 100% with Ramanan on the things that we disagree on.
Tom,
"…The horizonta probleml becomes a vertical issue, since the banking system and govt are joined at the hip."
I understand but I suspect most of the problem is lack of regulation and oversight. Private banks have no business being involved in fx transactions - they should be more like public utilities.
Hedging is nothing more than off-loading losses to unsuspecting rubes.
Hell of a way for a system that exists for public purpose to operate.
What? Banks don't exist for public purpose? Screw 'em then.
"Is allowing the private defaults to happen and imports to contract towards balance with exports an option?"
Not if you work for an international banking concern....
Resp,
"Now let us take the case of an open economy. The sectoral balances identity now is
NAFA = DEF + CAB
A deficit in the current account implies an increase in the net indebtedness to foreigners. Unless the markets miraculously clear with the exchange rate adjusting to bring the CAB in balance, a deficit in the current account implies the nation as a whole has to attract foreigners to finance this deficit i.e., via a lower NAFA or higher DEF. In the long run, the private sector is accumulating financial assets (or has small positive NAFA) and the whole of the current account balance is reflected in the public sector balance."
Ramanan, STF, Tom, everyone, what happens if the Government stops issuing debt instruments, and pays off all existing debt as it comes due by creating money either trough PPCS or by having the Fed pay off the debt and issue money after reorganizing the Fed under the Treasury Secretary? Then what happens to:
"So the debate fixed vs floating doesn’t help too much. A relaxation of fiscal policy may spill over into higher imports with the public debt and the net indebtedness to foreigners keeps rising forever to gdp. Hence nations typically have to curb growth to bring the current account into balance"?
Does it still hold?
Also, in asking this question, I understand very well that US currency is a liability of the Government and that to the extent exporters accept US currency, they are still accepting a liability of the US Government? But when they don't want to accept those IOUs anymore in payment for imports, won't they just stop exporting? And won't that bring trade balances into line as exporters become less and less willing to accept USD?
Next, can you really project out as far into the future as you're doing without finding a way to model the changes in willingness to export to the US as we stimulate our economy here with deficit spending?
Finally, why will importers be incurring debts to foreigners in external currencies, and if they do why would the US Government ever bail them out?
If we stop printing money the music stops.
90+% of the population would be screwed - the money to monetize most of the paper gains hasn't been printed yet.
Goodbye pensions, gains from stocks, you-name-it. Talk about a bank run…
Since WWII we've created ~$560 Trillion in GDP and ~$16 Trillion in NFA's.
I don't know what percentage of that GDP became wealth but it seems like there is a massive amount of leverage in play.
Maybe we should pass a balanced trade budget amendment…our trading partners would love that.
paul "I'm kind of dumbfounded that the Chinese would be allowed to own a bank in the FRS. What could possibly go wrong?"
Look at all the liquidity that the Fed poured into non-US banks operating in the US during the crisis. What's so different about Chinese banks?
paul at 1:28
banks get involved in fx in normal banking ops through customers involved in a import-export. It's a normal aspect of banking. Through this they accumulate an open position in fx, which, of course, is affected by the fx rate. They can get caught if the fx rate moves against them.
paul: "If we stop printing money the music stops."
Right. Any engineer can easily figure the nominal amount needed to fund the transaction potential of an economy when the data is available and reasonably accurate, as it is in the US. It's just a stock-flow problem like stock-flow problems in other fields. Not as difficult as regulating electricity flow in a complex grid system, with no stocks, only variable capacity.
"What's so different about Chinese banks?"
They're government owned?
I am trying to identify a logical inconsistency in that some may consider a UST at the Fed owned by a foreign nation a "debt" of the US but if that same nation buys a us bank and then would hold those same USTs in the account of said bank those same USTs would now be considered an asset... when mathematically it is the same thing....
Resp,
What worries me about the Chinese bank, is that now a foreign-owned bank can create deposits through lending. Don't think I want that!
Also, what happens if and when we want to take that bank into resolution for insolvency, then will there be an international incident? I think this decision is bad business: risky, stupid, and foolish. In my book, it's another reason why the Fed should be re-located under the Executive Branch,
"…Look at all the liquidity that the Fed poured into non-US banks operating in the US during the crisis…"
That shouldn't have happened.
