Wednesday, November 13, 2013

Randy Wray — What If China Dumps US Treasury Bonds? Paul Krugman inches toward MMT

Krugman continues to inch away from ISLM thinking and toward MMT. Witness his latest post:
New Economic Perspectives
What If China Dumps US Treasury Bonds? Paul Krugman inches toward MMT 
L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

16 comments:

Ralph Musgrave said...

I agree with Wray’s article except for a bit at the end where both Krugman and Wray make a mistake. Krugman says depressing the “value of the dollar” would be “good for America”.

The reality is that depressing the value of the dollar means a standard of living hit for US citizens: exports become more viable, so US citizens spend more time working away to produce stuff which is consumed not by themselves, but by the Chinese etc,. Plus imported goodies become more expensive for US citizens to purchase. I.e. as Warren Mosler keeps pointing out, exports are a cost and imports a benefit. See:

http://moslereconomics.com/2012/12/24/imports-are-a-benefit-exports-are-a-cost-is-it-clear-now/

Then in the penultimate paragraph, Wray says “I doubt any significant dollar appreciation will occur.” That might be a typo. If China dumps Treasuries and buys the bonds of other countries, then the US dollar would DEPRECIATE not APPRECIATE, wouldn’t it?


JK said...

Piggybacking on Ralph's comment, Dean Baker often talks about a depreciation of the dollar and more balanced trade as a good thing. Krugram is saying here it would be good for America. I was surprised to see Wray agree, but I got to thinking…

If…IF…. we were in an MMT full employment functional financed economy, then yes, ok, as MMT says and Ralphed stated above:

"The reality is that depressing the value of the dollar means a standard of living hit for US citizens: exports become more viable, so US citizens spend more time working away to produce stuff which is consumed not by themselves, but by the Chinese etc,. Plus imported goodies become more expensive for US citizens to purchase."

But … BUT… if we're going to have an incompetent political class that is either naively or purposely not giving us the purchsing power to bring about the effective demand to really create and sustain low unemployment.. THEN… ok, I think it does start to make sense to say that a depreciation of the dollar would be good for Ameica.

In sum:

What do we need? More effective demand
Where are we gonna get it? If not via Congress (lower taxes and/or higher deficit spending), then the next best option is from the foreign sector.

Ok, on more point:: this is a dumb strategy for the country with the Reserve currency. If the world wants to hoard dollars, so be it. Trying to fight that desire is akin to trying swim upstream -> likely leading to trade and FX tit for tats, etc.

Ryan Harris said...

I get that whole schtick about imports being good for 'us' and exports bad. Unless you don't have a job or have a crap job at walmart and would rather have a job in manufacturing or something that pays decent. Then the whole thing is patently absurd. If you are unemployed/underemployed, and the Demo-Repub government refuses to do fiscal then a fall in the dollar hurts the rich and helps you get a job so you can buy something rather than nothing. If you are starving you don't turn down a bland potato to wait for a succulent steak. This is where that pragmatic part of capitalism can be handy rather than the strict catholic variety.

Matt Franko said...

Wray: "Folks, all the dollars the Chinese have came from the US. There is no net supply of dollars from China..... The rest of the world are users of the dollar, not issuers. They can never hold us hostage."

If you don't believe this, you are a moron, sorry!

rsp,

Tom Hickey said...

The basic idea about trade equilibrium is that currencies will adjust "in the long run" to balance trade and so imbalances are self-correcting. This ignores that exchange rates are not only dependent on economic conditions, since the strength of a currency is based on the strength of a nation, and the currencies of strong nations are the most desirable to hold, especially in parlous times when they are perceived as a safe haven. The US being the largest economy and the global hegemon, the USD has a leg up in spite of other considerations.

But most economists consider equilibrium conditions better than not. Moreover, there are tradeoffs. An advantage in real terms of trade is good for domestic living standards but bad for domestic employment, since embedded labor is being imported along with the goods, in effect, allowing foreign workers to compete with domestic, i.e., it is virtual immigration that reduces domestic labor bargaining power.

