Read it at The Case of Concerted Action
Born In The U.S.A. – MMT And Monetary Sovereignty
Posted by Ramanan
Guest Post by Sergio Cesaratto | Professor of Economics at the University of Siena
Prof. Cesaratto argues against the MMT position citing Nersisyan Y., Wray R.L. (2010), Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff, Working Paper No. 603, Levy Institute June 2010, and Wray L.R. (2011), Currency Solvency and the Special Case of the US Dollar.
60 comments:
Typical PK anti-MMT stuff we've seen for years.
He even misrepresents Randy a bit who writes (Sergio's own quote): "a country can run a current account deficit SO LONG AS the rest of the world wants to accumulate its IOUs."
Then Sergio writes in response: "That is, any country with a fully sovereign currency and no promise of convertibility at a given exchange rate can confide on an unlimited foreign credit."
In fact, Sergio's interpretation of RAndy's statement is completely wrong, as anyone who has a good grasp of English should be able to see. Indeed, Randy's been very clear in recent MMP blogs that there are limits.
I'm curious why these people think the UK's been able to run current account deficits largely along the lines of the US without being the reserve currency and with its interest rates still following monetary policy as in the US and Japan.
Anywa, this is the kind of stuff that keeps non-US countries from understanding the options available to them. As if markets are suddenly going to turn against a nation who's macro policy leads to full employment--that's actually far more likely with a fixed exchange rate.
This certainly won't convince any MMT economists--we've heard this for years and we're still waiting for a sovereign currency issuing nation to prove them right and us wrong. Hasn't happened yet.
Well Randy Wray - an avowed Minskyite wrote in 2007 that Mexico has no issues at all. In 2008 it was begging the IMF for funds.
What about the other post on his blog http://www.concertedaction.com/2012/05/04/the-monetary-economics-of-sovereign-government-rating/
Is S&P really correct?
Don't know the details of Mexico that well, but Mexico's exchange rate was roughly pegged prior to the crisis, giving it a clear reason to go to the IMF not-inconsistent with MMT.
Next?
"clear reason to go to the IMF not-inconsistent with MMT. "
No floating.
Try harder.
@ Ramanan
http://www.bis.org/publ/bppdf/bispap54q.pdf
Might wanna read that, page 8 where Mexican corporations were playing with fx derivatives.
andy,
Dont tell me contracts cash settled in USDs?? And the parties had no access to lender of last resort???
This is the crooked shit that the
Fed facilitates... it's bad enough that they endorse this activity domestically but here we can see that this corruption has indeed gone global.
Resp,
AndyCFC,
Even banks in the US have derivative positions. So do we wait till the next millenium for them to cancel the contracts so that your pet theory can hope to describe?
Let me offer an analogy, the US private sector ran deficits and hence was highly indebted because of this. At the same time Wall Street was securitizing the loans. would you infer that if the wall street hadn't securitized, the private sector could have run deficits forever?
@ Ramanan
Look I just led you to that paper.
Definately a case of a another country needing another countries currency, it doesnt invalidate the MMT position like you claim. Thats it nothing else dont shoot the messenger so dont go off on one. Not proof of MMT or proof that you are right but in this case sides with MMT.
@matt
certainly looks like it, I notice the paper doesnt tell you who sold them those contracts, I bet I could guess who ;)
I said "roughly pegged" to about 11 pesos per $1. For about 5 years prior to the crisis-- http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=DEXMXUS&s[1][range]=10yrs
They were clearly trying to maintain some sort of range before it left the range in the crisis. Looks like a flexible fx in name only.
AndyCFC's point is very relevant--large indebtedness by the corporate sector in foreign currency, and banks got in to trouble. All that fits the MMT story of problems that can arise if you do flexible fx (or pretend to, as the case may be) in a silly way. I would argue it would have been worse if they had fixed fx, since the speculative attack against the currency would have been worse as the CB would have been expected to defend for a while. The article suggests that the peso/$ was expected to stay within a particular range by market traders.
