An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
I think this article is poorly written, so I went to the original article: “The myth of monetary sovereignty” by Frances Coppola.
For Coppola, a national government may have monetary sovereignty over its own currency, but if that government must borrow foreign currency with which to buy imports, then the government has no monetary sovereignty. Therefore monetary sovereignty is a myth.
Nonsense. If a government’s debt is denominated in the government’s own currency, then the government has no “debt crisis.” But if the government has debt in foreign currencies, then the government may have a problem. MMT has never denied this.
“For various reasons, most countries are not monetarily sovereign, even if they issue their own currencies and have floating exchange rates and open capital accounts.”
Wrong. “Monetary sovereignty” means the government has sovereignty over its own currency. Therefore the supposed need to reduce its deficit in its own currency is bullshit.
“Sadly, if MMT's policy recommendations rely on there being monetary sovereignty, it can never safely be used in more than a handful of countries. Monetary sovereignty is largely a myth.”
It is a myth in places like the euro-zone, whose 19 governments cannot create their currency out of thin air. It is not a myth in places like the UK, USA, Canada, and Australia, whose currencies are widely accepted outside their borders. Nor is it a myth in nations that have their own currencies, but also have debts in foreign currencies.
None of this invalidates MMT, although I do agree that when we discuss macroeconomics, we should always be clear about which nation we are referring to.
Konrad, quite possibly poorly written :) Just want to say - it is not the article I would write on this subject. I had to try to make it follow Coppola's convoluted and handwaving argument. In other words, the bullet points I had to follow are not the order I would ever write a "fresh" article on this topic in (or address at all). So my own response is shaped by what I see as her poor reasoning. Anyway, I just wanted to get the basics right, regardless of the form, and keep the issue out there. Cheers, Clint
Good response, Clint, but I think you mean "foreign-denominated debt" when you say "foreign debt". Konrad said the same above as I was writing this. In general, her logic is very odd, she is saying Bill Mitchell's definition of monetary sovereignty is "wrong" because it doesn't match up to hers (which is arguably so stringent that it was never satisfied by any country). But she is arguing about the meaning of a phrase with people who are close to the guy who coined it and using it the same way as he does! (Rodger Malcolm Mitchell is the one who coined the phrase. It is the name of his blog.)
Also "Countries indeed must roughly match imports with exports over time or inevitably suffer." is wrong and contradicts the rest of the essay. Or you have to take it as the rough matching occurs over time - yesterday's imports are matched with tomorrow's exports. Or it is a practical observation that imports / exports won't be at a ratio of 2 or 10 forever. But a 5 or 10 or 20% or whatever excess is perfectly sustainable forever.
Not that I think it will be, but the US could be the reserve currency issuer forever, just as the UK could have remained it. As late as the 1960s, there were still more foreign reserves in pounds than dollars. There is no inevitable insustainability.
Indeed this amounts to ceding far too much to the opposition "sound finance" viewpoint here represented by Coppola. A few years ago she agreed with me on Abba Lerner's merits, but it doesn't sound to me like she has actually read him, as he ably refuted her arguments before she was born.
If it is NOT reinterpreted as I did just above, there is no real, conceptual difference between saying imports and exports must roughly match over time and saying that a country can't deficit spend forever - i.e. that spending and revenue must roughly match over time. A parallel practical observation is that Debt/GDP doesn't go to infinity. (Or some deficit level is not practically sustainable forever) E.G. highest debt/gdp I know of in a developed country is about 6. For endless trade deficits do not lead to unemployment or diminished manufacturing capacity IF the trade deficit country simply practices functional finance. Same for endless budget deficits and currency values and inflation.
Calgacus – thanks, let me look at that on :foreign-denominated debt”. You mean, I need to change the phrase? I wrote it in a bit of a rush, so any editing like that is useful, thanks.
You write “Not that I think it will be, but the US could be the reserve currency issuer forever,”
My point is about the harm it does to the US economy to export dollars for imported manufactured goods. We can do it, but we lose manufacturing jobs, we lose tacit knowledge, we diminish our military strength when we do so. It is not worth it. There is not a gain from imports when they displace your increasing returns industries. Import/export cannot be analyzed without attention to what is being imported and exported, not just the $ value.
