Baker's argument is that given the present state of domestic finance still being highly leveraged and a zero possibility of increasing the government contribution under the present political circumstances, the only way out if through the external sector and a falling dollar would support this. Moreover, if the world held fewer dollars in reserve relative to other global reserve currencies, then the trade deficit would be reduced, meaning fewer imports and less embedded labor. So with decreasing imports and increasing exports, US domestic investment would increase and so would domestic employment. In other words, there would be a US "rebalancing."
However, if the US would also adopt mercantilism, the global economy would likely buckle under the strain with the major marketplace accepting less from abroad and invading the marketplace of other countries. This is especially true now that the US is a major petroleum producer again, as well as natural gas.
The US is a very tough competitor and in a free market environment everyone else would at a disadvantage. That would likely result in calls for protectionism and an end to the era of free trade.
CEPR
If the Dollar Stopped Being the Preeminent Reserve Currency It Would Mean More Jobs and Growth
Dean Baker
Another example of how Baker doesn't get it. So, what, we get more export related jobs while losing our real terms of trade? Our economy becomes one of sending our real product to the rest of the world in exchange for somebody else's currency? That's what he wishes for?
ReplyDeleteI think he is saying that given the sectoral balances that is the outcome being forced on us in that the private sector is saving and government is gridlocked with the deficit falling. The only way out is through exports and a falling dollar due to a default would help bring that about. I don't think he is advocating for it though.
ReplyDeleteWhile I agree with the MMT position that the US could in principle run full employment and also enjoy the benefits in real trade terms if it adopted MMT policy, there is very little chance of that happening in the foreseeable future.
So the choice is either domestic austerity which the GOP seems to prefer or a falling dollar which the administrations seems to prefer. However, GOP policy may result in a falling dollar and rising exports, even though that is not their agenda.
The whole idea is predicated on the assumption that foreign countries will liquidate their dollar holdings and start buying US goods and services.
ReplyDeleteBut that isn't the reason they are holding dollars and dollar financial assets.
They are doing that to keep their currency down wrt the US dollar so they can keep their export-led polices on the road.
If the US starts to decline it is just as likely that they will hold *more* US dollar financial assets to maintain the space in the US economy for their real exports.
Only a shift away from export-led growth amongst the rest of the world would allow the dollar to be repatriated.
Dean Baker is convinced, (because I asked him), that foreign central banks are terrified of making 'losses' on US dollar financial assets.
In the central bank of foreign nations they are not assets. They are hostages.
The US are the main net importing "sink" for the several net exporters "sources".
ReplyDeleteIf the US go "balanced trade" then a global reconfiguration must take place as a "sink" substitute does not appear to exist.
Paulo, are you an engineer?
ReplyDeleteIt appears more and more people are looking at economic flows from an engineering systems perspective.
@ Paulo Garrido
ReplyDeleteYes, this why from a global closed system perspective the developed countries need to be net importers, or sinks as you put it, while the emerging world is catching up.
MMT shows how to balance the lost employment in the developed world through fiscal policy.
This is pretty simple and easily doable from the engineering (systems) perspective.