So, no question they needed $. But don't consider this an argument against MMT--this is a classic case of not doing things as MMT suggests.
No offense to this blog, but these comments should have been added to Ramanan's blog.
...oh, sorry, I forgot...Ramaman doesn't welcome comments on his blog. How convenient, no?
This guy criticizes everything in sight yet doesn't give the same courtesy to others when it comes to challenging his views.
Cesaratto seems to be stuck on the price of credit provided by foreigners. He doesn't get that the central bank can set rates. Period. Because there are inflationary limits to consumption and currency exchange stability limits doesn't mean there isn't plenty of policy space within those limits. If the tiny island of Iceland could make it through their collapse, reestablish trade with the outside world in only a couple years using their own currency and temporary capital controls surely a well developed consumer economy in Europe could perform even better.
"That is, any country with a fully sovereign currency and no promise of convertibility at a given exchange rate can confide on an unlimited foreign credit." In a way, Sergio is right. And the "unlimited foreign credit" is the problem. :-) Other countries can & will extend unlimited foreign credit to the sovereign currency nation, as measured in that nation's currency. Just won't sell it very much for it, if it goes crazy printing money. The credit will be finite using any other measuring stick.
with a sovereign currency PD and CA debts are not a problem only apply to the U.S.
"any State 'can run budget deficits that help to fuel current account deficits without worry about government or national insolvency' applies indeed only to the US: precisely because the rest of the world wants Dollars."
No, it applies everywhere, because if the rest of the world doesn't want Ruritanian marks, then the Ruritanian budget deficit for a domestic expansion will not fuel a current account deficit.
Debts which you don't have, which your country is unable to incur to its advantage, are not a problem. And as long as you don't do something insane, like allow foreign savings to create unemployment at home, debts in your own currency are not a problem either. Such crazy arguments at one point have the poor sovereign indebted, at one point not. With such inconsistency allowed, I can prove anything too.
O Ramanan, O Sergio, the truth is so much simpler, so much clearer than the complicated confusion you trap yourself into. Nowadays seems like fewer & fewer intertube MMTers are becoming enraptured by, fooled that there is anything substantial behind these confusions though.
Calgacus; "No, it applies everywhere, because if the rest of the world doesn't want Ruritanian marks, then the Ruritanian budget deficit for a domestic expansion will not fuel a current account deficit.
Debts which you don't have, which your country is unable to incur to its advantage, are not a problem."
Right. Without a corresponding KAS, no CAD gets created, and if others don't wish to save in the currency, the country either has to forgo imports, run balanced trade, or borrow in another currency. Running up obligations in another's currency when unable to borrow in one's own is where countries with "inferior currencies" get into trouble.
"…the truth is so much simpler, so much clearer than the complicated confusion you trap yourself into…"
Quoted for truth. Ramanan takes the simplest things and adds layers of complexity, all the while not seeming to understand the simple thing.
That's his schtick I suppose.
He's been acting like a troll lately.
In addition, the "capital flight" from the US that is presently occurring is chiefly on the part of US owned transnationals that see better investment opportunities in the ROW than the US.
Oh, and I would like to know what fx positions those so sure of what they assert are holding. Are they putting their money where their mouth is?
Disclosure: I am only holding USD.
Ramaman doesn't welcome comments on his blog. How convenient, no?
Hosting a conversation, maintaining a useful comment section is real work. I can respect the decision not to do it. Just as I appreciate the effort put forth by the hosts at the sites that do.
"They were clearly trying to maintain some sort of range before it left the range in the crisis. Looks like a flexible fx in name only. "
Ya how convenient and flexible. The trouble is you don't even have a definition. IMF's report says flexible.
Recently Randy in his blog said anything from peg to floating is what he considers sovereign.
I remember someone quoted the example of Britain in 1970s where it borrowed from the IMF and you said fixed. WRONG. It was floating.
Britain has had chronic balance of payments problems. only in recent times has it improved. The reason is that while it runs a low current account deficit, its net indebtedness is not high due to revaluation gains - possibly due to banking operations of its banks abroad.
