The Gold Standard Fell As All Currency Pegs Do — Martin Armstrong

The fate of pegs is always the same because there is this thing we call the business cycle.

Armstrong Economics
The Gold Standard Fell As All Currency Pegs Do
Martin Armstrong

Trump’s Cross of Gold — Barry Eichengreen

US President Donald Trump wants to compress the United States trade deficit and enhance the competitiveness of domestic manufacturers by using tariffs to raise the price of imported goods. And the fixed exchange rates he needs to achieve that goal are the real reason behind his nomination of Judy Shelton to the Federal Reserve Board.... 

Project Syndicate
Trump’s Cross of Gold

Barry Eichengreen | Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund

Gene Frieda — China’s Difficult Balancing Act

China needs to keep growth high enough to maintain social stability, but also must preserve external stability via the renminbi’s exchange rate. How China manages its currency during its economic policy shift could have important global consequences.

China is not sovereign in its currency since it pegs to the dollar. Currency sovereignty requires floating the rate whereas as peg sets a fixed rate. This means that China domestic policy is constrained by have to manage the exchange rate within the corridor of the peg.

China needs to float the RMB to return to currency sovereignty and manage its economy instead of managing the exchange rate. As Russia did when hit by US sanctions.

Project Syndicate
China’s Difficult Balancing Act

Gene Frieda | executive vice president and global strategist for PIMCO

Cecchetti & Schoenholtz — China's Awkward Exchange Rate Regime

Float that sucker.

Perhaps the best way for China to counter President-elect Trump’s outdated claims of manipulation would be to let the currency float. In the short run, however, that would almost surely trigger a plunge versus the U.S. dollar. Given China’s strong penchant for market intervention—including its unfortunate role in the 2015-2016 stock market boom and bust—Chinese savers may simply rush for the exit, fearing that anxious policymakers will slam the gate quickly.

In the end, there is no way to make such a fixed exchange rate regime less awkward without risking a bout of instability. Over the long run, capital controls won’t solve the problem; instead, they will further diminish the efficiency with which the country’s savings are used. For a large economy like China that is integrated into the global trading system, the global norm is a floating currency. Absent a trade war (and perhaps even with one), that’s still probably where we are headed within a few years. And, it’s increasingly a question of when, not if.

Money and Banking
China's Awkward Exchange Rate RegimeStephen G. Cecchetti, Professor of International Economics at the Brandeis International Business School, and Kermit L. Schoenholtz, Professor of Management Practice in the Department of Economics of New York University’s Leonard N. Stern School of Business
ht Mark Thoma at Economist's View

Cecchetti & Schoenholtz are the authors of Money, Banking and Financial Markets.

Frances Coppola — Understanding balance of payments crises in a fiat currency system

Frances appends a note to her post:

As I don't wish to get caught up in arguments about whether governments do or don't create money when they spend, I am preserving the fiction of central bank and government separation. This means that the language in this post is that of monetarism, rather than MMT. I do not apologise for this: it is my firm belief that MMT and market monetarism are brothers under the skin, and the differences between them are largely semantic. Though there might be a difference in political ideology too.

Coppola Comment
Understanding balance of payments crises in a fiat currency system
Frances Coppola

Michael Bordo and Harold James — Trilemmas in capital flows, and domestic and international order

The classic exchange rate trilemma presented a formulation for analysing the trade-offs between the incompatible macroeconomic goals of capital mobility and monetary autonomy within a fixed exchange rate regime. This column shows how policy trilemma analysis can be extended to other domains, specifically financial stability, political economy, and international relations. It argues that analysing these trade-offs can help to identify policy options that balance macroeconomic objectives and political realities in the face of globalisation.

VoxEU.org

Trilemmas in capital flows, and domestic and international order
Michael Bordo, Professor of Economics, Rutgers University, and Harold James, Professor of History and International Affairs and the Claude and Lore Kelly Professor of European Studies, Princeton University and CIGI Senior Fellow

Peter Martin — Classical economists don’t understand real people or real economies.