Any trade argument that doesn't incorporate the insights in these papers by Reinert is incomplete:
Reinert, Eric S. 1994. 'Catching-up from way behind - A Third World perspective on First World history' in Fagerberg, Jan, Bart Verspagen and Nick von Tunzelmann (eds.) The Dynamics of Technology, Trade, and Growth, Aldershot: Edward Elgar, pp. 168-197.
Reinert, Erik S. 1995. Competitiveness and its Predecessors - a 500 year Cross- National Perspective. Structural Change and Economic Dynamics 6: 23-42. 283
Reinert, Erik S. 1996. ‘The Role of Technology in the Creation of Rich Nations and Poor Nations: Underdevelopment in a Schumpeterian System’, in Rich Nations- Poor Nations, The Long Run Perspective. Aldershot: Edward Elgar, pp. 161-188.
Reinert, Erik S. 1998. ‘Raw Materials in the History of Economic Policy: Or Why List (the Protectionist) and Cobden (the Free Trader) Both Agreed on Free Trade in Corn’, pp. 275-300 in Gary Cook, ed. The Economics and Politics of Free Trade; Freedom and Trade: Volume II. London: Routledge, pp. 275-300.
Reinert, Eric S. 2004. How Rich Nations got Rich: Essays in the History of Economic Policy. Centre for Development and the Environment, University of Oslo, Working Paper no. 2004/01.
MMT is _almost_ correct on everything; w/out these (related, heterodox) trade insights incorporated, it is not correct on trade. (this list is from the bibliography of my dissertation https://www.academia.edu/450987/Initial_Conditions_as_Exogenous_Factors_in_Spatial_Explanation )
This paper is a really cool application of Reinert's thinking;
Hoeschele, Wolfgang. 2002. The Wealth of Nations at the Turn of the Millennium: A Classification System Based on the International Division of Labor. Economic Geography 78(2): 221-244.
I discuss both here "Mercantilism and the Rise of the West: Towards a Geography of Mercantilism" (unfinished draft, needs some transition sections I never did)
She probably fancies herself part of a future Labour govt (similar to what Kelton is doing here with Democrats) and Bill got a pretty good get there with his high call directly with McDonnell (she ever meet with him?)
Bill ofc didn’t sugar coat his message to McDonnell and now she is publicly on the social media defending McDonnell position by attacking Bill (complete with stereotypical biased accusation of Australian male misogyny ufb) which she thinks puts her in a better light with the McDonnell people for a Labour economic position or at least access to Labour should Labour ever get back in...
I don’t think we have to “check her math”....this is all just partisan politics as usual...
Clint; Glad I could help a bit. I think highly of most of the essay, except for what we are arguing about.
Basically the stuff MMT economists say about "household analogy" is blatantly self-contradictory nonsense. The core of MMT is actually the opposite - treating, thinking of household or private debt or state debt all in the same terms. Because they are all the same damn (not)thing. Read Mitchell-Innes. (Or Wray or Gardiner) It is more than an analogy, rather it is the systematic & CAREFUL application of the same concepts to different entities. The mainstream problem is not in thinking in terms of invalid analogies or bad framing and bad words, but errors in logic and reasoning. They do not apply the concepts correctly or with any care. Their statements do not follow from their assumptions. MMT statements do. What I am saying is that MMT is entirely correct, but MMTers can be sloppy about meta-MMT - most especially when they think they are being precise (but not doing T-accounts). :-)
Again, functional finance and that rarest of things, common sense, erases the always trivial and mostly imaginary problems from being a currency issuer or developed countries running trade deficits. There is no necessity or inevitability to losing important manufacturing jobs, know-how etc. It is really reversing cause and effect, ends and means. The rustbelt job losses etc that the USA has suffered were not some deplorable side effect of trade. They were an intentional device to crush labor.