"So, no question they needed $. But don't consider this an argument against MMT--this is a classic case of not doing things as MMT suggests."
Oh yeah. Trouble is that is like Milton Friedman who kept insisting that central banks control the money supply and since they don't do it, they are incompetent etc. The pure float fantasy is true only for advanced industrial nations.
Nations have to frequently intervene in the currency markets because pure floating doesn't work. This was understood by foreign exchange dealers after the fixed exchange system broke in 1971. Your pure float is almost pure fantasy.
Even there you have two definitions of floating. Sometimes you say no external debt in foreign currency and sometimes you don't say it.
"In fact, Sergio's interpretation of RAndy's statement is completely wrong, as anyone who has a good grasp of English should be able to see. Indeed, Randy's been very clear in recent MMP blogs that there are limits. "
Oh yeah nice shift!
"That's his schtick I suppose.
He's been acting like a troll lately."
Really? I commented here because it was posted on my blog. I don't generally comment in Neochartalists' blogs now.
"Ramanan takes the simplest things and adds layers of complexity, all the while not seeming to understand the simple thing."
Very simple, add all the balance sheets of sectors of a nation and if it is found that financial liabilities are greater than financial assets - it is a net debtor and this primarily arises due to current account imbalances which always lead to troubles. As simple as that.
"...oh, sorry, I forgot...Ramaman doesn't welcome comments on his blog. How convenient, no?
This guy criticizes everything in sight yet doesn't give the same courtesy to others when it comes to challenging his views."
I have engaged in discussions with a lot of people in other blogs and replied to them carefully and taken time.
I do welcome comments in my blog :)
just that i don't publish them because it can get into a discussion forum which requires frequent intervention. Yes that is not the best attitude - considering I have commented a lot on others' blog but you could challenge me anywhere, email me - quote my emails in public forums.
I really don't think it really matters who is or if there is even a Reserve Currency.
A bit far afield but even Iran is now accepting Chinese currency for Oil & that's without getting into floating stuff.
There's a little too much obsession with a pure float and a pure outcome whether that be with an exchange rate or how reserves are managed.
"I really don't think it really matters who is or if there is even a Reserve Currency."
Oh yeah right!
"A bit far afield but even Iran is now accepting Chinese currency for Oil & that's without getting into floating stuff."
So what?
"There's a little too much obsession with a pure float and a pure outcome whether that be with an exchange rate or how reserves are managed."
True to some extent. The problem is the external imbalance and the ability to finance the debt. fixed or floating debate completely misses the point.
For example Switzerland has no issues really because it has a strong external sector and is a creditor nation. So it can peg its exchange rate easily and has less issues than say Mexico.
Ramanan,
In your debate with Fullwiler regarding Mexico's exchange rate policy, I struggle to see your point.
I appreciate your emphasis on careful word choice, but in this case, it is clear that what is important analytically is the country's behavior. If Country X is running a fixed exchange rate, and then announces it is running a floating exchange rate, but behaves in the exact same manner as before, then it is effectively still fixed exchange.
You seem to be playing a "gotcha" word game that misses the point.
And any bit of reading comprehension makes clear that when MMT speaks of floating v flexible when analyzing currencies, what they mean is the country's behavior. Country X could call their exchange rate policy "cake batter." Using that against MMT clearly doesn't count as a valid argument.
"if the rest of the world doesn't want Ruritanian marks, then the Ruritanian budget deficit for a domestic expansion will not fuel a current account deficit."
If the rest of the world doesn't want Ruritanian marks, then Ruritania won't be able to import anything. Which might not be a problem if Ruritania can produce everything that it needs.
If Ruritania could produce everything it needs, then it's likely that the rest of the world would be interested in owning Ruritanian marks.
It's only those countries that can't produce everything they need that run the possible risk of having no external demand for their currency.