I thought companies doing transactions with foreigners did so in dollars and transactions went through the Fed Reserve banks (The vast majority of transactions). fx losses at the margins shouldn't matter much.
I don't know to what extent the private banking system has exposure, never thought it was that significant and I don't recall Warren Mosler worrying about it too much.
Still the answer isn't to not print money - that would crash the economy and break every American.
Force balanced trade on our partners. That works for me. I already have my iPad.
From what I understand, and I could be mis-interpreting, two foreign institutions can enter into a contract that has to be settled in USDs and then if it goes bust, neither have access to lender of last resort (ie The Fed) and this can bring the whole system down as the defaulter has to claim bankruptcy protection....
This type of scenario is I believe why the Fed did the swaplines... it didnt have anything to do with trade directly....
US divisions of of foreign banks had direct access to the Fed here in the US thru the other liquidity programs (TAF, TALP, etc...)
Resp,
"…I am trying to identify a logical inconsistency in that some may consider a UST at the Fed owned by a foreign nation a "debt"…"
I think you have…
Matt,
"This type of scenario is I believe why the Fed did the swaplines... it didnt have anything to do with trade directly...."
Thanks, that makes sense to me.
"Letsgetitdone"
Well, if the spends with an open line of credit at the central bank (hopes only), foreigners will be unimpressed and shift funds abroad leaving the banking system with open positions which either clears magically by the exchange rate or else the central bank or the government will need to intervene in the currency markets.
If you do not look at debt to foreigners as debt, you will hardly ever agree.
Plus the behavioural assumptions you seem to start has issues. Except for the US, nations import in foreign currencies more than in the domestic currency. Exporters do not export because they want to "net save" in the currency of the country importing. They just trying to find a market to sell their products and repatriate funds. The international financial system exchanges the currencies for them but the domestic residents have to attract the funds from foreigners.
Sorry, Ramanan, I don't see how your reply to me answers any of my questions. Would it be too much trouble for you to answer them one by responsively? I'd very much appreciate that so that we know we're not talking past one another.
Here are some more questions based on your latest reply.
"Well, if the spends with an open line of credit at the central bank (hopes only), foreigners will be unimpressed and shift funds abroad leaving the banking system with open positions which either clears magically by the exchange rate or else the central bank or the government will need to intervene in the currency markets."
What does this mean? Why should I care if foreigners are impressed with the Treasury having an open line of credit at the Fed? Also, more importantly, when did I assume this?
I mentioned the Executive using PPCS to fill the public purse with seigniorage profits, and I assume these would be used to pay down the debt and deficit spend Congressional appropriations when necessary. So why shouldn't foreigners be impressed with that, and again, why should I care if they are not?
"If you do not look at debt to foreigners as debt, you will hardly ever agree."
I look at debt instruments owned by foreigners as US debt. In fact, I think repayment of that debt is guaranteed by the 14th Amendment section 4. But I don't see how this brings me any closer to agreement with you.
"Plus the behavioural assumptions you seem to start has issues. Except for the US, nations import in foreign currencies more than in the domestic currency. . . "
They do? Please list those nations.
Do they include Japan, the UK, Australia, New Zealand, Canada, Norway, Sweden? In fact, what nations that have non-convertible fiat currencies with floating exchange rates and no external debts denominated in foreign currencies, are on your list?
"Exporters do not export because they want to "net save" in the currency of the country importing. They just trying to find a market to sell their products and repatriate funds. . . ."
I'm sure that's true, but, since to do that their countries must often "net save" in the foreign currency of the importing nation, then they certainly do want that net saving more than they want to give up their market, don't they?
"The international financial system exchanges the currencies for them but the domestic residents have to attract the funds from foreigners."
Sorry, please clarify ". . . but the domestic residents have to attract the funds from foreigners"?
That is, in the case of the US what funds from foreigners do the residents of the United States have to attract in order to buy imported goods?
"Sorry, Ramanan, I don't see how your reply to me answers any of my questions"
Precisely because you don't seem to see indebtedness to foreigners as debt. For the United States, being the reserves currency of the world, life is simpler which takes care of your last point as well.
If a nation as a whole is in deficit - that is if its income is lower than is expenditure, it is running a current account deficit and it has to net borrow from the rest of the world. Sadly enough - and this is beyond my ken - MMTers do not look at this as borrowing from foreigners and take offence at such terminology.