There is at last some evidence that the political mainstream is coming around to the idea that “places {in the same currency zone -PM} in deficit have to be easily financed by places in surplus”. At least there is, if we can consider John Redwood, a British Conservative MP, to be representative of the mainstream. He, himself, may well question that assertion, but nevertheless this recent quote shows that it isn’t just Greece’s Syriza and the political left who are making the argument.…

Modern Monetary Theory: Real Economics
Classical economists don’t understand real people or real economies.Peter Martin

Randy Wray — MMT And External Constraints

Randy agrees with Brian and Neil.

Economonitor — Great Leap Forward
MMT And External Constraints
L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Brian Romanchuk — Why Rich Countries Should Float Their Currencies

This article provides more depth to some comments I made in"MMT and Constraints". I explain why developed countries should allow their currencies to float, which is the policy stance advocated by Modern Monetary Theory (MMT). It is probably a good idea for developing countries to float their currencies as well, but they face inherently difficult policy problems that I do not know enough about to comment on. The implication of advocating a free-floating currency is that I do not see the "external constraint" as being a serious issue, or at least an issue that policy makers can hope to do anything useful about.

In that previous article, I made some quick comments in response to an assertion by Thomas Palley that the "foreign exchange market constraint" is very important for countries other than the United States. Since he did not explain that assertion, I was unable to offer a very detailed criticism. My response was too short, and drew some comments. I expand my explanation here.

I will first explain why I do not think that there is a significant external behavioural constraint on policy makers; but an accounting constraint obviously exists.

I will also note that what I am writing is my opinion, and does not necessarily reflect the views of the economists who developed MMT. I think that poorer countries face some difficulties with free-floating currencies, a view with which they may not agree.

Bond Economics
Why Rich Countries Should Float Their Currencies
Brian Romanchuk

Brian Romanchuk — Currency Regimes Matter If Policymakers Understand Them

In this article, Antonia Fatas argues that exchange rate regimes (like the euro) have limited power to explain differences of economic outcomes. It is based on an article by Andrew K. Rose, which looks at the currency regimes of smaller (mainly developing) economies during the global financial crisis.

Paul Krugman responded here, noting that bond yields only rose due debt concerns in the euro countries. From the point of view of the bond markets, that is a crucial point: a country that does not control the currency of its debt emissions is just another credit market borrower, and can end up facing prohibitive default risk premia.

Since his article illustrates that point well, I will discuss here the non-interest rate aspects of this debate. The currency regime is a critical component of Modern Monetary Theory (MMT), and so this debate is very important for understanding MMT.

Bond Economics
Currency Regimes Matter If Policymakers Understand Them
Brian Romanchuk

Ramanan — James Tobin Already Knew The Answer

John Maynard Keynes’ biggest disservice to the economics profession is to not start with an open economy. In a world of free trade and free movement of capital, a nation’s biggest constraint on raising output is the “balance-of-payments constraint”. It is sad that in spite of the crisis the economic profession has not even started debating on the constraints imposed on nations due to free trade (and the whole world as a consequence).

Intuitively I agree with Ramanan on this although I do not have the expertise in the subject to make a deeply informed judgment. But my sense is that until economists and especially political economists aka macroeconomists start with the global economy as a closed system, we are going to keep looking for solutions in the wrong direction. A lasting solution has to be social and political as well as economic, and the notion that nations get it right by each pursuing maximum utility in the form of "national interest" will be about as effective as individuals pursuing their own interest in achieving general equilibrium through markets. It's nonsense.

Historically, economics really begins with trade. Even communal tribes that operated on the gift economy internally traded with neighboring tribes and over time, trade encompassed most of the world, providing the first contact and later communication among different people, resulting in shared knowledge and cultural and institutional influence. So it is quite amazing to me as an outsider looking in at economics to find what seems obvious being relegated pretty much to an afterthought.

The world will not work and humanity will not see peace until the world works for everyone. What's good for humanity is good for the world economy rather than vice versa, as neoliberalism assumes.

The Case of Concerted Action
James Tobin Already Knew The Answer
Ramanan