For a country that has no external demand for its currency, the budget deficit is irrelevant. They still won't be able to import the things they need. Inflation will be rampant and the economy will be screwed.
wh10,
Really?
http://www.cfeps.org/pubs/wp-pdf/WP51-Wray.pdf
from January 2006 - Minsky wouldn't have liked this:
"Throughout the following exposition, it will be necessary to keep in mind that all of the arguments are predicated on the assumption that we are analyzing a country with a sovereign currency on a floating exchange rate—that is, a country like the UK, Japan, Mexico, Canada, or the USA."
Mexico in the list!
The IMF's Annual Report On Exchange Arrangements And Exchange Restrictions also said that in 2008 it was floating.
No offence, I won't contact the MMT headquarters to figure if a currency is floating or not.
For example, it's quite possible that since the markets think that there may be intervention it doesn't move beyond a range.
The Peso was simply not pegged.
just by eyeballing the graph, you can't conclude anything. Strangely such inferior methods have been used here.
Btw a movement from 11 to 10 is a 10% movement.
Anyways the fixed versus floating completely misses the point - but that's for another day.
Ramanan,
By insisting that it simply was not pegged and that Wray called it floating doesn't get you anywhere in the substantive debate with Fullwiler, except perhaps to highlight an analytical mistake on Wray's part. Right now Fullwiler is asserting that Mexico was behaving just like a fixed exchange rate regime, and you are asserting either they weren't or they weren't called that (the latter is the weak "cake batter" argument). I think there needs to be a little more rigor here until either side can declare victory.
wh10,
Wray says sovereign currency. now what?
The issue is that it the definitions of MMT are so vague that it is always possible for them to argue they are right. The problem is not really fixed versus floating. It is about external imbalances as Sergio rightly points out. If you do not read it as a criticism - you will find that his post - which is a part of an article he has written and will publish is a VERY nice article.
The trouble is that - as you correctly say - the problem is much more deeper and Sergio has attempted to start the debate which is good.
MMTers fail to understand that it is difficult for the central bank in a system of free trade to not intervene because banks will be left with a net open position in foreign currency.
Fullwiler's assertions sound like Milton Friedman - I was always right - the government and the central bank didn't understand me and intervened in the markets.
Btw,
the issues about central bank intervention etc have been understood well by neoclassical economics!!!
Author such as Eichengreen, McKinnon, Lyonds etc. The trouble is that their language is so neoclassical that one tends to be dismissive of them (especially given their illegitimate conclusion about fiscal austerity) but if rephrased in a proper manner can be very good analysis and a subject of research.
"it is difficult for the central bank in a system of free trade to not intervene because banks will be left with a net open position in foreign currency."
Ramanan, could you expand on this a bit?
p.s. why do you advocate deficit reduction whereas Godley preferred import restrictions?
Look, the "only" problem of this is that structural problems build over time in the real economy.
If this happens and builds up to a metastable equilibrium that then collapses to a new 'lower energy' equilibrium, where the former nation can't provide goods & services to its population they were consuming before and there is no effective substitution then this may cause social distress with whatever possible outcome (currency and political crisis, exploding poverty, violence, etc.).
With globalization the resilience of the economy can't be really understood by unilateral standards anymore, but that could change though if scarcity and resources become a problem in the future. And this is the big fat tail risk here.
But in that case finance, forex, and currencies will be the less of our problems, and will be only an effect of the underlying causes (supply shocks). So here we are with Mad Max scenarios.
If this does not happen, the real economy has one of the factors of resilience in its size, the only thing that has to be solved for extreme resilience is decentralization, more decentralization of finance is very necessary and stabilize monetary problems (a more stable monetary system), problems created in the real economy because of financial capital flows, leverage, deleverage, etc.
If we achieve that then the economy will be extremely resilient and progress will follow (we have to untangle the problem of 'lust' and capital accumulation some way though too to fix it all).
Anonymous @"May 9, 2012 10:32 AM"
Why do you say that about deficit reduction?