"What does this mean? Why should I care if foreigners are impressed with the Treasury having an open line of credit at the Fed? Also, more importantly, when did I assume this? "
You said the treasury stops issuing debt instruments. Since foreigners have funds due to their net exports, they want to place the funds somewhere. Unlike the case of the United States, foreigners do not have as much preference for domestic securities as domestic residents. Hence they are likely to repatriate funds. The nation should prevent funds from being repatriated as a whole.
"They do? Please list those nations. "
ALL countries except the United States.
"Do they include Japan, the UK, Australia, New Zealand, Canada, Norway, Sweden?"
Australia at least. Unsure as to where to get data for others. Highly likely to be the same.
http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/2E5DC0CD8723CD0FCA2573AA001446E9?OpenDocument
Japan and Norway are net exporters btw! I am not sure New Zealand's currency qualifies as a "sovereign currency" because its government has debt in foreign currency!
"In fact, what nations that have non-convertible fiat currencies with floating exchange rates and no external debts denominated in foreign currencies, are on your list?"
Hardly the perspective to take. You are assuming here that it is easy for nations to simply float and have the government not borrow in foreign currency!
Non-convertible is not standard terminology btw. Currencies are supposed to be convertible.
"I'm sure that's true, but, since to do that their countries must often "net save" in the foreign currency of the importing nation, then they certainly do want that net saving more than they want to give up their market, don't they?"
There is no meaning of "net save in currency". net saving is a bad terminology to begin with which reminds one of the saving net saving confusion that was discussed recently.
No they do not have to give up their markets. Don't know why you say that.
Somewhere I gave an example for Toyota selling cars in Thailand and repatriating funds back to Japan. This leaves the banking system indebted in Yen and it has to attract funds from Japan by hook or crook to close its net open position. Sometimes it works, sometimes doesn't.
"Sorry, please clarify ". . . but the domestic residents have to attract the funds from foreigners"?"
Clarified above hopefully.
"That is, in the case of the US what funds from foreigners do the residents of the United States have to attract in order to buy imported goods?"
The United States enjoys an exorbitant privilege of not only buying imports in its own currency but also that foreigners using the proceeds to buy US dollar assets. Other nations do not.
Hope that's okay. You can discuss this at *any* length with me!
Ramanan: "Non-convertible is not standard terminology btw. Currencies are supposed to be convertible."
I don't get this point about convertibility you are making. Not arguing with standard usage but meaning. The way MMT uses "convertible" means convertible into an actual numeraire like a specified amount of a PM to a unit of account. In what way are currencies supposed to be convertible in this sense. Seems to me that the standard usage you cite means "exchangeable for another currency." But there is no fixed rate involved in either of these. So I don't see the point of difference you are making.
Tom,
Not arguing about meanings.
As per standard monetary economics, currencies are convertible. You may prefer the term exchangeable but the standard terminology is convertible and hence it is a bit weird to use "non-convertible". Instead you should invent new terminology.
For example don't you often hear about "capital account convertibility" in addition to current account convertibility? These are standard and official/legal terminologies.
Thanks, got it.
Ramanan, You said:
"Sorry, Ramanan, I don't see how your reply to me answers any of my questions"
Precisely because you don't seem to see indebtedness to foreigners as debt."
But I specifically said previously that:
I look at debt instruments owned by foreigners as US debt. In fact, I think repayment of that debt is guaranteed by the 14th Amendment section 4. But I don't see how this brings me any closer to agreement with you."
So, contrary to your claim, it seems clear to me that I do recognize debts to the holders of debt instruments including foreigners who hold their instruments.
Next, you said:
". . . For the United States, being the reserves currency of the world, life is simpler which takes care of your last point as well.
If a nation as a whole is in deficit - that is if its income is lower than is expenditure, it is running a current account deficit and it has to net borrow from the rest of the world. Sadly enough - and this is beyond my ken - MMTers do not look at this as borrowing from foreigners and take offence at such terminology."
Ramanan, I think this is incorrect, if by it you mean that imports must be paid for by supplying debt instruments. On the other hand, if all you mean is that Americans must pay for those imports using USDs which are a liability of the government, then that's right. But, as you know the Government has no obligation to redeem these liabilities in anything but USD. It doesn't have to borrow foreign currency to pay these debts, does it?
