Sunday, November 18, 2018

Brian Romanchuk — How Can A Floating Currency Sovereign Default?

I have been toying with an idea of writing a book with the title "How Can a Floating Currency Sovereign Default?" As a follower of Modern Monetary Theory (MMT), this is a bit of a joke, since the text of the book would just be: "They can't." The book can then be submitted to the World's Shortest Book Competition.
Thinking about this has led to me to the realisation that the usual way of discussing sovereign default is inherently defective. (This criticism extends to my earlier book Understanding Government Finance, unfortunately.) The usual technique is to describe the mechanisms for default, look at some models, and argue why a default is unlikely. This then runs into a hurricane of whataboutery - what about the external constraint, Russia, Iceland, etc.
I think we need to follow a different tack, and I expect to turn that into a somewhat longer book.... 
Bond Economics
How Can A Floating Currency Sovereign Default?
Brian Romanchuk

6 comments:

Konrad said...

A monetarily sovereign government can indeed default in its own currency, although this would be a political choice, not a financial necessity.

The corollary to this is that monetarily sovereign governments do not run on tax revenue in their own currency. Nor can US programs like Social Security ever become “insolvent” except by political choice.

However monetarily sovereign governments can become insolvent from loans in foreign currency. This is why Argentina, for example, is an economic nightmare. Argentina’s government can create infinite pesos out of thin air, but the pesos cannot be used to buy imports. Foreigners won’t accept them as payment. (Argentina is woefully dependent on imports, and has a huge trade deficit.) And Argentina recently took a giant loan from the IMF, which means that Argentina’s government will go 100% neoliberal. We’re talking mass privatization, plus more poverty and inequality than ever.

Because of the growing shortages in consumer goods (caused by the trade deficit) Argentina’s government would spark inflation if it created too many pesos out of thin air.

Eventually Argentina’s government will have to start creating more pesos to keep the nation from collapsing, at which point Argentina will face hyper-inflation. U.S. conservatives will claim that Argentina’s hyper-inflation resulted from “socialism,” even though Argentina’s government is neoliberal, which is the opposite of socialism. (For right-wing morons, any economic problems, no matter what the cause, are the result of “socialism.”)

Nicaragua likewise has a huge trade deficit, and has recently taken IMF loans. Therefore Nicaragua will go the way of Argentina.

These are facts, not guesses.

Already there are nationwide strikes and protests in Argentina, and they are becoming more common in Nicaragua. The situation becomes more desperate by the day. However corporate media outlets pretend that the Argentine nightmare does not exist, since President Macri is a neoliberal.

Konrad said...

I’m not joking. Currently we see a wave of economic refugees from Honduras and Guatemala. Soon there will be refugees from Argentina and Nicaragua.

You cannot truly understand the nature of sheer desperation unless you have lived abroad with the poor (as I have). No one – I mean no one -- wants to make the hazardous journey north, but many people sincerely feel they have no choice.

American conservatives see the refugees as a hoard of invading rats, armed with machetes and bent on merciless plunder.

In reality the refugees desperate and terrified.

Don’t like refugees? Tell your government to stop creating them.

Incidentally we know that conditions are bad in Honduras (because of US support for the corrupt neoliberal government there), but why did 5,000 refugees suddenly come north? The answer is that humans are like lemmings. (I do not mean this as an insult.) With lemmings, population growth, plus food shortages, combine to create extreme anguish and stress. One day the lemmings suddenly go on the march, looking for new territory in a bid to survive. (It is a myth that lemmings deliberately commit suicide by jumping off cliffs.)

Humans are the same. In the case of Hondurans, the trigger was a false rumor that some rich person would take care of them if they traveled north. A trickle of refugees quickly became a flood. Even though the rumor proved false, people continue to travel in a large group because it is safer than traveling alone.

Conservative hatred for Hondurans reminds me of the Roman assault on Gaul. During the Battle of Alesia (52 BC) the Gauls ran out of food, and they sent all their women and children outside the fortress walls, hoping the Romans would take them as captives and feed them. The old and the sick were also sent out. However the Romans just stood and watched as all the women and children starved to death. Literally to death.

Andrew Anderson said...

Eventually Argentina’s government will have to start creating more pesos to keep the nation from collapsing, at which point Argentina will face hyper-inflation. Konrad

One way to increase demand for the peso and thus reduce the potential for hyperinflation would be to allow the entire population of Argentina (and the world?) to have peso accounts at the Central Bank of Argentina and to abolish all other privileges for the banks as well.

Let's not forget that government privileged banks can themselves create unlimited* price inflation.

*Even assuming Argentine banks are bound by the Supplemental Leverage Ratio, this can be overcome by issuing and selling more common stock to decrease the asset to capital ratio.

Konrad said...

"Let's not forget that government privileged banks can themselves create unlimited price inflation."

True, but banks create money as credit. They create money as loans (unlike government-created money). Hence the debt load can (in some cases) moderate inflation somewhat.

Andrew Anderson said...

Hence the debt load can (in some cases) moderate inflation somewhat. Konrad

The loans bump up asset values and thus so-called "credit worthiness" in an indefinite spiral upward, i.e. George Soros' "Theory of Reflexivity".

Monetary sovereigns shoot themselves in the foot, price inflation wise, by privileging "the banks."

Konrad said...

"Monetary sovereigns shoot themselves in the foot, price inflation wise, by privileging 'the banks'."

Banks are one form of creditors. Western society privileges all creditors over debtors, over society, over national survival, over the environment, and over the survival of the human species.

Hence Western society is doomed.