Yes import controls are useful. It decreases the propensity to import and hence acts as an injection to demand. A big risk is "retaliation". Indeed when Godley and Cripps proposed it, they were met with opposition from everyone on retaliation. They essentially were proposing a system of managed trade between nations so that trade is generally balanced between nations.
The idea was even deeper. It helps to do a fiscal relaxation which adds more demand and leads to higher output. Since higher production leads to higher productivity, its effect are stronger than one might think in the first instance.
What about using capital controls to regulate the capital account?
"Ramanan, could you expand on this a bit?"
When a nation is a net importer (unlike "modern monetary theory", which thinks we do not borrow from foreigners), a nation has to finance this by hook or crook. For the us it is relatively simple because exporters TO the US purchase dollar denominated assets. For other nations its not that simple. Let's say Toyota sells cars in Thailand. Now Toyota will repatriate funds back to Japan - which leaves a Thailand bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets. The Thai bank has to keep refunding this liability but it has to keep its net open position low because of regulatory requirements and self imposed requirements/discipline. So the banking system as a whole has to attract funds from abroad. This of course may be limited by how much foreigners are willing to lend and one strategy is a slightly higher interest rate by the central bank to attract funds.
However many times even this is insufficient and a shift of funds abroad leaves banks with a growing net open position. In the balance of payments language this is seen in the item "other investment". You can see this mentioned in some IMF research on nations having troubles in the fx markets. This can be quite risky and hence the central bank intervenes in the markets. The central bank is not just preventing the currency from depreciating. It is helping the banking system from acquiring huge open positions. Since the central bank is limited on this by the amount of reserves, the Treasury or the Exchange Stabilization Fund/Treasury issues debt in foreign currency. And these institutions coordinate the activities. By no means is the treasury borrowing funds in foreign currency in order to make expenditures in domestic currency. The objectives are different.
So typically nations' governments acquire foreign currency debt. Else they risk their currencies being unacceptable in the international money markets. You can't go and ask them to not borrow in foreign currency.
So Ramanan, here we are again in a case of wrong financial globalization creating problems. Globalization of production is not what is wrong, but globalization of financial capital is what creates the instability.
The problem is not the real economy trade and production but corporations using the wrong financial institutions and currencies to build up activity overseas.
Capital flow controls, breaking up international banks and limiting their operations to single monetary areas will help with this problem a lot.
I see how this is problem in a non-convertible floating rate system. What about in a convertible fixed rates system where international accounts are settled daily in gold? Seem like that sharply reduces trading opportunity for countries that cannot obtain gold by digging it out of the ground unless they are rich in natural resources that are in demand. Under such a system, now would nations trying to develop do so without borrowing in fx, e.g., through the world bank and thus become indebted to foreign creditors too?
Do you see a way though this conundrum, given that balanced trade is pretty much out of reach of such nations unless they are resource rich. And then why is this not neo-colonialism and neo-imperialism?
"Capital flow controls, breaking up international banks and limiting their operations to single monetary areas will help with this problem a lot."
Yeah but then you're talking about a different world to this one - so the MMT claim that "debt is no problem for a sovereign currency issuer" becomes utterly contingent on the whole international economic structure being transformed.
OK, fine, if we change the whole structure of the global economy, then debt is never a problem for a sovereign currency issuer. How about in the real world, as it actually is at present? In this actual real world, is it right to laugh off concerns about sovereign debt as 'stupid'? Yeah we can laugh at the idea that the US could ever face any problems, but what about countries that aren't the no.1 global superpower?
"The idea was even deeper. It helps to do a fiscal relaxation which adds more demand and leads to higher output. Since higher production leads to higher productivity, its effect are stronger than one might think in the first instance."
I don't quite understand this bit. Do you mean to say that import restrictions make govt deficit spending more effective, as it leads to higher domestic production and productivity, rather than being drained through an ever-expanding CAD?
Ramanan seems to only see problems.
Solutions are someone else's problem.
"The only winning move is not to play" - Joshua
The real world economy as it is is screwed and flawed unless some fundamental changes happen.
It's not fixable with a little patch up folks, so stop thinking on how it works and start asking how it should work.