I'll reply to your other comments as I get to them.
Ramanan, you next quoted me:
"What does this mean? Why should I care if foreigners are impressed with the Treasury having an open line of credit at the Fed? Also, more importantly, when did I assume this?"
and then you replied:
"You said the treasury stops issuing debt instruments."
Right, but I did not say that the Treasury had an open line of credit at the Fed. In my scenario, the Treasury would have many Trillions of USD in the Treasury General Account at all times and would not issue debt instruments.
You went on:
"Since foreigners have funds due to their net exports, they want to place the funds somewhere. Unlike the case of the United States, foreigners do not have as much preference for domestic securities as domestic residents. Hence they are likely to repatriate funds. The nation should prevent funds from being repatriated as a whole."
Why should we prevent USD from being repatriated rather than held in securities?
If foreigners must spend their dollars then we won't have the same degree of AD leakage from foreign trade that we have now.
Ramanan,
Continuing, you previously said:
". . . Except for the US, nations import in foreign currencies more than in the domestic currency. . . "
to which I replied:
"They do? Please list those nations."
And then you said:
"ALL countries except the United States."
But, I don't think you know that this is true. It is off the top of your head.
I asked: "Do they include Japan, the UK, Australia, New Zealand, Canada, Norway, Sweden?"
And you replied:
"Australia at least. Unsure as to where to get data for others. Highly likely to be the same."
Which means you don't KNOW the answer to my question but are just assuming that what you say is true. For Australia you gave this link: http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/2E5DC0CD8723CD0FCA2573AA001446E9?OpenDocument
Thanks for it. But it doesn't make the point that Australia isn't sovereign in its own currency because it owes an accumulated external debt that it must use foreign currencies to pay off.
You next add:
"Japan and Norway are net exporters btw! I am not sure New Zealand's currency qualifies as a "sovereign currency" because its government has debt in foreign currency!"
I agree with this, but would ask how big is New Zealand's foreign currency debt? If it's relatively small, then New Zealan's lack of control over interest rates in this currency will have little effect on its currency sovereignty.
Ramanan, continuing, you quote me:
"In fact, what nations that have non-convertible fiat currencies with floating exchange rates and no external debts denominated in foreign currencies, are on your list?"
And then you reply:
"Hardly the perspective to take. You are assuming here that it is easy for nations to simply float and have the government not borrow in foreign currency!"
I'm not assuming anything. I'm asking a question you earlier implied had only one nation on that list -- the US. But here you're implying that there are other nations, but that I'm using the wrong perspective. Let's see the list and then we'll be in a better position to evaluate whether there's anything wrong with that perspective.
You then go on:
"Non-convertible is not standard terminology btw. Currencies are supposed to be convertible."
I think this comment isn't either responsive or relevant. You and I both know I'm referring to the fact that some nations have fiat currencies that the government of issue has no obligation to convert to other currencies on demand, and when referring to this issue and context the term "convertible" is perfectly standard.
I think if we're going to have a successful communication we need to avoid raising false, merely semantic issues. Above I gave the definition of a nation sovereign in its own currency. That definition is useful for distinguishing such nations from others that don't have such sovereignty.
Ramanan, continuing, you said:
"Exporters do not export because they want to "net save" in the currency of the country importing. They just trying to find a market to sell their products and repatriate funds. . . ."
To which, I replied:
"I'm sure that's true, but, since to do that their countries must often "net save" in the foreign currency of the importing nation, then they certainly do want that net saving more than they want to give up their market, don't they?"
And you replied:
There is no meaning of "net save in currency". net saving is a bad terminology to begin with which reminds one of the saving net saving confusion that was discussed recently.
No they do not have to give up their markets. Don't know why you say that."
Well, again, a semantic issue. My point, which I think you understand very well, is that if they want to export more than they import from a nation that will only pay for its exports, then they must accept its currency in payments or not export to it, i.e. give up their market or at least that part of it that exceeds a neutral trade balance.
You then added:
"Somewhere I gave an example for Toyota selling cars in Thailand and repatriating funds back to Japan. This leaves the banking system indebted in Yen and it has to attract funds from Japan by hook or crook to close its net open position. Sometimes it works, sometimes doesn't."
