I found an interesting document at the BEA website that is a good top level overview of these reports. You can access the .pdf file here.
These BEA ITA reports cover the US balance of trade in the Current Account, as well as foreign purchases of US financial assets (such as Treasury Securities) in the Financial Account.
Fear mongers tell us often that (cue 'The Prospector') "We're borrowin' from the Chinese!", where we in the MMT paradigm would say rather that the Chinese are simply purchasing USD financial assets with the USD balances they accrue due to their outsized trade surplus with the US.
Who is right? Perhaps we should go to a neutral party to rule on this disagreement? Would the US BEA, the official government agency that maintains the records of these transactions qualify as an objective, unbiased authority on this topic? I would say so.
Then here is an excerpt from the BEA document I linked to above:
The ITAs apply a double-entry system of accounting in recording transactions: for any entry there must be counterpart entry. Exports of goods and services, income receipts, unilateral transfers to the United States, capital account receipts, decreases in U.S. assets abroad, and increases in foreign-owned liabilities in the United States are shown as credits (with a positive sign). Imports of goods and services, income payments, unilateral transfers from the United States, capital account payments, increases in U.S. assets abroad, and decreases in foreign owned liabilities in the United States are shown as debits (with a negative sign). For each credit entry there must be an equal and offsetting debit entry, and vice versa. For example, if a foreign resident purchased a U.S. good with a check drawn against its U.S. bank account, the offset to the credit entry for U.S. goods exports would be a debit entry for foreign-owned bank-reported liabilities, reflecting the reduction in foreign-owned assets in the United States
So here is the "T-account" breakdown according to the BEA; Chinese trade surplus: DEBIT, corresponding increase in Chinese owned US liabilities: CREDIT. That's all folks. There is no "borrowing" or "lending" involved here.
These are not my opinions, or Mike's opinions, or Tom's or John's or Kevin's opinions; or any of the MMT thought leader's opinions. This is a statement of fact promulgated by the US BEA.
Someone needs to tell former tax collector extraordinaire Rep. Michele "Hu's Your Daddy?" Bachmann that the official US government agency in charge of maintaining the accounting for international transactions, (btw an agency that she approves the operating budget for via Congressional appropriation) disagrees with her moron description of international accounting transactions.
Excellent, Matt.
ReplyDeleteThat old double-entry accounting gets 'em every time.
OMG it's the smoking gun!!! LOL This is brilliant work Matt.
ReplyDeleteWe need to get this OUT THERE...seriously!!!
I'd imagine it's WAY TOO dry for Mike to flash on Fox TV eh?!?! LOL
My new retort when someone says that economics is NOT accounting is that's right just like how chemistry is NOT math. LOL
I'm spreading this thing far and wide in my limited little universe. Could we get this onto prag cap perhaps with Cullen Roche? My Tyler Durden of zerohedge would get into this...he seems to like little factoids that are vitally crucial...although he sure is a perma-bear and seems to trump up hyper-inflation, etc., etc. :(
That old double-entry accounting gets 'em every time.
LOL!!!
Good stuff Matt. Funny you mentioned Michele Bachmann, I just finished reading Matt Taibbi's Rolling Stone profile. He gives her the full vampire squid treatment.
ReplyDeleteBachmann is a religious zealot whose brain is a raging electrical storm of divine visions and paranoid delusions. She believes that the Chinese are plotting to replace the dollar bill, that light bulbs are killing our dogs and cats, and that God personally chose her to become both an IRS attorney who would spend years hounding taxpayers and a raging anti-tax Tea Party crusader against big government...
http://www.rollingstone.com/politics/news/michele-bachmanns-holy-war-20110622?print=true
I'm trying to fully understand this so that I can be prepared to defend the MMT rationale against the usual critics and rhetoric.
ReplyDeleteIn this scenario of "double entry"... I understand that an entity such as China exchanges its dollar reserves in one account for treasuries in another account. They trading liquidity for a little bit of interest, but basically changing which column their numbers fall into.
Now as this happens, does the treasury credit itself with a dollar deposit and debit itself the value of the treasury?