You don't need a Phd in economics to see that the current state of affairs of financial globalization is unsustainable, with or without MMT, it just creates to much chaos.
The problem here is centring on 'production globalization' as if trade deficits were the problem. They are not, these problems will solve theirself alone when we have a proper forex and international capital market going on. Resorting to mercantilism is a flawed policy which is a tax on progress.
What you have to fix is the other thing, the financial markets problem. There is no 'free lunch', there is only screwed financial system going on which facilitates all this.
"Ramanan seems to only see problems."
So, Ramanan, goven your concerns, what 'solutions' would you propose, for the US. i.e. how would you get the US to full (or thereabouts) employment and strong sustainable growth?
sorry, given not goven
"I don't quite understand this bit. Do you mean to say that import restrictions make govt deficit spending more effective, as it leads to higher domestic production and productivity, rather than being drained through an ever-expanding CAD?"
Yes that's more or less it. Not that imports are necessarily reduced - the propensity to import is reduced. So imports can be the same or slightly lower but output is much higher. Hence as a consequence, imports do not suffer because incomes are higher and since imports depend on income as well as income elasticity of demand .. hence ...
About globalization - yes it is a problem in the sense that nations who are unsuccessful in international trade do not manage to grow (and have to peg their currencies :-))
But globalization is good because it has seen success.
But it is still possible to have more globalization and balanced trade between nations. There's more globalization due to higher output across the world.
plus, it'd be interesting to hear what Mosler thinks of your conundrum.
No, no, no, you are missing the point.
Trade balance of goods and services will self correct if financial globalization is tackled. Why? Because then you will have functional forex markets without currency pegs.
Mercantilism policies are a failure and the first steep to war, period.
But you're right this is the policies the status quo will pursue at some point unfortunately, because fixing the damn financial system and bankers is too much trouble and anyway, they must have their free lunch (these guys are the ones getting free lunches all the time).
"Trade balance of goods and services will self correct if financial globalization is tackled. Why? Because then you will have functional forex markets without currency pegs."
How? Can you explain?
I don't think anyone is advocating mercantilism, only more balanced global trade.
"I don't think anyone is advocating mercantilism, only more balanced global trade."
How you have have balanced trade in the present system, in which underdeveloped countries and emerging nations cannot compete on level ground.
What this means is that the game will go on until emerging countries like China, India, Brazil, Russin, Iran, Indonesia, etc., finally are in a position to confront their Western overlords. Probably won't be pretty.
BTW, the West, especially the US, is hell-bent on preventing this from ever happening. What do you think all that military spending is for anyway?
Statement by Ramanan on his blog:
"This blog is about how to achieve sustainable growth in the short, medium and the long run and in the author’s opinion can come about only if international policies are coordinated. Policy coordination is not a new concept but for many years before the crisis, imbalances were allowed to continue even though many policy makers took notice of this. In my opinion, these were allowed to continue because the implicit assumption was that “market forces” will work toward resolving the imbalances. What is needed is a “grand bargain” as Mervyn King put it in early 2011. And it should come with an orientation toward fiscal expansion."
Makes sense to me.
I would agree also in substance also. The devil is in the details of the process. The US especially takes a hardline approach that any coordination has to be its terms, and it is not willing to give an inch.
"y",
great .. thanks.
AnonymousvMay 9, 2012 8:24 AM:
If the rest of the world doesn't want Ruritanian marks, then Ruritania won't be able to import anything. Which might not be a problem if Ruritania can produce everything that it needs.
Wrong!! (under the reading I meant) Ruritanian marks are only one of the things Ruritania produces. Nobody likes to save them because the picture of the King is so ugly it creeps everyone out, and the eccentric Ruritanians print them on oval paper, so they don't fit nicely in anyone's cash drawers.
However, Ruritania exports lots of wine & hokey literature and films, which allows it to get plenty of foreign money that it uses to buy foreign imports with. There just isn't any net demand for its money in particular. As soon as foreigners get sought-after Ruritanian marks, they get drunk & watch a Ruritanian movie, which are even more sought-after.