I don't think this is relevant to our exchange, because obviously to have that situation Thailand has to be willing to pay for those Toyotas in Yen rather than using Bhat. That's why Toyota could repatriate its funds to Japan. If Thailand had been able to pay in Bhat, then there would have been no problem, and, of course, since the US gets to pay in USD, we don't have to worry about that. Perhaps Thailand should tell Toyota that it won't buy any more Toyotas unless they're manufactured and sold in Thailand.
Ramanan, OK we're coming to the end now. To my question:
"Sorry, please clarify ". . . but the domestic residents have to attract the funds from foreigners"?"
You replied:
"Clarified above hopefully."
I understand what you mean, now, but have previously offered disagreements on key points.
And you continue with another question of mine:
"That is, in the case of the US what funds from foreigners do the residents of the United States have to attract in order to buy imported goods?"
And you replied:
"The United States enjoys an exorbitant privilege of not only buying imports in its own currency but also that foreigners using the proceeds to buy US dollar assets. Other nations do not."
Well again, which other nations do not, or put another way which nations apart from the US enjoy that "exorbitant privilege"?
just a general comment about commenting on this site. There's a 4096 character limit on comments here. In my view that limits dialogue. In the case above I had to split my reply to Ramanan over 6 comments in order to give a point-by-point reply. Sometimes such replies are needed in debates. So, I think this site ought to remove that limit.
Letsgetitdone,
I will try to attempt to go over your points but one thing caught my attention.
"ALL countries except the United States."
But, I don't think you know that this is true. It is off the top of your head.
I asked: "Do they include Japan, the UK, Australia, New Zealand, Canada, Norway, Sweden?"
And you replied:
"Australia at least. Unsure as to where to get data for others. Highly likely to be the same."
Which means you don't KNOW the answer to my question but are just assuming that what you say is true. For Australia you gave this link: http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/2E5DC0CD8723CD0FCA2573AA001446E9?OpenDocument
Thanks for it. But it doesn't make the point that Australia isn't sovereign in its own currency because it owes an accumulated external debt that it must use foreign currencies to pay off.
Firstly you asked a wrong question - in the sense that you should have asked - yourself, rather than me - on how many countries are able to pay for imports in the domestic currency and also have foreigners hold assets in that currency. Instead you concentrated on only a few nations.
The Neochartalist proposal is to have countries float their currencies and escape the balance of payments constraint as a result.
Next you allege I said it on top of my head. Now I specifically gave you an example of Australia - which sufficiently shows that the story about foreigners coming in a ship and selling by demanding the domestic currency is chimerical to begin with.
Also it's a known fact that most of international trade is in the US dollar - I am surprised of your ignorance to this. I will try to find the data for other nations however.
The second thing which caught my attention is
"I think this comment isn't either responsive or relevant. You and I both know I'm referring to the fact that some nations have fiat currencies that the government of issue has no obligation to convert to other currencies on demand, and when referring to this issue and context the term "convertible" is perfectly standard."
Obviously, it is official language to use convertible currencies. If you do not know, the articles of agreement have a clause on official convertibility as well - opposite of what you claim. In addition there is "market convertibility".
It's good to use the right language than wrongly use standard accepted terms in debates and in writings.
My view is that it better to keep the comments short and argue point by point in separate comments. It's a lot easier for others to follow the train of thought.
Letgetitdone,
About your references to constitution, law etc - for the purpoase at hand - these are minor things. As required by you I am assuming that the US government "simply credits bank accounts"
"Ramanan, I think this is incorrect, if by it you mean that imports must be paid for by supplying debt instruments. On the other hand, if all you mean is that Americans must pay for those imports using USDs which are a liability of the government, then that's right. But, as you know the Government has no obligation to redeem these liabilities in anything but USD. It doesn't have to borrow foreign currency to pay these debts, does it?"
It is NOT incorrect. If there is a current account deficit, there's net borrowing. This net borrowing can be financed by sale of assets or by incurring liabilities by one of the resident sectors. Standard national/BoP accounting.
The United States is in a special position where foreigners purchase US dollar denominated debt from the proceeds of their exports.
Other nations do not have the privilege.
Let's say a country like India needs to purchase oil. Assuming the oil corporation is state owned, the government can borrow simply by borrowing funds in foreign currency.
"Why should we prevent USD from being repatriated rather than held in securities?
If foreigners must spend their dollars then we won't have the same degree of AD leakage from foreign trade that we have now."