The lay thinking is that we trade the cash for the IOU and spend it, leaving the old "future generations" to figure out how to pay off the "debt".
Can someone illustrate how this is the wrong way to look at this?
On a Yahoo thread once talking about US debt, I posted this.
ReplyDeleteThere is not really debt to China. They are just getting puny interest on money from the crap they sell us.
I got 4 upvotes and no downvotes for that the last time I checked.
Broll,
ReplyDelete"In this scenario of "double entry"... I understand that an entity such as China exchanges its dollar reserves in one account for treasuries in another account."
Ok Broll, now before this happens, before this Chinese "redistribution" of US financial assets from reserves into fixed income Treasury securities, the BEA has already captured the ITA flow. The ITA flow has already happened. The Chinese entity exporting goods to the US has landed their product at the docks and signed it over to the US entity and at that point the BEA (will) capture the data for the USD value of the goods. Probably they will debit the Current Account in subline 20 in Table 1 of the document I linked to in my post. At this point, the debit side of the transaction is over and done.
Simultaneously, the Chinese entity wants to be paid. So the US entity "I" engaged in the import agreement with the Chinese entity "E" instructs their US bank to transfer balances from their (I's) bank account to the Chinese entity's US bank account for the agreed upon amount. This will be captured for the BEA right there in the Financial Account as the credit in line 69 of the Table 1 (US liabilites reported by US banks). So that's it, transaction over according to the BEA. No lending agreements were signed or anything of the sort. A US entity has product and a Chinese exporter now owns USD financial assets. Period.
"They trading liquidity for a little bit of interest, but basically changing which column their numbers fall into."
These are decisions pertaining to asset allocation that occur post the original ITA flow transaction. The ITA flow Financial Account balance will not change because of this intra-account re-allocation.
"This happens, does the treasury credit itself with a dollar deposit and debit itself the value of the treasury?"
I believe yes, but this has nothing to do with the original ITA transaction flow that credited the Financial Account.
"The lay thinking is that we trade the cash for the IOU and spend it, leaving the old "future generations" to figure out how to pay off the "debt"."
Both "the cash" and (NOT THE "IOU"!) a US Treasury Security are both liabilities of the US Government. One usually pays a bit more interest.
Resp,
Have to disagree somewhat with this manner of speaking. The best, simplest way to understand MMT is as "creditary economics". The words "debit/debt" and "credit" are used in their usual sense. The US does owe a debt to China, and can be said to borrow from China. But it owes it the minute the Chinese sell the US something and accept a dollar bill in payment. Exchanging a dollar bill for a bond is not borrowing.
ReplyDeleteThe Chinese sending an appliance that a US customer buys at WalMart, in return for dollars ultimately held by People's Bank is exactly the same transaction as a neighbor borrowing a cup of sugar in return for an remembered obligation going the other way, redeemable at some future time. Any government purchase of goods or services, real wealth, can be considered the same kind of borrowing - the government gets something of value, and the seller gets a government IOU, a dollar, a statement that Uncle Sam owes him a favor. Broll, both the cash and the treasury securities are IOUs.
Of course Bachmann is crazy. We don't owe any money to China. They have tons of our money in the form of bonds. What we owe them is the real wealth that the money they hold can be used to purchase. It would be nice for both countries if they started directly redeeming their dollars now.
Matt & Calgacus - thank you for your responses, although I think Matt's response may have gone over my head.
ReplyDeletePerhaps the easiest way to wrap my mind around it is to not use the terms "buying" or "selling" of treasury securities. If the government "sells" treasuries, the term implies the government is receiving funds in exchange for its own use. In operational reality, the funds are only being transformed from dollars into bonds, reducing liquidity and reducing money in circulation. Would this be a fair way to characterize the process?
Finally - the problem about creating soooooo many assets via MMMMMMMTTTTT is that too many assets dilutes the market and creates a spiral of deflation ..... NNNNNOT inflation.