For a country that has no external demand for its currency, the budget deficit is irrelevant. They still won't be able to import the things they need. Inflation will be rampant and the economy will be screwed. As explained above, this is only true if "no external demand" means exactly that - no demand at all, zero fx currency value, zero demand for any Ruritanian exports. This is not the same thing as no foreign demand for saving Ruritanian marks. No external demand at all just means the country is completely cut off from the outside world. This of course says nothing about inflation, or how screwed the economy is. Maybe there are fabulously wealthy, hard money, countries on planets in Andromeda. There's no demand here for their exports or currency though.
Sergio was unable to post his reply here, so I am posting it on his behalf.
@STF You say:
Well, I might have forced Randy's position, but: 1) perhaps he should have been more precise and write: " "a country can run a current account deficit SO LONG AS IT IS THE U.S. AND THEREFORE the rest of the world wants to accumulate its IOUs." 2) indeed not only me (poor peripheral ignorant not-English speaking guy even PK) but thousand of MMT followers just ignored that "SO LONG" and get the idea that Italy, Spain, Argentina etc could afford any current account deficit just paying in liras, pesetas or pesos. Of course the devil is in the detail, and the detail - you rightly point out - is in that SO LONG. So you (and Wray) recognize that the irrelevance of the foreign flows and stock balances for fully sovereign countries is only valid (so far) for the U.S.. We fully agree, but please, explain that to your followers. I would like an Argentinian to have a say: they recovered their full monetary sovregnity, including last weeks a central bank that has to cooperate with the democratically elected government. This is very good, but still the country has not magically solved the foreign constraint by being able to print pesos.
[Sergio was unable to post his reply here, so I am posting it on his behalf.]
@STF You say:
He even misrepresents Randy a bit who writes (Sergio's own quote): "a country can run a current account deficit SO LONG AS the rest of the world wants to accumulate its IOUs." Then Sergio writes in response: "That is, any country with a fully sovereign currency and no promise of convertibility at a given exchange rate can confide on an unlimited foreign credit." In fact, Sergio's interpretation of RAndy's statement is completely wrong, as anyone who has a good grasp of English should be able to see. Indeed, Randy's been very clear in recent MMP blogs that there are limits.
Well, I might have forced Randy's position, but: 1) perhaps he should have been more precise and write: " "a country can run a current account deficit SO LONG AS IT IS THE U.S. AND THEREFORE the rest of the world wants to accumulate its IOUs." 2) indeed not only me (poor peripheral ignorant not-English speaking guy even PK) but thousand of MMT followers just ignored that "SO LONG" and get the idea that Italy, Spain, Argentina etc could afford any current account deficit just paying in liras, pesetas or pesos. Of course the devil is in the detail, and the detail - you rightly point out - is in that SO LONG. So you (and Wray) recognize that the irrelevance of the foreign flows and stock balances for fully sovereign countries is only valid (so far) for the U.S.. We fully agree, but please, explain that to your followers. I would like an Argentinian to have a say: they recovered their full monetary sovregnity, including last weeks a central bank that has to cooperate with the democratically elected government. This is very good, but still the country has not magically solved the foreign constraint by being able to print pesos.
Sergio: I doubt Wray would say that, because the "more precise" version is not "more precise" but wrong, theoretically & empirically. The dollar is not the only "reserve currency". The USA is not the only country able to run CADs, the dollar not the only IOU the world wants to accumulate.
The UK does too, as Scott Fulwiller says. The US took over this role from the UK, and there are still old geezers who like to collect pounds, because they like Brenda. Italy, Spain etc can run any trade deficit the world allows them to run in non-domestic currency terms, and any one they want to run in domestic terms. As Wray frequently says, it takes two to tango. The "foreign constraint" is no constraint at all on nominal spending, particularly on nominal spending to attain full employment, and the only constraint which the foreign sector, like any other participant in the money game a state runs can influence, is domestic inflation or fx value, the value of nominal spending in real or foreign currency terms. And this influence is finite, bounded by foreign savings and by the foreign value of domestic exports, respectively (mainly).