You are assuming that foreigners are "mousetrapped". Foreigners can also shift portfolios to another currency. In the case of the US it is less likely to happen for now but it happens all the time for most of other nations.
cont'd ...
This is part 1 which Blogspot ate!
Firstly you asked a wrong question - in the sense that you should have asked - yourself, rather than me - on how many countries are able to pay for imports in the domestic currency and also have foreigners hold assets in that currency. Instead you concentrated on only a few nations.
The Neochartalist proposal is to have countries float their currencies and escape the balance of payments constraint as a result.
Next you allege I said it on top of my head. Now I specifically gave you an example of Australia - which sufficiently shows that the story about foreigners coming in a ship and selling by demanding the domestic currency is chimerical to begin with.
Also it's a known fact that most of international trade is in the US dollar - I am surprised of your ignorance to this. I will try to find the data for other nations however.
The second thing which caught my attention is
"I think this comment isn't either responsive or relevant. You and I both know I'm referring to the fact that some nations have fiat currencies that the government of issue has no obligation to convert to other currencies on demand, and when referring to this issue and context the term "convertible" is perfectly standard."
Obviously, it is official language to use convertible currencies. If you do not know, the articles of agreement have a clause on official convertibility as well - opposite of what you claim. In addition there is "market convertibility".
It's good to use the right language than wrongly use standard accepted terms in debates and in writings.
Part 3:
"Well, again, a semantic issue. My point, which I think you understand very well, is that if they want to export more than they import from a nation that will only pay for its exports, then they must accept its currency in payments or not export to it, i.e. give up their market or at least that part of it that exceeds a neutral trade balance."
Sorry, I don't get you. Don't think just a semantic issue. Goes into concepts of national accounting about what saving is and the counterparts of this saving are etc.
"I don't think this is relevant to our exchange, because obviously to have that situation Thailand has to be willing to pay for those Toyotas in Yen rather than using Bhat. That's why Toyota could repatriate its funds to Japan. If Thailand had been able to pay in Bhat, then there would have been no problem, and, of course, since the US gets to pay in USD, we don't have to worry about that. Perhaps Thailand should tell Toyota that it won't buy any more Toyotas unless they're manufactured and sold in Thailand."
Yes it is relevant to the issue!
It goes into how exporters sell their products - what happens to these funds, the role of banks in international setting and the role of the CB/govt in the game itself.
When Toyota rapatriates funds abroad, a Thai bank stands ready to buy or sell currency in the fx markets. The decision to repatriate funds by Toyota throws the banking system into a higher foreign currency liability. In case of floating exchange rates, either the currency depreciates to the point of bringing foreigners back to purchase Thai securities or else if the banks are unable to close their positions, the central bank has to intervene.
Tom,
Issues here in posting! Comments disappear!
Part 3:
"Well, again, a semantic issue. My point, which I think you understand very well, is that if they want to export more than they import from a nation that will only pay for its exports, then they must accept its currency in payments or not export to it, i.e. give up their market or at least that part of it that exceeds a neutral trade balance."
Sorry, I don't get you. Don't think just a semantic issue. Goes into concepts of national accounting about what saving is and the counterparts of this saving are etc.
"I don't think this is relevant to our exchange, because obviously to have that situation Thailand has to be willing to pay for those Toyotas in Yen rather than using Bhat. That's why Toyota could repatriate its funds to Japan. If Thailand had been able to pay in Bhat, then there would have been no problem, and, of course, since the US gets to pay in USD, we don't have to worry about that. Perhaps Thailand should tell Toyota that it won't buy any more Toyotas unless they're manufactured and sold in Thailand."
Yes it is relevant to the issue!
It goes into how exporters sell their products - what happens to these funds, the role of banks in international setting and the role of the CB/govt in the game itself.
When Toyota rapatriates funds abroad, a Thai bank stands ready to buy or sell currency in the fx markets. The decision to repatriate funds by Toyota throws the banking system into a higher foreign currency liability. In case of floating exchange rates, either the currency depreciates to the point of bringing foreigners back to purchase Thai securities or else if the banks are unable to close their positions, the central bank has to intervene.
Part 3:
"Well, again, a semantic issue. My point, which I think you understand very well, is that if they want to export more than they import from a nation that will only pay for its exports, then they must accept its currency in payments or not export to it, i.e. give up their market or at least that part of it that exceeds a neutral trade balance."