Lerner and others understood and wrote about this stuff decades ago. As he understood, there is no "internationally", there is absolutely nothing that happens internationally that should not be understood domestically. To quote him - there is nothing in functional finance that needs to be modified when we talk about international trade and finance. If you think there is some necessity to matching exports and imports in a stricter way than the very loose ones I outlined, then you are going down the neoclassical, mainstream, commodity theory road. Vague mention of "household analogy", suggestions that it magically arises when we talk about international trade, but not domestic commerce, proves nothing.
Thia is not to say that MMT, universal practice of functional finance, something more like the postwar era, would probably lead to rather more balanced trade than we have now. But if it didn't, trade numerology is not something the USA above all should give a flying f about. And not really the UK, Australia, Canada etc. People don't understand how damn rich the country is, how much work and sabotage our oligarchs do in making people live so far below their means.
You were doing good here: “mainstream problem is not in thinking in terms of invalid analogies or bad framing and bad words, but errors in logic and reasoning.”
“the international currency hierarchy forces DEEs [developing and emerging economies] to adopt higher interest rates to maintain demand for their currencies. It is this policy, however, which encourages national agents to borrow in international markets, thereby increasing their foreign exchange exposure and adding to debt servicing outflows.” (Bortz & Kaltenbrunner, 2018, p. 14)
An obvious means to increase demand for a Nation's fiat is to allow the citizens to use it, as the banks do, in convenient, inherently risk-free account form and to abolish all other privileges (e.g. government-provided deposit insurance) for bank deposits too.
Moreover, the current two-tiered money model, whereby fiat use is largely confined to banks and other depository institutions, is a relic of expensive fiat, i.e. the Gold Standard. The current money model is thus just as unnatural as needlessly expensive fiat is and should likewise be abolished in a just, responsible manner.
13 comments:
I think this article is poorly written, so I went to the original article: “The myth of monetary sovereignty” by Frances Coppola.
For Coppola, a national government may have monetary sovereignty over its own currency, but if that government must borrow foreign currency with which to buy imports, then the government has no monetary sovereignty. Therefore monetary sovereignty is a myth.
Nonsense. If a government’s debt is denominated in the government’s own currency, then the government has no “debt crisis.” But if the government has debt in foreign currencies, then the government may have a problem. MMT has never denied this.
“For various reasons, most countries are not monetarily sovereign, even if they issue their own currencies and have floating exchange rates and open capital accounts.”
Wrong. “Monetary sovereignty” means the government has sovereignty over its own currency. Therefore the supposed need to reduce its deficit in its own currency is bullshit.
“Sadly, if MMT's policy recommendations rely on there being monetary sovereignty, it can never safely be used in more than a handful of countries. Monetary sovereignty is largely a myth.”
It is a myth in places like the euro-zone, whose 19 governments cannot create their currency out of thin air. It is not a myth in places like the UK, USA, Canada, and Australia, whose currencies are widely accepted outside their borders. Nor is it a myth in nations that have their own currencies, but also have debts in foreign currencies.
None of this invalidates MMT, although I do agree that when we discuss macroeconomics, we should always be clear about which nation we are referring to.
Konrad, quite possibly poorly written :)
Just want to say - it is not the article I would write on this subject. I had to try to make it follow Coppola's convoluted and handwaving argument. In other words, the bullet points I had to follow are not the order I would ever write a "fresh" article on this topic in (or address at all). So my own response is shaped by what I see as her poor reasoning.
Anyway, I just wanted to get the basics right, regardless of the form, and keep the issue out there.
Cheers,
Clint
Good response, Clint, but I think you mean "foreign-denominated debt" when you say "foreign debt". Konrad said the same above as I was writing this. In general, her logic is very odd, she is saying Bill Mitchell's definition of monetary sovereignty is "wrong" because it doesn't match up to hers (which is arguably so stringent that it was never satisfied by any country). But she is arguing about the meaning of a phrase with people who are close to the guy who coined it and using it the same way as he does! (Rodger Malcolm Mitchell is the one who coined the phrase. It is the name of his blog.)