ReplyDeleteIn operational reality, the funds are only being transformed from dollars into bonds, reducing liquidity and reducing money in circulation. Would this be a fair way to characterize the process?
ReplyDeleteHi Broll,
Yes. Bonds are savings and so those savings are reducing money in circulation. MMT calls that "demand leakage."
Matt was attempting (with wonderful articulation) to distinguish for you the two things going on with China and the US as trading partners.
The first thing is that they are trading partners of PHYSICAL GOODS. China exports stuff to the US; the US imports stuff from China. Cool.
When the US receives the stuff from China...obviously China wants/needs to get compensated for that giving us that stuff. So we give them USD to compensate them for the stuff they sent to us. Cool. THAT process is the REAL ACTION that is taking place that Matt broke down for you play by play in the accounting process and T-accounts. The US is debited with a new asset (stuff) and the US is crediting a cash payment. Basically debit is receiving something, credit is giving something. In this case between the US and China as trade partners the US receives (debits) stuff (aka assets) and gives (credits) cash to China. Does that make more sense now?
The SECOND part of all of this is that China then takes that cash they just got from the US for the stuff they sold to us and they BUY US BONDS/TSYS with that cash. This is the part that people get all freaked out about...but there's really nothing going on here. MMT states that bonds are essentially as good as cash...the only difference is that it's cash out in the FUTURE and so it's slightly more valuable than today's cash...hence the interest rate on the bond. For this reason it is NOT a big deal for China to buy bonds with their cash. We can easily just pay them the interest that they are earning on it by just a click of the computer. We can do this b/c of the type of monetary system we have...a non-convertible floating exchange rate system. We have complete control over our dollar. China doesn't have to buy bonds with the cash they receive from trading with us however. They could buy Euro bonds, they could bring that cash back home and hold it in their accounts in the yuan (that would raise the value of the yuan, which is not good for their exporting industry, so they don't do that...hence buying US bonds instead...hence the US peg...hence the USD as world's reserve currency along with oil $, etc.), or they could buy stuff from the US or from the Middle East or from anywhere. They have the cash and they can do whatever they want with it.
Some people, like Googleheim (and others I know), believe that it would be good for China to spend some of those bonds they have in the US economy b/c that would boost demand in our country, and we really need more demand right now (more cash flow since everyone's saving and deleveraging). But it's really not a big deal either way if China does or doesn't do this (imho). Why? B/c we can, if we wanted, boost demand ourselves without China's help! How? MMT shows that we can cut taxes for one, we can increase government spending for two, we can create a Jobs program, we can provide universal healthcare, a universal pension, infrastructure, education, etc., etc., etc. We don't need China to spend our own dollars for us...we can do that ourselves if we wanted. We don't need China at all other than as a supplier for the stuff that we consume...but really we could get that stuff from anywhere if we wanted and it was available. It seems to me that China needs us more than we need China...if we only realized that fact!!! No grandkids involved in this scenario.
Does that help you at all with this? Great to meet you and hear you're interested in spreading the word too. Does my heart good. :) Cheers!
Mario,
ReplyDelete"They could buy Euro bonds, they could bring that cash back home and hold it in their accounts in the yuan"
I dont believe they can do this exactly.
I think about what I call "Hickey's Law": "A currency must stay in it's currency zone."
So to buy the Euro bonds China would have to find an intermediary to first exchange their USD for Euros and then they would be able to buy Euro denominated bonds with their newly acquired Euro balances. Now granted they perhaps could find an international investment bank that could work it all out for them where it would look like they exchanged USD for Euro bonds but in reality the international bank would have to prearrange all this. Ramanan over at Bill Mitchells has recently termed this: "“not so straightforward banking operations”. I'm trying to better understand these operations...
As far as "bringing the cash back home and holding it in Yuan": I do not believe this is possible. Again I come back to Hickey's Law, ie a currency must stay in it's currency zone, they are literally stuck with the USD balances.
They cant get out of them.
All they can do is exchange them for either other USD financial assets in the Financial Account or for US goods in the Current Account.