Sorry, I don't get you. Don't think just a semantic issue. Goes into concepts of national accounting about what saving is and the counterparts of this saving are etc.
"I don't think this is relevant to our exchange, because obviously to have that situation Thailand has to be willing to pay for those Toyotas in Yen rather than using Bhat. That's why Toyota could repatriate its funds to Japan. If Thailand had been able to pay in Bhat, then there would have been no problem, and, of course, since the US gets to pay in USD, we don't have to worry about that. Perhaps Thailand should tell Toyota that it won't buy any more Toyotas unless they're manufactured and sold in Thailand."
Yes it is relevant to the issue!
It goes into how exporters sell their products - what happens to these funds, the role of banks in international setting and the role of the CB/govt in the game itself.
When Toyota rapatriates funds abroad, a Thai bank stands ready to buy or sell currency in the fx markets. The decision to repatriate funds by Toyota throws the banking system into a higher foreign currency liability. In case of floating exchange rates, either the currency depreciates to the point of bringing foreigners back to purchase Thai securities or else if the banks are unable to close their positions, the central bank has to intervene.
Part 4 ...
"Well again, which other nations do not, or put another way which nations apart from the US enjoy that "exorbitant privilege"?"
Few nations such as US, Canada, Australia ... The point is that currencies are usually unacceptable to foreigners. Hence the government or the nation as a whole has to attract funds by hook or crook from abroad.
Even this privilege depends on several things. There is no guarantee that it will last forever. The important thing is the indebtedness of the nation as a whole which foreigners can see as unsustainable.
@ Ramanan
I'll check the spam filter again right now.
You wrote "The Neochartalist proposal is to have countries float their currencies and escape the balance of payments constraint as a result."
I don't think that is exactly the MMT position, although WM does seem to favor that. But as Randy has written, countries have to watch inflation and fx. I am assuming he is including loss of purchasing power wrt to both inflation and fx as operational contraints. Why would he mention fx along with inflation if were not a nominal constraint relative to real resources?
Ramanan "Issues here in posting! Comments disappear!
I just fished three of your comments out of spam. I have no idea why blogspot doesn't like some of your posts and not others. Makes no sense to me. Anyone else have any ideas?
Part 5:
"I agree with this, but would ask how big is New Zealand's foreign currency debt? If it's relatively small, then New Zealan's lack of control over interest rates in this currency will have little effect on its currency sovereignty."
According to data from 2009, which is the last I could find till now, the public debt in foreign currency is $4.2b and New Zealand GDP is around $120b or so.
So not low. It could even get higher in the future!
Which raises the question. What is the exact definition of a "sovereign currency". In many places - such as Bill's blog - I have seen zero debt in foreign currency.
Surely according to it, only the US dollar is sovereign currency.
If there is an alternative definition - who decides if its high or low?
Joe, I checked the formatting options and there doesn't seem to be a control for setting comment size. But as I said above, stating issues individually in separate comments makes the train of thought easier to follow, at least for me.
ramanan I love your ideas and am so grateful that you post. You are awesome.
I see what you're saying about non-US nations always being forced to have an external sector indebted in a foreign currency. It would appear this is b/c of Bretton Woods as you state.
I have questions for you regarding the implications of this fact.
#1. Assuming your Toyota example with Thai and Japan...for example let's say 1 yen = 2 bhat. If so, what is the difference if Thai paid 2 Bhat (in their own currency) to Japan or if they exchanged their 2 Bhat for 1 yen at a JAPANESE BANK instead of a Thai bank? Wouldn't that fix the problem such that the Thai bank is no longer "liable" for the debt, but a Japanese bank is? And this would then be the "cost" of exporting for the exporter? That is to offer to take the other side of the currency exchange in return for their goods being sold? In other words isn't it possible for a currency exchange to take place such that there is no net change of either currency and no foreign debt liability? What am I missing here?
Also what solution is there towards the Bretton Woods decision? It would appear that we'd need some international reserve currency for all nations to clear exports through? Could that reserve currency be fixed while national currencies could float and thereby still have competitive advantages and supply/demand pricing within each currency and trade relation? I may be totally off here but I'd love to hear your thoughts in this regard. Thanks!
wouldn't you also think that a Chinese bank with the FRS would allow the Chinese a greater ability to "clear" their own US Treasury holdings much more easily and freely?