Anonymous said...

ryan,

if one evaluates actions not words, it is clear the "Demo-Repub government" doesn't actually care about the "deficit" or government "debt." just look at actual spending and taxing (fiscal) decisions and priorities.

however, they do appear to care about crushing labor power and that is highly unlikely to change in response to efforts to "balance" trade.

seems to me the roadblock to full employment (and therefor, increasing labor power) is squarely in the sphere of domestic politics and not foreign relations/politics.

Matt Franko said...

selise,

If we look at "the deficit" as the ex post record of non-govt savings, and we experience a change in these external non-govt sector agents savings desires for USDs then they may start to export less to the US and this probably will at least "help" the US increase industrial output and associated employment cet par...

Will help but far from full employment perhaps to your point...

When you say here: "it is clear the "Demo-Repub government" doesn't actually care about the "deficit" or government "debt."

You are arguing with "facts" that are not in evidence... fyi...

Right now this is the biggest issue in the political realm even with the current issues with "Obamacare" so-called...

In fact there is some sort of big budget committee meeting today that I'm sure will garner the most attention in politics ....

the debt and deficit (and reducing both) is a BIG bipartisan issue out there currently.... imo the biggest...

rsp

Ralph Musgrave said...

JK, I agree: if a country is plagued by incompetent politicians who wont implement enough stimulus, then devaluing the currency and effectively knicking demand from other countries might bring net benefits to the country concerned.

Ryan Harris said...
This comment has been removed by the author.
Unknown said...

"The reality is that depressing the value of the dollar means a standard of living hit for US citizens: exports become more viable, so US citizens spend more time working away to produce stuff which is consumed not by themselves, but by the Chinese etc"

I think whether this is a good or bad thing for most people depends a lot on the distribution of wealth and income in the US. A current account deficit could be good in theory, in practice it isn't if most of the real benefit goes to a small part of the population and the rest has low income, high levels of debt and unemployment.

selise said...

matt, you're right, i shouldn't have used phrases such as "care about the deficit." i don't know what anyone cares about.

my position is 1) that we can't assume deficit spending would be the same under differing conditions of external balance and 2) that the above employment level predictions do make that implicit assumption.

Unknown said...

some good recent posts by Philip Pilkington here, btw:

http://fixingtheeconomists.wordpress.com/

Matt Franko said...

selise,

" that we can't assume deficit spending would be the same"

All we can control is the SPENDING so there is really no such thing as "deficit spending" in the here and now... the deficit is ex post, spending is the here and now...

So to say 'deficit spending' violates the arrow of time and imo we should NOT use this term/phrasing anymore....

I think we could expect SPENDING to be about the same if the Chinese transitioned away from exports.

So what probably would happen is that domestic entities would be able then to increase their USD savings as opposed to the external Chinese entities who currently use their abysmal domestic conditions to gain advantage in the real terms of trade to step in front of US domestic non-govt savers currently...

If they (Chinese) stopped saving, imo the deficit would probably stay about the same initially but the savings would flow to domestic entities and domestic output would increase...

rsp,

Ryan Harris said...

Capital investment and related economic activity ( the so called multiplier effects) come with each job and dollar of trade 'nikked' from our trading adversaries.

JK said...

This would all be so much simpler if politcians worldwide ran government budgets according to Functional Finance.

selise said...

matt,

"All we can control is the SPENDING..."

no. both spending and taxation must be taken into account (why i wrote "deficit spending" but will attempt to refrain in the future) and they

"we could expect SPENDING to be about the same..."

"imo the deficit would probably stay about the same initially"

spending and taxation are affected by both policy and by endogenous factors. even putting aside policy/political considerations (which i don't thtink we should), how can you justify assuming away endogenous factors like automatic stabilizers and resource bottlenecks?