Aside: Both China and Japan are sort of on the macro level not acting rationally in how truly zealous both nations are to acquire USD balances. Tom has blogged about "Rational Expectations" hypothesis being BS, and I agree with him. I often perceive humans as not acting in what I would consider a economically rational way both individually and collectively.
Here's one: I will bet anyone their favorite beverage of choice that even though Japan has had the terrible earthquake and tsunami in March, (and all the media people telling us that now Japan is not going to buy Treasuries because they have to re-build) that they will still, for the half coming out of this disaster ending Sep '11 (April/May/June/July/August/Sept), Japan will still increase their holdings of US Treasury securities, and for April the data is already in and they decreased by $1B, so you would already have a $1B headstart.
link_http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Any takers?
Tsys, like reserves, are entires on the Fed's spreadsheet, so they never leave the country. Anyone, including China. can convert its tsys into reserves and exchange the reserves for any currency it wishes. Someone else will hold the tsys instead of China, which could be just about anyone.
ReplyDeleteThe primary dealers are the market makers in tsys. They expand and contract their holdings based on changing saving desire in order to stabilize the tsy market, knowing that the Fed stands behind them as needed to provide liquidity. So if there would be many more sellers of tsys than buyers at any given time, the primary dealers step in and stabilize the market. the idea that US bonds could suddenly be driven to dirt, skyrocketing US interest rates, is silly when the Fed (government) controls the market as currency monopolist. Moreover, no large holder of tsys like China would dump its holdings, risking a significant loss of principal as bond values fell. Even a small contraction is a big one for someone whose holdings are at the trillion dollar level.
China could conceivably slowly exchange its US holdings for cash and ship the cash back to China — where it would have the value of the paper it is printed on, unless China would allow transactions in China in USD. That, of course, is not going to happen, since China wants the yuan to rival the dollar.
The only way for China to get the USD back to China is to convert them to yuan, and China does not want to do that because 1) it would drive up the value of the RMB relative to the dollar, harming China's trade with the US, and 2) it would increase the Chinese money supply and be inflationary. After all, China got the dollars through shipping goods for foreign consumption. If it were allow the payment for this to be converted to yuan and repatriated, then there would be an increase in money supply without corresponding increase in goods for domestic purchase.
Moreover, China has good reason to hold dollars, since a country's capital and current account must balance. If China wants to sell the US goods and not exchange them in trade, then it has to either invest in US real assets or save US financial assets.
As China expert Michael Pettis points out, this is not something that China has any control over or choice about. That double-entry accounting again.
Broll & Mario:In operational reality, the funds are only being transformed from dollars into bonds, reducing liquidity and reducing money in circulation. Would this be a fair way to characterize the process?
ReplyDeleteHi Broll,
Yes. Bonds are savings and so those savings are reducing money in circulation. MMT calls that "demand leakage."
Basically right, but not exactly about "savings". Bonds are merely another kind of money. (The usual, imho misguided MMT terminology is "NFA"). The mainstream idea is that currency is "money" and that purchase of interest bearing securities- bonds is a demand leakage. Hence the idea that "printing bonds" to "finance" a deficit is OK & non-inflationary, but "printing money" will cause the sky to fall. The mainstream idea is, as usual, crazily wrong. The difference between the effects on consumption and investment, and hence inflation of "printing money" and "printing bonds" is "not likely to be very large" (Abba Lerner). And the evidence tends to be that "printing money" is deflationary. (Gibson's paradox)
Broll: Buying or selling, for bond transactions is accurate enough, but "borrowing" is not.Thing to remember is that it is a favor the government is doing. It is a monetary operation, and boils down to nothing but money-changing, like changing two tens for a twenty. A private economy near analog is a landlord allowing a tenant to prepay his rent. The landlord is not borrowing here, but allowing the tenant to exchange a future liability for a current one, probably at a discount.
Mario:the only difference is that it's cash out in the FUTURE and so it's slightly more valuable than today's cash Slightly less valuable.
Matt&Tom: China does have control over its balances if it doesn't want to spend them. But only one way. It can always burn its pile of dollars. :)