Note that such a tactic is the same way that a speculator can attack a currency like Soros did to the Thai Bhat in the 90's. Assuming that in say 20 years or so (as Ramanan suggest may be the case for the US) the US dollar may not be in such high demand and clear so easily.
see this video by Khan regarding this very topic:
http://www.youtube.com/watch?v=P2IWGlR1SHs
here is the more direct video on the Thai currency crisis:
http://www.youtube.com/watch?v=lA3sjWwu5-s&feature=relmfu
Ramanan...can't a central bank buy whatever amount of foreign currency reserves (at current market rates) in whatever proportion necessary in relation to the amount of external deficit they find their own nation to be in?
This way the nation that needs to clear will always be prepared and able to "absorb and clear" whatever amount is necessary to stabilize any unwind?
Mario,
Thanks!
Doesn't matter. The Japanese bank will sell the Thai Bhat whenever it sees undesired positions and will try to neutralize the inventory discrepancy.
There are some Post Keynesian proposals on Bancor (the original Keynes' proposal at the Bretton Woods conference which was not used) but it doesn't really solve anything. The underlying problem is real and shows up as a monetary problem.
I am not sure what you are asking about Chinese banks. Any context to this?
A central bank cannot so easily go around purchasing foreign reserves. It typically acquires it via export proceeds and/or government issuance of foreign currency debt.
If the central bank tries to purchase foreign currency the way you suggest, it will leave foreign banks with excess domestic currency and they will try to get rid of it by sales. It can work if the central bank needs some depreciation of the currency but can't solve the general problem of financing the external deficit.
Ramanan: "|The underlying problem is real and shows up as a monetary problem.
Agreed. The underlying assumption of neoliberalism is that the circular flow of production (supply), distribution (market price), and consumption (demand) is balanced in markets through competitive price discovery, so that in the long run there is always equilibrium, unless there is some shock to the system like a war or natural disaster that create an artificial disruption. But left alone, markets will do the job of restoring equilibrium themselves. They will admit some intervention in the form of monetary policy (interest rate = the price of borrowing money). But Austrian economists reject eject all intervention in markets due the "calculation problem."
Keynesians in general reject that view in favor of selective governmental intervention to restore balance with less distortion than would occur with a market solution. They also point out that markets do not always restore equilibrium through a return to the status quo ante, but it may be at a lower of level of economic performance.
For that reason, I am skeptical of the claim that floating rates solve currency issues as long as there is currency sovereignty. As Ramanan observes, this is because the underlying issues are real rather than nominal. Available resources are not being distributed effectively and efficiently through markets, if only because markets are in reality not actually free, nor are markets perfectly competitive, nor is knowledge perfect either. The model is just too simplistic.
International coordination concerning making real resources available is needed, and the countries that dominate the process, notably the US, reject that approach other than in lip service.
Tom,
Generally one is used to thinking of resource endowment as important but it alone doesn't explain success of nations. The important thing is competitiveness of its producers and how they make use of the resources. That's a part of the "balance-of-payments constraint" story.
Sorry that was me, pressed a few buttons by mistake.
Right, but at the real level it is a developmental problem. There is not going to be balance in the world with the level of asymmetry that presently exists, nor can there be in the EU either given the asymmetry. We can say that the US and Germany are just out-competing everyone else, but that is is simplistic viewpoint.
The point is that if we use intelligence to grow the pie everyone has more and there is greater peace on earth (pun intended).
Who is against peace and prosperity? Only those who are too greedy to overcome self-interest enough to coordinate. This cohort has even managed to create the widespread perspective that maximizing utility through the pursuit of self-interest is the natural state and leads to the superior outcome, even if 0.1% own almost everything of consequence. That's were neoliberalism and market fundamentalism lead.
Ramanan:
I am not sure what you are asking about Chinese banks. Any context to this?
If down the road, there is a time when the US is not as attractive to investors, China may have a hard time finding a buyer of the US dollar so they can liquidate their dollar positions. However if they have a US bank!!...then they can in part create their own buyers to exit their own dollar positions.
I may not be thinking accurately about this, but there you go.
Seems like the only way to get rid of external sector risk for a fiat currency would be a one-world government/currency. No thanks there!!
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