Also "Countries indeed must roughly match imports with exports over time or inevitably suffer." is wrong and contradicts the rest of the essay. Or you have to take it as the rough matching occurs over time - yesterday's imports are matched with tomorrow's exports. Or it is a practical observation that imports / exports won't be at a ratio of 2 or 10 forever. But a 5 or 10 or 20% or whatever excess is perfectly sustainable forever.
Not that I think it will be, but the US could be the reserve currency issuer forever, just as the UK could have remained it. As late as the 1960s, there were still more foreign reserves in pounds than dollars. There is no inevitable insustainability.
Indeed this amounts to ceding far too much to the opposition "sound finance" viewpoint here represented by Coppola. A few years ago she agreed with me on Abba Lerner's merits, but it doesn't sound to me like she has actually read him, as he ably refuted her arguments before she was born.
If it is NOT reinterpreted as I did just above, there is no real, conceptual difference between saying imports and exports must roughly match over time and saying that a country can't deficit spend forever - i.e. that spending and revenue must roughly match over time. A parallel practical observation is that Debt/GDP doesn't go to infinity. (Or some deficit level is not practically sustainable forever) E.G. highest debt/gdp I know of in a developed country is about 6. For endless trade deficits do not lead to unemployment or diminished manufacturing capacity IF the trade deficit country simply practices functional finance. Same for endless budget deficits and currency values and inflation.
Calgacus – thanks, let me look at that on :foreign-denominated debt”. You mean, I need to change the phrase? I wrote it in a bit of a rush, so any editing like that is useful, thanks.
You write “Not that I think it will be, but the US could be the reserve currency issuer forever,”
My point is about the harm it does to the US economy to export dollars for imported manufactured goods. We can do it, but we lose manufacturing jobs, we lose tacit knowledge, we diminish our military strength when we do so.
It is not worth it. There is not a gain from imports when they displace your increasing returns industries. Import/export cannot be analyzed without attention to what is being imported and exported, not just the $ value.
Any trade argument that doesn't incorporate the insights in these papers by Reinert is incomplete:
Reinert, Eric S. 1994. 'Catching-up from way behind - A Third World perspective on
First World history' in Fagerberg, Jan, Bart Verspagen and Nick von Tunzelmann
(eds.) The Dynamics of Technology, Trade, and Growth, Aldershot: Edward
Elgar, pp. 168-197.
Reinert, Erik S. 1995. Competitiveness and its Predecessors - a 500 year Cross-
National Perspective. Structural Change and Economic Dynamics 6: 23-42.
283
Reinert, Erik S. 1996. ‘The Role of Technology in the Creation of Rich Nations and
Poor Nations: Underdevelopment in a Schumpeterian System’, in Rich Nations-
Poor Nations, The Long Run Perspective. Aldershot: Edward Elgar, pp. 161-188.
Reinert, Erik S. 1998. ‘Raw Materials in the History of Economic Policy: Or Why
List (the Protectionist) and Cobden (the Free Trader) Both Agreed on Free Trade
in Corn’, pp. 275-300 in Gary Cook, ed. The Economics and Politics of Free
Trade; Freedom and Trade: Volume II. London: Routledge, pp. 275-300.
Reinert, Eric S. 2004. How Rich Nations got Rich: Essays in the History of Economic
Policy. Centre for Development and the Environment, University of Oslo,
Working Paper no. 2004/01.
MMT is _almost_ correct on everything; w/out these (related, heterodox) trade insights incorporated, it is not correct on trade. (this list is from the bibliography of my dissertation https://www.academia.edu/450987/Initial_Conditions_as_Exogenous_Factors_in_Spatial_Explanation )
Calgacus, foreign debt bit corrected, many thanks! :)
This paper is a really cool application of Reinert's thinking;
Hoeschele, Wolfgang. 2002. The Wealth of Nations at the Turn of the Millennium: A
Classification System Based on the International Division of Labor. Economic
Geography 78(2): 221-244.