As Abba Lerner said, the price of potatoes is always & everywhere a potato phenomenon. Saying that governments have the capacity to spend infinitely on potatoes is not saying they have the capacity to buy an infinity of potatoes.
bah, ask an Argentinian. You seem to abolish the foreign constraint and no heterodox Italian and, I believe, Latino-American economist would follow you. The only other example besides the US you provide is the UK. I have not a precise reply, but I doubt that the UK has this privilege (Keynes and kaldor were obsessed by the British foreign constraint!). Unfortunately Wray seems even to invite the countries “where the foreign demand for domestic currency assets is limited” to pursue the catastrophic road of foreign borrowing: for them “there still is the possibility of non government borrowing in foreign currency to promote economic development that will increase the ability to export” (http://neweconomicperspectives.org/2011/11/mmp-blog-25-currency-solvency-and.html. But why do you think De Gaulle’s finance minister Giscard D’Estaing famously denounced the US “exorbitant privilege” . Anyway, our reciprocal positions are very clear.
Prof. Cesaratto, thank you for stopping by and commenting. We are honored to have you.
The external is a key area of concern in monetary economics, and we need constructive debate to clarity it. Glad to see you engaging.
This is a important debate.
The lessons I think are clear: MMT would be fine for
(1) the US,
(2) those nations with strong trade surpluses (say, Germany and Japan),
(3) those nations that seem to run near perpetual current account deficits but attractive a lot of foreign capital (say, Australia).
(4) even the Eurozone, if it were suitably reformed with a union-wide fiscal policy, would be able to achieve full employment via MMT-style policies.
But those nations, especially developing nations, that face real constraints on their current account deficits would perhaps find it difficult to maintain full employment via MMT, if balance of payments crises ensued in response to surging imports.
All this underlines the need for reform of the international payments system. It's time to give developing countries the support from the IMF and World Bank (suitably reformed) that they need for infrastructure and industrial development to achieve some degree of export balance and internal wealth, to make MMT work.
http://socialdemocracy21stcentury.blogspot.com/2012/07/some-serious-criticism-of-mmt.html
LK: "All this underlines the need for reform of the international payments system. It's time to give developing countries the support from the IMF and World Bank (suitably reformed) that they need for infrastructure and industrial development to achieve some degree of export balance and internal wealth, to make MMT work."
Agree. Market solutions don't work in the face of asymmetry, privilege, or cheating.
Cheating is the free rider problem that appears very early on the evolutionary scale. Humans have chosen to address it through the rule of law.
The push of democracy was a drive to eliminated privilege but property rights under capitalism create another form of privilege similar to the privilege of the titled nobility. The title was not an honorific but actual entitlement to the rent from a specified portion of land during the agricultural age. Capitalism simply (largely) replaced the type and ownership of titles, without destroying the privilege.
Economic asymmetry is a euphemism for inequality. It pertains to individuals in groups and societies, and among groups and societies, including nations.
For a market system to work smoothly within the context of liberal democracy — not plutocratic oligarchy masquerading as liberal democracy — then cheating, privilege and inequality have to be eliminated as far as possible.
What MMT adds is that there is never an affordability issue when real resources are available. The problem is with the distribution system, which in a monetary framework is based on "money."
A dynamic system runs on energy flow and constantly confronts entropy as a real constraint. Money is like energy in a monetary economic. The energy has to flow to where it is needed, as in an organism, or entropy increases and there is decay and death.
An economy is constituted of human beings and so it is more like at organism than a machine. Ilya Prigogine explored how a chemical system like an organism deals with entropy by energy flow through a dynamic system. Kenneth Boulding took a similar approach to economics based on systems thinking. Economists also need to read Ludwig von Bertalanffy's work on general systems theory and see where they fit it. Hint: Boulding was a co-developer of general systems theory.
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