Ramanan criticizes the MMT claim that imports are benefit in real terms and trade deficits don't matter as long as other countries desire to save in the importer's currency, because floating rates ensure market clearing and a currency sovereign is not constrained operationally in its own currency.
Read it at The Case of Concerted Action — Post Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve
The Monetary Economics Of Sovereign Government Rating
by Ramanan
Ramanan has a comments section at The Case of Concerted Action, where I expect one can count on his responding to reasonable criticism. Comments welcome here, of course.
This has been done to death.
ReplyDeleteThe worst that can happen is that exports = imports in monetary terms because nobody is prepared to hold the currency other than those with a liability in it.
All other x-border transactions would then fail due to the lack of funding.
But that's the extreme case. There is always somebody out there prepared to take a risk.
The mistake in R's analysis is to forget the real side.
ReplyDeleteIf foreigners won't fund imports > exports then the excess imports simply don't happen.
The funding chain and the real transaction chain all have to be in place before they will happen.
The suggestion that the government 'has' to intervene in the foreign exchange markets in the wrong direction is a slippery slope logical fallacy.
A correctly managed economy is maintaining domestic output at maximum capacity all the time. But within that it has to have an eye on maintaining diversity or production so that substitution can happen in pretty much all markets.
The risk is greatest to a monoculture economy - one that is a true believer in comparative advantage.
"forget the real side."
ReplyDeleteSounds like the same issue that we face when trying to deal with people who think we are "borrowing from the future"...
There are psychological things going on wrt the external sector that I believe have to be factored in, as additional to these financial analyses.
I see a form of 'irrationality' in the policies of the perennial surplus nations.
resp,
But what if the import is oil and there is no substitute for oil in an oil-based economy ?
ReplyDeleteThat is my worry if the dollar loses reserve currency status.
BTW you can't post comments over there, cause he doesn't want to worry about having to moderate. So replies have to be posted here or elsewhere.
ReplyDelete"it has to have an eye on maintaining diversity or production so that substitution can happen in pretty much all markets."
ReplyDeleteThis is precisely why huge, growing and persistent trade deficits are a potential threat.
Many countries are not capable of such substitution in certain goods. The UK, for example, has a large growing population and limited natural resources. Even the mighty USA is increasingly dependent on imports, esp. oil.
Those that are capable of being fully independent (anyone?) may still have to go through a very painful and very high-inflation period of adjustment, following a balance of payments/currency crisis.
The longer a large trade deficit persists, the more difficult such a transition becomes.
Mitchell has stated that trade deficits could be a problem if the skills needed to replace imports (if need be) are not maintained. Such loss of skills is more likely to occur the longer a large and growing trade deficit is maintained.
Godley saw the CAD as the largest economic future threat to the US. His suggestion was trade barriers in the short term, then international agreements on more balanced global trade in the medium/long term.
Even if a large and growing CAD is a potential future threat, this doesn't mean however that there might not be some 'sustainable' level of CAD.
Anonymous, Ramanan apparently changed that no-comments policy. He has a comment section up now. I assume it works.
ReplyDeleteI don't see trade deficits in the same way. As Ramanan points out it isn't the trade deficit per se, but the CAD, which calls forth a corresponding KAS as an accounting identity.
ReplyDeleteI am not a big believer in the invisible hand of markets (floating rate) to rectify imbalances. We know that markets don't always clear, New Classicalism not withstanding.
But this is not the actual problem, as far as I am concerned. We need to begin considering the global economy as a closed economy and coordinating its management as the life-support system for humanity. To me this is a no-brainer. To do less is to be less than human.
KAS?
ReplyDeleteKAS stands for "Capital Account Surplus". CAD stands for "Current Account Deficit."
ReplyDeleteKAS stands for "Capital Account Surplus".
ReplyDeleteUncle.
Ok, I'm pretty sure I've seen that acronym over at heteconomist. Since he's not known for his typos, I always thought it was some sort of 'kapital' letter-play.
Knock it off, y'all.
I was wrong about in stating that Ramanan now publishes comments. The comment section is to contact him with a comment, but he does not put them up.
ReplyDeleteIf you want to comment and see it, do it here.