I discuss both here "Mercantilism and the Rise of the West: Towards a Geography of Mercantilism" (unfinished draft, needs some transition sections I never did)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2164912
"i.e. that spending and revenue must roughly match over time."
Domestic economy, no, this never applies. Household analogy never applies domestically. Hence functional finance, why bonds are vestigial etc.
Internationally, household analogy does apply, yes.
She probably fancies herself part of a future Labour govt (similar to what Kelton is doing here with Democrats) and Bill got a pretty good get there with his high call directly with McDonnell (she ever meet with him?)
Bill ofc didn’t sugar coat his message to McDonnell and now she is publicly on the social media defending McDonnell position by attacking Bill (complete with stereotypical biased accusation of Australian male misogyny ufb) which she thinks puts her in a better light with the McDonnell people for a Labour economic position or at least access to Labour should Labour ever get back in...
I don’t think we have to “check her math”....this is all just partisan politics as usual...
Clint; Glad I could help a bit. I think highly of most of the essay, except for what we are arguing about.
Basically the stuff MMT economists say about "household analogy" is blatantly self-contradictory nonsense. The core of MMT is actually the opposite - treating, thinking of household or private debt or state debt all in the same terms. Because they are all the same damn (not)thing. Read Mitchell-Innes. (Or Wray or Gardiner) It is more than an analogy, rather it is the systematic & CAREFUL application of the same concepts to different entities. The mainstream problem is not in thinking in terms of invalid analogies or bad framing and bad words, but errors in logic and reasoning. They do not apply the concepts correctly or with any care. Their statements do not follow from their assumptions. MMT statements do. What I am saying is that MMT is entirely correct, but MMTers can be sloppy about meta-MMT - most especially when they think they are being precise (but not doing T-accounts). :-)
Again, functional finance and that rarest of things, common sense, erases the always trivial and mostly imaginary problems from being a currency issuer or developed countries running trade deficits. There is no necessity or inevitability to losing important manufacturing jobs, know-how etc. It is really reversing cause and effect, ends and means. The rustbelt job losses etc that the USA has suffered were not some deplorable side effect of trade. They were an intentional device to crush labor.
Lerner and others understood and wrote about this stuff decades ago. As he understood, there is no "internationally", there is absolutely nothing that happens internationally that should not be understood domestically. To quote him - there is nothing in functional finance that needs to be modified when we talk about international trade and finance. If you think there is some necessity to matching exports and imports in a stricter way than the very loose ones I outlined, then you are going down the neoclassical, mainstream, commodity theory road. Vague mention of "household analogy", suggestions that it magically arises when we talk about international trade, but not domestic commerce, proves nothing.
Thia is not to say that MMT, universal practice of functional finance, something more like the postwar era, would probably lead to rather more balanced trade than we have now. But if it didn't, trade numerology is not something the USA above all should give a flying f about. And not really the UK, Australia, Canada etc. People don't understand how damn rich the country is, how much work and sabotage our oligarchs do in making people live so far below their means.
“how much work and sabotage our oligarchs do in making people live so far below their means.“
Conspiracy Theory....
You were doing good here: “mainstream problem is not in thinking in terms of invalid analogies or bad framing and bad words, but errors in logic and reasoning.”
But then lost it somehow....
“the international currency hierarchy forces DEEs [developing and emerging economies] to adopt higher interest rates to maintain demand for their currencies. It is this policy, however, which encourages national agents to borrow in international markets, thereby increasing their foreign exchange exposure and adding to debt servicing outflows.” (Bortz & Kaltenbrunner, 2018, p. 14)
An obvious means to increase demand for a Nation's fiat is to allow the citizens to use it, as the banks do, in convenient, inherently risk-free account form and to abolish all other privileges (e.g. government-provided deposit insurance) for bank deposits too.
Moreover, the current two-tiered money model, whereby fiat use is largely confined to banks and other depository institutions, is a relic of expensive fiat, i.e. the Gold Standard. The current money model is thus just as unnatural as needlessly expensive fiat is and should likewise be abolished in a just, responsible manner.
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